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 September 30, 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 November 7, 2014, there were 38,781,507 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 September 30, 2014	1
	Consolidated Statements of Operations and Comprehensive Loss — Three months and nine months ended September 30, 2013 and 2014	2
	Consolidated Statements of Cash Flows —Nine months ended September 30, 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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
Part II.	Other Information
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41
Signatures		42
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)

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RESPONSE GENETICS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2013			September 30, 2014
ASSETS
Current assets
Cash and cash equivalents	$	8,148,599		$	5,959,314
Accounts receivable, net of allowance for doubtful accounts of $2,404,659 and $2,204,177 at December 31, 2013 and September 30, 2014, respectively.		6,225,923			6,889,100
Prepaid expenses and other current assets		981,908			996,977
Total current assets		15,356,430			13,845,391
Property and equipment, net		1,934,582			1,536,780
Intangible assets, net		767,223			679,975
Deferred financing costs, net		—			202,476
Total assets	$	18,058,235		$	16,264,622
LIABILITIES, COMMON STOCK CLASSIFED OUTSIDE OF STOCKHOLDERS’ EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	1,694,312		$	1,399,023
Accrued expenses		666,675			409,861
Accrued interest		—			200,813
Accrued royalties		1,293,717			1,169,763
Accrued payroll and related liabilities		1,850,923			1,418,424
Capital lease obligation, current portion		157,238			92,505
Total current liabilities		5,662,865			4,690,389
Capital lease obligation, net of current portion		136,419			124,690
Line of credit, non-current		1,000,000			1,500,000
Loan, net of debt discount, non-current		—			7,939,843
Total liabilities		6,799,284			14,254,922
Commitments and contingencies (Note 5)
Common stock classified outside of stockholders’ equity		5,500,000			—
Stockholders’ equity
Common stock, $0.01 par value; 70,000,000 shares authorized; 38,712,896 and 38,732,896 shares issued and outstanding at December 31, 2013 and September 30, 2014, respectively		337,185			387,385
Additional paid-in capital		70,986,406			77,495,796
Accumulated deficit		(65,297,179	)		(75,584,477	)
Accumulated other comprehensive loss		(267,461	)		(289,004	)
Total stockholders’ equity		5,758,951			2,009,700
Total liabilities, common stock classified outside of stockholders’ equity and stockholders’ equity	$	18,058,235		$	16,264,622

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

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RESPONSE GENETICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	Three Months Ended September 30,						Nine Months Ended September 30
	2013			2014			2013			2014
Net revenue	$	4,092,277		$	4,464,991		$	15,030,382		$	12,641,160
Cost of revenue		2,740,147			2,542,718			7,981,835			7,566,832
Gross profit		1,352,130			1,922,273			7,048,547			5,074,328
Operating expenses:
Selling and marketing		1,197,717			1,303,940			3,961,712			4,039,924
General and administrative		2,500,108			3,495,515			6,744,542			9,556,013
Research and development		391,592			477,303			1,136,478			1,418,194
Total operating expenses		4,089,417			5,276,758			11,842,732			15,014,131
Operating loss		(2,737,287	)		(3,354,485	)		(4,794,185	)		(9,939,803	)
Other income (expense):
Interest expense		(25,763	)		(259,105	)		(65,949	)		(306,477	)
Interest income		1			1			46			4
Other		44,923			(30,357	)		20,503			(41,024	)
Net loss		(2,718,126	)		(3,643,946	)		(4,839,585	)		(10,287,300	)
Unrealized gain (loss) on foreign currency translation		(712	)		1,347			(2,567	)		(21,543	)
Comprehensive loss	$	(2,718,838	)	$	(3,642,599	)	$	(4,842,152	)	$	(10,308,843	)
Net loss per share — basic and diluted	$	(0.08	)	$	(0.09	)	$	(0.15	)	$	(0.27	)
Weighted-average shares — basic and diluted		33,137,368			38,732,896			32,911,836			38,728,454

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

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RESPONSE GENETICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
	2013			2014
Cash flows from operating activities:
Net loss	$	(4,839,585	)	$	(10,287,300	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		449,183			632,121
Share-based compensation		295,305			659,250
Bad debt expense		1,506,654			4,266,013
Amortization of deferred financing costs and debt discount		—			23,072
Changes in operating assets and liabilities:
Accounts receivable		(3,052,701	)		(4,890,804	)
Prepaid expenses and other current assets		34,956			(15,069	)
Accounts payable		(107,824	)		(295,289	)
Accrued expenses		174,908			(116,841	)
Accrued royalties		457,086			(123,954	)
Accrued payroll and related liabilities		102,216			(432,499	)
Deferred revenue		(483,052	)		—
Net cash used in operating activities		(5,462,854	)		(10,581,300	)
Cash flows from investing activities:
Purchases of property and equipment		(241,910	)		(31,620	)
Purchases of software		(137,499	)		(54,132	)
Cash paid for purchase of assets		(200,000	)		—
Net cash used in investing activities		(579,409	)		(85,752	)
Cash flows from financing activities:
Net proceeds from issuance of debt		—			8,113,887
Net proceeds from issuance of common stock		1,702,271			—
Borrowing on line of credit		—			500,000
Capital lease payments		(133,410	)		(137,779	)
Proceeds from exercise of stock options		23,993			23,200
Net cash provided by financing activities		1,592,854			8,499,308
Effect of foreign exchange rates on cash and cash equivalents		(2,568	)		(21,541	)
Net decrease in cash and cash equivalents		(4,451,977	)		(2,189,285	)
Cash and cash equivalents:
Beginning of period		9,041,478			8,148,599
End of period	$	4,589,501		$	5,959,314
Cash paid during the period for:
Interest	$	65,949		$	80,552
Supplemental disclosure of non-cash financing activities
Equipment and software acquired under capital leases	$	239,150		$	61,317
Assets acquired by issuance of common stock	$	980,000		$	—

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

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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 September 30, 2014, the Company had an accumulated deficit of $75,584,477. 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 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.

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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 September 30, 2014 were $1,892,384 and $769,294, respectively. There were no allowances for doubtful accounts recorded against these pharmaceutical accounts receivable at December 31, 2013 and September 30, 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 $2,204,177 as of December 31, 2013 and September 30, 2014, respectively. The Company’s bad debt expense for the three months ended September 30, 2013 and 2014 was $688,205 and $1,604,320, respectively, and for the nine months ended September 30, 2013 and 2014 was $1,506,654 and $4,266,013, respectively.

ResponseDX^® accounts receivable as of December 31, 2013 and September 30, 2014, consisted of the following:

	December 31, 2013			September 30, 2014
				(Unaudited)
Net Medicare receivable	$	2,422,611		$	2,377,560
Net Private Payor receivable		4,315,587			5,946,423
		6,738,198			8,323,983
Allowance for doubtful accounts		(2,404,659	)		(2,204,177	)
Total	$	4,333,539		$	6,119,806

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.

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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 for the three months ended September 30, 2013 and 2014 of $1,550,765 and $547,406, respectively and for the nine months ended September 30, 2013 and 2014 of $6,200,295 and $1,724,069, 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 Current Procedural Terminology (“CPT”).

The following details ResponseDX^® revenue for the periods indicated:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	(Unaudited)				(Unaudited)
	2013		2014		2013		2014
Net Medicare revenue	$	956,716	$	857,786	$	3,379,405	$	3,378,203
Net Private Payor revenue		1,584,796		3,059,799		5,450,682		7,538,888
Net ResponseDX® revenue	$	2,541,512	$	3,917,585	$	8,830,087	$	10,917,091

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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 testing service providers such as the Company. As a result of these cost containment measures and increased administrative resources required to address these measures, the Company continues to experience elongated time to collect payments and non-payment from payors. There can be no assurance that these measures and any 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 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 updated payment rates for some, but not all, of the CPT codes used by the Company.

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 an analysis that considered our historical patterns of revenue by payor in conjunction with the fluctuations we experienced in the three and nine months ended September 30, 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 October 31, 2014, CMS released CMS-1612-FC, a new final rule with comment period (the “Final Rule”) entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule, Access to Identifiable Data for the Center for Medicare and Medicaid Innovation Models & Other Revisions to Part B for CY 2015”. The Final Rule which was initially proposed on July 3, 2014 contains a number of provisions including new and modified CPT codes that may adversely impact the level of reimbursement for certain tests offered by the Company, including fluorescent in-situ hybridization (“FISH”) tests for which the Company receives reimbursement from the Medicare program beginning on January 1, 2015. Although we are still assessing the Final Rule, if it is enacted as drafted, it will materially impact our FISH reimbursements for 2015. The Final Rule is subject to a 60 days comment period, ending on December 30, 2014.

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RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

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 (“PCR”), 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 net sales price as defined in the agreement 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 of net sales price as defined in the agreement 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. Based upon the most recent analyses, the Company reduced the accrued liability during the quarter ended September 30, 2014 to an amount that management believes represents the amounts due under the USC license agreement. Management believes the accrued liability could be further revised in future periods based upon interactions with licensors.

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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”) and, as discussed below, on July 30, 2014, the agreement was amended. The line of credit is collateralized by the Company’s pharmaceutical, Private Payor and Medicare receivables. As of September 30, 2014, the maximum amount the Company can draw from the line of credit was $2,000,000 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. The interest rate charged to the Company was 5% through July 2014 and was 5.5% from August 2014 through September 2014. As needed from time to time, the Company may draw on this line to use for general corporate purposes. As of December 31, 2013 and September 30, 2014, the Company had drawn $1,000,000 and $1,500,000, respectively, against the line of credit. The line of credit is subject to various financial covenants. At September 30, 2014, the Company was in compliance with the covenants. Historically, however, the Company has been out of compliance with the covenants from time to time, and the Company has received waivers and forbearance agreements from the Bank.

As of December 31, 2013, the line of credit under the credit agreement was classified as a non-current liability on the accompanying condensed consolidated balance sheets as the line of credit had a maturity date of March 7, 2015, which was greater than one year from the date of the balance sheet. As of September 30, 2014, the line of credit under the credit agreement was classified as a non-current liability because the Waiver and Sixth Amendment to Loan and Security Agreement extended the maturity of the facility to July 25, 2016.

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.

On July 30, 2014, in connection with entering into a credit agreement with SWK Funding LLC discussed below, the Company and the Bank entered into a Waiver and Sixth Amendment to Loan and Security Agreement (the “Sixth Amendment”). The Sixth Amendment waived previous defaults under the loan agreement, modified the financial covenants, extended the maturity of the loan to July 25, 2016, modified the interest rate to the prime rate published by the Wall Street Journal plus 2.25% per annum, and implemented a pre-payment fee of $40,000. At September 30, 2014, the interest rate charged to the Company was 5.5%. The financial covenants under the Sixth Amendment include a revenue covenant and a liquidity covenant that conform with and are cross defaulted with the revenue covenant and liquidity covenant of the SWK Credit Agreement. The Company will pay a closing fee of $10,000 for the Sixth Amendment on July 18, 2015, approximately one year from the date of the closing.

SWK Term Loan

On July 30, 2014 (the “Closing Date”), the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK Funding LLC, as the administrative agent (the “Agent” or “SWK”), and the lenders (including SWK) party thereto from time to time (the “Lenders”). The SWK Credit Agreement provides for a multi-draw term loan to the Company (the “Loan”) up to a maximum principal amount of $12,000,000 (the “Loan Commitment Amount”). On the Closing Date, the Lenders advanced the Company an amount equal to $8,500,000 which is due and payable on July 30, 2020 (the “Term Loan Maturity Date”) or such earlier date on which the Loan Commitment Amount is terminated pursuant to the terms of the SWK Credit Agreement.

The Loan bears interest at a rate equal to the LIBOR Rate (as defined in the SWK Credit Agreement) plus an applicable margin of 12.5% per annum, subject to a one percent (1.0%) LIBOR floor. Interest on the Loan is due and payable in arrears (i) on the forty-fifth (45th) day following the last calendar day of each of the months of September, December, March, and June, commencing on November 15, 2014, (ii) upon a prepayment of the Loan and (iii) on the Term Loan Maturity Date. At September 30, 2014, the interest rate charged to the Company was 13.5%. Upon the earlier of (a) the Term Loan Maturity Date or (b) full repayment of the Loan, the Company is also required to pay an exit fee. On September 9, 2014, SWK, in its capacity as the initial Lender, assigned part of its interests under the SWK Credit Agreement to SG-Financial, LLC (“SG”). Pursuant to the assignment, SG was assigned $2,500,000 of the $8,500,000 Closing Date initial advance to the Company and $1,029,412 of the subsequent term loan commitment. Pursuant to the assignment, as of the effective date of the assignment, SG is a party to the SWK Credit Agreement as a Lender.

