10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

¨ 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: 001-33509

RESPONSE GENETICS, INC.

(Exact name of registrant as specified in its charter)

Delaware	11-3525548
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)
1640 Marengo St., 7th Floor, Los Angeles, California	90033
(Address of principal executive offices)	(Zip Code)

(323) 224-3900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
(do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

On May 9, 2014, there were 38,732,896 shares of common stock, $.01 par value per share, issued and outstanding.

Response Genetics, Inc.

Form 10-Q

Table of Contents

		Page
		Number
Part I.	Financial Information
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets — December 31, 2013 and March 31, 2014	1
	Consolidated Statements of Operations and Comprehensive Loss — Three months ended March 31, 2013 and 2014	2
	Consolidated Statements of Cash Flows —Three months ended March 31, 2013 and 2014	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
Part II.	Other Information
Item 1.	Legal Proceedings	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	31
Signatures		32
Exhibit Index
	EX-31.1 (Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
	EX-31.2 (Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
	EX-32 (Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

ii

RESPONSE GENETICS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2013			March 31, 2014
ASSETS
Current assets
Cash and cash equivalents	$	8,148,599		$	4,956,503
Accounts receivable, net of allowance for doubtful accounts of $2,404,659 and $1,751,567 at December 31, 2013 and March 31, 2014, respectively.		6,225,923			5,528,509
Prepaid expenses and other current assets		981,908			1,333,776
Total current assets		15,356,430			11,818,788
Property and equipment, net		1,934,582			1,766,657
Intangible assets, net		767,223			772,824
Total assets	$	18,058,235		$	14,358,269
LIABILITIES, COMMON STOCK CLASSIFED OUTSIDE OF STOCKHOLDERS’ EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	1,694,312		$	1,383,898
Accrued expenses		666,675			517,291
Accrued royalties		1,293,717			1,349,051
Accrued payroll and related liabilities		1,850,923			1,927,616
Capital lease obligation, current portion		157,238			129,456
Line of credit, current		—			1,000,000
Total current liabilities		5,662,865			6,307,312
Capital lease obligation, net of current portion		136,419			116,157
Line of credit, non-current		1,000,000			—
Total liabilities		6,799,284			6,423,469
Commitments and contingencies (Note 5)
Common stock classified outside of stockholders’ equity		5,500,000			5,500,000
Stockholders’ equity
Common stock, $0.01 par value; 50,000,000 shares authorized; 38,712,896 and 38,728,196 shares issued and outstanding at December 31, 2013 and March 31, 2014, respectively		337,185			337,338
Additional paid-in capital		70,986,406			71,188,770
Accumulated deficit		(65,297,179	)		(68,801,618	)
Accumulated other comprehensive loss		(267,461	)		(289,690	)
Total stockholders’ equity		5,758,951			2,434,800
Total liabilities, common stock classified outside of stockholders’ equity and stockholders’ equity	$	18,058,235		$	14,358,269

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

RESPONSE GENETICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	Three Months Ended March 31,
	2013			2014
Net revenue	$	5,624,191		$	3,894,934
Cost of revenue		2,533,722			2,438,376
Gross profit		3,090,469			1,456,558
Operating expenses:
Selling and marketing		1,442,235			1,452,905
General and administrative		2,135,186			3,013,898
Research and development		297,200			467,567
Total operating expenses		3,874,621			4,934,370
Operating loss		(784,152	)		(3,477,812	)
Other income (expense):
Interest expense		(19,410	)		(24,221	)
Interest income		43			1
Other		(20,785	)		(2,407	)
Net loss	$	(824,304	)	$	(3,504,439	)
Unrealized loss on foreign currency translation		(1,853	)		(22,229	)
Comprehensive loss	$	(826,157	)	$	(3,526,668	)
Net loss per share — basic and diluted	$	(0.03	)	$	(0.09	)
Weighted-average shares — basic and diluted		32,797,625			38,718,336

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

RESPONSE GENETICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2013			2014
Cash flows from operating activities:
Net loss	$	(824,304	)	$	(3,504,439	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		137,399			206,884
Share-based compensation		105,324			184,769
Bad debt expense		468,463			1,293,850
Changes in operating assets and liabilities:
Accounts receivable		(364,991	)		(596,437	)
Prepaid expenses and other current assets		(477,748	)		(351,868	)
Accounts payable		(292,303	)		(310,414	)
Accrued expenses		378,951			(149,384	)
Accrued royalties		194,250			55,334
Accrued payroll and related liabilities		277,718			76,693
Deferred revenue		(483,052	)		—
Net cash used in operating activities		(880,293	)		(3,095,012	)
Cash flows from investing activities:
Purchases of property and equipment		(81,414	)		(30,040	)
Purchases of software		(4,400	)		(14,519	)
Net cash used in investing activities		(85,814	)		(44,559	)
Cash flows from financing activities:
Proceeds from exercise of stock options		—			17,748
Capital lease payments		(39,208	)		(48,044	)
Net cash used in financing activities		(39,208	)		(30,296	)
Effect of foreign exchange rates on cash and cash equivalents		(1,853	)		(22,229	)
Net decrease in cash and cash equivalents		(1,007,168	)		(3,192,096	)
Cash and cash equivalents:
Beginning of period		9,041,478			8,148,599
End of period	$	8,034,310		$	4,956,503
Cash paid during the period for:
Interest	$	19,410		$	24,221

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization, Operations and Basis of Accounting

Response Genetics, Inc. (the “Company”) was incorporated in the State of Delaware on September 23, 1999 as Bio Type, Inc. for the purpose of providing molecular profiling services of tumor tissue that has been formalin-fixed and embedded in paraffin. In August 2000, the Company changed its name to Response Genetics, Inc.

The Company is a life science company engaged in the research, development, marketing and sale of pharmacogenomics-clinical diagnostic tests for cancer. Pharmacogenomics is the science of how an individual’s genetic makeup relates to drug response. Diagnostic tests based on pharmacogenomics facilitate the prediction of a response to drug therapy or survival following surgery based on an individual’s genetic makeup. In order to generate pharmacogenomic information from patient specimens for these tests, the Company uses its proprietary technologies that enable the Company to reliably and consistently extract ribonucleic acid (“RNA”) and deoxyribonucleic acid (“DNA”) from tumor specimens that are stored as formalin-fixed and paraffin-embedded (“FFPE”) specimens and, thereby to analyze genetic information contained in these tissues for each patient. The Company’s platforms include analysis of single biomarkers using the polymerase chain reaction method as well as global gene interrogation using microarray methods and fluorescence in situ hybridization (“FISH”) from paraffin or frozen tissue specimens. The Company primarily derives its revenue from the sale of its ResponseDX^® diagnostic testing products and by providing pharmacogenomic clinical trial testing services to pharmaceutical companies in the United States, Asia and Europe.

The Company’s goal is to provide cancer patients and their physicians with a means to make informed, individualized treatment decisions based on genetic analysis of tumor tissues. The Company’s pharmacogenomic analysis of clinical trial specimens for the pharmaceutical industry may provide data that will lead to a better understanding of the molecular basis for response to specific drugs and, therefore lead to individualized treatment.

Liquidity and Management’s Plans

Since its inception, the Company has devoted substantial effort in developing its products and has incurred losses and negative cash flows from operations. At March 31, 2014, the Company had an accumulated deficit of $68,801,618. The Company anticipates continued losses and negative cash flows as it funds its selling and marketing activities and research and development programs.

The Company’s current operating plan includes various assumptions concerning the level and timing of cash receipts from sales and cash outlays for operating expenses and capital expenditures. The Company’s ability to successfully carry out its business plan is primarily dependent upon its ability to (1) obtain sufficient additional capital at acceptable costs, (2) attract and retain knowledgeable employees, and (3) generate significant revenues. At this time, the Company expects to satisfy its future cash needs primarily through additional financing and/or strategic investments. The Company is currently seeking such additional financing and/or strategic investments; however, there can be no assurance that any additional financing or strategic investments will be available on acceptable terms, if at all. If the Company is unable to timely and successfully raise additional capital and/or achieve profitability, it will not have sufficient capital resources to implement its business plan or continue its operations, and the Company will most likely be required to reduce certain discretionary spending and/or curtail operations, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. No adjustments have been made to the accompanying unaudited condensed consolidated financial statements to reflect any of the matters discussed above. The unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the fiscal year. The balances as of December 31, 2013 were derived from our audited financial statements as of December 31, 2013. The financial statements should be read in conjunction with the Company’s audited December 31, 2013 and 2012 consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K previously filed with the SEC on March 31, 2014.

2. Summary of Significant Accounting Policies

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Response Genetics, Ltd., a Scottish corporation (the “Subsidiary”), which was incorporated in November 2006. The Subsidiary had no employees or active operations in 2013 or to date in 2014. All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity date of three months or less from the date of purchase to be cash equivalents. The carrying value of cash equivalents approximates fair value due to the short-term nature and liquidity of these instruments. The Company’s cash equivalents are comprised of cash on hand, deposits in banks and money market investments.

4

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Accounts Receivable

Pharmaceutical Accounts Receivable

The Company invoices its clients as specimens are processed and any other contractual obligations are met. The Company’s contracts with clients typically require payment within 45 days of the date of invoice. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments. The Company specifically analyzes accounts receivable and historical bad debts, client credit, current economic trends and changes in client payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. To date, the Company’s pharmaceutical customers have primarily been large pharmaceutical companies. As a result, bad debts from pharmaceutical accounts receivable to date have been minimal. Pharmaceutical company accounts receivable as of December 31, 2013 and March 31, 2014 were $1,892,384 and $892,162, respectively.  There were no allowances for doubtful accounts recorded against these pharmaceutical accounts receivable at December 31, 2013 and March 31, 2014.

ResponseDX^® Accounts Receivable

ResponseDX^® accounts receivable are recorded from two primary payors: (1) Medicare and (2) third party payors such as commercial insurance and private payors or self-paying payors (“Private Payors”).  ResponseDX^® accounts receivable are recorded at established billing rates less an estimated billing adjustment, based on reporting models utilizing historical cash collection percentages and updated for current effective reimbursement factors.  Management performs ongoing valuations of accounts receivable balances based on management’s evaluation of historical collection experience and industry trends.  Based on the historical experience for our Medicare and Private Payor accounts, management has determined, based on a detailed analysis, that accounts receivable associated with certain billings are unlikely to be collected. Therefore, the Company has recorded an allowance for doubtful accounts of $2,404,659 and $1,751,567 as of December 31, 2013 and March 31, 2014, respectively. The Company’s bad debt expense for the three months ended March 31, 2013 and 2014 was $468,463 and $1,293,850, respectively.

ResponseDX^® accounts receivable as of December 31, 2013 and March 31, 2014, consisted of the following:

	December 31, 2013			March 31, 2014
				(Unaudited)
Net Medicare receivable	$	2,422,611		$	2,223,793
Net Private Payor receivable		4,315,587			4,164,121
		6,738,198			6,387,914
Allowance for doubtful accounts		(2,404,659	)		(1,751,567	)
Total	$	4,333,539		$	4,636,347

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the double declining balance and straight-line methods over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:

Laboratory equipment	5 to 7 years
Furniture and equipment	3 to 7 years
Leasehold improvements	Shorter of the useful life (5 to 7 years) or the lease term

Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.

Intangible Assets

Intangible assets are carried at the cost to obtain them. Purchased software and internally-developed intangible assets are amortized using the straight-line method over estimated useful lives of three to five years. The Company has capitalized costs related to the development of database software (see Note 3). The portion of this database placed into service is amortized in accordance with ASC 350-40, Internal-Use Software. The amortization period is five years using the straight-line method.

5

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies - (continued)

Revenue Recognition

Pharmaceutical Revenue

Revenues that are derived from testing services provided to pharmaceutical companies are recognized on a contract specific basis pursuant to the terms of the related agreements. Revenue is recognized in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

Revenues are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through the Company’s laboratory under a specified contractual protocol and are recorded on the date the tests are completed. Certain contracts have minimum assay requirements that, if not met, result in payments that are due upon the completion of the designated period. In these cases, revenues are recognized when the end of the specified contract period is reached.

On occasion, the Company may enter into a contract that requires the client to provide an advance payment for specimens that will be processed at a later date. In these cases, the Company records this advance as deferred revenue and recognizes the revenue as the specimens are processed or at the end of the contract period, as appropriate.

The Company recorded revenue from pharmaceutical clients of $2,441,693 and $577,381 for the three months ended March 31, 2013 and 2014, respectively.

ResponseDX^® Revenue

Revenues that are derived from ResponseDX^® testing services are recognized in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. We record revenues when our tests have confirmed results, which are evidence that the services have been performed.

Revenues are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through our laboratory under a specified contractual protocol.

ResponseDX^® Private Payor and Medicare revenues are recorded at established billing rates less an estimated billing adjustment, based on reporting models utilizing historical cash collection percentages and updated for current effective reimbursement factors. The Company’s Medicare provider number allows it to invoice and collect from Medicare. The Company’s invoicing to Medicare is primarily based on amounts allowed by Medicare for the service provided as defined by Common Procedural Terminology (“CPT”).

The following details ResponseDX^® revenue for the three months ended March 31, 2013 and 2014:

	Three Months
	Ended March 31,
	(Unaudited)
	2013		2014
Net Medicare revenue	$	1,344,215	$	1,308,422
Net Private Payor revenue		1,838,283		2,009,131
Net ResponseDX® revenue	$	3,182,498	$	3,317,553

6

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies - (continued)

Revenue Recognition – (continued)

Cost-Containment Measures

Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of health care services, which include diagnostic test providers such as the Company, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company.

Regulatory Matters

A portion of the Company’s revenues are derived from Medicare reimbursement. Laws and regulations governing Medicare programs are complex and subject to change and to interpretation, and the Company may be adversely affected by future changes in the applicable laws and regulations and governmental investigations, lawsuits or private actions which include mandatory damages, fines, penalties, criminal charges, loss or suspension of licenses and/or suspension or exclusion from Medicare and certain other governmental programs. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing.

Medicare reimbursement rates are also subject to regulatory changes and government funding restrictions. In January 2013, a Medicare fee schedule update was announced which included proposed changes to Medicare reimbursement rates that significantly reduced the reimbursement rates for certain of the testing services we provide. The Company participated with other impacted organizations to provide guidance to the local Medicare Administrative Contractor (“MAC”) that resulted in the local MAC updating certain pricing through September 2013 which reflected an increase in many of the tests originally priced in January 2013. On October 1, 2013, the Centers for Medicare and Medicaid Services (“CMS”) issued fees for some, but not all, of the CPT codes used by the Company. It is uncertain if continued guidance provided to Medicare and the local MAC by impacted organizations will result in additional fee increases or additional positive coverage determinations in 2014. If, however, the current reduction in reimbursement rates is adopted as is, it may have a material adverse effect on the Company's operations.

As a result of these Current Procedural Terminology (“CPT”) code changes and Medicare price changes, we have experienced a departure from our normal reimbursement patterns with Medicare and other payors. Specifically, we have experienced delays in certain reimbursements for services and an increase in initial denials of claims for certain services provided. Accordingly, we re-evaluated the assumptions employed in our model for estimating revenue to be recognized for ResponseDX^® testing. We view the code and price changes described above as affecting only the assumptions we used in pricing our services. The nature of the testing we provide, the evidence we gather to establish the creditworthiness of our payors and the delivery method of our services have not changed from prior periods, and there are no indicators that these assumptions require change.

We performed an analysis that considered our historical patterns of revenue by payor in conjunction with the fluctuations we experienced in the three months ended March 31, 2013 and 2014 to arrive at the revenue recorded during those periods. We believe that the changes in CPT codes and pricing that are causing confusion and erratic payment experience in the payor community will take some time to resolve. The time needed for resolution will depend upon Medicare and the local MAC releasing additional pricing changes and potentially, revisions to previously revised prices, and upon the private payor community adopting the new CPT codes and some level of revised pricing. Accordingly, our revenue recognition estimates could be materially affected in future periods as pricing and payments patterns change and develop, and we may be materially affected by future or retroactive price changes.

On July 8, 2013, CMS released a new proposed rulemaking entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule & Other Revisions to Part B for CY 2014”. This proposed rule contains a number of provisions that may adversely impact the level of reimbursement for a variety of tests for which the Company receives reimbursement from the Medicare program beginning in 2014. Among other things, CMS has proposed examining approximately 1,200 laboratory tests that appear on the Clinical Lab Fee Schedule (“CLFS”) over a period of five years to determine whether advances in technology may have reduced the cost of providing such tests and whether or not the level of reimbursement should be revised. The Company is currently performing molecular testing which is reimbursed using CPT codes that fall on the CLFS. CMS has also proposed changing the methodology used to determine reimbursement rates for the technical component of certain tests reimbursed off of the Physician Fee Schedule (“PFS”). Among other provisions, CMS has proposed limiting the Relative Value Units (“RVUs”) ascribed to the Practice Expense component of their reimbursement formula for tests performed in “Non-Facilities” (which would include most clinical laboratories like the Company) to the RVUs that have been ascribed for the same procedures under the Hospital Outpatient Prospective Payment System, or the Ambulatory Payment Classification (“APC”) system which are used to reimburse “Facilities” (such as hospitals and ambulatory surgery centers). The Company currently performs FISH testing, which may be impacted by this PFS rule change if it is enacted. CMS has not yet proposed any specific rates for 2014 and the Company is examining the potential impact that a reduction in the level of reimbursement for the tests the Company offers may have on its operations.

Additionally, CMS has as part of its regulatory structure the National Correct Coding Initiative (“NCCI”). Recent changes to NCCI guidance may reduce allowable quantities billed for FISH testing. These changes would lower reimbursement amounts for FISH tests, and there can be no assurance that CMS will make any modifications in the existing language of the NCCI documents.

A number of proposals for legislation or regulation continue to be under discussion which could have the effect of substantially reducing Medicare reimbursements for clinical laboratories or introducing cost sharing to beneficiaries. Depending upon the nature of regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.

Cost of Revenue

Cost of revenue represents the cost of materials, direct labor, royalties, costs associated with processing tissue specimens including pathological review, staining, microdissection, paraffin extraction, reverse transcription polymerase chain reaction, fluorescence in situ hybridization (“FISH”), quality control analyses, license fees and delivery charges necessary to render an individualized test result. Costs associated with performing tests are recorded as the tests are processed.

License Fees

The Company licenses technology for the extraction of RNA and DNA from FFPE tumor specimens from the University of Southern California (“USC”) in exchange for royalty fees on revenue generated by use of the technology. These royalties are calculated as a fixed percentage of revenue that we generate from use of the technology licensed from USC. We also maintain a non-exclusive license to use Roche Molecular Systems, Inc.’s (“Roche”) PCR, homogenous PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we generate through use of this technology.

The Company is subject to potentially significant variations in royalties recorded in any period. While the amount paid is based on a fixed percentage from revenues of specific tests pursuant to terms set forth in the agreements with USC and Roche, the amount due is calculated based on the revenue we recognize using the respective licensed technology. As discussed above, this revenue can vary from period to period as it is dependent on the timing of the specimens submitted by our clients for testing.

Additionally, the Company periodically analyzes the technical procedures performed in its test offerings to assess which activities utilize licensed technologies and to calculate royalties for use of the licensed technology. The most recent analyses indicate that the Company could owe less than the amounts that have been accrued for royalties payable. However, the licensors have not reviewed the Company’s updated royalty calculations. As a result, the Company has not reduced the historical accrued liability for royalties but has adjusted the current period accrual based on the revised calculation.

7

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies - (continued)

Research and Development

The Company expenses costs associated with research and development activities as incurred. Research and development costs are expensed as incurred and classified as research and development costs. Research and development costs include employee costs (salaries, payroll taxes, benefits, and travel), equipment depreciation and warranties and maintenance, laboratory supplies, primers and probes, reagents, patent costs and occupancy costs.

Line of Credit

On July 14, 2011, the Company entered into a line of credit agreement with Silicon Valley Bank (the “Bank”). The agreement has been amended most recently on March 7, 2013. The line of credit is collateralized by the Company’s pharmaceutical, Private Payor and Medicare receivables. The amended maximum amount that can be borrowed from the credit line is $2,000,000. As of March 31, 2014, the amount the Company can draw from the line of credit was $1,000,000 calculated as the lesser of (i) the Company’s calculated borrowing base, which was 80% of certain of the Company’s accounts receivable, or (ii) the amount available under the credit line. As of March 31, 2014, the interest fees associated with this line of credit were set at the prime rate plus 1%. During 2013 and the three months ended March 31, 2014, the rate charged to the Company was 5%. As needed from time to time, the Company may draw on this line for use for general corporate purposes. As of December 31, 2013 and March 31, 2014, the Company had drawn $1,000,000 against the line of credit. The line of credit is subject to various financial covenants. At March 31, 2014, the Company was in compliance with the covenants. As of December 31, 2013, the Company was not in compliance with one of these covenants, and the Bank waived the covenant violation. Prior to the most recent amendment on March 7, 2013, the Company was also not in compliance with certain other covenants. The September 28, 2012 amendment provided forbearance for the failure to comply with these certain covenants through November 30, 2012, and modified the covenants to include a requirement that the Company maintain account balances at the Bank totaling a minimum of $4,000,000 during the covered forbearance period. The December 6, 2012 amendment to the agreement extended the forbearance for the failure to comply with these certain covenants and the requirement for the Company to maintain account balances at the Bank totaling a minimum of $4,000,000 during the forbearance period. In addition, pursuant to the March 7, 2013 amendment, the Bank waived the Company's existing breach of financial covenants under the credit agreement and the parties restructured the line of credit to provide that, among other things: (i) the revolving line of credit's maturity date was extended to March 7, 2015, (ii) the fee for the unused portion of the revolving line of credit was reduced from 0.375% to 0.250% per annum of the average unused portion of the revolving line of credit, (iii) the Company must continue to meet certain reporting requirements including providing financial statements and a certificate of compliance with the terms and conditions of the credit agreement by an authorized officer to the Bank within 45 days of the last day of each calendar quarter, provided that if the Company has less than $4,000,000 in its account at the Bank at any time during such calendar quarter, the Company must provide the financial statements and the certificate of compliance within 30 days of the end of such calendar quarter and provide a monthly report on revenues realized from Private Payors, (iv) the financial covenants were amended and restated to require the Company to maintain a ratio of quick assets to current liabilities of 1:50 to 1:00 and meet certain specified minimum adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements as defined in the amendment and measured on a monthly basis and (v) the Bank is granted certain additional inspection of books, records and collateral rights.

As of December 31, 2013, the line of credit under the credit agreement was classified as a non-current liability on the accompanying consolidated balance sheets as the line of credit had a maturity date of greater than one year from the date of the balance sheet. As of March 31, 2014, the line of credit under the credit agreement was classified as a current liability on the accompanying consolidated balance sheets as the line of credit had a maturity date of less than one year from the date of the balance sheet.

From time to time, the Company’s calculated borrowing base under its Bank line of credit may decrease to a level where the Company is in an over-advance position in which case the Company will be required to repay any outstanding amounts greater than the calculated borrowing base for such covered period back to the Bank immediately. The Company will be able to draw down on the credit line again with respect to such paid back amount once the Company is in compliance with the borrowing base requirement.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2013 and March 31, 2014, the Company does not have a liability for unrecognized tax benefits. The Company recognizes interest and penalties associated with tax matters as part of the income tax provision and includes accrued interest and penalties with the related tax liability in the balance sheet. For the periods ended March 31, 2013 and 2014, interest and penalties totaling $107 and $0, respectively, were recorded in the consolidated statements of operations.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Stock Compensation, Share-Based Payment. Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value estimated in accordance with the provisions of ASC 718.  The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting period.

The Company accounts for equity instruments issued to non-employees in accordance with ASC 505, Equity. Under ASC 505, stock option awards issued to non-employees are measured at fair value using the Black-Scholes option-pricing model and recognized pursuant to a performance model.

8

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies - (continued)

Management Estimates

The preparation of financial statements in conformity with U.S. 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 revenues and expenses during the reporting period.  Significant estimates in these condensed consolidated financial statements have been made for revenue, allowances for doubtful accounts, impairment of long-lived assets, depreciation of property and equipment and stock-based compensation. Actual results could differ materially from those estimates.

Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the asset with the estimated undiscounted future cash flows associated with the use of the asset and its eventual disposition. Should the review indicate that the assets cost is not recoverable, the carrying value of the asset would be reduced to its fair value, which is measured by future discounted cash flows.

Foreign Currency Translation

The financial position and results of operations of the Company’s foreign subsidiary are determined using local currency as the functional currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period-end. Statement of Operations amounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in stockholders’ equity.

Comprehensive Loss

The components of comprehensive loss are accumulated net loss and unrealized foreign currency translation adjustments for the three months ended March 31, 2013 and 2014.

Fair Value of Financial Instruments

Cash and cash equivalents are stated at cost, which approximates fair market value.  Cash equivalents consist of money market accounts, with fair values estimated based on quoted market prices. Debt balances are stated at historical amounts less principal payments, which approximate fair market value. The Company believes interest rates in its debt agreements are commensurate with lender risk profiles for similar companies.

Advertising Costs

The Company markets its services through its advertising activities in trade publications and on the internet. Advertising costs are included in selling and marketing expenses on the statements of operations and are expensed as incurred.  Advertising costs for the three months ended March 31, 2013 and 2014 were $0 and $6,422, respectively.

9

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies - (continued)

Concentration of Credit Risk and Clients and Limited Suppliers

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. At March 31, 2014, the Company had $4,498,950 in cash and cash equivalents that exceeded federally insured limits. At March 31, 2014, $12,333 of cash was held outside of the United States.

Revenue sources that account for greater than 10 percent of total revenue are provided below.

	Three Months Ended March 31,
	2013					2014
	(Unaudited)					(Unaudited)
	Revenue		Percent of Total Revenue			Revenue		Percent of Total Revenue
Abbott Molecular, Inc.	$	910,182		16	%	$	21,824		*	%
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	—		—	%	$	—		—	%
GlaxoSmithKline Biologicals S.A.	$	1,356,384		24	%	$	328,281		*	%
Total GlaxoSmithKline entities	$	1,356,384		24	%	$	328,281		*	%
Medicare, net of contractual allowances	$	1,344,215		24	%	$	1,308,422		34	%

* Represents less than 10% of revenue.

Customers that account for greater than 10 percent of gross accounts receivable are provided below.

	As of December 31, 2013					As of March 31, 2014
						(Unaudited)
	Receivable Balance		Percent of Total Receivables			Receivable Balance		Percent of Total Receivables
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	597,937		*	%	$	—		—	%
GlaxoSmithKline Biologicals S.A.	$	544,298		*	%	$	631,033		*	%
Total GlaxoSmithKline entities	$	1,691,144		13	%	$	631,033		*	%
Medicare, net of contractual allowances	$	2,422,611		28	%	$	2,223,793		31	%

* Represents less than 10% of accounts receivable.

Many of the supplies and reagents used in the Company’s testing process are procured from a limited number of suppliers. Any supply interruption or an increase in demand beyond the suppliers’ capabilities could have an adverse impact on the Company’s business. Management believes it can identify alternative sources, if necessary, but it is possible such sources may not be identified in sufficient time to avoid an adverse impact on its business. The Company purchases certain laboratory supplies and reagents primarily from two suppliers. Purchases from these two suppliers accounted for approximately 65% and 74% of the Company’s reagent purchases for the three months ended March 31, 2013 and 2014, respectively.

10

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Property and Equipment and Intangible Assets

Property and equipment and intangible assets consist of the following:

	December 31, 2013			March 31, 2014
				(Unaudited)
Laboratory equipment	$	4,468,055		$	4,475,415
Furniture and equipment		736,886			750,886
Leasehold improvements		487,843			496,523
		5,692,784			5,722,824
Less: Accumulated depreciation		(3,758,202	)		(3,956,167	)
Total property and equipment, net	$	1,934,582		$	1,766,657
Purchased software	$	749,587		$	764,105
Internally developed software		213,361			213,361
Trademarks		33,000			33,000
		995,948			1,010,466
Less: Accumulated amortization		(228,725	)		(237,642	)
Total intangible assets, net	$	767,223		$	772,824

Depreciation and amortization expense, included in cost of revenue, selling and marketing expenses, general and administrative expenses, and research and development expenses for the three months ended March 31, 2013 and 2014 was $137,401 and $206,884, respectively.

Capital Leases

The Company leases certain equipment that is recorded as capital leases. This equipment is included in property and equipment on the accompanying consolidated balance sheet as of March 31, 2014 as follows:

	(Unaudited)
Equipment purchased under capital leases	$	584,150
Less: Accumulated amortization		(369,449	)
Equipment purchased under capital leases, net	$	214,701

Future minimum lease payments under capital leases as of March 31, 2014 are as follows:

Years ending December 31,	(Unaudited)
2014	$	130,431
2015		101,309
2016		46,852
Total minimum lease payments		278,592
Less amount represented by interest		(32,979	)
Less current portion		(129,456	)
Capital lease obligation, net of current portion	$	116,157

11

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Loss Per Share

The Company calculates net loss per share in accordance with ASC 260, Earnings Per Share. Under the provisions of ASC 260, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive common stock equivalents then outstanding. Common stock equivalents consist of shares of common stock issuable upon the exercise of stock options and warrants.

The following table sets forth the computation for basic and diluted loss per share:

	Three Months Ended March 31,
	2013			2014
	(Unaudited)			(Unaudited)
Numerator:
Net loss	$	(824,304	)	$	(3,504,439	)
Numerator for basic and diluted earnings per share	$	(824,304	)	$	(3,504,439	)
Denominator:
Denominator for basic and diluted earnings per share — weighted-average shares outstanding		32,797,625			38,718,336
Basic and diluted loss per share	$	(0.03	)	$	(0.09	)

Outstanding stock options to purchase 1,711,643 and 2,217,134 shares for the periods ended March 31, 2013 and 2014, respectively, were excluded from the calculation of diluted loss per share as their effect would have been antidilutive.

5. Commitments and Contingencies

Operating Leases

The Company leases 27,446 square feet of office and laboratory space in Los Angeles, California, under a non-cancelable operating lease that was amended and extended on February 3, 2014 and will expire on June 30, 2015. The Company has the option to extend the lease to June 30, 2016. The Company also leased 1,460 square feet of space in Frederick, Maryland, where administrative functions were performed until July 31, 2012. The Company moved the administrative functions performed out of this office primarily to its Los Angeles facilities and closed the Maryland office on July 31, 2012. The lease for the Maryland office expired on January 31, 2013.

Rent expense, which is classified in cost of revenue, selling and marketing, general and administrative, and research and development expenses was $160,790 and $212,181 for the three months ended March 31, 2013 and 2014, respectively.

Future minimum lease payments by year and in the aggregate, under the Company’s non-cancelable operating leases for facilities, equipment and software as a service, consist of the following at March 31, 2014:

Years Ending December 31,	Unaudited
2014	$	710,160
2015		522,518
2016		35,807
Total	$	1,268,485

12

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Commitments and Contingencies – (continued)

Guarantees

The Company enters into indemnification provisions under its agreements with other counterparties in its ordinary course of business, typically with business partners, clients and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities. These indemnification provisions generally survive termination of the underlying agreement. The Company reviews its exposure under these agreements no less than annually, or more frequently when events require. The Company believes the estimated fair value of these agreements is minimal as, historically, no payments have been made by the Company under these indemnification obligations. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2013 and March 31, 2014.

Legal Matters

The Company is, from time to time, involved in legal proceedings, regulatory actions, claims and litigation arising in the ordinary course of business. These matters are not expected to have a material adverse effect upon the Company’s financial condition.

Employment Agreements

The Company has employment contracts with several individuals, which provide for annual base salaries and potential bonuses. These contracts contain certain change of control, termination and severance clauses that require the Company to make payments to certain of these employees if certain events occur as defined in their respective contracts.

6. License and Collaborative Agreements

License Agreement with the University of Southern California (“USC”)

In April 2000, as amended in June 2002 and April 2005, the Company entered into a license agreement with USC. Under this agreement, USC granted the Company a worldwide, exclusive license with the right to sublicense, the patents for nucleic acid extraction methodologies (“RGI-1”) and related technology, for use in human and veterinary diagnostic laboratory services, the sale of clinical diagnostic products, and the sale of research products to the research community. USC retains the right under the agreement to use the technology for research and educational purposes.

In consideration for this license, the Company agreed to pay USC royalties based on a percentage of net sales of products or services that make use of RGI-1 and related technology and to meet a certain minimum in royalty payments. Royalty expense relating to this agreement amounted to $104,105 and $10,961 for the three months ended March 31, 2013 and 2014, respectively.  Such expense is included in cost of revenue in the accompanying unaudited consolidated statements of operations.

License Agreement with Roche Molecular Systems (“Roche”)

In November 2004, the Company entered into a non-exclusive license to use Roche’s technology including specified nucleic acid amplification processes (“PCR Processes”) to perform certain human invitro clinical laboratory services. In consideration for this license, the Company is obligated to pay royalties to Roche, based on a percentage of net sales of products or services that make use of the PCR Processes. Royalty expense included in cost of revenue relating to this agreement amounted to $90,145 and $44,373 for the three months ended March 31, 2013 and 2014, respectively.

In November 2004, the Company also entered into an agreement with Roche, pursuant to which the Company is collaborating with Roche to produce commercially viable assays used in the validation of genetic markers for pharmaceutical companies. Specifically, the Company has licensed the rights to Roche to use the pre-diagnostic assays the Company develops in the course of using its RNA-extraction technologies to provide testing services to pharmaceutical companies and to produce diagnostic kits that then can be sold commercially to those pharmaceutical companies. Roche is required to pay the Company royalties of a certain percentage of net sales of such diagnostic kits sold to pharmaceutical companies. Through March 31, 2014, Roche has not been required to pay any royalties to the Company pursuant to this agreement.

13

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. License and Collaborative Agreements - (continued)

Services Agreement with Taiho Pharmaceutical Co., Ltd. (“Taiho”)

In July 2001, the Company entered into an agreement with Taiho pursuant to which the Company provided Taiho with RGI-1 generated molecular-based tumor analyses for use in guiding chemotherapy treatment for cancer patients and for use in Taiho’s business of developing and marketing pharmaceutical and diagnostic products for use against cancer. The agreement was subsequently amended and extended through December 31, 2013. Revenue recognized under this agreement for the three months ended March 31, 2013 and 2014 was $33,920 and $0, respectively.

Services Agreement with GlaxoSmithKline, LLC formerly known as SmithKline Beecham Corporation (d.b.a. GlaxoSmithKline or “GSK”)

In January 2006, the Company entered into a master services agreement with GSK, a leading pharmaceutical manufacturer, pursuant to which the Company provides services in connection with profiling the expression of various genes from a range of human cancers. Under the agreement, the Company provides GSK with testing services as described in individual protocols and GSK pays the Company for such services based on the pricing schedule established for each particular protocol. GSK was obligated to make minimum annual payments to the Company under the agreement and also was obligated to make a non-refundable upfront payment to the Company, to be credited against work undertaken pursuant to the agreement.

In December 2008, the Company amended and restated its master services agreement with GSK and extended the term of the agreement for a two-year period, with the option for the parties to extend the agreement for additional one-year periods at the end of the term, upon their mutual written agreement. In addition, the Company became a preferred provider to GSK and its affiliates of genetic testing services on a fee-for-service basis and, in anticipation of the services to be provided, GSK agreed to make a non-refundable upfront payment.

The Company did not recognize any revenue relating to the GSK agreement for the three months ended March 31, 2013 and 2014, respectively.

Non-Exclusive License Agreement with GSK

In March 2010, the Company entered into a non-exclusive license agreement with GSK.  Under the agreement, the Company granted GSK a non-exclusive, sublicenseable license to its proprietary PCR analysis technology and diagnostic expertise to assess BRAF gene mutations in human tumor samples.  As part of the agreement, the Company received a non-refundable technology access fee in consideration for the transfer of the Company’s technology to GSK. The agreement also contains milestone provisions which allowed the Company to earn further payments from GSK, and, as of March 31, 2014, the Company has met all the milestones in the agreement and earned the applicable milestone payments.

14

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. License and Collaborative Agreements - (continued)

Master Services Agreement with GlaxoSmithKline Biologicals S.A. (“GSK Bio”)

On July 26, 2012, the Company entered into a second amended and restated master services agreement with GSK Bio, the vaccine division of GSK. Pursuant to this agreement, which has an effective date of May 15, 2012, the Company provides testing services for clinical trials and epidemiology studies relating to GSK Bio’s cancer immunotherapies. The Company performs these testing services on a fee-for-service basis as embodied in written task orders. GSK Bio retains the intellectual property rights to inventions, improvements and data resulting from the services performed under the agreement. The Company retains all intellectual property rights to its testing services, proprietary processes and all accompanying patent information owned by the Company. All intellectual property owned by either party on the date of the agreement remains the exclusive property of the owning party.

The agreement will expire on December 31, 2014, provided that any outstanding task orders at the time of termination will not thereby terminate (unless otherwise agreed in writing by the parties), and any such task orders will continue for the respective terms specified in such task orders (and the parties shall continue to perform their obligations thereunder). GSK Bio may terminate the agreement, without cause, upon 90 days’ written notice to the Company. The Company may terminate the agreement, without cause, upon one year’s written notice to GSK Bio. The agreement may also be terminated early if either party enters bankruptcy or similar proceedings or in the event of a material breach. GSK Bio may terminate the agreement immediately if the Company experiences a “change of control,” as defined in the agreement.

The agreement also provides for mutual indemnification by the parties and contains customary representations, warranties and covenants, including covenants governing the parties’ use of confidential information and representations regarding adequate insurance coverage or self-insurance.

The Company recognized revenue of $1,356,384 and $328,281 relating to the services performed for GSK Bio for the three months ended March 31, 2013 and 2014, respectively.

15

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Stock Option Plans

In March 2000, the Company adopted a Stock Option Plan (the “2000 Stock Plan”) as approved by its Board of Directors. Under the 2000 Stock Plan, the Company granted options to acquire up to 1,600,000 shares of common stock. In connection with the adoption of the 2006 Employee, Director and Consultant Stock Plan, as further discussed below, the Company is to grant no additional options under the 2000 Stock Plan. Under the 2000 Stock Plan, there were no options to purchase shares of the Company’s common stock that remained outstanding as of December 31, 2013. Prior to March 2007, the Company also granted options to purchase 16,000 shares of common stock to two consultants which were granted under separate agreements outside of the 2000 Stock Plan.

On October 26, 2006, the Board of Directors of the Company approved, and on May 1, 2007, reapproved the adoption of the 2006 Employee, Director and Consultant Stock Plan (the “2006 Stock Plan”). The stockholders approved the 2006 Stock Plan on June 1, 2007. The initial number of shares which may be issued from time to time pursuant to the 2006 Stock Plan was 2,160,000 shares of common stock. Also, the 2006 Stock Plan includes the number of shares subject to purchase under options issued under the 2000 Stock Plan, where the options expired on or after October 18, 2006, subject to a maximum of 210,000 additional options.  In addition, on the first day of each fiscal year of the Company during the period beginning in fiscal year 2008 and ending on the second day of fiscal year 2017, the number of shares that may be issued from time to time pursuant to the 2006 Stock Plan is increased by the lesser of (i) 200,000 shares or equivalent, after determination of the effect of any stock split, stock dividend, combination or similar transactions as set forth in the 2006 Stock Plan, (ii) 5% of the number of outstanding shares of common stock of the Company on such date or (iii) an amount determined by the Board of Directors of the Company.  The initial number of shares available for issuance of 2,160,000 increased by 210,000 for options issued under the 2000 Stock Plan expiring after October 2006 and by 200,000 in 2008 through 2012, resulting in the total number of shares that may be issued as of January 1, 2014 to be 3,770,000. As of March 31, 2014, there were 1,552,866 options available for grant under the 2006 Stock Plan.

Employee options vest according to the terms of the specific grant and expire 10 years from the date of grant. Non-employee option grants to date typically vest over a 2 to 3 year period. The Company had 2,217,134 options outstanding at a weighted average exercise price of $1.85 at March 31, 2014. There were 1,212,311 non-vested stock options outstanding with a weighted average grant date fair value of $1.34 at March 31, 2014.  As of March 31, 2014, there was $969,580 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Stock Plan. That cost is expected to be recognized over a weighted-average period of 2.7 years.

Except for certain grants of restricted common stock and common stock options containing market conditions as described below, the Company estimated share-based compensation expense for the three months ended March 31, 2013 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended March 31, 2013
	(Unaudited)
Risk free interest rate		1.03-1.14	%
Expected dividend yield		—
Expected volatility		104.0-104.9	%
Expected term **(in years)		6.25
Forfeiture rate		7.0	%

No options were granted during the three months ended March 31, 2014.

** Expected term is calculated using SAB 107, Simplified Formula. Management has concluded that the use of the simplified method for calculating the expected term of its common stock option grants is appropriate given the Company’s lack of history of option exercises.

The following table summarizes the stock option activity for the 2006 Plan for the three months ended March 31, 2014:

	Number of Shares			Weighted Average Exercise Price		Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2013		2,288,076		$	1.83		8.41	$	1,082
Granted (Unaudited)		—		$	—		—		—
Exercised (Unaudited)		(15,300	)	$	1.16		8.33		6,007
Expired (Unaudited)		—			—		—		—
Forfeited (Unaudited)		(55,642	)	$	1.36		—		110
Outstanding, March 31, 2014 (Unaudited)		2,217,134		$	1.85		8.14	$	14,054
Exercisable, March 31, 2014 (Unaudited)		1,004,823		$	2.46		8.05	$	8,042

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2013 was $1.39. The Company did not grant any options during the three months ended March 31, 2014.

16

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Stock Option Plans – (continued)

The following table provides additional information regarding options outstanding under the 2006 Plan as of March 31, 2014 (unaudited):

		Options Outstanding				Options Exercisable
Exercise Price		Number of Options		WA Remaining Contractual Term		Number of Options		WA Remaining Contractual Term
$	1.00 to 1.99		1,712,134		8.86		558,810		7.92
	2.00 to 2.99		287,500		7.32		228,513		7.19
	3.00 to 3.99		71,000		4.33		71,000		4.33
	4.29		11,500		3.40		11,500		3.40
	7.00		135,000		3.19		135,000		3.19
			2,217,134		8.14		1,004,823		6.81

Stock-based compensation expense was classified as follows in the results of operation:

	Three Months Ended March 31,
	( Unaudited )
	2013		2014
Cost of revenue	$	13,487	$	11,256
Research and development		9,842		13,197
Sales and marketing		17,400		15,749
General and administrative		64,595		144,567
Totals	$	105,324	$	184,769

Thomas Bologna was appointed Chief Executive Officer of the Company on December 21, 2011 and in connection with his appointment, Mr. Bologna was awarded stock options outside of the 2006 Stock Plan. Pursuant to the employment agreement between the Company and Mr. Bologna, dated December 21, 2011, and in reliance on NASDAQ Listing Rule 5636(c), the Company granted Mr. Bologna (i) a stock option to purchase 600,000 shares of the Company’s common stock, which vests monthly over 36 months from the date of grant, subject to his continued employment with the Company, (ii) a stock option to purchase 300,000 shares of the Company’s common stock, which vested in 2012, and (iii) 270,000 shares of restricted common stock of the Company, which vest on the date on which the 30-day trailing average closing price of the Company’s common stock equals or exceeds $2.40. The exercise price of the stock options is $1.20 per share, the closing price of the Company’s common stock on the day prior to the date of grant. The expense recognized in connection with these grants was $44,531 and $44,531 for the three months ended March 31, 2013 and 2014, respectively, and is included in the above table.

17

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Stock Option Plans – (continued)

The following table summarizes these awards to Mr. Bologna:

Type	Grant Date	Number of Awards		Intrinsic Value as of March 31, 2014		Exercise Price		Options Exercisable		Remaining Contractual Term
Restricted Shares of Common Stock	12/21/2011		270,000	$	321,300	$	—		—		7.7
Options	12/21/2011		600,000	$	—	$	1.20		400,000		7.7
Options	12/21/2011		300,000	$	—	$	1.20		300,000		7.7

18

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Income Taxes

Deferred income taxes result from temporary differences between income tax and financial reporting computed at the effective income tax rate. The Company has established a valuation allowance against its net deferred tax asset due to the uncertainty surrounding the realization of such asset. Management periodically evaluates the recoverability of the deferred tax assets. At such time it is determined that it is more likely than not that deferred tax assets are realizable, the valuation allowance will be reduced.

The Company files U.S. federal, U.S. state, and foreign tax returns. The Company’s major tax jurisdictions are U.S. federal and the State of California. The Company is subject to tax examinations for the open years from 2003 through 2013.

9. Segment Information

The Company operates in a single reporting segment, with an operating facility in the United States.

The following enterprise wide disclosure was prepared on a basis consistent with the preparation of the condensed consolidated financial statements.

The following tables contain certain financial information by geographic area:

	Three Months Ended March 31,
	2013		2014
	(Unaudited)		(Unaudited)
Net revenue:
United States	$	4,153,172	$	3,546,903
Europe		1,361,249		342,601
Japan		109,770		5,430
	$	5,624,191	$	3,894,934

	December 31, 2013		March 31, 2014
			(Unaudited)
Long-lived assets:
United States	$	2,701,805	$	2,539,481

19

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Sale of Common Stock

Common stock classified outside of stockholders’ equity

September 2012 Private Placement

On September 13, 2012, the Company entered into a purchase agreement (the “Purchase Agreement”) with Glaxo Group Limited, an affiliate of GSK (the “GSK Investor”) and two existing investors, Swiftcurrent Partners, L.P. and Swiftcurrent Offshore, Ltd. (collectively with the GSK Investor, the “September Investors”) for the private placement of an aggregate of 8,000,000 newly-issued shares of the Company’s common stock (the “September Shares”) at a purchase price of $1.10 per share (the “September 2012 Private Placement”). The Company raised gross cash proceeds of $8,800,000 in the September 2012 Private Placement, which closed on September 13, 2012 (the “Closing”).

Pursuant to the Purchase Agreement, for so long as the GSK Investor or its affiliates own at least 50% of the September Shares it purchased pursuant to the Purchase Agreement, the GSK Investor has the right to designate one non-voting board observer (the "Board Observer"). The Board Observer, if appointed, has the right to attend all meetings of the Board of Directors of the Company and to receive all board meeting materials, subject to certain restrictions set forth in the Purchase Agreement. As of the date hereof, the GSK Investor has not exercised its right to designate the Board Observer.

In connection with the September 2012 Private Placement, the Company also entered into a registration rights agreement, dated September 13, 2012 (the “September Registration Rights Agreement”), with the September Investors pursuant to which the Company agreed to file, within 45 days of the Closing, a registration statement with the SEC to register the September Shares for resale, which registration statement was required to become effective within 180 days following the Closing. The Company also granted the September Investors certain “piggyback” registration rights, which are triggered if the Company proposes to file a registration statement for its own account or the account of one or more stockholders until the earlier of the sale of all of the September Shares or the September Shares becoming eligible for sale under Rule 144(b)(1) without restriction.