9

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

In addition, on the Closing Date, the Company issued to the Agent a warrant (the “Initial Warrant”) to purchase up to 681,090 shares of the Company's common stock. The Initial Warrant is exercisable, in whole or in part and from time to time, from the date of issuance until and including July 30, 2020 at an exercise price of $0.936 per share, subject to adjustment. The Initial Warrant was valued at $414,239, or approximately $0.61 per covered share, using a Black-Scholes pricing model with the following assumptions: 2.01% risk free rate, 0% dividend, 101.5% volatility, and six-year expected life. The value of the warrant was recorded on the balance sheet as discussed below. On September 9, 2014, the Agent assigned a portion of the Initial Warrant consisting of the right to purchase 200,321 shares of common stock to SG-Financial, LLC.

For accounting purposes, the proceeds received in the transaction were allocated to the liability for debt, a debt issuance discount and additional paid-in capital for the warrant based upon the relative fair value of the loan and the warrant. The amounts recorded in the financial statements were $8,500,000 for loan liability, $576,161 for debt issuance discount and $377,140 to additional paid-in capital for the warrant. Additionally, the Company recorded deferred loan issuance costs of $187,092 for investment banker fees and legal fees incurred to enter into the SWK Credit Agreement. The debt issuance discount and the deferred issuance costs are being amortized to interest expense over the six-year term of the loan.

The remaining $3,500,000 of the Loan Commitment Amount (the “Subsequent Term Loan”) may be advanced to the Company upon written request to the Agent during the period beginning on the Closing Date and ending February 28, 2016 provided that (i) no default or event of default has occurred or is continuing under the SWK Credit Agreement, (ii) the aggregate revenue recognized by the Company and any of its subsidiaries during any period of four (4) consecutive fiscal quarters ending prior to December 31, 2015 exceeds a certain dollar amount threshold and (iii) the Agent has received an executed warrant (the “Subsequent Term Loan Warrant”) to purchase a number of shares of common stock equal to the number obtained when the principal amount of the Subsequent Term Loan is multiplied by 7.5% and the product is divided by the exercise price of such warrant. The exercise price of the Subsequent Term Loan Warrant will be equal to 1.2 times the lower of (a) the average closing price of the common stock on the previous 20 trading days before the closing date of the Subsequent Term Loan, or (b) the closing price of the common stock on the last trading day prior to such Subsequent Term Loan’s closing date. The Subsequent Term Loan Warrant will be exercisable for a period of six years from the closing date of the Subsequent Term Loan, subject to adjustment. Upon issuance, the Agent may exercise the Subsequent Term Loan Warrant on a cashless basis at any time. In the event the Lender exercises the Subsequent Term Loan Warrant on a cashless basis we will not receive any proceeds. The exercise price of the Subsequent Term Loan Warrant is subject to customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.

The Company may prepay the Loan, in whole or in part, upon five business days’ written notice provided that a prepayment premium is paid to the Lenders as set forth in the SWK Credit Agreement. The Company is required to prepay the Loan with any net cash proceeds received from certain types of dispositions of assets described in the SWK Credit Agreement. The Company is also required to make certain revenue-based payments on the Company’s quarterly revenues, applied in the following priority: (i) first, to the payment of all fees, costs, expenses and indemnities due and owing to the Agent under the SWK Credit Agreement, (ii) second, to the payment of all fees, costs, expenses and indemnities due and owing to the Lenders under the SWK Credit Agreement, (iii) third, to the payment of all accrued but unpaid interest until paid in full, (iv) fourth, for each revenue-based payment date after August 2016, to the payment of all principal of the Loan up to an aggregate amount of $750,000 on any such payment date and (v) fifth, all remaining amounts to the Company.

The SWK Credit Agreement contains customary affirmative and negative covenants for credit facilities of its type, including covenants that limit the Company’s ability to pay dividends or redeem outstanding equity interests, incur additional indebtedness, grant additional liens, engage in any other type of business, make investments, merge, consolidate or sell all or substantially all of its assets and enter into transactions with related parties. The SWK Credit Agreement also contains certain financial covenants, including certain minimum aggregate revenue requirements.

The SWK Credit Agreement includes customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, default under certain other indebtedness, certain insolvency or bankruptcy events, the occurrence of certain material judgments, the institution of any proceeding by a government agency or a change of control of the Company that it is not otherwise permitted under the SWK Credit Agreement.

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 September 30, 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 September 30, 2013 and 2014, nominal amounts of interest and penalties were recorded in the Condensed Consolidated Statement of Operations.

10

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

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.

11

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 and nine months ended September 30, 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 September 30, 2013 and 2014 were $10,924 and $26,979, respectively, and for the nine months ended September 30, 2013 and 2014 were $14,247 and $53,239, respectively. 

12

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 September 30, 2014, the Company had $5,826,536 in cash and cash equivalents that exceeded federally insured limits. At September 30, 2014, $11,838 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 September 30,										Nine Months Ended September 30,
	2013					2014					2013					2014
	(Unaudited)										(Unaudited)
	Revenue		Percent of Total Revenue			Revenue		Percent of Total Revenue			Revenue		Percent of Total Revenue			Revenue		Percent of Total Revenue
GlaxoSmithKline entities:
GlaxoSmithKline, LLC	$	76,792		*	%	$	165,169		*	%	$	579,606		*	%	$	165,169		*	%
GlaxoSmithKline Biologicals S.A.		633,543		16			296,250		*			3,166,288		21			1,017,406		*
Total GlaxoSmithKline entities	$	710,335		17		$	461,419		10		$	3,745,894		25	%	$	1,182,575		*
Medicare, net of contractual allowances	$	956,716		23	%	$	857,786		19	%	$	3,379,405		23	%	$	3,378,203		27	%

* 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 September 30, 2014
						(Unaudited)
	Receivable Balance		Percent of Total Receivables			Receivable Balance		Percent of Total Receivables
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	597,937		*	%	$	145,654		*	%
GlaxoSmithKline Biologicals S.A.	$	544,298		*	%	$	470,957		*	%
Total GlaxoSmithKline entities	$	1,142,235		13	%	$	616,611		*	%
Medicare, net of contractual allowances	$	2,422,611		28	%	$	2,377,560		26	%

* 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. The Company made approximately 87% of its reagent purchases from three suppliers during the three months ended September 30, 2013 and made approximately 76% of its reagent purchases from three suppliers during the three months ended September 30, 2014. The Company made approximately 90% of its reagent purchases from four suppliers during the nine months ended September 30, 2013 and made approximately 69% of its reagent purchases from two suppliers during the nine months ended September 30, 2014.

13

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which modifies how all entities recognize revenue, and consolidates into one Accounting Standards Codification ("ASC") Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in ASC Topic 605, Revenue Recognition, and various other revenue accounting standards for specialized transactions and industries. The core principle of the guidance is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In achieving this objective, an entity must perform five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations of the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also clarifies how an entity should account for costs of obtaining or fulfilling a contract in a new ASC Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers.

ASU 2014-09 is effective for public companies for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is not permitted. ASU 2014-09 may be applied using either a full retrospective approach, in which all years included in the financial statements are presented under the revised guidance, or a modified retrospective approach. Under the modified retrospective approach, financial statements will be prepared using the new standard for the year of adoption, but not for prior years. Under this method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the company and disclose all line items in the year of adoption as if they were prepared under the old revenue guidance. We will adopt ASU 2014-09 on January 1, 2017 and are currently evaluating the impact that this adoption will have on our consolidated financial statements. At this time, the Company has not determined the transition method that will be used.

In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-09”). ASU 2014-15 provides guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. The Company has not yet determined the impact of this guidance on the Company's consolidated financial statements.

14

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			September 30, 2014
				(Unaudited)
Laboratory equipment	$	4,468,055		$	4,536,732
Furniture and equipment		736,886			752,465
Leasehold improvements		487,843			496,523
		5,692,784			5,785,720
Less: Accumulated depreciation		(3,758,202	)		(4,248,940	)
Total property and equipment, net	$	1,934,582		$	1,536,780
Purchased software	$	749,587		$	908,718
Internally developed software		213,361			108,362
Trademarks		33,000			33,000
		995,948			1,050,080
Less: Accumulated amortization		(228,725	)		(370,105	)
Total intangible assets, net	$	767,223		$	679,975

Depreciation expense, included in cost of revenue, general and administrative expenses, and research and development expenses for the three months ended September 30, 2013 and 2014 was $162,328 and $204,848, respectively, and for the nine months ended September 30, 2013 and 2014 was $449,183 and $632,121, 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 September 30, 2014 as follows:

	(Unaudited)
Equipment purchased under capital leases	$	645,467
Less: Accumulated amortization		(440,101	)
Equipment purchased under capital leases, net	$	205,366

Future minimum lease payments under capital leases as of September 30, 2014 are as follows:

Years ending December 31,	(Unaudited)
2014	$	29,418
2015		117,673
2016		63,216
2017		16,364
2018		16,364
Thereafter		9,547
Total minimum lease payments		252,582
Less amount represented by interest		(35,387	)
Less current portion		(92,505	)
Capital lease obligation, net of current portion	$	124,690

15

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 September 30,						Nine Months Ended September 30,
	2013			2014			2013			2014
	(Unaudited)						(Unaudited)
Numerator:
Net loss	$	(2,718,126	)	$	(3,643,946	)	$	(4,839,585	)	$	(10,287,300	)
Numerator for basic and diluted earnings per share	$	(2,718,126	)	$	(3,643,946	)	$	(4,839,585	)	$	(10,287,300	)
Denominator:
Denominator for basic and diluted earnings per share — weighted-average shares		33,137,368			38,732,896			32,911,836			38,728,454
Basic and diluted loss per share	$	(0.08	)	$	(0.09	)	$	(0.15	)	$	(0.27	)

Outstanding stock options to purchase 1,439,876 and 2,799,888 shares of common stock of the Company for the periods ended September 30, 2013 and 2014, respectively, were excluded from the calculation of diluted loss per share as their effect would have been antidilutive. Outstanding warrants to purchase 681,090 shares of common stock of the Company for the period ended September 30, 2014 were excluded from the calculation of diluted loss per share as its effect would have been antidilutive. Also excluded from the calculation were 270,000 and 311,667 unvested shares of restricted common stock for both of the periods ended September 30, 2013 and 2014.

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, general and administrative, and research and development expenses was $163,578 and $212,181 for the three months ended September 30, 2013 and 2014, respectively, and was $508,456 and $638,543 for the nine months ended September 30, 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, consisted of the following at September 30, 2014:

Years Ending December 31,	Unaudited
2014	$	296,720
2015		582,018
2016		35,807
Total	$	914,545

16

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 September 30, 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 $49,407 and a credit of $229,388 for the three months ended September 30, 2013 and 2014, respectively, and $240,421 and a credit of $207,977 for the nine months ended September 30, 2013 and 2014, respectively. The Company recorded the credit to royalty expense in the quarter ended September 30, 2014 to adjust accrued liabilities to management’s current estimate of amounts due under the license agreement. Changes to estimates of factors impacting the accrued royalty liability could result in additional adjustments in future periods. 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 $47,158 and $25,946 for the three months ended September 30, 2013 and 2014, respectively and $221,665 and $184,023 for the nine months ended September 30, 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 September 30, 2014, Roche has not been required to pay any royalties to the Company pursuant to this agreement.

17

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 September 30, 2013 and 2014 was $182,830 and $0, respectively, and for the nine months ended September 30, 2013 and 2014 was $523,010 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 recognized revenue of $76,792 and $165,169 relating to the GSK agreement for the three months ended September 30, 2013 and 2014, respectively, and $579,606 and $165,169 relating to the GSK agreement for the nine months ended September 30, 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. The Company has met all the milestones in the agreement and earned the three milestone payments of $500,000 each in July 2012, May 2013 and December 2013.

18

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 $633,543 and $296,250 relating to the services performed for GSK Bio for the three months ended September 30, 2013 and 2014, respectively, and $3,166,288 and $1,017,406 for the nine months ended September 30, 2013 and 2014, respectively.

19

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Stock Options, Restricted Stock and Warrants

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 2014, resulting in the total number of shares that may be issued as of January 1, 2014 to be 3,770,000. As of September 30, 2014, there were 811,589 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 two- to three-year period. The Company had 2,799,888 options outstanding at a weighted average exercise price of $1.63 at September 30, 2014. There were 1,612,301 non-vested stock options outstanding with a weighted average exercise price of $1.15 at September 30, 2014. As of September 30, 2014, there was $1,064,174 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 2.5 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 and nine months ended September 30, 2013 and 2014 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2014			2013			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Risk free interest rate		1.37	%		1.78-1.91	%		0.90-1.40	%		1.78-1.91	%
Expected dividend yield		—			—			—	%		—	%
Expected volatility		107.4	%		98.4-103.3	%		102.1-107.4	%		98.4-103.3	%
Expected term **(in years)		5.0			5.5-6.0			5.0-6.0	%		5.5-6.0
Forfeiture rate		7.0	%		7.0	%		7.0	%		7.0	%

** 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 nine months ended September 30, 2014:

	Number of Shares			Weighted Average Exercise Price		Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2013		2,288,076		$	1.83		8.4	$	1,082
Granted (Unaudited)		755,250		$	0.88		9.8		—
Exercised (Unaudited)		(20,000	)	$	1.16		7.8		7,605
Expired (Unaudited)		(13,211	)		1.36		8.5		—
Forfeited (Unaudited)		(210,227	)	$	1.13		—		—
Outstanding, September 30, 2014 (Unaudited)		2,799,888		$	1.63		8.0	$	—
Exercisable, September 30, 2014 (Unaudited)		1,187,587		$	2.29		6.7	$	—

The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2013 was $1.60 and $1.41, respectively. The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2014 was $0.70 and $0.70, respectively.