20

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Sale of Common Stock – (continued)

Under the September Registration Rights Agreement, the Company is obligated to use commercially reasonable efforts to cause a registration statement to become effective and to remain continuously effective and to maintain the listing of the covered common stock on NASDAQ or other exchanges, as defined, for a period that will terminate upon the earlier of (i) the date on which all Registrable Securities covered by such Registration Statement as amended from time to time, have been sold, (ii) the date on which there are no longer any Registrable Securities outstanding or (iii) three years from the date of filing of such Registration Statement (the “Effectiveness Period”) and advise each September Investor in writing when the Effectiveness Period has expired. “Registrable Securities” means (i) the September Shares and (ii) shares of capital stock or any other securities issued or issuable with respect to or in exchange for the September Shares; provided, that, a security shall cease to be a Registrable Security with respect to a September Investor upon (A) sale by such September Investor pursuant to a registration statement or Rule 144 under the Securities Act of 1933, or (B) such security becoming eligible for sale by such September Investor without restriction pursuant to Rule 144(b)(1).   In the event the Company fails to satisfy its obligations under the September Registration Rights Agreement, the Company would be in breach of such agreement, in which event, the September Investors would be entitled to pursue all rights and remedies at law or equity including an injunction or other equitable relief. The September Registration Rights Agreement does not provide an explicitly stated or defined penalty due upon a breach.  Because the potential penalty for any breach of the September Registration Rights Agreement is not explicitly stated or defined, which prohibits the Company from applying the guidance of ASC 825-20-15, Registration Payment Arrangements, the Company was required to present the investment of approximately $8,800,000 in the Company’s common stock as common stock outside of stockholders’ equity in the accompanying consolidated balance sheets under ASC 480-10-S99-3, Classification and Measurement of Redeemable Securities.

Pursuant to the September Registration Rights Agreement, the Company filed a registration statement with the SEC on October 26, 2012, to register the September Shares for resale. This registration statement became effective on November 13, 2012 and remained effective as of March 31, 2014.

As of December 31, 2012, the Company has removed the restriction on 3,000,000 of the 8,000,000 September Shares and reclassified the shares to common stock from common stock classified outside of stockholders’ equity. Therefore, as of December 31, 2013 and March 31, 2014, a total of $5,500,000 of common stock relating to the 5,000,000 remaining restricted September Shares was classified outside of stockholders’ equity related to this transaction.

Activity in common stock classified outside of stockholders’ equity was as follows:

	Number of Shares		Amount
Balance, December 31, 2013		5,000,000	$	5,500,000
Issuance of common stock classified outside of stockholders’ equity		—		—
Reclassification to stockholders’ equity		—		—
Balance, March 31, 2014 (unaudited)		5,000,000	$	5,500,000

11. Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.  ASC 820 establishes a three-level valuation hierarchy of valuation techniques that is based on observable and unobservable inputs. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The first two inputs are considered observable and the last unobservable, that may be used to measure fair value and include the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of December 31, 2012, the Company held certain assets that are required to be measured at fair value on a recurring basis, including its cash and cash equivalents. The fair value of these assets was determined using the following inputs in accordance with ASC 820 at December 31, 2012 and March 31, 2013:

	Fair Value Measurement as of March 31, 2013
	Total		Level 1		Level 2		Level 3
Description	$		$		$		$
Money market accounts (1)		10,000		10,000		—		—

	Fair Value Measurement as of March 31, 2014
	(Unaudited)
	Total		Level 1		Level 2		Level 3
Description	$		$		$		$
Money market accounts (1)		—		—		—		—

(1) Included in cash and cash equivalents on the accompanying consolidated balance sheets.

As of December 31, 2013 and March 31, 2014, the Company did not hold any liabilities that are required to be measured at fair value on a recurring basis.

21

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

Special Note Regarding Forward-Looking Statements

Certain information included or incorporated by reference in this Quarterly Report on Form 10-Q for the period ended on March 31, 2014 contains or may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, as may be amended from time to time. Statements that are not historical facts, including statements that use terms such as “anticipate,” “believe,” “should,” “expect,” “intend,” “plan,” “project,” “seek” and “will” and that relate to our plans, objectives, strategy and intentions for future operations, future financial position, future revenues, projected costs and prospects are forward-looking statements but not all forward-looking statements contain these identifying words. Forward-looking statements relate to future periods and may, for example, include statements about our expectation that, for the foreseeable future, a significant amount of our revenues will be derived from ResponseDX^® product sales or our expectations regarding revenues from ResponseDX^® products; our ability to maintain revenue from pharmaceutical clients; the factors that may impact our financial results; the extent of our net losses and our ability to achieve sustained profitability; our business strategy and our ability to achieve our strategic goals; the amount of future revenues that we may derive from Medicare patients; the potential or intent to enter into distribution arrangements; our ability to sustain or increase demand for our tests; our sales forces’ capacity to sell our tests; plans for the development of additional tests; our expectation that our research and development, general and administrative and sales and marketing expenses will increase and our anticipated uses of those funds; our ability to comply with the requirements of a public company; our ability to attract and retain qualified employees; our compliance with federal and state regulatory requirements; the potential impact resulting from the regulation of our tests by the U.S. Food and Drug Administration; the impact of new or changing policies or regulation of our business; our belief that we have filed adequate patent and trademark applications to protect our intellectual property rights; the impact of accounting pronouncements and our accounting policies, estimates, assumptions or models on our financial results; and anticipated challenges to our business.

Forward-looking statements are subject to significant inherent risks and uncertainties that could cause actual results to differ materially from those expected. For us, these risks and uncertainties include, but are not limited to, our ability to develop and commercialize new product without unanticipated delay; the risk that we may not maintain reimbursement for our existing tests or any future tests; the risk that reimbursement pricing may change; the risks and uncertainties associated with the regulation of our tests; our ability to compete; our ability to obtain capital when needed; and our history of operating losses. In light of the risks and uncertainties inherent in all forward-looking statements, including the above, the inclusion of such statements in this Quarterly Report on Form 10-Q for the period ended on March 31, 2014 should not be considered as a representation by us that our objectives, projections or plans will be achieved. These statements are based on current plans, estimates and expectations. Actual results may differ materially from those projected in such forward-looking statements and therefore you should not place undue reliance on them. The forward-looking statements included in this Quarterly Report on Form 10-Q for the period ended on March 31, 2014 speak only as of the date hereof and we expressly disclaim any obligation or undertaking to publicly update any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes to the financial statements included elsewhere in this Quarterly Report on Form 10-Q for the period ended March 31, 2014 and our audited consolidated financial statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K for the year ended December 31, 2013 previously filed with the Securities and Exchange Commission.

Overview

Response Genetics, Inc. (the “Company”) was incorporated in the State of Delaware on September 23, 1999 as Bio Type, Inc. for the purpose of providing molecular profiling services of tumor tissue that has been formalin-fixed and embedded in paraffin. In August 2000, we changed our name to Response Genetics, Inc.

Our Approach

Clinical studies have shown that not all cancer chemotherapy works effectively in every patient, and that a number of patients receive therapy that has no benefit to them and may potentially even be harmful. Our goal is to provide cancer patients and their physicians with a means to make informed, individualized treatment decisions based on genetic analysis of tumor tissues. We are focusing our efforts in the following areas:

• Continued commercialization of our ResponseDX^® tests;

• Broadening our offerings with the introduction of the former Pathwork Diagnostics Tissue of Origin test that was acquired when we purchased the Pathwork Diagnostics assets in August 2013 and moved the assets to our Los Angeles facility. We began selling the Tissue of Origin test in February 2014;

• Enhancing our capabilities in the way we deliver our services to oncologists and pathologists. In late 2013, the Company introduced its TC/PC system to competitively offer its services to pathologists;

• Developing additional diagnostic tests for assessing the risk of cancer recurrence, prediction to therapy response and tumor classification in cancer patients;

• Expanding our testing services business by pursuing new technologies through collaborations and in-licensing to expand our business;

• Entered into an exclusive agreement with Knight Diagnostic Laboratories at Oregon Health & Science University for a proprietary next generation sequencing panel for lung cancer; and

• Selectively building our pharmaceutical services business.

Our technologies enable us to reliably and consistently extract the nucleic acids ribonucleic acid (“RNA”) and deoxyribonucleic acid (“DNA”) from tumor specimens that are stored as formalin-fixed and paraffin-embedded, specimens and thereby to analyze genetic information contained in these tissues. This is significant because the majority of patients diagnosed with cancer have a tumor biopsy sample stored in paraffin, while only a small percentage of patients’ tumor specimens are frozen. Our technologies also enable us to use the formalin-fixed paraffin embedded (“FFPE”) patient biopsies for the development of diagnostic tests.

22

ResponseDX^®

The outcome of cancer therapy is highly variable due to genetic differences among the tumors in cancer patients. Some patients respond well with tumor shrinkage and increase in life span. Other patients do not obtain benefit from the same therapy and may actually experience toxic side effects, psychological trauma and delay in effective treatment.

Until recently, most cancer treatment regimens were administered without any pre-selection of patients on the basis of the particular genetics of their tumor. However, advances in molecular technologies have enabled researchers to identify and measure genetic factors in patients’ tumors that may predict the probability of success or failure of many anti-cancer agents. In order to increase the chances of a better outcome for cancer patients, we offer and continue to expand our offering of tests for measuring predictive factors for therapy response in tumor tissue samples. We provide tests for non-small cell lung cancer (“NSCLC”), colorectal cancer (“CRC”), gastric and gastroesophageal cancer (“GE”), melanoma, thyroid cancer, and breast cancer patients’ tumor tissue specimens through our ResponseDX: Lung^®, ResponseDX: Colon^®, ResponseDX: Gastric^®, ResponseDX: Melanoma^®, ResponseDX: Thyroid^TM and ResponseDX: Breast^TM test suites at our laboratory located in Los Angeles, California, which is certified under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”). These tests serve to help oncologists make optimal therapeutic decisions for cancer patients. The results from our tests may help oncologists choose among therapies to treat their cancer patients.

In August 2013, the Company acquired substantially all of the assets of Pathwork Diagnostics, Inc. including its FDA-cleared Tissue of Origin cancer test. This newly acquired test was launched commercially by the Company in February 2014 as the ResponseDX: Tissue of Origin^TM test. The ResponseDX: Tissue of Origin^TM test is a microarray-based gene expression test that aids in identifying challenging tumors, including metastatic, poorly differentiated, and undifferentiated cancers. The ResponseDX: Tissue of Origin^TM test uses a proprietary microarray platform and proprietary software to compare the expression of 2,000 genes in a patient's tumor with a panel of 15 known tumor types that represent 90% of all cancers. The test received FDA clearance in June 2010.

As of March 31, 2014, our ResponseDX^® sales team consisted of 19 members located in the West, Southeast, and Northeast areas of the United States.

Expansion of our ResponseDX® diagnostic test panels

Our research and development activities primarily relate to the development and validation of diagnostic tests in connection with our ResponseDX^® diagnostic services. In 2014, we plan to build out our product offering to include a ResponseDX^® Glioma profile as well as additional tests in our existing panels.

Addition of Next-Generation Sequencing to our suite of technologies

The Company is pursuing mutational analysis by next-generation sequencing (“NGS”) to complement our suite of molecular diagnostics platforms for the analysis of cancer specimens. We plan to use NGS to detect genomic changes from FFPE tissue samples and to provide physicians with reports that are comprehensive with respect to clinically actionable alterations. To this end, on April 15, 2014, the Company entered into an agreement with Knight Diagnostic Laboratories of the Oregon Health and Science University (“OHSU”) to offer OHSU’s proprietary next generation sequencing panel which provides full gene sequencing of the actionable genes for lung cancer rather than detection only of so-called hot spots as part of the Company’s testing menu. The collaboration leverages the Company’s national sales force.

Pursue Additional Collaborations and In-Licensing to Expand Our Business

We intend to pursue additional collaborations with pharmaceutical companies or in-licensing of products or technologies that will enable us to accelerate the implementation of our plans to expand the services we provide to oncologists and pathologists. We expect to implement this plan by way of licensing of technology and know-how, investments in other companies, strategic collaborations, and other similar transactions. We expect these collaborations to provide us with early access to new technologies available for commercialization.

There are no assurances that we will be able to continue making our current ResponseDX^® tests available, or make additional ResponseDX^® tests available; or that we will be able to develop and commercialize tests of other types of cancer; or that we will be able to expand our testing service business through collaborations.

We anticipate that, over the next 12 months, a substantial portion of our capital resources and efforts will be focused on sales and marketing activities related to our ResponseDX^® diagnostic tests, research and development to expand our series of diagnostic tests for cancer patients, and for other general corporate purposes.

Research and development is crucial to the Company’s development as we seek to expand our series of diagnostic tests for cancer patients. Our research and development expenses were $297,200 and $467,567 for the three months ended March 31, 2013 and 2014, respectively, representing 5.3% and 12.0% of our net revenue for the three months ended March 31, 2013 and 2014, respectively. Major components of our research and development expenses include supplies and reagents for our research activities, personnel costs, occupancy costs, equipment warranties and service, patent fees, insurance, business consulting and sample procurement costs. We expect research and development expenses to increase as we work to develop additional aspects of our technology and to study diagnostic indicators for various forms of cancer.

23

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from those estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements.

Revenue Recognition

Pharmaceutical Revenue

Revenues that are derived from pharmacogenomic testing services provided to pharmaceutical companies are recognized on a contract specific basis pursuant to the terms of the related agreements. Revenue is recognized in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

Revenues are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through the Company’s laboratory under a specified contractual protocol and are recorded on the date the tests are completed. Certain contracts have minimum assay requirements that, if not met, result in payments that are due upon the completion of the designated period. In these cases, revenues are recognized when the end of the specified contract period is reached, if the minimum assay requirements are not met.

ResponseDX^® Revenue

Net revenue for the Company’s diagnostic services is recognized on an accrual basis at the time diagnostic tests are completed. Each test performed relates to a specimen encounter derived from a patient, and received by the Company on a specific date (such encounter is commonly referred to as an “accession”). The Company’s services are billed to various payors, including Medicare, private health insurance companies, healthcare institutions, and patients. The Company reports net revenue from contracted payors, including certain private health insurance companies, and healthcare institutions based on the contracted rate, or in certain instances, the Company’s estimate of the amount expected to be collected for the services provided. For billing to Medicare, the Company uses the published fee schedules, net of standard discounts (commonly referred to as “contractual allowances”). The Company reports net revenue from non-contracted payors, including certain private health insurance companies, based on the amount expected to be collected for the services provided. The Company analyzes historical payments from payors as a percentage of amounts billed by the Company to estimate expected collections for purposes of recording net revenue.

The Company has its Medicare provider number which allows it to invoice and collect from Medicare. Invoicing to Medicare is primarily based on amounts allowed by Medicare for the service provided as defined by Common Procedural Terminology (“CPT”) codes. In January 2013, a Medicare fee schedule update was announced which included proposed changes to Medicare reimbursement rates that significantly reduced the reimbursement rates for certain of the testing services we provide. The Company participated with other impacted organizations to provide guidance to the local Medicare Administrative Contractor (“MAC”) that resulted in the local MAC updating certain pricing through September 2013 which reflected an increase in many of the tests originally priced in January 2013. In addition, on October 1, 2013, the Centers for Medicare and Medicaid Services (“CMS”) issued fees for some, but not all, of the CPT codes used by the Company. It is uncertain if continued guidance provided to Medicare and the local MAC by impacted organizations will result in additional fee increases or additional positive coverage determinations in 2014. If, however, the current level of reduction in reimbursement rates is adopted as is, it may have a material adverse effect on the Company's operations.

As a result of these CPT code changes and Medicare price changes, we have experienced a departure from our normal reimbursement patterns with Medicare and other payors. Specifically, we have experienced delays in certain reimbursements for services and an increase in initial denials of claims for certain services provided. Accordingly, we re-evaluated the assumptions employed in our model for estimating revenue to be recognized for ResponseDX^® testing. We view the code and price changes described above as affecting only the assumptions we used in pricing our services. The nature of the testing we provide, the evidence we gather to establish the creditworthiness of our payors and the delivery method of our services have not changed from prior periods, and there are no indicators that these assumptions require change.

We performed analyses that considered our historical patterns of revenue by payor in conjunction with the fluctuations we experienced in the quarters ended March 31, 2013 and 2014 to arrive at the revenue recorded during those periods. We believe that the changes in CPT codes and pricing that are causing confusion and erratic payment experience in the payor community will take some time to resolve. The time needed for resolution will depend upon Medicare and the local MAC releasing additional pricing changes and potentially, revisions to previously revised prices, and upon the private payor community adopting the new CPT codes and some level of revised pricing. Accordingly, our revenue recognition estimates could be materially affected in future periods as pricing and payments patterns change and develop, and we may be materially affected by future or retroactive price changes.

On July 8, 2013, CMS released a new proposed rulemaking entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule & Other Revisions to Part B for CY 2014”. This proposed rule contains a number of provisions that may adversely impact the level of reimbursement for a variety of tests for which the Company receives reimbursement from the Medicare program beginning in 2014. Among other things, CMS has proposed examining approximately 1,200 laboratory tests that appear on the Clinical Lab Fee Schedule (“CLFS”) over a period of five years to determine whether advances in technology may have reduced the cost of providing such tests and whether or not the level of reimbursement should be revised. The Company is currently performing molecular testing which is reimbursed using CPT codes that fall on the CLFS. CMS has also proposed changing the methodology used to determine reimbursement rates for the technical component of certain tests reimbursed off of the Physician Fee Schedule (“PFS”). Among other provisions, CMS has proposed limiting the Relative Value Units (“RVUs”) ascribed to the Practice Expense component of their reimbursement formula for tests performed in “Non-Facilities” (which would include most clinical laboratories like the Company) to the RVUs that have been ascribed for the same procedures under the Hospital Outpatient Prospective Payment System, or the Ambulatory Payment Classification (“APC”) system which are used to reimburse “Facilities” (such as hospitals and ambulatory surgery centers). The Company currently performs FISH testing, which may be impacted by this PFS rule change if it is enacted.

Additionally, CMS has as part of its regulatory structure the National Correct Coding Initiative (“NCCI”). Recent changes to NCCI guidance may reduce allowable quantities billed for FISH testing. These changes would lower reimbursement amounts for FISH tests, and there can be no assurance that CMS will make any modifications in the existing language of the NCCI documents.

A number of proposals for legislation or regulation continue to be under discussion which could have the effect of substantially reducing Medicare reimbursements for clinical laboratories or introducing cost sharing to beneficiaries. Depending upon the nature of regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.

License Fees

We have licensed technology for the extraction of RNA and DNA from FFPE tumor specimens from the University of Southern California (“USC”) in exchange for royalty fees on revenue generated by use of this technology. These royalties are calculated as a fixed percentage of revenue that we generate from use of the technology licensed from USC. Total license fees expensed in cost of revenue under the royalty agreement with USC were $104,105 and $10,961 for the three months ended March 31, 2013 and 2014, respectively. We also maintain a non-exclusive license to use Roche Molecular Systems, Inc.’s (“Roche”) polymerase chain reaction (“PCR”), homogenous PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we generate through use of this technology. Royalties expensed in cost of revenue under this agreement totaled $90,145 and $44,373 for the three months ended March 31, 2013 and 2014, respectively.

We are subject to potentially significant variations in royalties recorded in any period. While the amount paid is based on a fixed percentage from revenues of specific tests pursuant to terms set forth in the agreements with USC and Roche, the amount due is calculated based on the revenue we recognize using the respective licensed technology. As discussed above, this revenue can vary from period to period as it is dependent on the timing of the specimens submitted by our clients for testing.

24

Accounts Receivable and Allowance for Doubtful Accounts

We invoice our pharmaceutical clients as specimens are processed and any other contractual obligations are met. Our contracts with pharmaceutical clients typically require payment within 45 days of the date of invoice. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. We specifically analyze accounts receivable and historical bad debts, client credit, current economic trends and changes in client payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. To date, our clients have primarily been large pharmaceutical companies. Bad debts to date have been minimal and there is no allowance for doubtful accounts for our pharmaceutical revenue at December 31, 2013 and March 31, 2014.

We bill Medicare and private payors (“Private Payors”) for ResponseDX^® upon completion of the required testing services. As such, we take assignment of benefits and the risk of collection with Medicare and Private Payors. We continue to monitor the collection history for Medicare and Private Payors.  Based on the historical experience for our Medicare and Private Payor accounts, we have determined, based on a detailed analysis, that accounts receivable associated with certain billings are unlikely to be collected. Therefore, we have recorded an allowance for doubtful accounts of $2,404,659 and $1,751,567 as of December 31, 2013 and March 31, 2014, respectively.

An allowance for doubtful accounts is recorded for estimated uncollectible amounts due from the Company’s various payor groups. The process for estimating the allowance for doubtful accounts involves significant assumptions and judgments. Specifically, the allowance for doubtful accounts is adjusted periodically, and is principally based upon an evaluation of historical collection experience of accounts receivable for the Company’s various payor classes. After appropriate collection efforts, accounts receivable are written off and deducted from the allowance for doubtful accounts. Additions to the allowance for doubtful accounts are charged to bad debt expense. The payment realization cycle for certain governmental and managed care payors can be lengthy, involving denial, appeal, and adjudication processes, and is subject to periodic adjustments that may be significant.

We cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and financial health of specific customers. We consider all available information in our assessments of the adequacy of the reserves for uncollectible accounts.

Income Taxes

We estimate our tax liability through calculations we perform for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. Our management then assesses the likelihood that deferred tax assets will be recovered in future periods through future operating results. To the extent that we cannot conclude that it is more likely than not that the benefit of such assets will be realized, we establish a valuation allowance to adjust the net carrying value of such assets. The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income, based on management’s estimates and assumptions. These estimates and assumptions take into consideration future taxable income and ongoing feasible tax strategies in determining recoverability of such assets. Our valuation allowance is subject to significant change based on management’s estimates of future profitability and the ultimate realization of the deferred tax assets. The Company has established a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding the realization of such assets.

Results of Operations

Quarters Ended March 31, 2014 and March 31, 2013

Revenue:   Revenue was $3,894,934 for the quarter ended March 31, 2014, as compared to $5,624,191 for the quarter ended March 31, 2013, a decrease of $1,729,257. The decrease was due to lower pharmaceutical revenue of $1,864,313 offset by higher ResponseDX^® revenue of $135,055. ResponseDX^® revenue accounted for 85.2% of total revenue for the quarter ended March 31, 2014 compared to 56.6% for the quarter ended March 31, 2013. The increase in ResponseDX^® revenue primarily relates to our continued focus on the restructuring of the sales team since the first quarter of 2013, the introduction of new programs (where the Company performs the technical component of testing and the client physician performs the related professional interpretation), and the introduction of the Tissue of Origin test. The decrease in pharmaceutical revenue was primarily related to the timing of completion of several pharmaceutical client studies.

Cost of Revenue:   Cost of revenue for the quarter ended March 31, 2014 was $2,438,376 as compared to $2,533,722 for the quarter ended March 31, 2013, a decrease of $95,346 or 3.8%. Cost of revenue declined less than did revenue due to the fixed and semi-fixed nature of many of the cost items and due to our preparation for the launch of our ResponseDX: Tissue of Origin^TM test. The decrease in cost of revenue resulted primarily from lower laboratory supplies and reagents and royalties of $403,056 offset by higher personnel costs of $154,207, depreciation of $50,587, rent of $45,070 and equipment service and repair of $43,818. For items that increased, the higher costs resulted primarily from our expansion related to our new ResponseDX: Tissue of Origin^TM test, which launched during the quarter ended March 31, 2014. Cost of revenue as a percentage of revenue was 62.6% for the quarter ended March 31, 2014, as compared to 45.1% for the quarter ended March 31, 2013.

25

Research and Development Expenses:   Research and development expenses were $467,567 for the quarter ended March 31, 2014, as compared to $297,200 for the quarter ended March 31, 2013, an increase of $170,367 or 57.3%. This increase resulted primarily from efforts to develop new tests and to enhance existing tests. The increase in expense was the result of higher laboratory supplies and reagents of $117,224 and personnel costs of $55,934. We expect research and development expenses to increase as we continue work to develop additional aspects of our technology, introduce new tests and to study diagnostic indicators for various forms of cancer.