20

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Stock Options, Restricted Stock and Warrants – (continued)

The following table provides additional information regarding options outstanding under the 2006 Plan as of September 30, 2014 (unaudited):

		Options Outstanding				Options Exercisable
Exercise Price		Number of Options		WA Remaining Contractual Term		Number of Options		WA Remaining Contractual Term
$	0.88		712,125		9.8		24,439		9.8
	1.00 to 1.99		1,572,763		8.3		694,813		7.7
	2.00 to 2.99		297,500		6.9		250,835		6.7
	3.00 to 3.99		71,000		3.8		71,000		3.8
	4.29		11,500		2.9		11,500		2.9
	7.00		135,000		2.7		135,000		2.7
			2,799,888		8.1		1,187,587		6.7

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	( Unaudited )
	2013		2014		2013		2014
Cost of revenue	$	12,600	$	12,164	$	40,984	$	36,341
Research and development		8,075		1,373		26,833		38,461
Sales and marketing		6,493		4,905		19,466		51,318
General and administrative		74,293		32,157		208,022		533,130
Totals	$	101,461	$	50,599	$	295,305	$	659,250

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, as amended, 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 September 30, 2013 and 2014, respectively, and was $133,592 and $133,592 for the nine months ended September 30, 2013 and 2014, respectively, and is included in the above table. 

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RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. Stock Options, Restricted Stock and Warrants – (continued)

The following table summarizes these awards to Mr. Bologna:

Type	Grant Date	Number of Awards		Intrinsic Value as of September 30, 2014		Exercise Price		Options Exercisable		Remaining Contractual Term
Restricted Shares of Common Stock	12/21/2011		270,000	$	186,300	$	—		—		7.2
Options	12/21/2011		600,000	$	—	$	1.20		550,000		7.2
Options	12/21/2011		300,000	$	—	$	1.20		300,000		7.2

On March 12, 2014, the Company granted 62,500 shares of restricted common stock, with a value of $86,250, to a vendor in connection with a contract for services. The shares vest monthly in equal installments from April 2014 through December 2014. At September 30, 2014, 41,667 shares had vested. The expense recognized in connection with this grant was $28,750 and $57,500 for the three and nine months ended September 30, 2014, respectively, and is included in general and administrative expense in the stock-based compensation table above.

On July 30, 2014, the Company issued an Initial Warrant to purchase up to 681,090 shares of common stock in connection with the SWK Credit Agreement, and the warrant was recorded as an equity warrant in the balance sheet. The warrant is exercisable, in whole or in part and from time to time, from the date of issuance until and including July 30, 2020 at an exercise price of $0.936 per share, subject to adjustment. The warrant was valued at $414,239, or approximately $0.61 per covered share, using a Black-Scholes pricing model with the following assumptions: 2.01% risk free rate, 0% dividend, 101.5% volatility, and six-year expected life. The proceeds received pursuant to the SWK Credit Agreement were allocated to the liability for debt, a debt issuance discount and $377,140 to additional paid-in capital for the warrant. Pursuant to the SWK Credit Agreement, upon funding of the second tranche of the commitment under the agreement, the Company will be required to issue a second warrant to the lenders under the SWK Credit Agreement. The number of common shares that could be purchased under the second warrant will be calculated if and when the Company draws the second tranche of funding. On September 9, 2014, SWK Funding LLC, the initial lender and agent, assigned a portion of the Initial Warrant consisting of the right to purchase 200,321 shares of common stock to SG-Financial, LLC.

22

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 September 30,				Nine Months Ended September 30,
	2013		2014		2013		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Net revenue:
United States	$	3,277,279	$	4,159,921	$	11,234,719	$	11,584,184
Europe		632,168		305,070		3,178,393		1,051,546
Japan		182,830		—		617,270		5,430
	$	4,092,277	$	4,464,991	$	15,030,382	$	12,641,160

	December 31, 2013		September 30, 2014
			(Unaudited)
Long-lived assets:
United States	$	2,701,805	$	2,216,755

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RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Sale of Common Stock

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.

24

RESPONSE GENETICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Sale of Common Stock – (continued)

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 September 30, 2014.

As of December 31, 2012, the Company had 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. During the quarter ended June 30, 2014, the restriction was eligible for removal from the remaining 5,000,000 restricted September Shares. Therefore, as of December 31, 2013 and September 30, 2014, a total of $5,500,000 and $0, respectively, of common stock relating to 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		(5,000,000	)		(5,500,000	)
Balance, September 30, 2014 (unaudited)		—		$	—

25

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 September 30, 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 win pharmaceutical business and maintain revenue from pharmaceutical clients; our ability to generate or obtain from external sources sufficient liquidity for our operations; 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; our ability to successfully collect payments from Medicare and other payors; 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 maintain compliance with the listing requirements of Nasdaq; 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, including the recent government- and private-pay-sources-instituted cost containment measures; 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 products without unanticipated delay; to continue to provide the ResponseDX: Tissue of Origin^TM test, the TC/PC pathology partnering program, the ResponseDX: Comprehensive Lung Profile; 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 September 30, 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 September 30, 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 September 30, 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^TM 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 ResponseDX: Tissue of Origin^TM 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;

26

• 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.

27

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, ResponseDX: Breast^TM and ResponseDX^® Glioma 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^TM 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 September 30, 2014, our ResponseDX^® sales team consisted of 21 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. During 2014, we have been building out our product offerings, and we anticipate continuing to do so in the future.

Addition of Next-Generation Sequencing to our suite of technologies

The Company is utilizing mutational analysis by next-generation sequencing (“NGS”) to complement our suite of molecular diagnostics platforms for the analysis of cancer specimens. The Company is using 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 represented 9.6% and 9.0% of our total operating expenses for the three months ended September 30, 2013 and 2014, respectively, and 9.6% and 9.5% of our total operating expenses for the nine months ended September 30, 2013 and 2014, respectively. Major components of the $391,592 and $477,303 in research and development expenses for the three months ended September 30, 2013 and 2014, respectively, and of the $1,136,478 and $1,418,194 in research and development expenses for the nine months ended September 30, 2013 and 2014, respectively, included supplies and reagents for our research activities, sample procurement costs, personnel costs and patent fees. 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.

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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 of the amount expected to be collected for the services provided 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 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 updated payment rates for some, but not all, of the CPT codes used by the Company.

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 three and nine months ended September 30, 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.

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On October 31, 2014, CMS released CMS-1612-FC, a new final rule with comment period (the “Final Rule”) entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule, Access to Identifiable Data for the Center for Medicare and Medicaid Innovation Models & Other Revisions to Part B for CY 2015”. The Final Rule which was initially proposed on July 3, 2014 contains a number of provisions including new and modified CPT codes that may adversely impact the level of reimbursement for certain tests offered by the Company, including fluorescent in-situ hybridization (“FISH”) tests for which the Company receives reimbursement from the Medicare program beginning on January 1, 2015. Although we are still assessing the Final Rule, if it is enacted as drafted, it will materially impact our FISH reimbursements for 2015. The Final Rule is subject to a 60 days comment period, ending on December 30, 2014.

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 net sales price as defined in the agreement 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 $49,407 and a credit of $229,388 for the three months ended September 30, 2013 and 2014, respectively, and were $240,421 and a credit of $207,977 for the nine months ended September 30, 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 $47,158 and $25,946 for the three months ended September 30, 2013 and 2014, respectively, and were $221,665 and $184,023 for the nine months ended September 30, 2013 and 2014, respectively. The Company recorded the credit to royalty expense in the quarter ended September 30, 2014 to adjust accrued liabilities to management’s current estimate of amounts due under the USC license agreement. Changes to estimates of factors impacting the accrued royalty liability could result in additional adjustments in future periods.

We are subject to potentially significant variations in royalties recorded in any period. While the amount paid is based on a fixed percentage of net sales price as defined in the agreement 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.

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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 September 30, 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 $2,204,177 as of December 31, 2013 and September 30, 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 September 30, 2014 and September 30, 2013

Revenue:   Revenue was $4,464,991 for the quarter ended September 30, 2014 as compared to $4,092,277 for the quarter ended September 30, 2013, an increase of $372,714 or 9.1%. The increase was due primarily to an increase in ResponseDX^® revenue of $1,376,073 or 54.1%, offset by a decline in pharmaceutical client revenue of $1,003,358 or 64.7%. ResponseDX^® revenue accounted for 87.7% of total revenue for the quarter ended September 30, 2014 compared to 62.1% for the quarter ended September 30, 2013. The increase in ResponseDX^® revenue primarily relates to our continued focus on marketing and sales activities, 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 Response DX: Tissue of Origin^TM test. The decrease in pharmaceutical client revenue related to the completion of certain studies by pharmaceutical clients.

Cost of Revenue:   Cost of revenue for the quarter ended September 30, 2014 was $2,542,718 as compared to $2,740,147 for the quarter ended September 30, 2013, a decrease of $197,429 or 7.2%. The decrease in cost of revenue resulted primarily from lower laboratory supplies and reagents of $84,966. Also, royalty expense decreased by $300,005 primarily as a result of a credit to royalty expense in the quarter ended September 30, 2014 to adjust accrued liabilities to management’s current estimate of amounts due under the USC license agreement. Changes to estimates of factors impacting the accrued royalty liability could result in additional adjustments in future periods. These decreases were offset by higher personnel costs of $61,055, consulting expense of $40,958, rent of $36,452, equipment maintenance, service and repair of $34,734, and depreciation of $25,900. 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 56.9% for the quarter ended September 30, 2014, as compared to 67.0% for the quarter ended September 30, 2013.

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Sales and Marketing Expenses:   Sales and marketing expenses were $1,303,940 for the quarter ended September 30, 2014 as compared to $1,197,717 for the quarter ended September 30, 2013, an increase of $106,223 or 8.9%. The increase was primarily to due higher personnel costs of $62,495 and travel costs of $25,930. The major expenditures for sales and marketing activities in both periods were compensation and travel expenses.

General and Administrative Expenses:   General and administrative expenses were $3,495,515 for the quarter ended September 30, 2014, as compared to $2,500,108 for the quarter ended September 30, 2013, an increase of $995,407 or 39.8%. This increase resulted primarily from higher bad debt expense of $916,115 and stock compensation expense of $141,436 offset by lower consulting fees of $87,454.

Research and Development Expenses:   Research and development expenses were $477,303 for the quarter ended September 30, 2014, as compared to $391,592 for the quarter ended September 30, 2014, an increase of $85,711 or 21.9%. The increase in expense was primarily the result of higher legal fees of $85,732. We expect to continue to invest in research and development as we continue to work to develop additional aspects of our technology, introduce new tests and to study diagnostic indicators for various forms of cancer.

Other Income and Expense:  Other income and expense primarily represents the interest expense we incur under the credit agreement with SWK Funding LLC as the agent and the lenders party thereto (the “SWK Credit Agreement”), amortization of deferred loan costs, 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 $259,105 for the three months ended September 30, 2014 compared to $25,763 for the three months ended September 30, 2013. The increase was primarily due to the new SWK Credit Agreement and amortization of related debt issuance costs and debt discount. Other expense increased to $30,357 for the three months ended September 30, 2014 compared to other income of $44,923 for the three months ended September 30, 2013. The change primarily relates to an increase in realized and unrealized foreign currency losses. 

Net Income/(Loss):   As a result of the foregoing, our net loss increased by $925,820 to $3,643,946 for the three months ended September 30, 2014 as compared to a net loss of $2,718,126 for the three months ended September 30, 2013.

Nine Months Ended September 30, 2014 and September 30, 2013

Revenue:   Revenue was $12,641,160 for the nine months ended September 30, 2014, as compared to $15,030,382 for the nine months ended September 30, 2013, a decrease of $2,389,222 or 15.9%. The decrease in overall revenue was primarily the result of a decrease in pharmaceutical client revenue of $4,476,227 or 72.2% offset by an increase in ResponseDX^® revenue of $2,087,044 or 23.6%. The decrease in pharmaceutical client revenue related to the completion of certain studies by pharmaceutical clients. ResponseDX^® revenue accounted for 86.4% of total revenue for the nine months ended September 30, 2014 compared to 58.7% for the nine months ended September 30, 2013. The increase in ResponseDX^® revenue primarily relates to our continued focus on marketing and sales activities, 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 ResponseDX: Tissue of Origin^TM test.