General and Administrative Expenses:  General and administrative expenses were $3,013,898 for the quarter ended March 31, 2014, as compared to $2,135,186 for the quarter ended March 31, 2013, an increase of $878,712 or 41.2%. This increase resulted primarily from higher bad debt expense of $825,388 and personnel costs of $170,069 offset primarily by lower legal fees of $64,543.

Sales and Marketing Expenses:   Sales and marketing expenses were $1,452,905 for the quarter ended March 31, 2014, as compared to $1,442,235 for the quarter ended March 31, 2013, a decrease of $10,670 or 0.7%. We expect that sales and marketing costs will increase to support sales and marketing activities.

Other Income and Expense:  Other income and expense primarily represents the interest expense we incur on our revolving credit facility with Silicon Valley Bank and equipment leases as well as realized and unrealized foreign currency exchange gains or losses on our Euro-denominated accounts receivable. Interest expense increased to $24,221 for the three months ended March 31, 2014 compared with $19,410 for the three months ended March 31, 2013. The increase was primarily due to new equipment leases. Other expense decreased to $2,407 for the three months ended March 31, 2014 compared to $20,785 three months ended March 31, 2013 due to lower realized foreign currency exchange losses.

Net Income/(Loss):  As a result of the foregoing, our net loss increased by $2,680,135 to $3,504,439 for the three months ended March 31, 2014 as compared to a net loss of $824,304 for the three months ended March 31, 2013.

Liquidity and Capital Resources

We incurred a net loss of $3,504,439 during the three months ended March 31, 2014. Since our inception in September 1999, we have incurred cumulative losses and as of March 31, 2014, we had an accumulated deficit of $68,801,618. We have not yet achieved profitability and anticipate that we will likely incur additional losses. We cannot provide assurance as to when we will achieve profitability. We expect that our cash and cash equivalents will be used to fund our selling and marketing activities primarily related to our ResponseDX^® tests, research and development, and general corporate purposes. As a result, we will need to generate significant revenues to achieve profitability.

The Company’s current operating plan includes various assumptions concerning the level and timing of cash receipts from sales and cash outlays for operating expenses and capital expenditures. The Company’s ability to successfully carry out its business plan is primarily dependent upon its ability to (1) obtain sufficient additional capital at acceptable costs, (2) attract and retain knowledgeable employees, and (3) generate significant revenues. At this time, the Company expects to satisfy its future cash needs primarily through additional financing and/or strategic investments. The Company is currently seeking such additional financing and/or strategic investments; however, there can be no assurance that any additional financing or strategic investments will be available on acceptable terms, if at all. If the Company is unable to timely and successfully raise additional capital and/or achieve profitability, it will not have sufficient capital resources to implement its business plan or continue its operations, and the Company will most likely be required to reduce certain discretionary spending and/or curtail operations, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. The unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.

On July 14, 2011, the Company entered into a line of credit agreement with Silicon Valley Bank (the “Bank”). The agreement has been amended most recently on March 7, 2013. The line of credit is collateralized by the Company’s pharmaceutical, Private Payor and Medicare receivables. The amended maximum amount that can be borrowed from the credit line is $2,000,000. As of March 31, 2014, the amount the Company can draw from the line of credit was $1,000,000 calculated as the lesser of (i) the Company’s calculated borrowing base, which was 80% of certain of the Company’s accounts receivable, or (ii) the amount available under the credit line. As of March 31, 2014, the interest fees associated with this line of credit were set at the prime rate plus 1%. During 2013 and the three months ended March 31, 2014, the rate charged to the Company was 5%. As needed from time to time, the Company may draw on this line for use for general corporate purposes. As of December 31, 2013 and March 31, 2014, the Company had drawn $1,000,000 against the line of credit. The line of credit is subject to various financial covenants. As of March 31, 2014, the Company was in compliance with the covenants. As of December 31, 2013, the Company was not in compliance with one of these covenants, and the Bank waived the covenant violation. Prior to the most recent amendment on March 7, 2013, the Company was also not in compliance with certain other covenants. The September 28, 2012 amendment provided forbearance for the failure to comply with these certain covenants through November 30, 2012, and modified the covenants to include a requirement that the Company maintain account balances at the Bank totaling a minimum of $4,000,000 during the covered forbearance period. The December 6, 2012 amendment to the agreement extended the forbearance for the failure to comply with these certain covenants and the requirement for the Company to maintain account balances at the Bank totaling a minimum of $4,000,000 during the forbearance period. In addition, pursuant to the March 7, 2013 amendment, the Bank waived the Company's existing breach of financial covenants under the credit agreement and the parties restructured the line of credit to provide that, among other things: (i) the revolving line of credit's maturity date was extended to March 7, 2015, (ii) the fee for the unused portion of the revolving line of credit was reduced from 0.375% to 0.250% per annum of the average unused portion of the revolving line of credit, (iii) the Company must continue to meet certain reporting requirements including providing financial statements and a certificate of compliance with the terms and conditions of the credit agreement by an authorized officer to the Bank within 45 days of the last day of each calendar quarter, provided that if the Company has less than $4,000,000 in its account at the Bank at any time during such calendar quarter, the Company must provide the financial statements and the certificate of compliance within 30 days of the end of such calendar quarter and provide a monthly report on revenues realized from Private Payors, (iv) the financial covenants were amended and restated to require the Company to maintain a ratio of quick assets to current liabilities of 1:50 to 1:00 and meet certain specified minimum adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements as defined in the amendment and measured on a monthly basis and (v) the Bank is granted certain additional inspection of books, records and collateral rights.

As of December 31, 2013, the line of credit under the credit agreement was classified as a non-current liability on the accompanying consolidated balance sheets as the line of credit had a maturity date of greater than one year from the date of the balance sheet. As of March 31, 2014, the line of credit under the credit agreement was classified as a current liability on the accompanying consolidated balance sheets as the line of credit had a maturity date of less than one year from the date of the balance sheet.

From time to time, the Company’s calculated borrowing base under its Bank line of credit may decrease to a level where the Company is in an over-advance position in which case the Company will be required to repay any outstanding amounts greater than the calculated borrowing base for such covered period back to the Bank immediately. The Company will be able to draw down on the credit line again with respect to such paid back amount once the Company is in compliance with the borrowing base requirement.

If we are able to secure additional capital, we expect to use our capital to fund research and development and to make capital expenditures to keep pace with the expansion of our research and development programs and to scale up our commercial operations. The amount and timing of actual expenditures may vary significantly depending upon a number of factors, such as the progress of our product development, regulatory requirements, commercialization efforts, and the amount of cash used by operations. We expect that we will continue to generate revenue through our pharmacogenomic testing services and ResponseDX^® testing services that we provide to pharmaceutical clients and to the users of our ResponseDX^® testing services which include oncologists, pathologists, hospitals, and cancer care centers. These revenues are not guaranteed and are not expected to substantially offset the costs associated with our expansion efforts.

Following is a summary of recent events and the expected impact these events have had or may have on our liquidity and future realization of revenues.

Sales of Common Stock

Under the Company’s Articles of Incorporation, the Company has one class of common stock and its holders have no preemptive, subscription, redemption or conversion rights. As described below, the Company sold shares of its common stock during 2012 and 2013. In connection with certain of these offerings, the Company entered into registration rights agreements with the purchasers of the common shares which give such purchasers certain registration rights.

26

February 2012 Private Placement

On February 2, 2012, the Company entered into purchase agreements with various investors (collectively, the “February Investors”) for the private placement of an aggregate of 5,257,267 newly-issued shares of the Company’s common stock (the “February Shares”) at a purchase price of $1.50 per share (the “February 2012 Private Placement”). Net cash proceeds raised in the February 2012 Private Placement were approximately $7,822,000. The February Investors participating in the February 2012 Private Placement were various institutions and all the then current officers and directors of the Company. The final closing of the February 2012 Private Placement (the “February Closing”) occurred on February 2, 2012.

In connection with the February 2012 Private Placement, the Company also entered into registration rights agreements, each dated February 2, 2012, with the February Investors pursuant to which the Company agreed to file, within 90 days of the February Closing, a registration statement with the SEC to register the February Shares for resale, which registration statement was required to become effective within 180 days following the February Closing. The Company also granted the February Investors certain “piggyback” registration rights, which are triggered if the Company proposes to file a registration statement for its own account or the account of one or more shareholders until the earlier of the sale of all of the February Shares or the February Shares becoming eligible for sale under Rule 144(b)(1) without restriction.

Pursuant to the registration rights agreements dated February 2, 2012, the Company filed a registration statement with the SEC on April 30, 2012, to register the February Shares for resale. This registration statement became effective on May 17, 2012 and remained effective as of March 31, 2014.

August 2013 Issuance of Registered Shares of Common Stock of the Company as Part of the Pathwork Assets Acquisition Purchase Price

On August 23, 2013, the Company entered into an asset purchase agreement (the “Pathwork Purchase Agreement”) with Pathwork (assignment for the benefit of creditors), LLC (“Seller”), pursuant to which the Company acquired substantially all of the assets of Pathwork Diagnostics, Inc. (“Pathwork”), which had previously assigned all of its assets to Seller for the benefit of its creditors pursuant to a General Assignment, dated as of April 2, 2013. Pursuant to the Pathwork Purchase Agreement, the Company acquired the Pathwork assets for the following consideration: (i) an aggregate of 500,000 newly-issued registered shares of the Company’s common stock valued at $1.96 per share, or $980,000, issued to two senior secured creditors of Pathwork which were designated by Seller in the Pathwork Purchase Agreement and (ii) a cash payment of $200,000 to Seller.

September 2013 Registered Direct Offering

On September 20, 2013, the Company entered into a definitive agreement with certain institutional investors for the sale of 932,805 shares of its common stock in a registered direct offering at a price of $2.05 per share (the "September 2013 Offering"). The September 2013 Offering was completed on September 25, 2013. Gross proceeds of the September 2013 Offering were $1,912,250. Net proceeds, after deducting the placement agent fee and the September 2013 Offering costs, were approximately $1.7 million.

December 2013 Underwritten Public Offering

On December 13, 2013, the Company entered into an underwriting agreement with National Securities Corporation (the "Underwriter"), pursuant to which the Underwriter agreed to purchase 4,464,443 shares of the Company's common stock (the "Shares") at the public offering price of $1.20 per share less an underwriting discount of 5%. The Shares were offered and sold by the Company pursuant to an effective registration statement on Form S-3 (File No. 333-171266) filed by the Company with the Securities and Exchange Commission on December 17, 2010, as amended, as supplemented by the prospectus supplement dated December 13, 2013 relating to the offering and the accompanying prospectus (the "December 2013 Offering"). The December 2013 Offering was completed on December 18, 2013. Gross proceeds of the December 2013 Offering were $5,357,332. Net proceeds, after deducting the placement agent fee and the December 2013 Offering costs, were approximately $4.8 million.

27

Common Stock Classified Outside of Stockholders’ Equity

September 2012 Private Placement

On September 13, 2012, the Company entered into a purchase agreement (the “Purchase Agreement”) with Glaxo Group Limited, an affiliate of GSK (the “GSK Investor”) and two existing investors, Swiftcurrent Partners, L.P. and Swiftcurrent Offshore, Ltd. (collectively with the GSK Investor, the “September Investors”) for the private placement of an aggregate of 8,000,000 newly-issued shares of the Company’s common stock (the “September Shares”) at a purchase price of $1.10 per share (the “September 2012 Private Placement”). The Company raised gross cash proceeds of $8,800,000 in the September 2012 Private Placement, which closed on September 13, 2012 (the “Closing”).

Pursuant to the Purchase Agreement, for so long as the GSK Investor or its affiliates own at least 50% of the September Shares it purchased pursuant to the Purchase Agreement, the GSK Investor has the right to designate one non-voting board observer (the "Board Observer"). The Board Observer, if appointed, has the right to attend all meetings of the Board of Directors of the Company and to receive all board meeting materials, subject to certain restrictions set forth in the Purchase Agreement. As of the date hereof, the GSK Investor has not exercised its right to designate the Board Observer.

In connection with the September 2012 Private Placement, the Company also entered into a registration rights agreement, dated September 13, 2012 (the “September Registration Rights Agreement”), with the September Investors pursuant to which the Company agreed to file, within 45 days of the Closing, a registration statement with the SEC to register the September Shares for resale, which registration statement was required to become effective within 180 days following the Closing. The Company also granted the September Investors certain “piggyback” registration rights, which are triggered if the Company proposes to file a registration statement for its own account or the account of one or more stockholders until the earlier of the sale of all of the September Shares or the September Shares becoming eligible for sale under Rule 144(b)(1) without restriction.

Under the September Registration Rights Agreement, the Company is obligated to use commercially reasonable efforts to cause a registration statement to become effective and to remain continuously effective and to maintain the listing of the covered common stock on NASDAQ or other exchanges, as defined, for a period that will terminate upon the earlier of (i) the date on which all Registrable Securities covered by such Registration Statement as amended from time to time, have been sold, (ii) the date on which there are no longer any Registrable Securities outstanding or (iii) three years from the date of filing of such Registration Statement (the “Effectiveness Period”) and advise each September Investor in writing when the Effectiveness Period has expired. “Registrable Securities” means (i) the September Shares and (ii) shares of capital stock or any other securities issued or issuable with respect to or in exchange for the September Shares; provided, that, a security shall cease to be a Registrable Security with respect to a September Investor upon (A) sale by such September Investor pursuant to a registration statement or Rule 144 under the Securities Act of 1933, or (B) such security becoming eligible for sale by such September Investor without restriction pursuant to Rule 144(b)(1).   In the event the Company fails to satisfy its obligations under the September Registration Rights Agreement, the Company would be in breach of such agreement, in which event, the September Investors would be entitled to pursue all rights and remedies at law or equity including an injunction or other equitable relief. The September Registration Rights Agreement does not provide an explicitly stated or defined penalty due upon a breach.  Because the potential penalty for any breach of the September Registration Rights Agreement is not explicitly stated or defined, which prohibits the Company from applying the guidance of ASC 825-20-15, Registration Payment Arrangements, the Company was required to present the investment of approximately $8,800,000 in the Company’s common stock as common stock outside of stockholders’ equity in the accompanying consolidated balance sheet under ASC 480-10-S99-3, Classification and Measurement of Redeemable Securities.

Pursuant to the September Registration Rights Agreement, the Company filed a registration statement with the SEC on October 26, 2012, to register the September Shares for resale. This registration statement became effective on November 13, 2012 and remained effective as of March 31, 2014.

As of December 31, 2012, the Company has removed the restriction on 3,000,000 of the 8,000,000 September Shares and reclassified the shares to common stock from common stock classified outside of stockholders’ equity. Therefore, as of December 31, 2013 and March 31, 2014, a total of $5,500,000 of common stock relating to the 5,000,000 remaining restricted September Shares was classified outside of stockholders’ equity related to this transaction.

28

Comparison of Cash Flows for the Three Months Ended March 31, 2013 and 2014

As of March 31, 2013, we had $8,034,310 in cash and cash equivalents, working capital of $10,018,759 and an accumulated deficit of $58,100,968. As of March 31, 2014, we had $4,956,503 in cash and cash equivalents, working capital of $5,511,476 and an accumulated deficit of $68,801,618.

Cash flows provided by operating activities

During the three months ended March 31, 2014, the Company used cash flows in operating activities of $3,095,012 compared to $880,293 used in the three months ended March 31, 2013. The increase in cash used in operating activities of $2,214,719 was due mainly to an increase in the net loss from $824,304 for the quarter ended March 31, 2013 to $3,504,439 for the quarter ended March 31, 2014. Other items that impacted cash flows from operating activities include increases in accounts receivable, prepaid expenses, royalties and payroll-related liabilities and decreases in accounts payable and accrued expenses.

The increase in accounts receivable related mainly to increases in Medicare and Private Payor receivables resulting from the recent changes to the molecular codes used for billing. It is anticipated that these billings will continue to take longer to collect in the short-term as a result of these recent changes.

Cash flows used in investing activities

Net cash used in investing activities was $85,814 for the three months ended March 31, 2013 and $44,559 for the three months ended March 31, 2014. The reduction in cash used in investing activities was primarily attributable to lower purchases of equipment and software.

Cash flows used in financing activities

Cash flows from financing activities for the three months ended March 31, 2013 used net cash of $39,208 for repayment of capital lease obligations. Cash flows from financing activities for the three months ended March 31, 2014 used net cash of $30,296 for repayment of capital lease obligations net of proceeds received from the exercise of stock options.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

29

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

ITEM 4. Controls and Procedures.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Under the supervision, and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of the end of the period covered by this report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.

It should be noted that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As a result, there can be no assurance that a control system will succeed in preventing all possible instances of error and fraud. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the conclusions of our Principal Executive Officer and the Principal Financial Officer are made at the “reasonable assurance” level.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

The Company is, from time to time, involved in legal proceedings, regulatory actions, claims and litigation arising in the ordinary course of business. These matters are not expected to have a material adverse effect upon the Company’s financial condition.

ITEM 1A. Risk Factors.

Not applicable.

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

None.

30

ITEM 3. Defaults Upon Senior Securities.

None.

ITEM 4. Mine Safety Disclosures.

Not applicable.

ITEM 5. Other Information.

None.

ITEM 6. Exhibits.

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

31

SIGNATURES

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

	RESPONSE GENETICS, INC.
DATE: May 15, 2014	By:	/s/ Thomas A. Bologna
		Thomas A. Bologna
		Chief Executive Officer (Principal Executive Officer)
DATE: May 15, 2014	By:	/s/ Kevin R. Harris
		Kevin R. Harris
		Vice President and Chief Financial Officer (Principal Financial Officer)

32

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Thomas A. Bologna, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Response Genetics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2014

/s/ Thomas A. Bologna

Thomas A. Bologna

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Kevin R. Harris, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Response Genetics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2014

/s/ Kevin R. Harris

Kevin R. Harris

Vice President and Chief Financial Officer

EX-32

Exhibit 32

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Response Genetics, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report for the period ended March 31, 2014 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 15, 2014	/s/ Thomas A. Bologna
	Chief Executive Officer
Dated: May 15, 2014	/s/ Kevin R. Harris
	Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

This certification “accompanies” the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

XML

Commitments and Contingencies (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Commitments And Contingencies Disclosure [Line Items]
Rent expense	$ 212,181	$ 160,790
California State [Member]
Commitments And Contingencies Disclosure [Line Items]
Operating leases, space	27,446
Operating lease expiration date	Jun. 30, 2015
Maryland [Member]
Commitments And Contingencies Disclosure [Line Items]
Operating leases, space	1,460
Operating lease expiration date	Jan. 31, 2013

XML

Segment Information (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Segment Reporting Information [Line Items]
Net revenue	$ 3,894,934	$ 5,624,191
United States [Member]
Segment Reporting Information [Line Items]
Net revenue	3,546,903	4,153,172
Long-lived assets	2,539,481		2,701,805
Europe [Member]
Segment Reporting Information [Line Items]
Net revenue	342,601	1,361,249
Japan [Member]
Segment Reporting Information [Line Items]
Net revenue	$ 5,430	$ 109,770

XML

Stock Option Plans (Schedule of Stock-Based Compensation Included in Results of Operations) (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	$ 184,769	$ 105,324
Cost of revenue [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	11,256	13,487
Research and development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	13,197	9,842
Sales and marketing [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	15,749	17,400
General and administrative [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	$ 144,567	$ 64,595

XML

Property and Equipment and Intangible Assets (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Property, Plant and Equipment [Line Items]
Amortization Expenses	$ 206,884	$ 137,401

XML

Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

Schedule of Fair Value of Assets and Liabilities Measured on Recurring Basis

The fair value of these assets was determined using the following inputs in accordance with ASC 820 at December 31, 2012 and March 31, 2013:

	Fair Value Measurement as of March 31, 2013
	Total		Level 1		Level 2		Level 3
Description	$		$		$		$
Money market accounts (1)		10,000		10,000		—		—

	Fair Value Measurement as of March 31, 2014
	(Unaudited)
	Total		Level 1		Level 2		Level 3
Description	$		$		$		$
Money market accounts (1)		—		—		—		—

(1) Included in cash and cash equivalents on the accompanying consolidated balance sheets.

XML

Sale of Common Stock (Schedule of Common Stock Classified Outside of Stockholders' Equity) (Details) (USD $)	3 Months Ended
	Mar. 31, 2014
Number of Shares
Beginning balance	5,000,000
Issuance of common stock classified outside of stockholders’ equity	0
Reclassification to stockholders' equity	0
Ending Balance	5,000,000
Amount
Beginning balance	$ 5,500,000
Issuance of common stock classified outside of stockholders’ equity	0
Reclassification to stockholders' equity	0
Ending balance	$ 5,500,000

XML

Stock Option Plans (Details) (USD $)	3 Months Ended			3 Months Ended		1 Months Ended	3 Months Ended	1 Months Ended		3 Months Ended	12 Months Ended						3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013	Mar. 31, 2014 Non-employee option [Member] Maximum [Member]	Mar. 31, 2014 Non-employee option [Member] Minimum [Member]	Mar. 31, 2000 Stock Option [Member]	Mar. 31, 2014 Stock Option [Member]	Mar. 31, 2000 Stock Option Plan 2000 [Member]	Mar. 31, 2014 Stock Option Plan 2000 [Member]	Mar. 31, 2014 2006 Stock Plan [Member]	Dec. 31, 2012 2006 Stock Plan [Member]	Dec. 31, 2011 2006 Stock Plan [Member]	Dec. 31, 2010 2006 Stock Plan [Member]	Dec. 31, 2009 2006 Stock Plan [Member]	Dec. 31, 2008 2006 Stock Plan [Member]	Oct. 26, 2006 2006 Stock Plan [Member]	Mar. 31, 2014 Thomos Bologna [Member]	Mar. 31, 2013 Thomos Bologna [Member]	Mar. 31, 2014 Thomos Bologna [Member] Restricted Stock Units (RSUs) [Member]	Mar. 31, 2014 Thomos Bologna [Member] Restricted Stock Units (RSUs) [Member] Minimum [Member]	Mar. 31, 2014 Thomos Bologna [Member] Stock Option [Member]	Mar. 31, 2014 Thomos Bologna [Member] Stock Option [Member] Minimum [Member]	Mar. 31, 2014 Thomos Bologna [Member] Stock Option [Member] Period One [Member]	Mar. 31, 2014 Thomos Bologna [Member] Stock Option [Member] Period Two [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized									210,000	3,770,000						2,160,000
Stock option granted, number of common stock shares	0					16,000		1,600,000		1,552,866											600,000			300,000
Increase in the number of shares available for issuance										200,000	200,000	200,000	200,000	200,000	200,000
Increase in the number of shares available for issuance, percent of stock outstanding										5.00%
Options expiration period							10 years
Options vesting period				3 years	2 years																36 months
Options outstanding, weighted average exercise price	$ 1.85		$ 1.83							$ 1.85
Non-vested stock options outstanding, Weighted average grant date fair value	$ 1.34
Stock options granted, average fair value	$ 1.39
Average closing price of common stock																				$ 2.40
Number of days, for calculating average closing price of common stock																						30 years
Number of restricted common stock granted																			270,000
Stock option granted, exercise price	$ 0																						$ 1.20
Share-based compensation	$ 184,769	$ 105,324															$ 44,531	$ 44,531
Non-vested stock options	1,212,311
Unrecognized compensation cost related to non-vested share-based compensation arrangements granted	$ 969,580
Share Based Compensation Arrangement By Share Based Payment Award Options Non Vested Weighted Average Remaining Period	2 years 8 months 12 days

XML

Loss Per Share (Details)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Number of shares excluded from the calculation of diluted loss per share	2,217,134	1,711,643

XML

Stock Option Plans (Schedule of Awards to Mr. Bologna) (Details) (USD $)	3 Months Ended
	Mar. 31, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Intrinsic Value	$ 8,042
Options Exercisable	1,004,823
Remaining Contractual Term	8 years 1 month 20 days
Thomos Bologna [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grant Date	Dec. 21, 2011
Number of Awards	270,000
Intrinsic Value	321,300
Reclassification to stockholders’ equity	$ 0
Options Exercisable	0
Remaining Contractual Term	7 years 8 months 12 days
Employee Stock Option [Member] | Thomos Bologna [Member] | Period One [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grant Date	Dec. 21, 2011
Number of Awards	600,000
Intrinsic Value	0
Reclassification to stockholders’ equity	$ 1.20
Options Exercisable	400,000
Remaining Contractual Term	7 years 8 months 12 days
Employee Stock Option [Member] | Thomos Bologna [Member] | Period Two [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grant Date	Dec. 21, 2011
Number of Awards	300,000
Intrinsic Value	$ 0
Reclassification to stockholders’ equity	$ 1.20
Options Exercisable	300,000
Remaining Contractual Term	7 years 8 months 12 days

XML

Loss Per Share

3 Months Ended

Mar. 31, 2014

Earnings Per Share [Abstract]

Loss Per Share

4. Loss Per Share

The Company calculates net loss per share in accordance with ASC 260, Earnings Per Share. Under the provisions of ASC 260, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive common stock equivalents then outstanding. Common stock equivalents consist of shares of common stock issuable upon the exercise of stock options and warrants.