Cost of Revenue:   Cost of revenue for the nine months ended September 30, 2014 was $7,566,832 as compared to $7,981,835 for the nine months ended September 30, 2013, a decrease of $415,003 or 5.2%. 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 the launch of our ResponseDX: Tissue of Origin^TM test in early 2014. The decrease resulted primarily from lower laboratory supplies and reagent costs of $684,336. Also, royalty expense decreased by $486,040 primarily as a result of a credit to royalty expense in the quarter ended September 30, 2014 to adjust accrued liabilities to management’s current estimate of amounts due under the USC license agreement. Changes to estimates of factors impacting the accrued royalty liability could result in additional adjustments in future periods. These decreases were offset by higher personnel costs of 209,741, equipment maintenance, repair and service of $133,876, and rent of $117,974. 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 59.9% for the nine months ended September 30, 2014, as compared to 53.1% for the nine months ended September 30, 2013.

Sales and Marketing Expenses:   Sales and marketing expenses were $4,039,924 for the nine months ended September 30, 2014 as compared to $3,961,712 for the nine months ended September 30, 2013, an increase of $78,212 or 2.0%. The increase was primarily due to higher cost for marketing collateral and advertising of $149,775 and travel expense of $138,586 offset by lower recruiting costs of $136,607. The major expenditures for sales and marketing activities in both periods were compensation and travel expenses.

General and Administrative Expenses: General and administrative expenses were $9,556,013 for the nine months ended September 30, 2014, as compared to $6,744,542 for the nine months ended September 30, 2013, an increase of $2,811,471 or 41.7%. The increase resulted primarily from higher bad debt expense of $2,759,358 and stock compensation expense of $267,608 offset by lower consulting expense of $134,856.

Research and Development Expenses:   Research and development expenses were $1,418,194 for the nine months ended September 30, 2014, as compared to $1,136,478 for the nine months ended September 30, 2013, an increase of $281,716 or 24.8%. This increase resulted primarily from higher legal expense of $227,024. We expect continued investment in research and development as we work to develop additional aspects of our technology, introduce new tests and to study diagnostic indicators for various forms of cancer.

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Other Income and Expense:   Other income and expense primarily represents the interest expense we incur under the SWK Credit Agreement, amortization of deferred financing costs, our revolving credit facility with Silicon Valley Bank and other equipment financing arrangements as well as our realized and unrealized foreign currency exchange gains or losses on our Euro-denominated receivables. Interest expense increased to $306,477 for the nine months ended September 30, 2014 compared to $65,949 for the same period in 2013. The increase primarily relates to the new loan under the SWK Credit Agreement and amortization of related debt issuance costs and debt discount. Other expense increased $61,527 for the nine months ended September 30, 2014 to $41,024 compared to other income of $20,503 for the same period in 2013. The change primarily relates to an increase in realized and unrealized foreign currency losses.

Income Taxes:   As of September 30, 2014 and 2013, we have incurred substantial losses and have generated no taxable income. Therefore, a full valuation allowance has been recorded for the deferred tax assets since we do not believe the recoverability of the deferred income tax assets in the near future is more likely than not.

Net Income/(Loss):   As a result of the foregoing, our net loss increased by $5,447,715, or 112.6%, to $10,287,300 for the nine months ended September 30, 2014 as compared to a net loss of $4,839,585 for the nine months ended September 30, 2013.

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Liquidity and Capital Resources

We incurred a net loss of $10,287,300 during the nine months ended September 30, 2014. Since our inception in September 1999, we have incurred cumulative losses and as of September 30, 2014, we had an accumulated deficit of $75,584,477. 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 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.

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.

On July 30, 2014, we entered into a credit agreement (the “SWK Credit Agreement”) with SWK Funding LLC, as the administrative agent (the “Agent” or “SWK”), and the lenders (including SWK) party thereto from time to time (the “Lenders”). The SWK Credit Agreement provides for a multi-draw term loan to the Company (the “Loan”) for up to a maximum principal amount of $12,000,000 (the “Loan Commitment Amount”). On the Closing Date, the Lenders advanced the Company an amount equal to $8,500,000 which is due and payable on July 30, 2020 (the “Term Loan Maturity Date”) or such earlier date on which the Loan Commitment Amount is terminated pursuant to the terms of the SWK Credit Agreement.

The outstanding principal balance under the SWK Credit Agreement bears interest at a rate per annum equal to the LIBOR Rate (subject to a minimum amount of one percent (1.0%) plus twelve and half percent (12.5%), and will be due and payable in arrears (i) on the forty-fifth (45th) day following the last calendar day of each of the months of September, December, March, and June, commencing with November 15, 2014, (ii) upon a prepayment of the Loan and (iii) at maturity in cash. At September 30, 2014, the interest rate charged to the Company was 13.5%. Upon the earlier of (a) the Term Loan Maturity Date or (b) full repayment of the Loan, the Company is required to pay an exit fee. On September 9, 2014, SWK, in its capacity as the initial Lender, assigned part of its interests under the SWK Credit Agreement to SG-Financial, LLC (“SG”). Pursuant to the assignment, SG was assigned $2,500,000 of the $8,500,000 Closing Date initial advance to the Company and $1,029,412 of the subsequent term loan commitment. Pursuant to the assignment, as of the effective date of the assignment, SG is a party to the SWK Credit Agreement as a Lender.

On July 14, 2011, the Company entered into a line of credit agreement with Silicon Valley Bank (the “Bank”), and, as discussed below, on July 30, 2014, the agreement was amended. The line of credit is collateralized by the Company’s pharmaceutical, Private Payor and Medicare receivables. As of September 30, 2014, the maximum amount the Company can draw from the line of credit was $2,000,000 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. The interest rate charged to the Company was 5% through July 2014 and was 5.5% from August 2014 through September 2014. As needed from time to time, the Company may draw on this line to use for general corporate purposes. As of December 31, 2013 and September 30, 2014, the Company had drawn $1,000,000 and $1,500,000, respectively, against the line of credit. The financial covenants under the Sixth Amendment include a revenue covenant and a liquidity covenant that conform with and are cross defaulted with the revenue covenant and liquidity covenant of the SWK Credit Agreement. As of September 30, 2014, the Company was in compliance with the covenants. Historically, however, the Company has been out of compliance with the covenants from time to time, and the Company has received waivers and forbearance agreements from the Bank.

As of December 31, 2013, the line of credit under the credit agreement with the Bank was classified as a non-current liability on the accompanying condensed consolidated balance sheets as the line of credit had a maturity date of March 7, 2015, which was greater than one year from the date of the balance sheet. As of September 30, 2014, the line of credit under the credit agreement was classified as a non-current liability because the Waiver and Sixth Amendment to Loan and Security Agreement (further described below) extended the maturity of the facility to July 25, 2016.

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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.

On July 30, 2014, in connection with entering into a credit agreement with SWK, the Company and the Bank entered into a Waiver and Sixth Amendment to Loan and Security Agreement (“Sixth Amendment”). The Sixth Amendment waived previous defaults under the loan agreement, modified the financial covenants, extended the maturity of the loan to July 25, 2016, modified the interest rate to the prime rate published by the Wall Street Journal plus 2.25% per annum, and implemented a pre-payment fee of $40,000. At September 30, 2014, the interest rate charged to the Company was 5.5%. The financial covenants under the Sixth Amendment include a revenue covenant and a liquidity covenant that conform with and are cross defaulted with the revenue covenant and liquidity covenant of the SWK Credit Agreement. The Company will pay a closing fee of $10,000 for the Sixth Amendment on July 18, 2015, approximately one year from the date of the closing.

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.

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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 September 30, 2014.

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 .

36

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 September 30, 2014.

As of December 31, 2013, the Company had 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. During the second quarter of 2014, the restriction was eligible for removal from the remaining 5,000,000 restricted September Shares. Therefore, as of December 31, 2013 and September 30, 2014, a total of $5,500,000 and $0, respectively, of common stock relating to restricted September Shares was classified outside of stockholders’ equity related to this transaction.

37

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.

38

Comparison of Cash Flows for the Nine Months Ended September 30, 2013 and 2014

As of September 30, 2013, we had $4,589,501 in cash and cash equivalents, working capital of $7,891,676 and an accumulated deficit of $62,116,248. As of September 30, 2014, we had $5,959,314 in cash and cash equivalents, working capital of $9,155,002 and an accumulated deficit of $75,584,477.

Cash flows provided by operating activities

During the nine months ended September 30, 2013, the Company used cash flows in operating activities of $5,462,854 compared to $10,581,300 used in the nine months ended September 30, 2014. The increase in cash used in operating activities of $5,118,446 was due mainly to an increase in the net loss from $4,839,585 for the nine months ended September 30, 2013 to $10,287,300 for the nine months ended September 30, 2014. Other items that impacted cash flows from operating activities include increases in accounts receivable and decreases in accounts payable, payroll-related liabilities 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 changes.

Cash flows used in investing activities

Net cash used in investing activities was $579,409 for the nine months ended September 30, 2013 and $85,752 for the nine months ended September 30, 2014. The reduction in cash used in investing activities was attributable to lower purchases of equipment and software.

Cash flows used in financing activities

Cash flows from financing activities for the nine months ended September 30, 2013 provided net cash of $1,592,854 primarily from issuance of common stock. Cash flows from financing activities for the nine months ended September 30, 2014 provided net cash of $8,499,308 primarily from the loan under the SWK Credit Agreement and a drawdown of $500,000 on the line of credit with the Bank.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which modifies how all entities recognize revenue, and consolidates into one Accounting Standards Codification ("ASC") Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in ASC Topic 605, Revenue Recognition, and various other revenue accounting standards for specialized transactions and industries. The core principle of the guidance is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In achieving this objective, an entity must perform five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations of the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also clarifies how an entity should account for costs of obtaining or fulfilling a contract in a new ASC Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers.

ASU 2014-09 is effective for public companies for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is not permitted. ASU 2014-09 may be applied using either a full retrospective approach, in which all years included in the financial statements are presented under the revised guidance, or a modified retrospective approach. Under the modified retrospective approach, financial statements will be prepared using the new standard for the year of adoption, but not for prior years. Under this method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the company and disclose all line items in the year of adoption as if they were prepared under the old revenue guidance. We will adopt ASU 2014-09 on January 1, 2017 and are currently evaluating the impact that this adoption will have on our consolidated financial statements. At this time, we have not determined the transition method that will be used.

In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-09”). ASU 2014-15 provides guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. the Company has not yet determined the impact of this guidance on the Company's consolidated financial statements.

39

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 September 30, 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.

40

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.

41

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: November 14, 2014	By:	/s/ Thomas A. Bologna
		Thomas A. Bologna
		Chief Executive Officer (Principal Executive Officer)
DATE: November 14, 2014	By:	/s/ Kevin R. Harris
		Kevin R. Harris
		Vice President and Chief Financial Officer (Principal Financial Officer)

42

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: November 14, 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: November 14, 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 September 30, 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: November 14, 2014	/s/ Thomas A. Bologna
	Chief Executive Officer
Dated: November 14, 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

License and Collaborative Agreements (Details) (USD $)	3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		1 Months Ended			3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014 Licensing Agreements [Member] University of Southern California [Member]	Sep. 30, 2013 Licensing Agreements [Member] University of Southern California [Member]	Sep. 30, 2014 Licensing Agreements [Member] University of Southern California [Member]	Sep. 30, 2013 Licensing Agreements [Member] University of Southern California [Member]	Sep. 30, 2014 Licensing Agreements [Member] Roche Molecular Systems [Member]	Sep. 30, 2013 Licensing Agreements [Member] Roche Molecular Systems [Member]	Sep. 30, 2014 Licensing Agreements [Member] Roche Molecular Systems [Member]	Sep. 30, 2013 Licensing Agreements [Member] Roche Molecular Systems [Member]	Dec. 31, 2013 Licensing Agreements [Member] Glaxo, Smith, Kline [Member]	May 31, 2013 Licensing Agreements [Member] Glaxo, Smith, Kline [Member]	Jul. 31, 2012 Licensing Agreements [Member] Glaxo, Smith, Kline [Member]	Sep. 30, 2014 Service Agreements [Member] Glaxo, Smith, Kline [Member]	Sep. 30, 2013 Service Agreements [Member] Glaxo, Smith, Kline [Member]	Sep. 30, 2014 Service Agreements [Member] Glaxo, Smith, Kline [Member]	Sep. 30, 2013 Service Agreements [Member] Glaxo, Smith, Kline [Member]	Sep. 30, 2014 Service Agreements [Member] Taiho Pharmaceutical Co., Ltd. [Member]	Sep. 30, 2013 Service Agreements [Member] Taiho Pharmaceutical Co., Ltd. [Member]	Sep. 30, 2014 Service Agreements [Member] Taiho Pharmaceutical Co., Ltd. [Member]	Sep. 30, 2013 Service Agreements [Member] Taiho Pharmaceutical Co., Ltd. [Member]	Sep. 30, 2014 Service Agreements [Member] GSK Bio [Member]	Sep. 30, 2013 Service Agreements [Member] GSK Bio [Member]	Sep. 30, 2014 Service Agreements [Member] GSK Bio [Member]	Sep. 30, 2013 Service Agreements [Member] GSK Bio [Member]
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Royalty Expense					$ 229,388	$ 49,407	$ 207,977	$ 240,421	$ 25,946	$ 47,158	$ 184,023	$ 221,665
Revenue, Net, Total	4,464,991	4,092,277	12,641,160	15,030,382												165,169	76,792	165,169	579,606	0	182,830	0	523,010	296,250	633,543	1,017,406	3,166,288
Revenue Recognition, Milestone Method, Revenue Recognized													$ 500,000	$ 500,000	$ 500,000
Collaborative Agreement, Additional Period For Renewal																		1 year
Collaborative Agreement, Termination Notice Period																										90 days