The following table sets forth the computation for basic and diluted loss per share:

	Three Months Ended March 31,
	2013		2014
	(Unaudited)		(Unaudited)
Numerator:
Net loss	$	(824,304)	$	(3,504,439)
Numerator for basic and diluted earnings per share	$	(824,304)	$	(3,504,439)
Denominator:
Denominator for basic and diluted earnings per share — weighted-average shares outstanding		32,797,625		38,718,336
Basic and diluted loss per share	$	(0.03)	$	(0.09)

Outstanding stock options to purchase 1,711,643 and 2,217,134 shares for the periods ended March 31, 2013 and 2014, respectively, were excluded from the calculation of diluted loss per share as their effect would have been antidilutive.

XML

Stock Option Plans (Schedule of Assumptions Used to Estimate Share-Based Compensation Expense Using Black-Scholes Model) (Details)	3 Months Ended
	Mar. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected dividend yield	0.00%
Expected term (in years)	6 years 3 months	[1]
Forfeiture rate	7.00%
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk free interest rate	1.14%
Expected volatility	104.90%
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk free interest rate	1.03%
Expected volatility	104.00%

[1] Expected term is calculated using SAB 107, Simplified Formula. Management has concluded that the use of the simplified method for calculating the expected term of its common stock option grants is appropriate given the Company’s lack of history of option exercises.

XML

Summary of Significant Accounting Policies (Schedule of Estimated Useful Lives) (Details)	3 Months Ended
	Mar. 31, 2014
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	5 years
Laboratory Equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	5 years
Laboratory Equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	7 years
Furniture and Equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	3 years
Furniture and Equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	7 years
Leasehold Improvements [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	5 years
Leasehold Improvements [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	7 years

XML

Summary of Significant Accounting Policies (Schedule of ResponseDX Accounts Receivable) (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Allowance for doubtful accounts	$ (1,751,567)	$ (2,404,659)
Total	5,528,509	6,225,923
ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Accounts receivable	6,387,914	6,738,198
Allowance for doubtful accounts	(1,751,567)	(2,404,659)
Total	4,636,347	4,333,539
ResponseDX [Member] | Medicare [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Accounts receivable	2,223,793	2,422,611
Private Payor [Member] | ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Accounts receivable	$ 4,164,121	$ 4,315,587

XML

Stock Option Plans (Summary of Stock Option Activity) (Details) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Number of Shares
Outstanding, December 31, 2013	2,288,076
Granted	0
Exercised	(15,300)
Expired	0
Forfeited	(55,642)
Outstanding, March 31, 2014 (Unaudited)	2,217,134	2,288,076
Exercisable, March 31, 2014 (Unaudited)	1,004,823
Weighted Average Exercise Price
Outstanding, December 31, 2013	$ 1.83
Granted	$ 0
Exercised	$ 1.16
Expired	$ 0
Forfeited	$ 1.36
Outstanding, Ending balance	$ 1.85	$ 1.83
Outstanding, March 31, 2014 (Unaudited)	$ 2.46
Remaining Contractual Life (Years)
Exercised	8 years 3 months 29 days	8 years 4 months 28 days
Outstanding (in years)	8 years 1 month 20 days
Exercisable, March 31, 2014	8 years 18 days
Aggregate Intrinsic Value
Outstanding, December 31,2013	$ 1,082
Granted	0
Exercised	6,007
Expired	0
Forfeited	110
Outstanding, March 31, 2014	14,054	1,082
Exercisable, March 31, 2014	$ 8,042

XML

Summary of Significant Accounting Policies (Schedule of ResponseDX Revenue) (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Net ResponseDX ® revenue	$ 3,894,934	$ 5,624,191
ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Net ResponseDX ® revenue	3,317,553	3,182,498
ResponseDX [Member] | Private Payor [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Net ResponseDX ® revenue	2,009,131	1,838,283
Medicare [Member] | ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Net ResponseDX ® revenue	$ 1,308,422	$ 1,344,215

XML

Summary of Significant Accounting Policies (Schedule of Revenue Sources that Account for Greater than 10 Percent of Total Revenue) (Details) (USD $)	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	$ 3,894,934		$ 5,624,191
Abbott Molecular, Inc. [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	21,824		910,182
Percent of Total Revenue		[1]	16.00%
GlaxoSmithKline LLC[Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	0		0
Percent of Total Revenue	0.00%		0.00%
GlaxoSmithKline Biologicals S.A. [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	328,281		1,356,384
Percent of Total Revenue		[1]	24.00%
GlaxoSmithKline Entities [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	328,281		1,356,384
Percent of Total Revenue		[1]	24.00%
Medicare [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	$ 1,308,422		$ 1,344,215
Percent of Total Revenue	34.00%		24.00%

[1] Represents less than 10% of revenue.

XML

Property and Equipment and Intangible Assets

3 Months Ended

Mar. 31, 2014

Property, Plant and Equipment [Abstract]

Property and Equipment and Intangible Assets

3. Property and Equipment and Intangible Assets

Property and equipment and intangible assets consist of the following:

	December 31, 2013		March 31, 2014
			(Unaudited)
Laboratory equipment	$	4,468,055	$	4,475,415
Furniture and equipment		736,886		750,886
Leasehold improvements		487,843		496,523
		5,692,784		5,722,824
Less: Accumulated depreciation		(3,758,202)		(3,956,167)
Total property and equipment, net	$	1,934,582	$	1,766,657
Purchased software	$	749,587	$	764,105
Internally developed software		213,361		213,361
Trademarks		33,000		33,000
		995,948		1,010,466
Less: Accumulated amortization		(228,725)		(237,642)
Total intangible assets, net	$	767,223	$	772,824

Depreciation and amortization expense, included in cost of revenue, selling and marketing expenses, general and administrative expenses, and research and development expenses for the three months ended March 31, 2013 and 2014 was $137,401 and $206,884, respectively. 

Capital Leases 

The Company leases certain equipment that is recorded as capital leases. This equipment is included in property and equipment on the accompanying consolidated balance sheet as of March 31, 2014 as follows:

	(Unaudited)
Equipment purchased under capital leases	$	584,150
Less: Accumulated amortization		(369,449)
Equipment purchased under capital leases, net	$	214,701

Future minimum lease payments under capital leases as of March 31, 2014 are as follows:

Years ending December 31,	(Unaudited)
2014	$	130,431
2015		101,309
2016		46,852
Total minimum lease payments		278,592
Less amount represented by interest		(32,979)
Less current portion		(129,456)
Capital lease obligation, net of current portion	$	116,157

XML

Summary of Significant Accounting Policies (Schedule of Customers that Account for Greater than 10 Percent of Accounts Receivable) (Details) (USD $)	Mar. 31, 2014		Dec. 31, 2013
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Receivable Balance	$ 5,528,509		$ 6,225,923
GlaxoSmithKline, LLC [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Receivable Balance	0		597,937
Percent of Total Receivables	0.00%			[1]
GlaxoSmithKline Biologicals S.A. [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Receivable Balance	631,033		544,298
Percent of Total Receivables		[1]		[1]
GlaxoSmithKline Entities [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Receivable Balance	631,033		1,691,144
Percent of Total Receivables		[1]	13.00%
Medicare [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Receivable Balance	$ 2,223,793		$ 2,422,611
Percent of Total Receivables	31.00%		28.00%

[1] Represents less than 10% of accounts receivable.

XML

Commitments and Contingencies (Schedule of Future Minimum Lease Payments under Noncancelable Operating Leases) (Details) (USD $)	Mar. 31, 2014
Commitments And Contingencies Disclosure [Line Items]
2014	$ 710,160
2015	522,518
2016	35,807
Total	$ 1,268,485

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Mar. 31, 2014	Dec. 31, 2013
Current assets
Cash and cash equivalents	$ 4,956,503	$ 8,148,599
Accounts receivable, net of allowance for doubtful accounts of $2,404,659 and $1,751,567 at December 31, 2013 and March 31, 2014, respectively.	5,528,509	6,225,923
Prepaid expenses and other current assets	1,333,776	981,908
Total current assets	11,818,788	15,356,430
Property and equipment, net	1,766,657	1,934,582
Intangible assets, net	772,824	767,223
Total assets	14,358,269	18,058,235
Current liabilities
Accounts payable	1,383,898	1,694,312
Accrued expenses	517,291	666,675
Accrued royalties	1,349,051	1,293,717
Accrued payroll and related liabilities	1,927,616	1,850,923
Capital lease obligation, current portion	129,456	157,238
Line of credit, current	1,000,000	0
Total current liabilities	6,307,312	5,662,865
Capital lease obligation, net of current portion	116,157	136,419
Line of credit, non-current	0	1,000,000
Total liabilities	6,423,469	6,799,284
Commitments and contingencies (Note 5)
Common stock classified outside of stockholders’ equity	5,500,000	5,500,000
Stockholders’ equity
Common stock, $0.01 par value; 50,000,000 shares authorized; 38,712,896 and 38,728,196 shares issued and outstanding at December 31, 2013 and March 31, 2014, respectively	337,338	337,185
Additional paid-in capital	71,188,770	70,986,406
Accumulated deficit	(68,801,618)	(65,297,179)
Accumulated other comprehensive loss	(289,690)	(267,461)
Total stockholders’ equity	2,434,800	5,758,951
Total liabilities, common stock classified outside of stockholders’ equity and stockholders’ equity	$ 14,358,269	$ 18,058,235

XML

Stock Option Plans (Schedule of Options Outstanding) (Details)	3 Months Ended
	Mar. 31, 2014
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding Number of Options	2,217,134
Options Outstanding WA Remaining Contractual Term	8 years 1 month 20 days
Options Exercisable Number of Options	1,004,823
Options Exercisable WA Remaining Contractual Term	6 years 9 months 22 days
$ 1.00 to 1.99 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding Number of Options	1,712,134
Options Outstanding WA Remaining Contractual Term	8 years 10 months 10 days
Options Exercisable Number of Options	558,810
Options Exercisable WA Remaining Contractual Term	7 years 11 months 1 day
$ 2.00 to 2.99 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding Number of Options	287,500
Options Outstanding WA Remaining Contractual Term	7 years 3 months 25 days
Options Exercisable Number of Options	228,513
Options Exercisable WA Remaining Contractual Term	7 years 2 months 8 days
$ 3.00 to 3.99 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding Number of Options	71,000
Options Outstanding WA Remaining Contractual Term	4 years 3 months 29 days
Options Exercisable Number of Options	71,000
Options Exercisable WA Remaining Contractual Term	4 years 3 months 29 days
$ 4.29 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding Number of Options	11,500
Options Outstanding WA Remaining Contractual Term	3 years 4 months 24 days
Options Exercisable Number of Options	11,500
Options Exercisable WA Remaining Contractual Term	3 years 4 months 24 days
$ 7.00 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding Number of Options	135,000
Options Outstanding WA Remaining Contractual Term	3 years 2 months 8 days
Options Exercisable Number of Options	135,000
Options Exercisable WA Remaining Contractual Term	3 years 2 months 8 days

XML

Organization, Operations and Basis of Accounting

3 Months Ended

Mar. 31, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization, Operations and Basis of Accounting

1. Organization, Operations and Basis of Accounting

Response Genetics, Inc. (the “Company”) was incorporated in the State of Delaware on September 23, 1999 as Bio Type, Inc. for the purpose of providing molecular profiling services of tumor tissue that has been formalin-fixed and embedded in paraffin. In August 2000, the Company changed its name to Response Genetics, Inc. 

The Company is a life science company engaged in the research, development, marketing and sale of pharmacogenomics-clinical diagnostic tests for cancer. Pharmacogenomics is the science of how an individual’s genetic makeup relates to drug response. Diagnostic tests based on pharmacogenomics facilitate the prediction of a response to drug therapy or survival following surgery based on an individual’s genetic makeup. In order to generate pharmacogenomic information from patient specimens for these tests, the Company uses its proprietary technologies that enable the Company to reliably and consistently extract ribonucleic acid (“RNA”) and deoxyribonucleic acid (“DNA”) from tumor specimens that are stored as formalin-fixed and paraffin-embedded (“FFPE”) specimens and, thereby to analyze genetic information contained in these tissues for each patient. The Company’s platforms include analysis of single biomarkers using the polymerase chain reaction method as well as global gene interrogation using microarray methods and fluorescence in situ hybridization (“FISH”) from paraffin or frozen tissue specimens. The Company primarily derives its revenue from the sale of its ResponseDX^® diagnostic testing products and by providing pharmacogenomic clinical trial testing services to pharmaceutical companies in the United States, Asia and Europe.

The Company’s goal is to provide cancer patients and their physicians with a means to make informed, individualized treatment decisions based on genetic analysis of tumor tissues. The Company’s pharmacogenomic analysis of clinical trial specimens for the pharmaceutical industry may provide data that will lead to a better understanding of the molecular basis for response to specific drugs and, therefore lead to individualized treatment.

Liquidity and Management’s Plans

Since its inception, the Company has devoted substantial effort in developing its products and has incurred losses and negative cash flows from operations. At March 31, 2014, the Company had an accumulated deficit of $68,801,618. The Company anticipates continued losses and negative cash flows as it funds its selling and marketing activities and research and development programs.

The Company’s current operating plan includes various assumptions concerning the level and timing of cash receipts from sales and cash outlays for operating expenses and capital expenditures. The Company’s ability to successfully carry out its business plan is primarily dependent upon its ability to (1) obtain sufficient additional capital at acceptable costs, (2) attract and retain knowledgeable employees, and (3) generate significant revenues. At this time, the Company expects to satisfy its future cash needs primarily through additional financing and/or strategic investments. The Company is currently seeking such additional financing and/or strategic investments; however, there can be no assurance that any additional financing or strategic investments will be available on acceptable terms, if at all. If the Company is unable to timely and successfully raise additional capital and/or achieve profitability, it will not have sufficient capital resources to implement its business plan or continue its operations, and the Company will most likely be required to reduce certain discretionary spending  and/or curtail operations, which could have a material adverse effect on the Company’s ability to achieve its intended business objectives. No adjustments have been made to the accompanying unaudited condensed consolidated financial statements to reflect any of the matters discussed above. The unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern.

The accompanying unaudited  condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the fiscal year. The balances as of December 31, 2013 were derived from our audited financial statements as of December 31, 2013. The financial statements should be read in conjunction with the Company’s audited December 31, 2013 and 2012 consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K  previously filed with the SEC on March 31, 2014.

XML

Property and Equipment and Intangible Assets (Schedule of Capital Leased Assets) (Details) (USD $)	Mar. 31, 2014
Property, Plant and Equipment [Line Items]
Equipment purchased under capital leases	$ 584,150
Less: Accumulated amortization	(369,449)
Equipment purchased under capital leases, net	$ 214,701

XML

Stock Option Plans (Tables)

3 Months Ended

Mar. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Assumptions Used to Estimate Share-Based Compensation Expense Using Black-Scholes Model

Except for certain grants of restricted common stock and common stock options containing market conditions as described below, the Company estimated share-based compensation expense for the three months ended March 31, 2013 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended March 31, 2013
	(Unaudited)
Risk free interest rate		1.03-1.14	%
Expected dividend yield		—
Expected volatility		104.0-104.9	%
Expected term **(in years)		6.25
Forfeiture rate		7.0	%

No options were granted during the three months ended March 31, 2014. 

** Expected term is calculated using SAB 107, Simplified Formula. Management has concluded that the use of the simplified method for calculating the expected term of its common stock option grants is appropriate given the Company’s lack of history of option exercises.

Summary of Stock Option Activity

The following table summarizes the stock option activity for the 2006 Plan for the three months ended March 31, 2014:

			Weighted
			Average		Remaining		Aggregate
	Number of		Exercise		Contractual		Intrinsic
	Shares		Price		Life (Years)		Value
Outstanding, December 31, 2013		2,288,076	$	1.83		8.41	$	1,082
Granted (Unaudited)		—	$	—		—		—
Exercised (Unaudited)		(15,300)	$	1.16		8.33		6,007
Expired (Unaudited)		—		—		—		—
Forfeited (Unaudited)		(55,642)	$	1.36		—		110
Outstanding, March 31, 2014 (Unaudited)		2,217,134	$	1.85		8.14	$	14,054
Exercisable, March 31, 2014 (Unaudited)		1,004,823	$	2.46		8.05	$	8,042

Schedule of Options Outstanding

The following table provides additional information regarding options outstanding under the 2006 Plan as of March 31, 2014 (unaudited):

		Options Outstanding			Options Exercisable
Exercise Price		Number of Options		WA Remaining Contractual Term	Number of Options		WA Remaining Contractual Term
$	1.00 to 1.99		1,712,134	8.86		558,810		7.92
	2.00 to 2.99		287,500	7.32		228,513		7.19
	3.00 to 3.99		71,000	4.33		71,000		4.33
	4.29		11,500	3.40		11,500		3.40
	7.00		135,000	3.19		135,000		3.19
			2,217,134	8.14		1,004,823		6.81

Schedule of Stock Based Compensation Included in Results of Operations

Stock-based compensation expense was classified as follows in the results of operation:

	Three Months Ended March 31,
	( Unaudited )
	2013		2014
Cost of revenue	$	13,487	$	11,256
Research and development		9,842		13,197
Sales and marketing		17,400		15,749
General and administrative		64,595		144,567
Totals	$	105,324	$	184,769

Schedule of Awards to Mr. Bologna

The following table summarizes these awards to Mr. Bologna:

				Intrinsic
				Value as of				Options		Remaining
				March 31,				Options		Contractual
Type	Grant Date	Number of Awards		2014		Exercise Price		Exercisable		Term
Restricted Shares of Common Stock	12/21/2011		270,000	$	321,300	$	—		—		7.7
Options	12/21/2011		600,000	$	—	$	1.20		400,000		7.7
Options	12/21/2011		300,000	$	—	$	1.20		300,000		7.7

XML

Property and Equipment and Intangible Assets (Schedule of Future Minimum Lease Payments under Capital Leases) (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Property, Plant and Equipment [Line Items]
Years ending December 31, 2014	$ 130,431
Years ending December 31, 2015	101,309
Years ending December 31, 2016	46,852
Total minimum lease payments	278,592
Less amount represented by interest	(32,979)
Less current portion	(129,456)	(157,238)
Capital lease obligation, net of current portion	$ 116,157	$ 136,419

XML

Sale of Common Stock (Tables)

3 Months Ended

Mar. 31, 2014

Stockholders Equity Note [Abstract]

Schedule of Common Stock Classified Outside of Stockholders' Equity

Activity in common stock classified outside of stockholders’ equity was as follows:

	Number of Shares		Amount
Balance, December 31, 2013		5,000,000	$	5,500,000
Issuance of common stock classified outside of stockholders’ equity		—		—
Reclassification to stockholders’ equity		—		—
Balance, March 31, 2014 (unaudited)		5,000,000	$	5,500,000

XML

Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2014

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Response Genetics, Ltd., a Scottish corporation (the “Subsidiary”), which was incorporated in November 2006. The Subsidiary had no employees or active operations in 2013 or to date in 2014. All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity date of three months or less from the date of purchase to be cash equivalents. The carrying value of cash equivalents approximates fair value due to the short-term nature and liquidity of these instruments. The Company’s cash equivalents are comprised of cash on hand, deposits in banks and money market investments. 

Accounts Receivable

Pharmaceutical Accounts Receivable

The Company invoices its clients as specimens are processed and any other contractual obligations are met. The Company’s contracts with clients typically require payment within 45 days of the date of invoice. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments. The Company specifically analyzes accounts receivable and historical bad debts, client credit, current economic trends and changes in client payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. To date, the Company’s pharmaceutical customers have primarily been large pharmaceutical companies. As a result, bad debts from pharmaceutical accounts receivable to date have been minimal. Pharmaceutical company accounts receivable as of December 31, 2013 and March 31, 2014 were $1,892,384 and $892,162, respectively.  There were no allowances for doubtful accounts recorded against these pharmaceutical accounts receivable at December 31, 2013 and March 31, 2014.

ResponseDX^® Accounts Receivable

ResponseDX^® accounts receivable are recorded from two primary payors: (1) Medicare and (2) third party payors such as commercial insurance and private payors or self-paying payors (“Private Payors”).  ResponseDX^® accounts receivable are recorded at established billing rates less an estimated billing adjustment, based on reporting models utilizing historical cash collection percentages and updated for current effective reimbursement factors.  Management performs ongoing valuations of accounts receivable balances based on management’s evaluation of historical collection experience and industry trends.  Based on the historical experience for our Medicare and Private Payor accounts, management has determined, based on a detailed analysis, that accounts receivable associated with certain billings are unlikely to be collected. Therefore, the Company has recorded an allowance for doubtful accounts of $2,404,659 and $ 1,751,567 as of December 31, 2013 and March 31, 2014, respectively. The Company’s bad debt expense for the three months ended March 31, 2013 and 2014 was $468,463 and $1,293,850, respectively. 

ResponseDX ^® accounts receivable as of December 31, 2013 and March 31, 2014, consisted of the following:

	December 31, 2013		March 31, 2014
			(Unaudited)
Net Medicare receivable	$	2,422,611	$	2,223,793
Net Private Payor receivable		4,315,587		4,164,121
		6,738,198		6,387,914
Allowance for doubtful accounts		(2,404,659)		(1,751,567)
Total	$	4,333,539	$	4,636,347

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the double declining balance and straight-line methods over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:

Laboratory equipment	5 to 7 years
Furniture and equipment	3 to 7 years
Leasehold improvements	Shorter of the useful life (5 to 7 years) or the lease term

Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.

Intangible Assets

Intangible assets are carried at the cost to obtain them. Purchased software and internally-developed intangible assets are amortized using the straight-line method over estimated useful lives of three to five years. The Company has capitalized costs related to the development of database software (see Note 3). The portion of this database placed into service is amortized in accordance with ASC 350-40, Internal-Use Software. The amortization period is five years using the straight-line method.

Revenue Recognition

Pharmaceutical Revenue

Revenues that are derived from testing services provided to pharmaceutical companies are recognized on a contract specific basis pursuant to the terms of the related agreements. Revenue is recognized in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

Revenues are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through the Company’s laboratory under a specified contractual protocol and are recorded on the date the tests are completed. Certain contracts have minimum assay requirements that, if not met, result in payments that are due upon the completion of the designated period. In these cases, revenues are recognized when the end of the specified contract period is reached.