XML

Sale of Common Stock (Schedule of Common Stock Classified Outside of Stockholders' Equity) (Details) (USD $)	9 Months Ended
	Sep. 30, 2014
Number of Shares
Beginning balance	5,000,000
Issuance of common stock classified outside of stockholders' equity	0
Reclassification to stockholders' equity	(5,000,000)
Ending Balance	0
Amount
Beginning balance	$ 5,500,000
Issuance of common stock classified outside of stockholders' equity	0
Reclassification to stockholders' equity	(5,500,000)
Ending balance	$ 0

XML

Segment Information (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Segment Reporting Information [Line Items]
Net revenue	$ 4,464,991	$ 4,092,277	$ 12,641,160	$ 15,030,382
United States [Member]
Segment Reporting Information [Line Items]
Net revenue	4,159,921	3,277,279	11,584,184	11,234,719
Long-lived assets	2,216,755		2,216,755		2,701,805
Europe [Member]
Segment Reporting Information [Line Items]
Net revenue	305,070	632,168	1,051,546	3,178,393
Japan [Member]
Segment Reporting Information [Line Items]
Net revenue	$ 0	$ 182,830	$ 5,430	$ 617,270

XML

Property and Equipment and Intangible Assets (Schedule of Capital Leased Assets) (Details) (USD $)	Sep. 30, 2014
Property, Plant and Equipment [Line Items]
Equipment purchased under capital leases	$ 645,467
Less: Accumulated amortization	(440,101)
Equipment purchased under capital leases, net	$ 205,366

XML

Summary of Significant Accounting Policies (Details) (USD $)	1 Months Ended	3 Months Ended			6 Months Ended	9 Months Ended		12 Months Ended		9 Months Ended			9 Months Ended	1 Months Ended		9 Months Ended	3 Months Ended		9 Months Ended
	Aug. 31, 2014	Sep. 30, 2014	Sep. 30, 2013	Jun. 30, 2013	Jun. 30, 2014	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	Jul. 30, 2014	Sep. 30, 2014 Initial Warrant [Member]	Sep. 09, 2014 Initial Warrant [Member]	Sep. 09, 2014 SG Financial LLC [Member] Initial Warrant [Member]	Sep. 30, 2014 Subsequent Event [Member]	Jul. 30, 2014 SWK Credit Agreement [Member]	Jul. 31, 2014 SWK Credit Agreement [Member]	Sep. 30, 2014 SWK Credit Agreement [Member]	Sep. 30, 2014 Cost of Goods, Total [Member] Supplier Concentration Risk [Member]	Sep. 30, 2013 Cost of Goods, Total [Member] Supplier Concentration Risk [Member]	Sep. 30, 2014 Cost of Goods, Total [Member] Supplier Concentration Risk [Member]	Sep. 30, 2013 Cost of Goods, Total [Member] Supplier Concentration Risk [Member]	Sep. 30, 2014 Clinical [Member]	Dec. 31, 2013 Clinical [Member]	Sep. 30, 2014 ResponseDX [Member]	Dec. 31, 2013 ResponseDX [Member]
Significant Accounting Policies [Line Items]
Receivable Balance,net allowances for doubtful debts		$ 6,889,100				$ 6,889,100		$ 6,225,923													$ 769,294	$ 1,892,384
Allowance for doubtful accounts		2,204,177				2,204,177		2,404,659															2,204,177	2,404,659
Line of credit, expiration date					Jul. 25, 2016			Mar. 07, 2015					Dec. 31, 2015	Jul. 30, 2020
Line of credit, borrowing base percentage of pharmaceutical accounts receivable					80.00%
Line of credit, interest charged	5.50%			5.00%	5.00%
Line of credit, amount drawn					1,500,000			1,000,000
Advertising costs		26,979	10,924			53,239	14,247
Concentration risk percentage																	76.00%	87.00%	69.00%	90.00%
Payment period from the date of invoice						45 days
Cash and cash equivalents that exceeded federally insured limits		5,826,536				5,826,536
Payments for Fees						40,000
Line Of Credit Facility Fees Payable		10,000				10,000
Loans Receivable, Description of Variable Rate Basis						2.25%
Provision for Doubtful Accounts		1,604,320	688,205			4,266,013	1,506,654
Sales Revenue, Services, Other		547,406	1,550,765			1,724,069	6,200,295
Line of Credit Facility, Initiation Date						Jul. 14, 2011							Feb. 28, 2016
Cash, Uninsured Amount		11,838				11,838
Line of Credit Facility, Maximum Borrowing Capacity									2,000,000					8,500,000
Long-term Debt, Gross														12,000,000
Line of Credit Facility, Interest Rate Description																The Loan bears interest at a rate equal to the LIBOR Rate (as defined in the SWK Credit Agreement) plus an applicable margin of 12.5% per annum, subject to a one percent (1.0%) LIBOR floor. Interest on the Loan is due and payable in arrears (i) on the forty-fifth
Line of Credit Facility, Current Borrowing Capacity														2,500,000
Line of Credit Facility, Commitment Fee Amount													750,000		1,029,412
Class of Warrant or Right, Number of Securities Called by Warrants or Rights											681,090
Warrant Expiration Period										Jul. 30, 2020
Warrant Exercise Price										$ 0.936
Fair value Of Warrants Issued										414,239	414,239
Conversion of Stock Conversion Price Per Share										$ 0.61
Fair Value Assumptions, Risk Free Interest Rate										2.01%
Fair Value Assumptions, Expected Dividend Rate										0.00%
Fair Value Assumptions, Expected Volatility Rate										101.50%
Fair Value Assumptions, Expected Term										6 years
Class of Warrant or Right, Outstanding												200,321
Loans Payable																8,500,000
Debt Issuance Cost																576,161
Adjustments to Additional Paid in Capital, Warrant Issued													0.936			377,140
Deferred Finance Costs, Net																187,092
Line of Credit Facility, Expiration Period													6 years			6 years
Line of Credit Facility, Remaining Borrowing Capacity													$ 3,500,000
Line of Credit Facility, Commitment Fee Percentage													7.50%

XML

Stock Options, Restricted Stock and Warrants (Summary of Stock Option Activity) (Details) (USD $)	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Number of Shares
Outstanding, December 31, 2013	2,288,076
Granted (Unaudited)	755,250
Exercised (Unaudited)	(20,000)
Expired (Unaudited)	(13,211)
Forfeited (Unaudited)	(210,227)
Outstanding, September 30, 2014 (Unaudited)	2,799,888	2,288,076
Exercisable, September 30, 2014 (Unaudited)	1,187,587
Weighted Average Exercise Price
Outstanding, December 31, 2013	$ 1.83
Granted (Unaudited)	$ 0.88
Exercised (Unaudited)	$ 1.16
Expired (Unaudited)	$ 1.36
Forfeited (Unaudited)	$ 1.13
Outstanding, September 30, 2014 (Unaudited)	$ 1.63	$ 1.83
Exercisable, September 30, 2014 (Unaudited)	$ 2.29
Remaining Contractual Life (Years)
Outstanding	8 years	8 years 4 months 24 days
Granted (Unaudited)	9 years 9 months 18 days
Exercised (Unaudited)	7 years 9 months 18 days
Expired (Unaudited)	8 years 6 months
Forfeited (Unaudited)	0 years
Exercisable, June 30, 2014 (Unaudited)	6 years 8 months 12 days
Aggregate Intrinsic Value
Outstanding, December 31,2013	$ 1,082
Granted (Unaudited)	0
Exercised (Unaudited)	7,605
Expired (Unaudited)	0
Forfeited (Unaudited)	0
Outstanding, September 30, 2014 (Unaudited)	0	1,082
Exercisable, September 30, 2014 (Unaudited)	$ 0

XML

Commitments and Contingencies (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Commitments And Contingencies Disclosure [Line Items]
Rent expense	$ 212,181	$ 163,578	$ 638,543	$ 508,456
California State [Member]
Commitments And Contingencies Disclosure [Line Items]
Operating leases, space	27,446		27,446
Lease Expiration Date			Jun. 30, 2015
Maryland [Member]
Commitments And Contingencies Disclosure [Line Items]
Operating leases, space	1,460		1,460
Lease Expiration Date			Jan. 31, 2013

XML

Sale of Common Stock (Details) (USD $)	9 Months Ended			1 Months Ended	12 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	Sep. 30, 2012 Private Placement [Member]	Dec. 31, 2012 Private Placement [Member]	Sep. 13, 2012 Private Placement [Member]	Dec. 31, 2012 September 2012 Private Placement [Member]	Sep. 30, 2014 September 2012 Private Placement [Member]	Jun. 30, 2014 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	$ 0	$ 1,702,271		$ 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)	$ 0		$ 5,500,000	$ 8,800,000				$ 0		$ 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	(5,000,000)				8,000,000		3,000,000
Shares classified outside of stockholders' equity	0		5,000,000			8,000,000			5,000,000

XML

Loss Per Share

9 Months Ended

Sep. 30, 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				Nine Months
	Ended September 30,				Ended September 30,
	2013		2014		2013		2014
	(Unaudited)				(Unaudited)
Numerator:
Net loss	$	(2,718,126)	$	(3,643,946)	$	(4,839,585)	$	(10,287,300)
Numerator for basic and diluted earnings per share	$	(2,718,126)	$	(3,643,946)	$	(4,839,585)	$	(10,287,300)
Denominator:
Denominator for basic and diluted earnings per share — weighted-average shares		33,137,368		38,732,896		32,911,836		38,728,454
Basic and diluted loss per share	$	(0.08)	$	(0.09)	$	(0.15)	$	(0.27)

Outstanding stock options to purchase 1,439,876 and 2,799,888 shares of common stock of the Company for the periods ended September 30, 2013 and 2014, respectively, were excluded from the calculation of diluted loss per share as their effect would have been antidilutive. Outstanding warrants to purchase 681,090 shares of common stock of the Company for the period ended September 30, 2014 were excluded from the calculation of diluted loss per share as its effect would have been antidilutive. Also excluded from the calculation were 270,000 and 311,667 unvested shares of restricted common stock for both of the periods ended September 30, 2013 and 2014.

XML

Stock Options, Restricted Stock and Warrants (Schedule of Options Outstanding) (Details)	9 Months Ended
	Sep. 30, 2014
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding Number of Options	2,799,888
Options Outstanding WA Remaining Contractual Term	8 years 1 month 6 days
Options Exercisable Number of Options	1,187,587
Options Exercisable WA Remaining Contractual Term	6 years 8 months 12 days
$ 0.88 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options Outstanding Number of Options	712,125
Options Outstanding WA Remaining Contractual Term	9 years 9 months 18 days
Options Exercisable Number of Options	24,439
Options Exercisable WA Remaining Contractual Term	9 years 9 months 18 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	1,572,763
Options Outstanding WA Remaining Contractual Term	8 years 3 months 18 days
Options Exercisable Number of Options	694,813
Options Exercisable WA Remaining Contractual Term	7 years 8 months 12 days
$ 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	297,500
Options Outstanding WA Remaining Contractual Term	6 years 10 months 24 days
Options Exercisable Number of Options	250,835
Options Exercisable WA Remaining Contractual Term	6 years 8 months 12 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	3 years 9 months 18 days
Options Exercisable Number of Options	71,000
Options Exercisable WA Remaining Contractual Term	3 years 9 months 18 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	2 years 10 months 24 days
Options Exercisable Number of Options	11,500
Options Exercisable WA Remaining Contractual Term	2 years 10 months 24 days
$ 7 [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	2 years 8 months 12 days
Options Exercisable Number of Options	135,000
Options Exercisable WA Remaining Contractual Term	2 years 8 months 12 days

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			9 Months Ended
	Sep. 30, 2014		Sep. 30, 2013	Sep. 30, 2014		Sep. 30, 2013
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	$ 4,464,991		$ 4,092,277	$ 12,641,160		$ 15,030,382
GlaxoSmithKline LLC [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	165,169		76,792	165,169		579,606
Percent of Total Revenue	0.00%			0.00%			[1]
GlaxoSmithKline Biologicals S.A. [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	296,250		633,543	1,017,406		3,166,288
Percent of Total Revenue		[1]	16.00%		[1]	21.00%
GlaxoSmithKline Entities [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	461,419		710,335	1,182,575		3,745,894
Percent of Total Revenue	10.00%		17.00%		[1]	25.00%
Medicare [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Revenue	$ 857,786		$ 956,716	$ 3,378,203		$ 3,379,405
Percent of Total Revenue	19.00%		23.00%	27.00%		23.00%

[1] Represents less than 10% of revenue.

XML

Summary of Significant Accounting Policies (Schedule of ResponseDX Revenue) (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Net ResponseDX ® revenue	$ 4,464,991	$ 4,092,277	$ 12,641,160	$ 15,030,382
ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Net ResponseDX ® revenue	3,917,585	2,541,512	10,917,091	8,830,087
Private Payor [Member] | ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Net ResponseDX ® revenue	3,059,799	1,584,796	7,538,888	5,450,682
Medicare [Member] | ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Net ResponseDX ® revenue	$ 857,786	$ 956,716	$ 3,378,203	$ 3,379,405

XML

Stock Options, Restricted Stock and Warrants (Schedule of Stock-Based Compensation Included in Results of Operations) (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	$ 50,599	$ 101,461	$ 659,250	$ 295,305
Cost of revenue [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	12,164	12,600	36,341	40,984
Research and development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	1,373	8,075	38,461	26,833
Sales and marketing [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	4,905	6,493	51,318	19,466
General and administrative [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation	$ 32,157	$ 74,293	$ 533,130	$ 208,022

XML

Summary of Significant Accounting Policies (Schedule of Customers that Account for Greater than 10 Percent of Accounts Receivable) (Details) (USD $)			3 Months Ended	9 Months Ended				12 Months Ended		3 Months Ended			9 Months Ended				12 Months Ended		3 Months Ended		9 Months Ended				12 Months Ended	3 Months Ended		9 Months Ended			12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2014 GlaxoSmithKline LLC [Member]	Sep. 30, 2014 GlaxoSmithKline LLC [Member]	Sep. 30, 2013 GlaxoSmithKline LLC [Member]		Sep. 30, 2014 GlaxoSmithKline LLC [Member] Accounts Receivable [Member]	Dec. 31, 2013 GlaxoSmithKline LLC [Member] Accounts Receivable [Member]		Sep. 30, 2014 GlaxoSmithKline Biologicals S.A. [Member]		Sep. 30, 2013 GlaxoSmithKline Biologicals S.A. [Member]	Sep. 30, 2014 GlaxoSmithKline Biologicals S.A. [Member]		Sep. 30, 2013 GlaxoSmithKline Biologicals S.A. [Member]	Sep. 30, 2014 GlaxoSmithKline Biologicals S.A. [Member] Accounts Receivable [Member]	Dec. 31, 2013 GlaxoSmithKline Biologicals S.A. [Member] Accounts Receivable [Member]		Sep. 30, 2014 GlaxoSmithKline Entities [Member]	Sep. 30, 2013 GlaxoSmithKline Entities [Member]	Sep. 30, 2014 GlaxoSmithKline Entities [Member]		Sep. 30, 2013 GlaxoSmithKline Entities [Member]	Sep. 30, 2014 GlaxoSmithKline Entities [Member] Accounts Receivable [Member]	Dec. 31, 2013 GlaxoSmithKline Entities [Member] Accounts Receivable [Member]	Sep. 30, 2014 Medicare [Member]	Sep. 30, 2013 Medicare [Member]	Sep. 30, 2014 Medicare [Member]	Sep. 30, 2013 Medicare [Member]	Sep. 30, 2014 Medicare [Member] Accounts Receivable [Member]	Dec. 31, 2013 Medicare [Member] Accounts Receivable [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Receivable Balance	$ 6,889,100	$ 6,225,923					$ 145,654	$ 597,937								$ 470,957	$ 544,298							$ 616,611	$ 1,142,235					$ 2,377,560	$ 2,422,611
Percent of Total Receivables			0.00%	0.00%		[1]	0.00%		[2]		[1]	16.00%		[1]	21.00%	0.00%		[2]	10.00%	17.00%		[1]	25.00%	0.00%	13.00%	19.00%	23.00%	27.00%	23.00%	26.00%	28.00%

[1] Represents less than 10% of revenue.

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

XML

Property and Equipment and Intangible Assets (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Property, Plant and Equipment [Line Items]
Amortization Expenses	$ 204,848	$ 162,328	$ 632,121	$ 449,183

XML

Property and Equipment and Intangible Assets

9 Months Ended

Sep. 30, 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,		September 30,
	2013		2014
			(Unaudited)
Laboratory equipment	$	4,468,055	$	4,536,732
Furniture and equipment		736,886		752,465
Leasehold improvements		487,843		496,523
		5,692,784		5,785,720
Less: Accumulated depreciation		(3,758,202)		(4,248,940)
Total property and equipment, net	$	1,934,582	$	1,536,780
Purchased software	$	749,587	$	908,718
Internally developed software		213,361		108,362
Trademarks		33,000		33,000
		995,948		1,050,080
Less: Accumulated amortization		(228,725)		(370,105)
Total intangible assets, net	$	767,223	$	679,975

Depreciation expense, included in cost of revenue, general and administrative expenses, and research and development expenses for the three months ended September 30, 2013 and 2014 was $162,328 and $204,848, respectively, and for the nine months ended September 30, 2013 and 2014 was $449,183 and $632,121, 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 September 30, 2014 as follows:

	(Unaudited)
Equipment purchased under capital leases	$	645,467
Less: Accumulated amortization		(440,101)
Equipment purchased under capital leases, net	$	205,366

Future minimum lease payments under capital leases as of September 30, 2014 are as follows:

Years ending December 31,	(Unaudited)
2014	$	29,418
2015		117,673
2016		63,216
2017		16,364
2018		16,364
Thereafter		9,547
Total minimum lease payments		252,582
Less amount represented by interest		(35,387)
Less current portion		(92,505)
Capital lease obligation, net of current portion	$	124,690

XML

Property and Equipment and Intangible Assets (Schedule of Property and Equipment and Intangible Assets) (Details) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 5,785,720	$ 5,692,784
Less: Accumulated depreciation	(4,248,940)	(3,758,202)
Total property and equipment, net	1,536,780	1,934,582
Intangible assets	1,050,080	995,948
Less: Accumulated amortization	(370,105)	(228,725)
Total intangible assets, net	679,975	767,223
Purchased Software [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	908,718	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	108,362	213,361
Laboratory Equipment [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	4,536,732	4,468,055
Furniture and Equipment [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	752,465	736,886
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Property and equipment, gross	$ 496,523	$ 487,843

XML

Stock Options, Restricted Stock and Warrants (Details) (USD $)	3 Months Ended		9 Months Ended			9 Months Ended			9 Months Ended	3 Months Ended	9 Months Ended		3 Months Ended	9 Months Ended		3 Months Ended	9 Months Ended			3 Months Ended	9 Months Ended	1 Months Ended		1 Months Ended	9 Months Ended	12 Months Ended							3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	Sep. 30, 2014 Initial Warrant [Member]	Sep. 09, 2014 Initial Warrant [Member]	Sep. 09, 2014 SG Financial LLC [Member] Initial Warrant [Member]	Sep. 30, 2014 Subsequent Event [Member]	Sep. 30, 2014 Maximum [Member]	Sep. 30, 2014 Maximum [Member]	Sep. 30, 2013 Maximum [Member]	Sep. 30, 2014 Minimum [Member]	Sep. 30, 2014 Minimum [Member]	Sep. 30, 2013 Minimum [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Non-employee option [Member] Maximum [Member]	Sep. 30, 2014 Non-employee option [Member] Minimum [Member]	Sep. 30, 2014 Restricted Stock [Member] vendor [Member]	Sep. 30, 2014 Stock Option [Member]	Mar. 31, 2000 Stock Option Plan 2000 [Member]	Sep. 30, 2014 Stock Option Plan 2000 [Member]	Mar. 31, 2000 Other Stock Plans [Member]	Sep. 30, 2014 2006 Stock Plan [Member]	Dec. 31, 2013 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]	Sep. 30, 2014 Thomos Bologna [Member]	Sep. 30, 2013 Thomos Bologna [Member]	Sep. 30, 2014 Thomos Bologna [Member]	Sep. 30, 2013 Thomos Bologna [Member]	Sep. 30, 2014 Thomos Bologna [Member] Restricted Stock Units (RSUs) [Member]	Sep. 30, 2014 Thomos Bologna [Member] Restricted Stock Units (RSUs) [Member] Minimum [Member]	Sep. 30, 2014 Thomos Bologna [Member] Stock Option [Member] Period One [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			755,250																			1,600,000		16,000											600,000
Increase in the number of shares available for issuance																									200,000	200,000	200,000	200,000	200,000	200,000	200,000
Options expiration period																					10 years
Options vesting period																		3 years	2 years																				36 months
Options outstanding, weighted average exercise price	$ 1.63		$ 1.63		$ 1.83
Non-vested stock options outstanding, Weighted average grant date fair value	$ 1.15		$ 1.15
Stock options granted, average fair value	$ 0.70	$ 1.60	$ 0.70	$ 1.41
Average closing price of common stock																																						$ 2.40
Number of restricted common stock granted			311,667	270,000													270,000			62,500																	270,000
Stock option granted, exercise price			$ 0.88																																				$ 1.20
Share-based compensation			$ 659,250	$ 295,305																													$ 44,531	$ 44,531	$ 133,592	$ 133,592
Non-vested stock options	0		0
Unrecognized compensation cost related to non-vested share-based compensation arrangements granted																									1,064,174
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant																									811,589
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition																									6 years
Stock Issued During Period, Value, Restricted Stock Award, Gross			86,250
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Vested in Period																	41,667
General and Administrative Expense, Total	3,495,515	2,500,108	9,556,013	6,744,542												28,750	57,500
Stock and Warrants Issued During Period, Value, Preferred Stock and Warrants									681,090
Adjustments to Additional Paid in Capital, Warrant Issued									0.936
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number, Beginning Balance	2,799,888		2,799,888		2,288,076
Percentage Of Common Stock OutStanding			5.00%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate	0.00%	0.00%	0.00%	0.00%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Exercise Price	$ 377,140		$ 377,140
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Risk Free Interest Rate		1.37%	2.01%							1.91%	1.91%	1.40%	1.78%	1.78%	0.90%
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Weighted Average Volatility Rate			101.50%
Class of Warrant or Right, Outstanding								200,321
Fair value Of Warrants Issued						$ 414,239	$ 414,239
Conversion of Stock Conversion Price Per Share						$ 0.61

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Sep. 30, 2014	Dec. 31, 2013
Current assets
Cash and cash equivalents	$ 5,959,314	$ 8,148,599
Accounts receivable, net of allowance for doubtful accounts of $2,404,659 and $2,204,177 at December 31, 2013 and September 30, 2014, respectively.	6,889,100	6,225,923
Prepaid expenses and other current assets	996,977	981,908
Total current assets	13,845,391	15,356,430
Property and equipment, net	1,536,780	1,934,582
Intangible assets, net	679,975	767,223
Deferred financing costs, net	202,476	0
Total assets	16,264,622	18,058,235
Current liabilities
Accounts payable	1,399,023	1,694,312
Accrued expenses	409,861	666,675
Accrued interest	200,813	0
Accrued royalties	1,169,763	1,293,717
Accrued payroll and related liabilities	1,418,424	1,850,923
Capital lease obligation, current portion	92,505	157,238
Total current liabilities	4,690,389	5,662,865
Capital lease obligation, net of current portion	124,690	136,419
Line of credit, non-current	1,500,000	1,000,000
Loan, net of debt discount, non-current	7,939,843	0
Total liabilities	14,254,922	6,799,284
Commitments and contingencies (Note 5)
Common stock classified outside of stockholders’ equity	0	5,500,000
Stockholders’ equity
Common stock, $0.01 par value; 70,000,000 shares authorized; 38,712,896 and 38,732,896 shares issued and outstanding at December 31, 2013 and September 30, 2014, respectively	387,385	337,185
Additional paid-in capital	77,495,796	70,986,406
Accumulated deficit	(75,584,477)	(65,297,179)
Accumulated other comprehensive loss	(289,004)	(267,461)
Total stockholders' equity	2,009,700	5,758,951
Total liabilities, common stock classified outside of stockholders' equity and stockholders' equity	$ 16,264,622	$ 18,058,235

XML

Stock Options, Restricted Stock and Warrants (Schedule of Awards to Mr. Bologna) (Details) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Awards	311,667	270,000
Exercise Price	$ 2.29
Options Exercisable	1,187,587
Remaining Contractual Term	8 years		8 years 4 months 24 days
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	$ 186,300
Exercise Price	$ 0
Options Exercisable	0
Remaining Contractual Term	7 years 2 months 12 days
Thomos Bologna [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Awards	270,000
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
Exercise Price	$ 1.20
Options Exercisable	550,000
Remaining Contractual Term	7 years 2 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
Exercise Price	$ 1.20
Options Exercisable	300,000
Remaining Contractual Term	7 years 2 months 12 days

XML

Organization, Operations and Basis of Accounting

9 Months Ended

Sep. 30, 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 September 30, 2014, the Company had an accumulated deficit of $75,584,477. 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 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.