On occasion, the Company may enter into a contract that requires the client to provide an advance payment for specimens that will be processed at a later date. In these cases, the Company records this advance as deferred revenue and recognizes the revenue as the specimens are processed or at the end of the contract period, as appropriate.

The Company recorded revenue from pharmaceutical clients of $2,441,693 and $577,381 for the three months ended March 31, 2013 and 2014, respectively.

ResponseDX^® Revenue

Revenues that are derived from ResponseDX^® testing services are recognized in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. We record revenues when our tests have confirmed results, which are evidence that the services have been performed.

Revenues are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through our laboratory under a specified contractual protocol.

ResponseDX^® Private Payor and Medicare revenues are recorded at established billing rates less an estimated billing adjustment, based on reporting models utilizing historical cash collection percentages and updated for current effective reimbursement factors. The Company’s Medicare provider number allows it to invoice and collect from Medicare. The Company’s invoicing to Medicare is primarily based on amounts allowed by Medicare for the service provided as defined by Common Procedural Terminology (“CPT”).

The following details ResponseDX^® revenue for the three months ended March 31, 2013 and 2014:

	Three Months
	Ended March 31,
	(Unaudited)
	2013		2014
Net Medicare revenue	$	1,344,215	$	1,308,422
Net Private Payor revenue		1,838,283		2,009,131
Net ResponseDX® revenue	$	3,182,498	$	3,317,553

Cost-Containment Measures

Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of health care services, which include diagnostic test providers such as the Company, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company.

Regulatory Matters

A portion of the Company’s revenues are derived from Medicare reimbursement. Laws and regulations governing Medicare programs are complex and subject to change and to interpretation, and the Company may be adversely affected by future changes in the applicable laws and regulations and governmental investigations, lawsuits or private actions which include mandatory damages, fines, penalties, criminal charges, loss or suspension of licenses and/or suspension or exclusion from Medicare and certain other governmental programs. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing.

Medicare reimbursement rates are also subject to regulatory changes and government funding restrictions. In January 2013, a Medicare fee schedule update was announced which included proposed changes to Medicare reimbursement rates that significantly reduced the reimbursement rates for certain of the testing services we provide. The Company participated with other impacted organizations to provide guidance to the local Medicare Administrative Contractor (“MAC”) that resulted in the local MAC updating certain pricing through September 2013 which reflected an increase in many of the tests originally priced in January 2013. On October 1, 2013, the Centers for Medicare and Medicaid Services (“CMS”) issued fees for some, but not all, of the CPT codes used by the Company. It is uncertain if continued guidance provided to Medicare and the local MAC by impacted organizations will result in additional fee increases or additional positive coverage determinations in 2014. If, however, the current reduction in reimbursement rates is adopted as is, it may have a material adverse effect on the Company's operations.

 

As a result of these Current Procedural Terminology (“CPT”) code changes and Medicare price changes, we have experienced a departure from our normal reimbursement patterns with Medicare and other payors. Specifically, we have experienced delays in certain reimbursements for services and an increase in initial denials of claims for certain services provided. Accordingly, we re-evaluated the assumptions employed in our model for estimating revenue to be recognized for ResponseDX^® testing. We view the code and price changes described above as affecting only the assumptions we used in pricing our services. The nature of the testing we provide, the evidence we gather to establish the creditworthiness of our payors and the delivery method of our services have not changed from prior periods, and there are no indicators that these assumptions require change.

We performed an analysis that considered our historical patterns of revenue by payor in conjunction with the fluctuations we experienced in the three months ended March 31, 2013 and 2014 to arrive at the revenue recorded during those periods. We believe that the changes in CPT codes and pricing that are causing confusion and erratic payment experience in the payor community will take some time to resolve. The time needed for resolution will depend upon Medicare and the local MAC releasing additional pricing changes and potentially, revisions to previously revised prices, and upon the private payor community adopting the new CPT codes and some level of revised pricing. Accordingly, our revenue recognition estimates could be materially affected in future periods as pricing and payments patterns change and develop, and we may be materially affected by future or retroactive price changes.

On July 8, 2013, CMS released a new proposed rulemaking entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule & Other Revisions to Part B for CY 2014”. This proposed rule contains a number of provisions that may adversely impact the level of reimbursement for a variety of tests for which the Company receives reimbursement from the Medicare program beginning in 2014. Among other things, CMS has proposed examining approximately 1,200 laboratory tests that appear on the Clinical Lab Fee Schedule (“CLFS”) over a period of five years to determine whether advances in technology may have reduced the cost of providing such tests and whether or not the level of reimbursement should be revised. The Company is currently performing molecular testing which is reimbursed using CPT codes that fall on the CLFS. CMS has also proposed changing the methodology used to determine reimbursement rates for the technical component of certain tests reimbursed off of the Physician Fee Schedule (“PFS”). Among other provisions, CMS has proposed limiting the Relative Value Units (“RVUs”) ascribed to the Practice Expense component of their reimbursement formula for tests performed in “Non-Facilities” (which would include most clinical laboratories like the Company) to the RVUs that have been ascribed for the same procedures under the Hospital Outpatient Prospective Payment System, or the Ambulatory Payment Classification (“APC”) system which are used to reimburse “Facilities” (such as hospitals and ambulatory surgery centers). The Company currently performs FISH testing, which may be impacted by this PFS rule change if it is enacted. CMS has not yet proposed any specific rates for 2014 and the Company is examining the potential impact that a reduction in the level of reimbursement for the tests the Company offers may have on its operations.

 

Additionally, CMS has as part of its regulatory structure the National Correct Coding Initiative (“NCCI”). Recent changes to NCCI guidance may reduce allowable quantities billed for FISH testing. These changes would lower reimbursement amounts for FISH tests, and there can be no assurance that CMS will make any modifications in the existing language of the NCCI documents.

A number of proposals for legislation or regulation continue to be under discussion which could have the effect of substantially reducing Medicare reimbursements for clinical laboratories or introducing cost sharing to beneficiaries. Depending upon the nature of regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.

Cost of Revenue

Cost of revenue represents the cost of materials, direct labor, royalties, costs associated with processing tissue specimens including pathological review, staining, microdissection, paraffin extraction, reverse transcription polymerase chain reaction, fluorescence in situ hybridization (“FISH”), quality control analyses, license fees and delivery charges necessary to render an individualized test result. Costs associated with performing tests are recorded as the tests are processed.

License Fees

The Company licenses technology for the extraction of RNA and DNA from FFPE tumor specimens from the University of Southern California (“USC”) in exchange for royalty fees on revenue generated by use of the technology. These royalties are calculated as a fixed percentage of revenue that we generate from use of the technology licensed from USC. We also maintain a non-exclusive license to use Roche Molecular Systems, Inc.’s (“Roche”) PCR, homogenous PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we generate through use of this technology.

The Company is subject to potentially significant variations in royalties recorded in any period. While the amount paid is based on a fixed percentage from revenues of specific tests pursuant to terms set forth in the agreements with USC and Roche, the amount due is calculated based on the revenue we recognize using the respective licensed technology. As discussed above, this revenue can vary from period to period as it is dependent on the timing of the specimens submitted by our clients for testing.

Additionally, the Company periodically analyzes the technical procedures performed in its test offerings to assess which activities utilize licensed technologies and to calculate royalties for use of the licensed technology. The most recent analyses indicate that the Company could owe less than the amounts that have been accrued for royalties payable. However, the licensors have not reviewed the Company’s updated royalty calculations. As a result, the Company has not reduced the historical accrued liability for royalties but has adjusted the current period accrual based on the revised calculation. 

Research and Development

The Company expenses costs associated with research and development activities as incurred. Research and development costs are expensed as incurred and classified as research and development costs. Research and development costs include employee costs (salaries, payroll taxes, benefits, and travel), equipment depreciation and warranties and maintenance, laboratory supplies, primers and probes, reagents, patent costs and occupancy costs.

Line of Credit

On July 14, 2011, the Company entered into a line of credit agreement with Silicon Valley Bank (the “Bank”). The agreement has been amended most recently on March 7, 2013. The line of credit is collateralized by the Company’s pharmaceutical, Private Payor and Medicare receivables. The amended maximum amount that can be borrowed from the credit line is $2,000,000. As of March 31, 2014, the amount the Company can draw from the line of credit was $1,000,000 calculated as the lesser of (i) the Company’s calculated borrowing base, which was 80% of certain of the Company’s accounts receivable, or (ii) the amount available under the credit line. As of March 31, 2014, the interest fees associated with this line of credit were set at the prime rate plus 1%. During 2013 and the three months ended March 31,  2014, the rate charged to the Company was 5%. As needed from time to time, the Company may draw on this line for use for general corporate purposes. As of December 31, 2013 and March 31, 2014, the Company had drawn $1,000,000 against the line of credit. The line of credit is subject to various financial covenants. At March 31, 2014, the Company was in compliance with the covenants. As of December 31, 2013, the Company was not in compliance with one of these covenants, and the Bank waived the covenant violation. Prior to the most recent amendment on March 7, 2013, the Company was also not in compliance with certain other covenants. The September 28, 2012 amendment provided forbearance for the failure to comply with these certain covenants through November 30, 2012, and modified the covenants to include a requirement that the Company maintain account balances at the Bank totaling a minimum of $4,000,000 during the covered forbearance period. The December 6, 2012 amendment to the agreement extended the forbearance for the failure to comply with these certain covenants and the requirement for the Company to maintain account balances at the Bank totaling a minimum of $4,000,000 during the forbearance period. In addition, pursuant to the March 7, 2013 amendment, the Bank waived the Company's existing breach of financial covenants under the credit agreement and the parties restructured the line of credit to provide that, among other things: (i) the revolving line of credit's maturity date was extended to March 7, 2015, (ii) the fee for the unused portion of the revolving line of credit was reduced from 0.375% to 0.250% per annum of the average unused portion of the revolving line of credit, (iii) the Company must continue to meet certain reporting requirements including providing financial statements and a certificate of compliance with the terms and conditions of the credit agreement by an authorized officer to the Bank within 45 days of the last day of each calendar quarter, provided that if the Company has less than $4,000,000 in its account at the Bank at any time during such calendar quarter, the Company must provide the financial statements and the certificate of compliance within 30 days of the end of such calendar quarter and provide a monthly report on revenues realized from Private Payors, (iv) the financial covenants were amended and restated to require the Company to maintain a ratio of quick assets to current liabilities of 1:50 to 1:00 and meet certain specified minimum adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements as defined in the amendment and measured on a monthly basis and (v) the Bank is granted certain additional inspection of books, records and collateral rights.

As of December 31, 2013, the line of credit under the credit agreement was classified as a non-current liability on the accompanying consolidated balance sheets as the line of credit had a maturity date of greater than one year from the date of the balance sheet. As of March 31, 2014, the line of credit under the credit agreement was classified as a current liability on the accompanying consolidated balance sheets as the line of credit had a maturity date of less than one year from the date of the balance sheet.

From time to time, the Company’s calculated borrowing base under its Bank line of credit may decrease to a level where the Company is in an over-advance position in which case the Company will be required to repay any outstanding amounts greater than the calculated borrowing base for such covered period back to the Bank immediately. The Company will be able to draw down on the credit line again with respect to such paid back amount once the Company is in compliance with the borrowing base requirement.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2013 and March 31, 2014, the Company does not have a liability for unrecognized tax benefits. The Company recognizes interest and penalties associated with tax matters as part of the income tax provision and includes accrued interest and penalties with the related tax liability in the balance sheet. For the periods ended March 31, 2013 and 2014, interest and penalties totaling $107 and $0, respectively, were recorded in the consolidated statements of operations.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Stock Compensation, Share-Based Payment. Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value estimated in accordance with the provisions of ASC 718.  The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting period.  

The Company accounts for equity instruments issued to non-employees in accordance with ASC 505, Equity. Under ASC 505, stock option awards issued to non-employees are measured at fair value using the Black-Scholes option-pricing model and recognized pursuant to a performance model.

Management Estimates

The preparation of financial statements in conformity with U.S. 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 revenues and expenses during the reporting period.  Significant estimates in these  condensed consolidated financial statements have been made for revenue, allowances for doubtful accounts, impairment of long-lived assets, depreciation of property and equipment and stock-based compensation. Actual results could differ materially from those estimates.

Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the asset with the estimated undiscounted future cash flows associated with the use of the asset and its eventual disposition. Should the review indicate that the assets cost is not recoverable, the carrying value of the asset would be reduced to its fair value, which is measured by future discounted cash flows. 

Foreign Currency Translation

The financial position and results of operations of the Company’s foreign subsidiary are determined using local currency as the functional currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period-end. Statement of Operations amounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in stockholders’ equity.

Comprehensive Loss

The components of comprehensive loss are accumulated net loss and unrealized foreign currency translation adjustments for the three months ended March 31, 2013 and 2014.

Fair Value of Financial Instruments

Cash and cash equivalents are stated at cost, which approximates fair market value.  Cash equivalents consist of money market accounts, with fair values estimated based on quoted market prices. Debt balances are stated at historical amounts less principal payments, which approximate fair market value. The Company believes interest rates in its debt agreements are commensurate with lender risk profiles for similar companies.

Advertising Costs

The Company markets its services through its advertising activities in trade publications and on the internet. Advertising costs are included in selling and marketing expenses on the statements of operations and are expensed as incurred.  Advertising costs for the three months ended March 31, 2013 and 2014 were $0 and $6,422, respectively. 

Concentration of Credit Risk and Clients and Limited Suppliers

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. At  March 31, 2014, the Company had $4,498,950 in cash and cash equivalents that exceeded federally insured limits. At March 31, 2014, $12,333 of cash was held outside of the United States.

Revenue sources that account for greater than 10 percent of total revenue are provided below.

	Three Months Ended March 31,
	2013				2014
	(Unaudited)				(Unaudited)
	Revenue		Percent of Total Revenue		Revenue		Percent of Total Revenue
Abbott Molecular, Inc.	$	910,182	16	%	$	21,824	*	%
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	—	—	%	$	—	—	%
GlaxoSmithKline Biologicals S.A.	$	1,356,384	24	%	$	328,281	*	%
Total GlaxoSmithKline entities	$	1,356,384	24	%	$	328,281	*	%
Medicare, net of contractual allowances	$	1,344,215	24	%	$	1,308,422	34	%

* Represents less than 10% of revenue.

Customers that account for greater than 10 percent of gross accounts receivable are provided below.

	As of December 31, 2013				As of March 31, 2014
					(Unaudited)
	Receivable Balance		Percent of Total Receivables		Receivable Balance		Percent of Total Receivables
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	597,937	*	%	$	—	—	%
GlaxoSmithKline Biologicals S.A.	$	544,298	*	%	$	631,033	*	%
Total GlaxoSmithKline entities	$	1,691,144	13	%	$	631,033	*	%
Medicare, net of contractual allowances	$	2,422,611	28	%	$	2,223,793	31	%

* Represents less than 10% of accounts receivable.

Many of the supplies and reagents used in the Company’s testing process are procured from a limited number of suppliers. Any supply interruption or an increase in demand beyond the suppliers’ capabilities could have an adverse impact on the Company’s business. Management believes it can identify alternative sources, if necessary, but it is possible such sources may not be identified in sufficient time to avoid an adverse impact on its business. The Company purchases certain laboratory supplies and reagents primarily from two suppliers. Purchases from these two suppliers accounted for approximately 65% and 74% of the Company’s reagent purchases for the three months ended March 31, 2013 and 2014, respectively.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Allowance for doubtful accounts	$ 1,751,567	$ 2,404,659
Common stock, par value per share	$ 0.01	$ 0.01
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	38,728,196	38,712,896
Common stock, shares outstanding	38,728,196	38,712,896

XML

Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2014

Accounting Policies [Abstract]

Basis of Consolidation

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Response Genetics, Ltd., a Scottish corporation (the “Subsidiary”), which was incorporated in November 2006. The Subsidiary had no employees or active operations in 2013 or to date in 2014. All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity date of three months or less from the date of purchase to be cash equivalents. The carrying value of cash equivalents approximates fair value due to the short-term nature and liquidity of these instruments. The Company’s cash equivalents are comprised of cash on hand, deposits in banks and money market investments. 

Accounts Receivable

Accounts Receivable

Pharmaceutical Accounts Receivable

The Company invoices its clients as specimens are processed and any other contractual obligations are met. The Company’s contracts with clients typically require payment within 45 days of the date of invoice. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments. The Company specifically analyzes accounts receivable and historical bad debts, client credit, current economic trends and changes in client payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. To date, the Company’s pharmaceutical customers have primarily been large pharmaceutical companies. As a result, bad debts from pharmaceutical accounts receivable to date have been minimal. Pharmaceutical company accounts receivable as of December 31, 2013 and March 31, 2014 were $1,892,384 and $892,162, respectively.  There were no allowances for doubtful accounts recorded against these pharmaceutical accounts receivable at December 31, 2013 and March 31, 2014.

ResponseDX^® Accounts Receivable

ResponseDX^® accounts receivable are recorded from two primary payors: (1) Medicare and (2) third party payors such as commercial insurance and private payors or self-paying payors (“Private Payors”).  ResponseDX^® accounts receivable are recorded at established billing rates less an estimated billing adjustment, based on reporting models utilizing historical cash collection percentages and updated for current effective reimbursement factors.  Management performs ongoing valuations of accounts receivable balances based on management’s evaluation of historical collection experience and industry trends.  Based on the historical experience for our Medicare and Private Payor accounts, management has determined, based on a detailed analysis, that accounts receivable associated with certain billings are unlikely to be collected. Therefore, the Company has recorded an allowance for doubtful accounts of $2,404,659 and $ 1,751,567 as of December 31, 2013 and March 31, 2014, respectively. The Company’s bad debt expense for the three months ended March 31, 2013 and 2014 was $468,463 and $1,293,850, respectively. 

ResponseDX ^® accounts receivable as of December 31, 2013 and March 31, 2014, consisted of the following:

	December 31, 2013		March 31, 2014
			(Unaudited)
Net Medicare receivable	$	2,422,611	$	2,223,793
Net Private Payor receivable		4,315,587		4,164,121
		6,738,198		6,387,914
Allowance for doubtful accounts		(2,404,659)		(1,751,567)
Total	$	4,333,539	$	4,636,347

Property and Equipment

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the double declining balance and straight-line methods over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:

Laboratory equipment	5 to 7 years
Furniture and equipment	3 to 7 years
Leasehold improvements	Shorter of the useful life (5 to 7 years) or the lease term

Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.

Intangible Assets

Intangible Assets

Intangible assets are carried at the cost to obtain them. Purchased software and internally-developed intangible assets are amortized using the straight-line method over estimated useful lives of three to five years. The Company has capitalized costs related to the development of database software (see Note 3). The portion of this database placed into service is amortized in accordance with ASC 350-40, Internal-Use Software. The amortization period is five years using the straight-line method.

Revenue Recognition

Revenue Recognition

Pharmaceutical Revenue

Revenues that are derived from testing services provided to pharmaceutical companies are recognized on a contract specific basis pursuant to the terms of the related agreements. Revenue is recognized in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured.

Revenues are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through the Company’s laboratory under a specified contractual protocol and are recorded on the date the tests are completed. Certain contracts have minimum assay requirements that, if not met, result in payments that are due upon the completion of the designated period. In these cases, revenues are recognized when the end of the specified contract period is reached.

On occasion, the Company may enter into a contract that requires the client to provide an advance payment for specimens that will be processed at a later date. In these cases, the Company records this advance as deferred revenue and recognizes the revenue as the specimens are processed or at the end of the contract period, as appropriate.

The Company recorded revenue from pharmaceutical clients of $2,441,693 and $577,381 for the three months ended March 31, 2013 and 2014, respectively.

ResponseDX^® Revenue

Revenues that are derived from ResponseDX^® testing services are recognized in accordance with ASC 605, Revenue Recognition, which requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred and title and the risks and rewards of ownership have been transferred to the client or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. We record revenues when our tests have confirmed results, which are evidence that the services have been performed.

Revenues are recorded on an accrual basis as the contractual obligations are completed and as a set of assays is processed through our laboratory under a specified contractual protocol.

ResponseDX^® Private Payor and Medicare revenues are recorded at established billing rates less an estimated billing adjustment, based on reporting models utilizing historical cash collection percentages and updated for current effective reimbursement factors. The Company’s Medicare provider number allows it to invoice and collect from Medicare. The Company’s invoicing to Medicare is primarily based on amounts allowed by Medicare for the service provided as defined by Common Procedural Terminology (“CPT”).

The following details ResponseDX^® revenue for the three months ended March 31, 2013 and 2014:

	Three Months
	Ended March 31,
	(Unaudited)
	2013		2014
Net Medicare revenue	$	1,344,215	$	1,308,422
Net Private Payor revenue		1,838,283		2,009,131
Net ResponseDX® revenue	$	3,182,498	$	3,317,553

Cost-Containment Measures

Both government and private pay sources have instituted cost-containment measures designed to limit payments made to providers of health care services, which include diagnostic test providers such as the Company, and there can be no assurance that future measures designed to limit payments made to providers will not adversely affect the Company.

Regulatory Matters

A portion of the Company’s revenues are derived from Medicare reimbursement. Laws and regulations governing Medicare programs are complex and subject to change and to interpretation, and the Company may be adversely affected by future changes in the applicable laws and regulations and governmental investigations, lawsuits or private actions which include mandatory damages, fines, penalties, criminal charges, loss or suspension of licenses and/or suspension or exclusion from Medicare and certain other governmental programs. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing.

Medicare reimbursement rates are also subject to regulatory changes and government funding restrictions. In January 2013, a Medicare fee schedule update was announced which included proposed changes to Medicare reimbursement rates that significantly reduced the reimbursement rates for certain of the testing services we provide. The Company participated with other impacted organizations to provide guidance to the local Medicare Administrative Contractor (“MAC”) that resulted in the local MAC updating certain pricing through September 2013 which reflected an increase in many of the tests originally priced in January 2013. On October 1, 2013, the Centers for Medicare and Medicaid Services (“CMS”) issued fees for some, but not all, of the CPT codes used by the Company. It is uncertain if continued guidance provided to Medicare and the local MAC by impacted organizations will result in additional fee increases or additional positive coverage determinations in 2014. If, however, the current reduction in reimbursement rates is adopted as is, it may have a material adverse effect on the Company's operations.

 

As a result of these Current Procedural Terminology (“CPT”) code changes and Medicare price changes, we have experienced a departure from our normal reimbursement patterns with Medicare and other payors. Specifically, we have experienced delays in certain reimbursements for services and an increase in initial denials of claims for certain services provided. Accordingly, we re-evaluated the assumptions employed in our model for estimating revenue to be recognized for ResponseDX^® testing. We view the code and price changes described above as affecting only the assumptions we used in pricing our services. The nature of the testing we provide, the evidence we gather to establish the creditworthiness of our payors and the delivery method of our services have not changed from prior periods, and there are no indicators that these assumptions require change.

We performed an analysis that considered our historical patterns of revenue by payor in conjunction with the fluctuations we experienced in the three months ended March 31, 2013 and 2014 to arrive at the revenue recorded during those periods. We believe that the changes in CPT codes and pricing that are causing confusion and erratic payment experience in the payor community will take some time to resolve. The time needed for resolution will depend upon Medicare and the local MAC releasing additional pricing changes and potentially, revisions to previously revised prices, and upon the private payor community adopting the new CPT codes and some level of revised pricing. Accordingly, our revenue recognition estimates could be materially affected in future periods as pricing and payments patterns change and develop, and we may be materially affected by future or retroactive price changes.