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Loss Per Share (Details) (USD $)	9 Months Ended
	Sep. 30, 2014	Sep. 30, 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	2,799,888	1,439,876
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	311,667	270,000
Warrants and Rights Outstanding	$ 681,090

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2014

Segment Reporting [Abstract]

Schedule of Financial Information by Geographic Area

The following tables contain certain financial information by geographic area:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2014		2013		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Net revenue:
United States	$	3,277,279	$	4,159,921	$	11,234,719	$	11,584,184
Europe		632,168		305,070		3,178,393		1,051,546
Japan		182,830		—		617,270		5,430
	$	4,092,277	$	4,464,991	$	15,030,382	$	12,641,160

	December 31, 2013		September 30, 2014
			(Unaudited)
Long-lived assets:
United States	$	2,701,805	$	2,216,755

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Loss Per Share (Computation for Basic and Diluted Loss Per Share) (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Numerator:
Net loss	$ (3,643,946)	$ (2,718,126)	$ (10,287,300)	$ (4,839,585)
Numerator for basic and diluted earnings per share	$ (3,643,946)	$ (2,718,126)	$ (10,287,300)	$ (4,839,585)
Denominator:
Denominator for basic and diluted earnings per share — weighted-average shares	38,732,896	33,137,368	38,728,454	32,911,836
Basic and diluted loss per share	$ (0.09)	$ (0.08)	$ (0.27)	$ (0.15)

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Organization, Operations and Basis of Accounting (Details) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Organization, Consolidation And Presentation Of Financial Statements [Line Items]
Accumulated deficit	$ (75,584,477)	$ (65,297,179)

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 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 September 30, 2014 were $1,892,384 and $769,294, respectively. There were no allowances for doubtful accounts recorded against these pharmaceutical accounts receivable at December 31, 2013 and September 30, 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 $2,204,177 as of December 31, 2013 and September 30, 2014, respectively. The Company’s bad debt expense for the three months ended September 30, 2013 and 2014 was $688,205 and $1,604,320, respectively, and for the nine months ended September 30, 2013 and 2014 was $1,506,654 and $4,266,013, respectively.

ResponseDX^® accounts receivable as of December 31, 2013 and September 30, 2014, consisted of the following:

	December 31,		September 30,
	2013		2014
			(Unaudited)
Net Medicare receivable	$	2,422,611	$	2,377,560
Net Private Payor receivable		4,315,587		5,946,423
		6,738,198		8,323,983
Allowance for doubtful accounts		(2,404,659)		(2,204,177)
Total	$	4,333,539	$	6,119,806

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 for the three months ended September 30, 2013 and 2014 of $1,550,765 and $547,406, respectively and for the nine months ended September 30, 2013 and 2014 of $6,200,295 and $1,724,069, 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 Current Procedural Terminology (“CPT”).

The following details ResponseDX^® revenue for the periods indicated:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	(Unaudited)				(Unaudited)
	2013		2014		2013		2014
Net Medicare revenue	$	956,716	$	857,786	$	3,379,405	$	3,378,203
Net Private Payor revenue		1,584,796		3,059,799		5,450,682		7,538,888
Net ResponseDX® revenue	$	2,541,512	$	3,917,585	$	8,830,087	$	10,917,091

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 testing service providers such as the Company. As a result of these cost containment measures and increased administrative resources required to address these measures, the Company continues to experience elongated time to collect payments and non-payment from payors. There can be no assurance that these measures and any 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 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 updated payment rates for some, but not all, of the CPT codes used by the Company.

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 an analysis that considered our historical patterns of revenue by payor in conjunction with the fluctuations we experienced in the three and nine months ended September 30, 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 October 31, 2014, CMS released CMS-1612-FC, a new final rule with comment period (the “Final Rule”) entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule, Access to Identifiable Data for the Center for Medicare and Medicaid Innovation Models & Other Revisions to Part B for CY 2015”. The Final Rule which was initially proposed on July 3, 2014 contains a number of provisions including new and modified CPT codes that may adversely impact the level of reimbursement for certain tests offered by the Company, including fluorescent in-situ hybridization (“FISH”) tests for which the Company receives reimbursement from the Medicare program beginning on January 1, 2015. Although we are still assessing the Final Rule, if it is enacted as drafted, it will materially impact our FISH reimbursements for 2015. The Final Rule is subject to a 60 days comment period, ending on December 30, 2014.

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 (“PCR”), 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 net sales price as defined in the agreement 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 of net sales price as defined in the agreement 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. Based upon the most recent analyses, the Company reduced the accrued liability during the quarter ended September 30, 2014 to an amount that management believes represents the amounts due under the USC license agreement. Management believes the accrued liability could be further revised in future periods based upon interactions with licensors.

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”) and, as discussed below, on July 30, 2014, the agreement was amended. The line of credit is collateralized by the Company’s pharmaceutical, Private Payor and Medicare receivables. As of September 30, 2014, the maximum amount the Company can draw from the line of credit was $2,000,000 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. The interest rate charged to the Company was 5% through July 2014 and was 5.5% from August 2014 through September 2014. As needed from time to time, the Company may draw on this line to use for general corporate purposes. As of December 31, 2013 and September 30, 2014, the Company had drawn $1,000,000 and $1,500,000, respectively, against the line of credit. The line of credit is subject to various financial covenants. At September 30, 2014, the Company was in compliance with the covenants. Historically, however, the Company has been out of compliance with the covenants from time to time, and the Company has received waivers and forbearance agreements from the Bank.

As of December 31, 2013, the line of credit under the credit agreement was classified as a non-current liability on the accompanying condensed consolidated balance sheets as the line of credit had a maturity date of March 7, 2015, which was greater than one year from the date of the balance sheet. As of September 30, 2014, the line of credit under the credit agreement was classified as a non-current liability because the Waiver and Sixth Amendment to Loan and Security Agreement extended the maturity of the facility to July 25, 2016.

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.

On July 30, 2014, in connection with entering into a credit agreement with SWK Funding LLC discussed below, the Company and the Bank entered into a Waiver and Sixth Amendment to Loan and Security Agreement (the “Sixth Amendment”). The Sixth Amendment waived previous defaults under the loan agreement, modified the financial covenants, extended the maturity of the loan to July 25, 2016, modified the interest rate to the prime rate published by the Wall Street Journal plus 2.25% per annum, and implemented a pre-payment fee of $40,000. At September 30, 2014, the interest rate charged to the Company was 5.5%. The financial covenants under the Sixth Amendment include a revenue covenant and a liquidity covenant that conform with and are cross defaulted with the revenue covenant and liquidity covenant of the SWK Credit Agreement. The Company will pay a closing fee of $10,000 for the Sixth Amendment on July 18, 2015, approximately one year from the date of the closing.

SWK Term Loan

On July 30, 2014 (the “Closing Date”), the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK Funding LLC, as the administrative agent (the “Agent” or “SWK”), and the lenders (including SWK) party thereto from time to time (the “Lenders”). The SWK Credit Agreement provides for a multi-draw term loan to the Company (the “Loan”) up to a maximum principal amount of $12,000,000 (the “Loan Commitment Amount”). On the Closing Date, the Lenders advanced the Company an amount equal to $8,500,000 which is due and payable on July 30, 2020 (the “Term Loan Maturity Date”) or such earlier date on which the Loan Commitment Amount is terminated pursuant to the terms of the SWK Credit Agreement.

The Loan bears interest at a rate equal to the LIBOR Rate (as defined in the SWK Credit Agreement) plus an applicable margin of 12.5% per annum, subject to a one percent (1.0%) LIBOR floor. Interest on the Loan is due and payable in arrears (i) on the forty-fifth (45th) day following the last calendar day of each of the months of September, December, March, and June, commencing on November 15, 2014, (ii) upon a prepayment of the Loan and (iii) on the Term Loan Maturity Date. At September 30, 2014, the interest rate charged to the Company was 13.5%. Upon the earlier of (a) the Term Loan Maturity Date or (b) full repayment of the Loan, the Company is also required to pay an exit fee. On September 9, 2014, SWK, in its capacity as the initial Lender, assigned part of its interests under the SWK Credit Agreement to SG-Financial, LLC (“SG”). Pursuant to the assignment, SG was assigned $2,500,000 of the $8,500,000 Closing Date initial advance to the Company and $1,029,412 of the subsequent term loan commitment. Pursuant to the assignment, as of the effective date of the assignment, SG is a party to the SWK Credit Agreement as a Lender.

In addition, on the Closing Date, the Company issued to the Agent a warrant (the “Initial Warrant”) to purchase up to 681,090 shares of the Company's common stock. The Initial Warrant is exercisable, in whole or in part and from time to time, from the date of issuance until and including July 30, 2020 at an exercise price of $0.936 per share, subject to adjustment. The Initial Warrant was valued at $414,239, or approximately $0.61 per covered share, using a Black-Scholes pricing model with the following assumptions: 2.01% risk free rate, 0% dividend, 101.5% volatility, and six-year expected life. The value of the warrant was recorded on the balance sheet as discussed below. On September 9, 2014, the Agent assigned a portion of the Initial Warrant consisting of the right to purchase 200,321 shares of common stock to SG-Financial, LLC.

For accounting purposes, the proceeds received in the transaction were allocated to the liability for debt, a debt issuance discount and additional paid-in capital for the warrant based upon the relative fair value of the loan and the warrant. The amounts recorded in the financial statements were $8,500,000 for loan liability, $576,161 for debt issuance discount and $377,140 to additional paid-in capital for the warrant. Additionally, the Company recorded deferred loan issuance costs of $187,092 for investment banker fees and legal fees incurred to enter into the SWK Credit Agreement. The debt issuance discount and the deferred issuance costs are being amortized to interest expense over the six-year term of the loan.

The remaining $3,500,000 of the Loan Commitment Amount (the “Subsequent Term Loan”) may be advanced to the Company upon written request to the Agent during the period beginning on the Closing Date and ending February 28, 2016 provided that (i) no default or event of default has occurred or is continuing under the SWK Credit Agreement, (ii) the aggregate revenue recognized by the Company and any of its subsidiaries during any period of four (4) consecutive fiscal quarters ending prior to December 31, 2015 exceeds a certain dollar amount threshold and (iii) the Agent has received an executed warrant (the “Subsequent Term Loan Warrant”) to purchase a number of shares of common stock equal to the number obtained when the principal amount of the Subsequent Term Loan is multiplied by 7.5% and the product is divided by the exercise price of such warrant. The exercise price of the Subsequent Term Loan Warrant will be equal to 1.2 times the lower of (a) the average closing price of the common stock on the previous 20 trading days before the closing date of the Subsequent Term Loan, or (b) the closing price of the common stock on the last trading day prior to such Subsequent Term Loan’s closing date. The Subsequent Term Loan Warrant will be exercisable for a period of six years from the closing date of the Subsequent Term Loan, subject to adjustment. Upon issuance, the Agent may exercise the Subsequent Term Loan Warrant on a cashless basis at any time. In the event the Lender exercises the Subsequent Term Loan Warrant on a cashless basis we will not receive any proceeds. The exercise price of the Subsequent Term Loan Warrant is subject to customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.

The Company may prepay the Loan, in whole or in part, upon five business days’ written notice provided that a prepayment premium is paid to the Lenders as set forth in the SWK Credit Agreement. The Company is required to prepay the Loan with any net cash proceeds received from certain types of dispositions of assets described in the SWK Credit Agreement. The Company is also required to make certain revenue-based payments on the Company’s quarterly revenues, applied in the following priority: (i) first, to the payment of all fees, costs, expenses and indemnities due and owing to the Agent under the SWK Credit Agreement, (ii) second, to the payment of all fees, costs, expenses and indemnities due and owing to the Lenders under the SWK Credit Agreement, (iii) third, to the payment of all accrued but unpaid interest until paid in full, (iv) fourth, for each revenue-based payment date after August 2016, to the payment of all principal of the Loan up to an aggregate amount of $750,000 on any such payment date and (v) fifth, all remaining amounts to the Company.