On July 8, 2013, CMS released a new proposed rulemaking entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule & Other Revisions to Part B for CY 2014”. This proposed rule contains a number of provisions that may adversely impact the level of reimbursement for a variety of tests for which the Company receives reimbursement from the Medicare program beginning in 2014. Among other things, CMS has proposed examining approximately 1,200 laboratory tests that appear on the Clinical Lab Fee Schedule (“CLFS”) over a period of five years to determine whether advances in technology may have reduced the cost of providing such tests and whether or not the level of reimbursement should be revised. The Company is currently performing molecular testing which is reimbursed using CPT codes that fall on the CLFS. CMS has also proposed changing the methodology used to determine reimbursement rates for the technical component of certain tests reimbursed off of the Physician Fee Schedule (“PFS”). Among other provisions, CMS has proposed limiting the Relative Value Units (“RVUs”) ascribed to the Practice Expense component of their reimbursement formula for tests performed in “Non-Facilities” (which would include most clinical laboratories like the Company) to the RVUs that have been ascribed for the same procedures under the Hospital Outpatient Prospective Payment System, or the Ambulatory Payment Classification (“APC”) system which are used to reimburse “Facilities” (such as hospitals and ambulatory surgery centers). The Company currently performs FISH testing, which may be impacted by this PFS rule change if it is enacted. CMS has not yet proposed any specific rates for 2014 and the Company is examining the potential impact that a reduction in the level of reimbursement for the tests the Company offers may have on its operations.

 

Additionally, CMS has as part of its regulatory structure the National Correct Coding Initiative (“NCCI”). Recent changes to NCCI guidance may reduce allowable quantities billed for FISH testing. These changes would lower reimbursement amounts for FISH tests, and there can be no assurance that CMS will make any modifications in the existing language of the NCCI documents.

A number of proposals for legislation or regulation continue to be under discussion which could have the effect of substantially reducing Medicare reimbursements for clinical laboratories or introducing cost sharing to beneficiaries. Depending upon the nature of regulatory action, if any, which is taken and the content of legislation, if any, which is adopted, the Company could experience a significant decrease in revenues from Medicare and Medicaid, which could have a material adverse effect on the Company. The Company is unable to predict, however, the extent to which such actions will be taken.

Cost of Revenue

Cost of Revenue

Cost of revenue represents the cost of materials, direct labor, royalties, costs associated with processing tissue specimens including pathological review, staining, microdissection, paraffin extraction, reverse transcription polymerase chain reaction, fluorescence in situ hybridization (“FISH”), quality control analyses, license fees and delivery charges necessary to render an individualized test result. Costs associated with performing tests are recorded as the tests are processed.

License Fees

License Fees

The Company licenses technology for the extraction of RNA and DNA from FFPE tumor specimens from the University of Southern California (“USC”) in exchange for royalty fees on revenue generated by use of the technology. These royalties are calculated as a fixed percentage of revenue that we generate from use of the technology licensed from USC. We also maintain a non-exclusive license to use Roche Molecular Systems, Inc.’s (“Roche”) PCR, homogenous PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we generate through use of this technology.

The Company is subject to potentially significant variations in royalties recorded in any period. While the amount paid is based on a fixed percentage from revenues of specific tests pursuant to terms set forth in the agreements with USC and Roche, the amount due is calculated based on the revenue we recognize using the respective licensed technology. As discussed above, this revenue can vary from period to period as it is dependent on the timing of the specimens submitted by our clients for testing.

Additionally, the Company periodically analyzes the technical procedures performed in its test offerings to assess which activities utilize licensed technologies and to calculate royalties for use of the licensed technology. The most recent analyses indicate that the Company could owe less than the amounts that have been accrued for royalties payable. However, the licensors have not reviewed the Company’s updated royalty calculations. As a result, the Company has not reduced the historical accrued liability for royalties but has adjusted the current period accrual based on the revised calculation. 

Research and Development

Research and Development

The Company expenses costs associated with research and development activities as incurred. Research and development costs are expensed as incurred and classified as research and development costs. Research and development costs include employee costs (salaries, payroll taxes, benefits, and travel), equipment depreciation and warranties and maintenance, laboratory supplies, primers and probes, reagents, patent costs and occupancy costs.

Line of Credit

Line of Credit

On July 14, 2011, the Company entered into a line of credit agreement with Silicon Valley Bank (the “Bank”). The agreement has been amended most recently on March 7, 2013. The line of credit is collateralized by the Company’s pharmaceutical, Private Payor and Medicare receivables. The amended maximum amount that can be borrowed from the credit line is $2,000,000. As of March 31, 2014, the amount the Company can draw from the line of credit was $1,000,000 calculated as the lesser of (i) the Company’s calculated borrowing base, which was 80% of certain of the Company’s accounts receivable, or (ii) the amount available under the credit line. As of March 31, 2014, the interest fees associated with this line of credit were set at the prime rate plus 1%. During 2013 and the three months ended March 31,  2014, the rate charged to the Company was 5%. As needed from time to time, the Company may draw on this line for use for general corporate purposes. As of December 31, 2013 and March 31, 2014, the Company had drawn $1,000,000 against the line of credit. The line of credit is subject to various financial covenants. At March 31, 2014, the Company was in compliance with the covenants. As of December 31, 2013, the Company was not in compliance with one of these covenants, and the Bank waived the covenant violation. Prior to the most recent amendment on March 7, 2013, the Company was also not in compliance with certain other covenants. The September 28, 2012 amendment provided forbearance for the failure to comply with these certain covenants through November 30, 2012, and modified the covenants to include a requirement that the Company maintain account balances at the Bank totaling a minimum of $4,000,000 during the covered forbearance period. The December 6, 2012 amendment to the agreement extended the forbearance for the failure to comply with these certain covenants and the requirement for the Company to maintain account balances at the Bank totaling a minimum of $4,000,000 during the forbearance period. In addition, pursuant to the March 7, 2013 amendment, the Bank waived the Company's existing breach of financial covenants under the credit agreement and the parties restructured the line of credit to provide that, among other things: (i) the revolving line of credit's maturity date was extended to March 7, 2015, (ii) the fee for the unused portion of the revolving line of credit was reduced from 0.375% to 0.250% per annum of the average unused portion of the revolving line of credit, (iii) the Company must continue to meet certain reporting requirements including providing financial statements and a certificate of compliance with the terms and conditions of the credit agreement by an authorized officer to the Bank within 45 days of the last day of each calendar quarter, provided that if the Company has less than $4,000,000 in its account at the Bank at any time during such calendar quarter, the Company must provide the financial statements and the certificate of compliance within 30 days of the end of such calendar quarter and provide a monthly report on revenues realized from Private Payors, (iv) the financial covenants were amended and restated to require the Company to maintain a ratio of quick assets to current liabilities of 1:50 to 1:00 and meet certain specified minimum adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements as defined in the amendment and measured on a monthly basis and (v) the Bank is granted certain additional inspection of books, records and collateral rights.

As of December 31, 2013, the line of credit under the credit agreement was classified as a non-current liability on the accompanying consolidated balance sheets as the line of credit had a maturity date of greater than one year from the date of the balance sheet. As of March 31, 2014, the line of credit under the credit agreement was classified as a current liability on the accompanying consolidated balance sheets as the line of credit had a maturity date of less than one year from the date of the balance sheet.

From time to time, the Company’s calculated borrowing base under its Bank line of credit may decrease to a level where the Company is in an over-advance position in which case the Company will be required to repay any outstanding amounts greater than the calculated borrowing base for such covered period back to the Bank immediately. The Company will be able to draw down on the credit line again with respect to such paid back amount once the Company is in compliance with the borrowing base requirement.

Income Taxes

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2013 and March 31, 2014, the Company does not have a liability for unrecognized tax benefits. The Company recognizes interest and penalties associated with tax matters as part of the income tax provision and includes accrued interest and penalties with the related tax liability in the balance sheet. For the periods ended March 31, 2013 and 2014, interest and penalties totaling $107 and $0, respectively, were recorded in the consolidated statements of operations.

Stock-Based Compensation

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Stock Compensation, Share-Based Payment. Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value estimated in accordance with the provisions of ASC 718.  The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting period.  

The Company accounts for equity instruments issued to non-employees in accordance with ASC 505, Equity. Under ASC 505, stock option awards issued to non-employees are measured at fair value using the Black-Scholes option-pricing model and recognized pursuant to a performance model.

Management Estimates

Management Estimates

The preparation of financial statements in conformity with U.S. 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 revenues and expenses during the reporting period.  Significant estimates in these  condensed consolidated financial statements have been made for revenue, allowances for doubtful accounts, impairment of long-lived assets, depreciation of property and equipment and stock-based compensation. Actual results could differ materially from those estimates.

Long-lived Assets

Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the asset with the estimated undiscounted future cash flows associated with the use of the asset and its eventual disposition. Should the review indicate that the assets cost is not recoverable, the carrying value of the asset would be reduced to its fair value, which is measured by future discounted cash flows. 

Foreign Currency Translation

Foreign Currency Translation

The financial position and results of operations of the Company’s foreign subsidiary are determined using local currency as the functional currency. Assets and liabilities of these operations are translated at the exchange rate in effect at each period-end. Statement of Operations amounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in stockholders’ equity.

Comprehensive Loss

Comprehensive Loss

The components of comprehensive loss are accumulated net loss and unrealized foreign currency translation adjustments for the three months ended March 31, 2013 and 2014.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Cash and cash equivalents are stated at cost, which approximates fair market value.  Cash equivalents consist of money market accounts, with fair values estimated based on quoted market prices. Debt balances are stated at historical amounts less principal payments, which approximate fair market value. The Company believes interest rates in its debt agreements are commensurate with lender risk profiles for similar companies.

Advertising Costs

Advertising Costs

The Company markets its services through its advertising activities in trade publications and on the internet. Advertising costs are included in selling and marketing expenses on the statements of operations and are expensed as incurred.  Advertising costs for the three months ended March 31, 2013 and 2014 were $0 and $6,422, respectively. 

Concentration of Credit Risk and Clients and Limited Suppliers

Concentration of Credit Risk and Clients and Limited Suppliers

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. At  March 31, 2014, the Company had $4,498,950 in cash and cash equivalents that exceeded federally insured limits. At March 31, 2014, $12,333 of cash was held outside of the United States.

Revenue sources that account for greater than 10 percent of total revenue are provided below.

	Three Months Ended March 31,
	2013				2014
	(Unaudited)				(Unaudited)
	Revenue		Percent of Total Revenue		Revenue		Percent of Total Revenue
Abbott Molecular, Inc.	$	910,182	16	%	$	21,824	*	%
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	—	—	%	$	—	—	%
GlaxoSmithKline Biologicals S.A.	$	1,356,384	24	%	$	328,281	*	%
Total GlaxoSmithKline entities	$	1,356,384	24	%	$	328,281	*	%
Medicare, net of contractual allowances	$	1,344,215	24	%	$	1,308,422	34	%

* Represents less than 10% of revenue.

Customers that account for greater than 10 percent of gross accounts receivable are provided below.

	As of December 31, 2013				As of March 31, 2014
					(Unaudited)
	Receivable Balance		Percent of Total Receivables		Receivable Balance		Percent of Total Receivables
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	597,937	*	%	$	—	—	%
GlaxoSmithKline Biologicals S.A.	$	544,298	*	%	$	631,033	*	%
Total GlaxoSmithKline entities	$	1,691,144	13	%	$	631,033	*	%
Medicare, net of contractual allowances	$	2,422,611	28	%	$	2,223,793	31	%

* Represents less than 10% of accounts receivable.

Many of the supplies and reagents used in the Company’s testing process are procured from a limited number of suppliers. Any supply interruption or an increase in demand beyond the suppliers’ capabilities could have an adverse impact on the Company’s business. Management believes it can identify alternative sources, if necessary, but it is possible such sources may not be identified in sufficient time to avoid an adverse impact on its business. The Company purchases certain laboratory supplies and reagents primarily from two suppliers. Purchases from these two suppliers accounted for approximately 65% and 74% of the Company’s reagent purchases for the three months ended March 31, 2013 and 2014, respectively.

XML

Document And Entity Information	3 Months Ended
	Mar. 31, 2014	May 09, 2014
Document Information [Line Items]
Entity Registrant Name	RESPONSE GENETICS INC
Entity Central Index Key	0001124608
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		38,732,896
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2014
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2014

XML

Summary of Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2014

Accounting Policies [Abstract]

Schedule of ResponseDX Accounts Receivable

ResponseDX^® accounts receivable as of December 31, 2013 and March 31, 2014, consisted of the following:

	December 31, 2013		March 31, 2014
			(Unaudited)
Net Medicare receivable	$	2,422,611	$	2,223,793
Net Private Payor receivable		4,315,587		4,164,121
		6,738,198		6,387,914
Allowance for doubtful accounts		(2,404,659)		(1,751,567)
Total	$	4,333,539	$	4,636,347

Schedule of Estimated Useful Lives of Property and Equipment

The Company has determined the estimated useful lives of its property and equipment, as follows:

Laboratory equipment	5 to 7 years
Furniture and equipment	3 to 7 years
Leasehold improvements	Shorter of the useful life (5 to 7 years) or the lease term

Schedule of ResponseDX Revenue

The following details ResponseDX^® revenue for the three months ended March 31, 2013 and 2014:

	Three Months
	Ended March 31,
	(Unaudited)
	2013		2014
Net Medicare revenue	$	1,344,215	$	1,308,422
Net Private Payor revenue		1,838,283		2,009,131
Net ResponseDX® revenue	$	3,182,498	$	3,317,553

Schedule of Revenue Sources that Account for Greater than 10 Percent of Total Revenue

Revenue sources that account for greater than 10 percent of total revenue are provided below.

	Three Months Ended March 31,
	2013				2014
	(Unaudited)				(Unaudited)
	Revenue		Percent of Total Revenue		Revenue		Percent of Total Revenue
Abbott Molecular, Inc.	$	910,182	16	%	$	21,824	*	%
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	—	—	%	$	—	—	%
GlaxoSmithKline Biologicals S.A.	$	1,356,384	24	%	$	328,281	*	%
Total GlaxoSmithKline entities	$	1,356,384	24	%	$	328,281	*	%
Medicare, net of contractual allowances	$	1,344,215	24	%	$	1,308,422	34	%

* Represents less than 10% of revenue.

Schedule of Customers that Account for Greater than 10 Percent of Accounts Receivable

Customers that account for greater than 10 percent of gross accounts receivable are provided below.

	As of December 31, 2013				As of March 31, 2014
					(Unaudited)
	Receivable Balance		Percent of Total Receivables		Receivable Balance		Percent of Total Receivables
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	597,937	*	%	$	—	—	%
GlaxoSmithKline Biologicals S.A.	$	544,298	*	%	$	631,033	*	%
Total GlaxoSmithKline entities	$	1,691,144	13	%	$	631,033	*	%
Medicare, net of contractual allowances	$	2,422,611	28	%	$	2,223,793	31	%

* Represents less than 10% of accounts receivable.

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Net revenue	$ 3,894,934	$ 5,624,191
Cost of revenue	2,438,376	2,533,722
Gross Profit	1,456,558	3,090,469
Operating expenses:
Selling and marketing	1,452,905	1,442,235
General and administrative	3,013,898	2,135,186
Research and development	467,567	297,200
Total operating expenses	4,934,370	3,874,621
Operating loss	(3,477,812)	(784,152)
Other income (expense):
Interest expense	(24,221)	(19,410)
Interest income	1	43
Other	(2,407)	(20,785)
Net loss	(3,504,439)	(824,304)
Unrealized loss on foreign currency translation	(22,229)	(1,853)
Comprehensive loss	$ (3,526,668)	$ (826,157)
Net loss per share — basic and diluted (in dollars per share)	$ (0.09)	$ (0.03)
Weighted-average shares — basic and diluted (in shares)	38,718,336	32,797,625

XML

Stock Option Plans

3 Months Ended

Mar. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Option Plans

7. Stock Option Plans

In March 2000, the Company adopted a Stock Option Plan (the “2000 Stock Plan”) as approved by its Board of Directors. Under the 2000 Stock Plan, the Company granted options to acquire up to 1,600,000 shares of common stock. In connection with the adoption of the 2006 Employee, Director and Consultant Stock Plan, as further discussed below, the Company is to grant no additional options under the 2000 Stock Plan. Under the 2000 Stock Plan, there were no options to purchase shares of the Company’s common stock that remained outstanding as of December 31, 2013. Prior to March 2007, the Company also granted options to purchase 16,000 shares of common stock to two consultants which were granted under separate agreements outside of the 2000 Stock Plan.

On October 26, 2006, the Board of Directors of the Company approved, and on May 1, 2007, reapproved the adoption of the 2006 Employee, Director and Consultant Stock Plan (the “2006 Stock Plan”). The stockholders approved the 2006 Stock Plan on June 1, 2007. The initial number of shares which may be issued from time to time pursuant to the 2006 Stock Plan was 2,160,000 shares of common stock. Also, the 2006 Stock Plan includes the number of shares subject to purchase under options issued under the 2000 Stock Plan, where the options expired on or after October 18, 2006, subject to a maximum of 210,000 additional options.  In addition, on the first day of each fiscal year of the Company during the period beginning in fiscal year 2008 and ending on the second day of fiscal year 2017, the number of shares that may be issued from time to time pursuant to the 2006 Stock Plan is increased by the lesser of (i) 200,000 shares or equivalent, after determination of the effect of any stock split, stock dividend, combination or similar transactions as set forth in the 2006 Stock Plan, (ii) 5% of the number of outstanding shares of common stock of the Company on such date or (iii) an amount determined by the Board of Directors of the Company.  The initial number of shares available for issuance of 2,160,000 increased by 210,000 for options issued under the 2000 Stock Plan expiring after October 2006 and by 200,000 in 2008 through 2012, resulting in the total number of shares that may be issued as of January 1, 2014 to be 3,770,000. As of March 31, 2014, there were 1,552,866 options available for grant under the 2006 Stock Plan.

Employee options vest according to the terms of the specific grant and expire 10 years from the date of grant. Non-employee option grants to date typically vest over a 2 to 3 year period. The Company had 2,217,134 options outstanding at a weighted average exercise price of $1.85 at March 31, 2014. There were 1,212,311 non-vested stock options outstanding with a weighted average grant date fair value of $1.34 at March 31, 2014.  As of March 31, 2014, there was $969,580 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Stock Plan. That cost is expected to be recognized over a weighted-average period of 2.7 years.

Except for certain grants of restricted common stock and common stock options containing market conditions as described below, the Company estimated share-based compensation expense for the three months ended March 31, 2013 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended March 31, 2013
	(Unaudited)
Risk free interest rate		1.03-1.14	%
Expected dividend yield		—
Expected volatility		104.0-104.9	%
Expected term **(in years)		6.25
Forfeiture rate		7.0	%

No options were granted during the three months ended March 31, 2014. 

** Expected term is calculated using SAB 107, Simplified Formula. Management has concluded that the use of the simplified method for calculating the expected term of its common stock option grants is appropriate given the Company’s lack of history of option exercises.

The following table summarizes the stock option activity for the 2006 Plan for the three months ended March 31, 2014:

			Weighted
			Average		Remaining		Aggregate
	Number of		Exercise		Contractual		Intrinsic
	Shares		Price		Life (Years)		Value
Outstanding, December 31, 2013		2,288,076	$	1.83		8.41	$	1,082
Granted (Unaudited)		—	$	—		—		—
Exercised (Unaudited)		(15,300)	$	1.16		8.33		6,007
Expired (Unaudited)		—		—		—		—
Forfeited (Unaudited)		(55,642)	$	1.36		—		110
Outstanding, March 31, 2014 (Unaudited)		2,217,134	$	1.85		8.14	$	14,054
Exercisable, March 31, 2014 (Unaudited)		1,004,823	$	2.46		8.05	$	8,042

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2013 was $1.39. The Company did not grant any options during the three months ended March 31, 2014.

The following table provides additional information regarding options outstanding under the 2006 Plan as of March 31, 2014 (unaudited):

		Options Outstanding			Options Exercisable
Exercise Price		Number of Options		WA Remaining Contractual Term	Number of Options		WA Remaining Contractual Term
$	1.00 to 1.99		1,712,134	8.86		558,810		7.92
	2.00 to 2.99		287,500	7.32		228,513		7.19
	3.00 to 3.99		71,000	4.33		71,000		4.33
	4.29		11,500	3.40		11,500		3.40
	7.00		135,000	3.19		135,000		3.19
			2,217,134	8.14		1,004,823		6.81

Stock-based compensation expense was classified as follows in the results of operation:

	Three Months Ended March 31,
	( Unaudited )
	2013		2014
Cost of revenue	$	13,487	$	11,256
Research and development		9,842		13,197
Sales and marketing		17,400		15,749
General and administrative		64,595		144,567
Totals	$	105,324	$	184,769

Thomas Bologna was appointed Chief Executive Officer of the Company on December 21, 2011 and in connection with his appointment, Mr. Bologna was awarded stock options outside of the 2006 Stock Plan. Pursuant to the employment agreement between the Company and Mr. Bologna, dated December 21, 2011, and in reliance on NASDAQ Listing Rule 5636(c), the Company granted Mr. Bologna (i) a stock option to purchase 600,000 shares of the Company’s common stock, which vests monthly over 36 months from the date of grant, subject to his continued employment with the Company, (ii) a stock option to purchase 300,000 shares of the Company’s common stock, which vested in 2012, and (iii)  270,000 shares of restricted common stock of the Company, which vest on the date on which the 30-day trailing average closing price of the Company’s common stock equals or exceeds $2.40. The exercise price of the stock options is $1.20 per share, the closing price of the Company’s common stock on the day prior to the date of grant. The expense recognized in connection with these grants was $44,531 and $44,531 for the three months ended March 31, 2013 and 2014, respectively, and is included in the above table.

The following table summarizes these awards to Mr. Bologna:

				Intrinsic
				Value as of				Options		Remaining
				March 31,				Options		Contractual
Type	Grant Date	Number of Awards		2014		Exercise Price		Exercisable		Term
Restricted Shares of Common Stock	12/21/2011		270,000	$	321,300	$	—		—		7.7
Options	12/21/2011		600,000	$	—	$	1.20		400,000		7.7
Options	12/21/2011		300,000	$	—	$	1.20		300,000		7.7

XML

License and Collaborative Agreements

3 Months Ended

Mar. 31, 2014

License And Collaborative Agreements [Abstract]

License and Collaborative Agreements

6. License and Collaborative Agreements

License Agreement with the University of Southern California (“USC”)

In April 2000, as amended in June 2002 and April 2005, the Company entered into a license agreement with USC. Under this agreement, USC granted the Company a worldwide, exclusive license with the right to sublicense, the patents for nucleic acid extraction methodologies (“RGI-1”) and related technology, for use in human and veterinary diagnostic laboratory services, the sale of clinical diagnostic products, and the sale of research products to the research community. USC retains the right under the agreement to use the technology for research and educational purposes.

In consideration for this license, the Company agreed to pay USC royalties based on a percentage of net sales of products or services that make use of RGI-1 and related technology and to meet a certain minimum in royalty payments. Royalty expense relating to this agreement amounted to $104,105 and $10,961 for the three months ended March 31, 2013 and 2014, respectively.  Such expense is included in cost of revenue in the accompanying unaudited consolidated statements of operations.

License Agreement with Roche Molecular Systems (“Roche”)

In November 2004, the Company entered into a non-exclusive license to use Roche’s technology including specified nucleic acid amplification processes (“PCR Processes”) to perform certain human invitro clinical laboratory services. In consideration for this license, the Company is obligated to pay royalties to Roche, based on a percentage of net sales of products or services that make use of the PCR Processes. Royalty expense included in cost of revenue relating to this agreement amounted to $90,145 and $44,373 for the three months ended March 31, 2013 and 2014, respectively.

In November 2004, the Company also entered into an agreement with Roche, pursuant to which the Company is collaborating with Roche to produce commercially viable assays used in the validation of genetic markers for pharmaceutical companies. Specifically, the Company has licensed the rights to Roche to use the pre-diagnostic assays the Company develops in the course of using its RNA-extraction technologies to provide testing services to pharmaceutical companies and to produce diagnostic kits that then can be sold commercially to those pharmaceutical companies. Roche is required to pay the Company royalties of a certain percentage of net sales of such diagnostic kits sold to pharmaceutical companies. Through March 31, 2014, Roche has not been required to pay any royalties to the Company pursuant to this agreement.

 Services Agreement with Taiho Pharmaceutical Co., Ltd. (“Taiho”) 

In July 2001, the Company entered into an agreement with Taiho pursuant to which the Company provided Taiho with RGI-1 generated molecular-based tumor analyses for use in guiding chemotherapy treatment for cancer patients and for use in Taiho’s business of developing and marketing pharmaceutical and diagnostic products for use against cancer. The agreement was subsequently amended and extended through December 31, 2013. Revenue recognized under this agreement for the three months ended March 31, 2013 and 2014 was $33,920 and $0, respectively.

Services Agreement with GlaxoSmithKline, LLC formerly known as SmithKline Beecham Corporation (d.b.a. GlaxoSmithKline or “GSK”)

In January 2006, the Company entered into a master services agreement with GSK, a leading pharmaceutical manufacturer, pursuant to which the Company provides services in connection with profiling the expression of various genes from a range of human cancers. Under the agreement, the Company provides GSK with testing services as described in individual protocols and GSK pays the Company for such services based on the pricing schedule established for each particular protocol. GSK was obligated to make minimum annual payments to the Company under the agreement and also was obligated to make a non-refundable upfront payment to the Company, to be credited against work undertaken pursuant to the agreement.

In December 2008, the Company amended and restated its master services agreement with GSK and extended the term of the agreement for a two-year period, with the option for the parties to extend the agreement for additional one-year periods at the end of the term, upon their mutual written agreement. In addition, the Company became a preferred provider to GSK and its affiliates of genetic testing services on a fee-for-service basis and, in anticipation of the services to be provided, GSK agreed to make a non-refundable upfront payment.

The Company did not recognize any revenue relating to the GSK agreement for the three months ended March 31, 2013 and 2014, respectively.

Non-Exclusive License Agreement with GSK

In March 2010, the Company entered into a non-exclusive license agreement with GSK.  Under the agreement, the Company granted GSK a non-exclusive, sublicenseable license to its proprietary PCR analysis technology and diagnostic expertise to assess BRAF gene mutations in human tumor samples.  As part of the agreement, the Company received a non-refundable technology access fee in consideration for the transfer of the Company’s technology to GSK. The agreement also contains milestone provisions which allowed the Company to earn further payments from GSK, and, as of March 31, 2014, the Company has met all the milestones in the agreement and earned the applicable milestone payments. 

Master Services Agreement with GlaxoSmithKline Biologicals S.A. (“GSK Bio”)

On July 26, 2012, the Company entered into a second amended and restated master services agreement with GSK Bio, the vaccine division of GSK. Pursuant to this agreement, which has an effective date of May 15, 2012, the Company provides testing services for clinical trials and epidemiology studies relating to GSK Bio’s cancer immunotherapies. The Company performs these testing services on a fee-for-service basis as embodied in written task orders. GSK Bio retains the intellectual property rights to inventions, improvements and data resulting from the services performed under the agreement. The Company retains all intellectual property rights to its testing services, proprietary processes and all accompanying patent information owned by the Company. All intellectual property owned by either party on the date of the agreement remains the exclusive property of the owning party.

The agreement will expire on December 31, 2014, provided that any outstanding task orders at the time of termination will not thereby terminate (unless otherwise agreed in writing by the parties), and any such task orders will continue for the respective terms specified in such task orders (and the parties shall continue to perform their obligations thereunder). GSK Bio may terminate the agreement, without cause, upon 90 days’ written notice to the Company. The Company may terminate the agreement, without cause, upon one year’s written notice to GSK Bio. The agreement may also be terminated early if either party enters bankruptcy or similar proceedings or in the event of a material breach. GSK Bio may terminate the agreement immediately if the Company experiences a “change of control,” as defined in the agreement.

The agreement also provides for mutual indemnification by the parties and contains customary representations, warranties and covenants, including covenants governing the parties’ use of confidential information and representations regarding adequate insurance coverage or self-insurance.

The Company recognized revenue of $1,356,384 and $328,281 relating to the services performed for GSK Bio for the three months ended March 31, 2013 and 2014, respectively.

XML

Segment Information (Tables)

3 Months Ended

Mar. 31, 2014

Segment Reporting [Abstract]

Schedule of Financial Information by Geographic Area

The following tables contain certain financial information by geographic area:

	Three Months Ended March 31,
	2013		2014
	(Unaudited)		(Unaudited)
Net revenue:
United States	$	4,153,172	$	3,546,903
Europe		1,361,249		342,601
Japan		109,770		5,430
	$	5,624,191	$	3,894,934

	December 31, 2013		March 31, 2014
			(Unaudited)
Long-lived assets:
United States	$	2,701,805	$	2,539,481

XML

Property and Equipment and Intangible Assets (Tables)

3 Months Ended

Mar. 31, 2014

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

Property and equipment and intangible assets consist of the following:

	December 31, 2013		March 31, 2014
			(Unaudited)
Laboratory equipment	$	4,468,055	$	4,475,415
Furniture and equipment		736,886		750,886
Leasehold improvements		487,843		496,523
		5,692,784		5,722,824
Less: Accumulated depreciation		(3,758,202)		(3,956,167)
Total property and equipment, net	$	1,934,582	$	1,766,657
Purchased software	$	749,587	$	764,105
Internally developed software		213,361		213,361
Trademarks		33,000		33,000
		995,948		1,010,466
Less: Accumulated amortization		(228,725)		(237,642)
Total intangible assets, net	$	767,223	$	772,824

Schedule of Capital Leased Assets

This equipment is included in property and equipment on the accompanying consolidated balance sheet as of March 31, 2014 as follows:

	(Unaudited)
Equipment purchased under capital leases	$	584,150
Less: Accumulated amortization		(369,449)
Equipment purchased under capital leases, net	$	214,701

Schedule of Future Minimum Lease Payments Under Capital Leases

Future minimum lease payments under capital leases as of March 31, 2014 are as follows:

Years ending December 31,	(Unaudited)
2014	$	130,431
2015		101,309
2016		46,852
Total minimum lease payments		278,592
Less amount represented by interest		(32,979)
Less current portion		(129,456)
Capital lease obligation, net of current portion	$	116,157

XML

Sale of Common Stock

3 Months Ended

Mar. 31, 2014

Stockholders Equity Note [Abstract]

Sale of Common Stock

10. Sale of Common Stock

Common stock classified outside of stockholders’ equity

September 2012 Private Placement

On September 13, 2012, the Company entered into a purchase agreement (the “Purchase Agreement”) with Glaxo Group Limited, an affiliate of GSK (the “GSK Investor”) and two existing investors, Swiftcurrent Partners, L.P. and Swiftcurrent Offshore, Ltd. (collectively with the GSK Investor, the “September Investors”) for the private placement of an aggregate of 8,000,000 newly-issued shares of the Company’s common stock (the “September Shares”) at a purchase price of $1.10 per share (the “September 2012 Private Placement”). The Company raised gross cash proceeds of $8,800,000 in the September 2012 Private Placement, which closed on September 13, 2012 (the “Closing”).

Pursuant to the Purchase Agreement, for so long as the GSK Investor or its affiliates own at least 50% of the September Shares it purchased pursuant to the Purchase Agreement, the GSK Investor has the right to designate one non-voting board observer (the "Board Observer"). The Board Observer, if appointed, has the right to attend all meetings of the Board of Directors of the Company and to receive all board meeting materials, subject to certain restrictions set forth in the Purchase Agreement. As of the date hereof, the GSK Investor has not exercised its right to designate the Board Observer.

In connection with the September 2012 Private Placement, the Company also entered into a registration rights agreement, dated September 13, 2012 (the “September Registration Rights Agreement”), with the September Investors pursuant to which the Company agreed to file, within 45 days of the Closing, a registration statement with the SEC to register the September Shares for resale, which registration statement was required to become effective within 180 days following the Closing. The Company also granted the September Investors certain “piggyback” registration rights, which are triggered if the Company proposes to file a registration statement for its own account or the account of one or more stockholders until the earlier of the sale of all of the September Shares or the September Shares becoming eligible for sale under Rule 144(b)(1) without restriction.

Under the September Registration Rights Agreement, the Company is obligated to use commercially reasonable efforts to cause a registration statement to become effective and to remain continuously effective and to maintain the listing of the covered common stock on NASDAQ or other exchanges, as defined, for a period that will terminate upon the earlier of (i) the date on which all Registrable Securities covered by such Registration Statement as amended from time to time, have been sold, (ii) the date on which there are no longer any Registrable Securities outstanding or (iii) three years from the date of filing of such Registration Statement (the “Effectiveness Period”) and advise each September Investor in writing when the Effectiveness Period has expired. “Registrable Securities” means (i) the September Shares and (ii) shares of capital stock or any other securities issued or issuable with respect to or in exchange for the September Shares; provided, that, a security shall cease to be a Registrable Security with respect to a September Investor upon (A) sale by such September Investor pursuant to a registration statement or Rule 144 under the Securities Act of 1933, or (B) such security becoming eligible for sale by such September Investor without restriction pursuant to Rule 144(b)(1).   In the event the Company fails to satisfy its obligations under the September Registration Rights Agreement, the Company would be in breach of such agreement, in which event, the September Investors would be entitled to pursue all rights and remedies at law or equity including an injunction or other equitable relief. The September Registration Rights Agreement does not provide an explicitly stated or defined penalty due upon a breach.  Because the potential penalty for any breach of the September Registration Rights Agreement is not explicitly stated or defined, which prohibits the Company from applying the guidance of ASC 825-20-15, Registration Payment Arrangements, the Company was required to present the investment of approximately $8,800,000 in the Company’s common stock as common stock outside of stockholders’ equity in the accompanying consolidated balance sheets under ASC 480-10-S99-3, Classification and Measurement of Redeemable Securities.

Pursuant to the September Registration Rights Agreement, the Company filed a registration statement with the SEC on October 26, 2012, to register the September Shares for resale. This registration statement became effective on November 13, 2012 and remained effective as of March 31, 2014.

As of December 31, 2012, the Company has removed the restriction on 3,000,000 of the 8,000,000 September Shares and reclassified the shares to common stock from common stock classified outside of stockholders’ equity. Therefore, as of December 31, 2013 and March 31, 2014, a total of $5,500,000 of common stock relating to the 5,000,000 remaining restricted September Shares was classified outside of stockholders’ equity related to this transaction.

Activity in common stock classified outside of stockholders’ equity was as follows:

	Number of Shares		Amount
Balance, December 31, 2013		5,000,000	$	5,500,000
Issuance of common stock classified outside of stockholders’ equity		—		—
Reclassification to stockholders’ equity		—		—
Balance, March 31, 2014 (unaudited)		5,000,000	$	5,500,000

XML

Income Taxes

3 Months Ended

Mar. 31, 2014

Income Tax Disclosure [Abstract]

Income Taxes

8. Income Taxes

Deferred income taxes result from temporary differences between income tax and financial reporting computed at the effective income tax rate. The Company has established a valuation allowance against its net deferred tax asset due to the uncertainty surrounding the realization of such asset. Management periodically evaluates the recoverability of the deferred tax assets. At such time it is determined that it is more likely than not that deferred tax assets are realizable, the valuation allowance will be reduced.

The Company files U.S. federal, U.S. state, and foreign tax returns. The Company’s major tax jurisdictions are U.S. federal and the State of California. The Company is subject to tax examinations for the open years from 2003 through 2013.

XML

Segment Information

3 Months Ended

Mar. 31, 2014

Segment Reporting [Abstract]

Segment Information

9. Segment Information

The Company operates in a single reporting segment, with an operating facility in the United States.

The following enterprise wide disclosure was prepared on a basis consistent with the preparation of the condensed consolidated financial statements.

The following tables contain certain financial information by geographic area:

	Three Months Ended March 31,
	2013		2014
	(Unaudited)		(Unaudited)
Net revenue:
United States	$	4,153,172	$	3,546,903
Europe		1,361,249		342,601
Japan		109,770		5,430
	$	5,624,191	$	3,894,934

	December 31, 2013		March 31, 2014
			(Unaudited)
Long-lived assets:
United States	$	2,701,805	$	2,539,481

XML

Fair Value Measurements

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurements

11. Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.  ASC 820 establishes a three-level valuation hierarchy of valuation techniques that is based on observable and unobservable inputs. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. The first two inputs are considered observable and the last unobservable, that may be used to measure fair value and include the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of December 31, 2012, the Company held certain assets that are required to be measured at fair value on a recurring basis, including its cash and cash equivalents. The fair value of these assets was determined using the following inputs in accordance with ASC 820 at December 31, 2012 and March 31, 2013:

	Fair Value Measurement as of March 31, 2013
	Total		Level 1		Level 2		Level 3
Description	$		$		$		$
Money market accounts (1)		10,000		10,000		—		—

	Fair Value Measurement as of March 31, 2014
	(Unaudited)
	Total		Level 1		Level 2		Level 3
Description	$		$		$		$
Money market accounts (1)		—		—		—		—

(1) Included in cash and cash equivalents on the accompanying consolidated balance sheets.

As of December 31, 2013 and March 31, 2014, the Company did not hold any liabilities that are required to be measured at fair value on a recurring basis.

XML

Property and Equipment and Intangible Assets (Schedule of Property and Equipment and Intangible Assets) (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 5,722,824	$ 5,692,784
Less: Accumulated depreciation	(3,956,167)	(3,758,202)
Total property and equipment, net	1,766,657	1,934,582
Intangible assets	1,010,466	995,948
Less: Accumulated amortization	(237,642)	(228,725)
Total intangible assets, net	772,824	767,223
Purchased Software [Member]
Property, Plant and Equipment [Line Items]
Intangible assets	764,105	749,587
Trademarks [Member]
Property, Plant and Equipment [Line Items]
Intangible assets	33,000	33,000
Internally developed software [Member]
Property, Plant and Equipment [Line Items]
Intangible assets	213,361	213,361
Laboratory Equipment [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	4,475,415	4,468,055
Furniture and Equipment [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	750,886	736,886
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 496,523	$ 487,843

XML

Fair Value Measurements (Details) (USD $)	Mar. 31, 2014		Mar. 31, 2013
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market accounts	$ 0	[1]	$ 10,000	[1]
Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market accounts	0	[1]	10,000	[1]
Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market accounts	0	[1]	0	[1]
Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Money market accounts	$ 0	[1]	$ 0	[1]

[1] Included in cash and cash equivalents on the accompanying consolidated balance sheets.

XML

Commitments and Contingencies (Tables)

3 Months Ended

Mar. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

Schedule of Future Minimum Lease Payments under Noncancelable Operating Leases

Future minimum lease payments by year and in the aggregate, under the Company’s non-cancelable operating leases for facilities, equipment and software as a service, consist of the following at March 31, 2014:

Years Ending December 31,	Unaudited
2014	$	710,160
2015		522,518
2016		35,807
Total	$	1,268,485

XML

Organization, Operations and Basis of Accounting (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Organization, Consolidation And Presentation Of Financial Statements [Line Items]
Accumulated deficit	$ (68,801,618)	$ (65,297,179)

XML

Sale of Common Stock (Details) (USD $)	3 Months Ended		1 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2012 Private Placement [Member]	Dec. 31, 2012 September 2012 Private Placement [Member]	Dec. 31, 2013 September 2012 Private Placement [Member]
Class Of Stock [Line Items]
Common stock issued, price per share			$ 1.10
Net proceeds from issuance of common stock			$ 8,800,000
Registration statement filing period after closing of Private Placement			45 days
Registration statement effective period after closing of Private Placement			180 days
Common stock classified outside of stockholders equity (deficit)	$ 5,500,000	$ 5,500,000	$ 8,800,000		$ 5,500,000
Percentage of shares purchased required to be held for board observer designation right			50.00%
Shares of common stock reclassified to equity	0			3,000,000
Shares classified outside of stockholders' equity	5,000,000	5,000,000	8,000,000

XML

License and Collaborative Agreements (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Licensing Agreements [Member] | University of Southern California [Member]
License and Collaborative Agreements [Line Items]
Revenue	$ 10,961	$ 104,105
Licensing Agreements [Member] | Roche Molecular Systems [Member]
License and Collaborative Agreements [Line Items]
Revenue	44,373	90,145
Service Agreements [Member] | Taiho Pharmaceutical Co., Ltd. [Member]
License and Collaborative Agreements [Line Items]
Revenue recognized	0	33,920
Service Agreements [Member] | GlaxoSmithKline, LLC [Member]
License and Collaborative Agreements [Line Items]
Collaborative agreement, optional additional period	1 year
Collaborative agreement, term	2 years
Service Agreements [Member] | GSK Bio [Member]
License and Collaborative Agreements [Line Items]
Revenue recognized	$ 328,281	$ 1,356,384
Collaborative agreement, termination notice period	90 days

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities:
Net loss	$ (3,504,439)	$ (824,304)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	206,884	137,399
Share-based compensation	184,769	105,324
Bad debt expense	1,293,850	468,463
Changes in operating assets and liabilities:
Accounts receivable	(596,437)	(364,991)
Prepaid expenses and other current assets	(351,868)	(477,748)
Accounts payable	(310,414)	(292,303)
Accrued expenses	(149,384)	378,951
Accrued royalties	55,334	194,250
Accrued payroll and related liabilities	76,693	277,718
Deferred revenue	0	(483,052)
Net cash used in operating activities	(3,095,012)	(880,293)
Cash flows from investing activities:
Purchases of property and equipment	(30,040)	(81,414)
Purchases of software	(14,519)	(4,400)
Net cash used in investing activities	(44,559)	(85,814)
Cash flows from financing activities:
Proceeds from exercise of stock options	17,748	0
Capital lease payments	(48,044)	(39,208)
Net cash used in financing activities	(30,296)	(39,208)
Effect of foreign exchange rates on cash and cash equivalents	(22,229)	(1,853)
Net decrease in cash and cash equivalents	(3,192,096)	(1,007,168)
Cash and cash equivalents:
Beginning of period	8,148,599	9,041,478
End of period	4,956,503	8,034,310
Cash paid during the period for:
Interest	$ 24,221	$ 19,410

XML

Commitments and Contingencies

3 Months Ended

Mar. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

5. Commitments and Contingencies

Operating Leases

The Company leases 27,446 square feet of office and laboratory space in Los Angeles, California, under a non-cancelable operating lease that was amended and extended on February 3, 2014 and will expire on June 30, 2015. The Company has the option to extend the lease to June 30, 2016. The Company also leased 1,460 square feet of space in Frederick, Maryland, where administrative functions were performed until July 31, 2012. The Company moved the administrative functions performed out of this office primarily to its Los Angeles facilities and closed the Maryland office on July 31, 2012. The lease for the Maryland office expired on January 31, 2013.

Rent expense, which is classified in cost of revenue, selling and marketing, general and administrative, and research and development expenses was $160,790 and $212,181 for the three months ended March 31, 2013 and 2014, respectively.

Future minimum lease payments by year and in the aggregate, under the Company’s non-cancelable operating leases for facilities, equipment and software as a service, consist of the following at March 31, 2014:

Years Ending December 31,	Unaudited
2014	$	710,160
2015		522,518
2016		35,807
Total	$	1,268,485

Guarantees

The Company enters into indemnification provisions under its agreements with other counterparties in its ordinary course of business, typically with business partners, clients and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities. These indemnification provisions generally survive termination of the underlying agreement. The Company reviews its exposure under these agreements no less than annually, or more frequently when events require. The Company believes the estimated fair value of these agreements is minimal as, historically, no payments have been made by the Company under these indemnification obligations. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2013 and March 31, 2014.

Legal Matters

The Company is, from time to time, involved in legal proceedings, regulatory actions, claims and litigation arising in the ordinary course of business. These matters are not expected to have a material adverse effect upon the Company’s financial condition.

Employment Agreements

The Company has employment contracts with several individuals, which provide for annual base salaries and potential bonuses. These contracts contain certain change of control, termination and severance clauses that require the Company to make payments to certain of these employees if certain events occur as defined in their respective contracts.

XML

Summary of Significant Accounting Policies (Details) (USD $)	2 Months Ended	3 Months Ended
	Mar. 07, 2013	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013	Dec. 31, 2012	Sep. 28, 2012
Significant Accounting Policies [Line Items]
Receivable Balance,net allowances for doubtful debts		$ 5,528,509		$ 6,225,923
Allowance for doubtful accounts		1,751,567		2,404,659
Revenue from pharmaceutical clients		577,381	2,441,693
Bad debt expense		1,293,850	468,463
Line of credit, expiration date	Mar. 07, 2015
Line of credit, fee for unused portion	0.25%	0.375%
Line of credit, maximum borrowing capacity		2,000,000
Line of credit facility, current borrowing capacity		1,000,000
Line of credit, borrowing base percentage of pharmaceutical accounts receivable		80.00%
Line of credit, interest above prime rate		1.00%
Line of credit, interest charged		5.00%	5.00%
Line of credit, amount drawn		1,000,000		1,000,000
Required minimum bank balance		4,000,000			4,000,000	4,000,000
Advertising costs		6,422	0
Uninsured foreign cash balance		12,333
Line of Credit Facility,Agreement Date		Jul. 14, 2011
Cash and cash equivalents that exceeded federally insured limits		4,498,950
Income Tax Examination, Penalties and Interest Expense, Total		0	107
Property, Plant and Equipment, Useful Life		5 years
Maximum [Member] | Purchased And Internally Developed Software Intangible Asset [Member]
Significant Accounting Policies [Line Items]
Finite-Lived Intangible Asset, Useful Life		5 years
Minimum [Member] | Purchased And Internally Developed Software Intangible Asset [Member]
Significant Accounting Policies [Line Items]
Finite-Lived Intangible Asset, Useful Life		3 years
Cost of Goods, Total [Member] | Supplier Concentration Risk [Member]
Significant Accounting Policies [Line Items]
Concentration risk percentage		74.00%	65.00%
Clinical [Member]
Significant Accounting Policies [Line Items]
Receivable Balance,net allowances for doubtful debts		892,162		1,892,384
Payment period from the date of invoice		45 days
ResponseDX [Member]
Significant Accounting Policies [Line Items]
Allowance for doubtful accounts		1,751,567		2,404,659
Bad debt expense		$ 1,293,850	$ 468,463

XML

Loss Per Share (Computation for Basic and Diluted Loss Per Share) (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Numerator:
Net loss	$ (3,504,439)	$ (824,304)
Numerator for basic and diluted earnings per share	$ (3,504,439)	$ (824,304)
Denominator:
Denominator for basic and diluted earnings per share — weighted-average shares outstanding	38,718,336	32,797,625
Basic and diluted loss per share	$ (0.09)	$ (0.03)

XML

Loss Per Share (Tables)

3 Months Ended

Mar. 31, 2014

Earnings Per Share [Abstract]

Computation for Basic and Diluted Loss Per Share

The following table sets forth the computation for basic and diluted loss per share:

	Three Months Ended March 31,
	2013		2014
	(Unaudited)		(Unaudited)
Numerator:
Net loss	$	(824,304)	$	(3,504,439)
Numerator for basic and diluted earnings per share	$	(824,304)	$	(3,504,439)
Denominator:
Denominator for basic and diluted earnings per share — weighted-average shares outstanding		32,797,625		38,718,336
Basic and diluted loss per share	$	(0.03)	$	(0.09)