The SWK Credit Agreement contains customary affirmative and negative covenants for credit facilities of its type, including covenants that limit the Company’s ability to pay dividends or redeem outstanding equity interests, incur additional indebtedness, grant additional liens, engage in any other type of business, make investments, merge, consolidate or sell all or substantially all of its assets and enter into transactions with related parties. The SWK Credit Agreement also contains certain financial covenants, including certain minimum aggregate revenue requirements.

The SWK Credit Agreement includes customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, default under certain other indebtedness, certain insolvency or bankruptcy events, the occurrence of certain material judgments, the institution of any proceeding by a government agency or a change of control of the Company that it is not otherwise permitted under the SWK Credit Agreement.

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 September 30, 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 September 30, 2013 and 2014, nominal amounts of interest and penalties were recorded in the Condensed Consolidated Statement 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 and nine months ended September 30, 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 September 30, 2013 and 2014 were $10,924 and $26,979, respectively, and for the nine months ended September 30, 2013 and 2014 were $14,247 and $53,239, 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 September 30, 2014, the Company had $5,826,536 in cash and cash equivalents that exceeded federally insured limits. At September 30, 2014, $11,838 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 September 30,								Nine Months Ended September 30,
	2013				2014				2013				2014
	(Unaudited)								(Unaudited)
			Percent				Percent				Percent				Percent
			of Total				of Total				of Total				of Total
	Revenue		Revenue		Revenue		Revenue		Revenue		Revenue		Revenue		Revenue
GlaxoSmithKline entities:
GlaxoSmithKline, LLC	$	76,792	*	%	$	165,169	*	%	$	579,606	*	%	$	165,169	*	%
GlaxoSmithKline Biologicals S.A.		633,543	16			296,250	*			3,166,288	21			1,017,406	*
Total GlaxoSmithKline entities	$	710,335	17		$	461,419	10		$	3,745,894	25	%	$	1,182,575	*
Medicare, net of contractual allowances	$	956,716	23	%	$	857,786	19	%	$	3,379,405	23	%	$	3,378,203	27	%

* 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 September 30, 2014
						(Unaudited)
			Percent of					Percent of
	Receivable		Total			Receivable		Total
	Balance		Receivables			Balance		Receivables
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	597,937		*	%	$	145,654		*	%
GlaxoSmithKline Biologicals S.A.	$	544,298		*	%	$	470,957		*	%
Total GlaxoSmithKline entities	$	1,142,235		13	%	$	616,611		*	%
Medicare, net of contractual allowances	$	2,422,611		28	%	$	2,377,560		26	%

* 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. The Company made approximately 87% of its reagent purchases from three suppliers during the three months ended September 30, 2013 and made approximately 76% of its reagent purchases from three suppliers during the three months ended September 30, 2014. The Company made approximately 90% of its reagent purchases from four suppliers during the nine months ended September 30, 2013 and made approximately 69% of its reagent purchases from two suppliers during the nine months ended September 30, 2014.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which modifies how all entities recognize revenue, and consolidates into one Accounting Standards Codification ("ASC") Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in ASC Topic 605, Revenue Recognition, and various other revenue accounting standards for specialized transactions and industries. The core principle of the guidance is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In achieving this objective, an entity must perform five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations of the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also clarifies how an entity should account for costs of obtaining or fulfilling a contract in a new ASC Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers.

ASU 2014-09 is effective for public companies for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is not permitted. ASU 2014-09 may be applied using either a full retrospective approach, in which all years included in the financial statements are presented under the revised guidance, or a modified retrospective approach. Under the modified retrospective approach, financial statements will be prepared using the new standard for the year of adoption, but not for prior years. Under this method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the company and disclose all line items in the year of adoption as if they were prepared under the old revenue guidance. We will adopt ASU 2014-09 on January 1, 2017 and are currently evaluating the impact that this adoption will have on our consolidated financial statements. At this time, the Company has not determined the transition method that will be used.

In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-09”). ASU 2014-15 provides guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. The Company has not yet determined the impact of this guidance on the Company's consolidated financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Allowance for doubtful accounts	$ 2,204,177	$ 2,404,659
Common stock, par value per share	$ 0.01	$ 0.01
Common stock, shares authorized	70,000,000	70,000,000
Common stock, shares issued	38,732,896	38,712,896
Common stock, shares outstanding	38,732,896	38,712,896

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2014

Significant Accounting Policies [Line Items]

Schedule of ResponseDX Accounts Receivable

ResponseDX^® accounts receivable as of December 31, 2013 and September 30, 2014, consisted of the following:

	December 31,		September 30,
	2013		2014
			(Unaudited)
Net Medicare receivable	$	2,422,611	$	2,377,560
Net Private Payor receivable		4,315,587		5,946,423
		6,738,198		8,323,983
Allowance for doubtful accounts		(2,404,659)		(2,204,177)
Total	$	4,333,539	$	6,119,806

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 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 September 30,								Nine Months Ended September 30,
	2013				2014				2013				2014
	(Unaudited)								(Unaudited)
			Percent				Percent				Percent				Percent
			of Total				of Total				of Total				of Total
	Revenue		Revenue		Revenue		Revenue		Revenue		Revenue		Revenue		Revenue
GlaxoSmithKline entities:
GlaxoSmithKline, LLC	$	76,792	*	%	$	165,169	*	%	$	579,606	*	%	$	165,169	*	%
GlaxoSmithKline Biologicals S.A.		633,543	16			296,250	*			3,166,288	21			1,017,406	*
Total GlaxoSmithKline entities	$	710,335	17		$	461,419	10		$	3,745,894	25	%	$	1,182,575	*
Medicare, net of contractual allowances	$	956,716	23	%	$	857,786	19	%	$	3,379,405	23	%	$	3,378,203	27	%

* Represents less than 10% of revenue.

Sales Revenue, Net [Member]

Significant Accounting Policies [Line Items]

Schedule of Revenue by Major Customers by Reporting Segments

The following details ResponseDX^® revenue for the periods indicated:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	(Unaudited)				(Unaudited)
	2013		2014		2013		2014
Net Medicare revenue	$	956,716	$	857,786	$	3,379,405	$	3,378,203
Net Private Payor revenue		1,584,796		3,059,799		5,450,682		7,538,888
Net ResponseDX® revenue	$	2,541,512	$	3,917,585	$	8,830,087	$	10,917,091

Accounts Receivable [Member]

Significant Accounting Policies [Line Items]

Schedule of Revenue by Major Customers by Reporting Segments

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

	As of December 31, 2013					As of September 30, 2014
						(Unaudited)
			Percent of					Percent of
	Receivable		Total			Receivable		Total
	Balance		Receivables			Balance		Receivables
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	597,937		*	%	$	145,654		*	%
GlaxoSmithKline Biologicals S.A.	$	544,298		*	%	$	470,957		*	%
Total GlaxoSmithKline entities	$	1,142,235		13	%	$	616,611		*	%
Medicare, net of contractual allowances	$	2,422,611		28	%	$	2,377,560		26	%

* Represents less than 10% of accounts receivable.

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Document And Entity Information	9 Months Ended
	Sep. 30, 2014	Nov. 07, 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		38,781,507
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2014
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2014

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Property and Equipment and Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2014

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

Property and equipment and intangible assets consist of the following:

	December 31,		September 30,
	2013		2014
			(Unaudited)
Laboratory equipment	$	4,468,055	$	4,536,732
Furniture and equipment		736,886		752,465
Leasehold improvements		487,843		496,523
		5,692,784		5,785,720
Less: Accumulated depreciation		(3,758,202)		(4,248,940)
Total property and equipment, net	$	1,934,582	$	1,536,780
Purchased software	$	749,587	$	908,718
Internally developed software		213,361		108,362
Trademarks		33,000		33,000
		995,948		1,050,080
Less: Accumulated amortization		(228,725)		(370,105)
Total intangible assets, net	$	767,223	$	679,975

Schedule of Capital Leased Assets

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 September 30, 2014 as follows:

	(Unaudited)
Equipment purchased under capital leases	$	645,467
Less: Accumulated amortization		(440,101)
Equipment purchased under capital leases, net	$	205,366

Schedule of Future Minimum Lease Payments Under Capital Leases

Future minimum lease payments under capital leases as of September 30, 2014 are as follows:

Years ending December 31,	(Unaudited)
2014	$	29,418
2015		117,673
2016		63,216
2017		16,364
2018		16,364
Thereafter		9,547
Total minimum lease payments		252,582
Less amount represented by interest		(35,387)
Less current portion		(92,505)
Capital lease obligation, net of current portion	$	124,690

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Net revenue	$ 4,464,991	$ 4,092,277	$ 12,641,160	$ 15,030,382
Cost of revenue	2,542,718	2,740,147	7,566,832	7,981,835
Gross profit	1,922,273	1,352,130	5,074,328	7,048,547
Operating expenses:
Selling and marketing	1,303,940	1,197,717	4,039,924	3,961,712
General and administrative	3,495,515	2,500,108	9,556,013	6,744,542
Research and development	477,303	391,592	1,418,194	1,136,478
Total operating expenses	5,276,758	4,089,417	15,014,131	11,842,732
Operating loss	(3,354,485)	(2,737,287)	(9,939,803)	(4,794,185)
Other income (expense):
Interest expense	(259,105)	(25,763)	(306,477)	(65,949)
Interest income	1	1	4	46
Other	(30,357)	44,923	(41,024)	20,503
Net loss	(3,643,946)	(2,718,126)	(10,287,300)	(4,839,585)
Unrealized gain (loss) on foreign currency translation	1,347	(712)	(21,543)	(2,567)
Comprehensive loss	$ (3,642,599)	$ (2,718,838)	$ (10,308,843)	$ (4,842,152)
Net loss per share — basic and diluted (in dollars per share)	$ (0.09)	$ (0.08)	$ (0.27)	$ (0.15)
Weighted-average shares — basic and diluted (in shares)	38,732,896	33,137,368	38,728,454	32,911,836

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Stock Options, Restricted Stock and Warrants

9 Months Ended

Sep. 30, 2014

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

Stock Option Plans

7. Stock Options, Restricted Stock and Warrants

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 2014, resulting in the total number of shares that may be issued as of January 1, 2014 to be 3,770,000. As of September 30, 2014, there were 811,589 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 two- to three-year period. The Company had 2,799,888 options outstanding at a weighted average exercise price of $1.63 at September 30, 2014. There were 1,612,301 non-vested stock options outstanding with a weighted average exercise price of $1.15 at September 30, 2014. As of September 30, 2014, there was $1,064,174 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 2.5 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 and nine months ended September 30, 2013 and 2014 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2014		2013				2014
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Risk free interest rate		1.37	%	1.78-1.91	%		0.90-1.40	%		1.78-1.91	%
Expected dividend yield		—		—			—	%		—	%
Expected volatility		107.4	%	98.4-103.3	%		102.1-107.4	%		98.4-103.3	%
Expected term **(in years)		5.0		5.5-6.0			5.0-6.0	%		5.5-6.0
Forfeiture rate		7.0	%	7.0	%		7.0	%		7.0	%

** 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  nine months ended  September 30, 2014:

			Weighted
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Life (Years)	Value
Outstanding, December 31, 2013		2,288,076	$	1.83	8.4	$	1,082
Granted (Unaudited)		755,250	$	0.88	9.8		—
Exercised (Unaudited)		(20,000)	$	1.16	7.8		7,605
Expired (Unaudited)		(13,211)		1.36	8.5		—
Forfeited (Unaudited)		(210,227)	$	1.13	—		—
Outstanding, September 30, 2014 (Unaudited)		2,799,888	$	1.63	8.0	$	—
Exercisable, September 30, 2014 (Unaudited)		1,187,587	$	2.29	6.7	$	—

The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2013 was $1.60 and $1.41, respectively. The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2014 was $0.70 and $0.70, respectively.

The following table provides additional information regarding options outstanding under the 2006 Plan as of September 30, 2014 (unaudited):

		Options Outstanding				Options Exercisable
				WA				WA
				Remaining				Remaining
		Number of		Contractual		Number of		Contractual
Exercise Price		Options		Term		Options		Term
$	0.88		712,125		9.8		24,439		9.8
	1.00 to 1.99		1,572,763		8.3		694,813		7.7
	2.00 to 2.99		297,500		6.9		250,835		6.7
	3.00 to 3.99		71,000		3.8		71,000		3.8
	4.29		11,500		2.9		11,500		2.9
	7.00		135,000		2.7		135,000		2.7
			2,799,888		8.1		1,187,587		6.7

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	( Unaudited )
	2013		2014		2013		2014
Cost of revenue	$	12,600	$	12,164	$	40,984	$	36,341
Research and development		8,075		1,373		26,833		38,461
Sales and marketing		6,493		4,905		19,466		51,318
General and administrative		74,293		32,157		208,022		533,130
Totals	$	101,461	$	50,599	$	295,305	$	659,250

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, as amended, 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 September 30, 2013 and 2014, respectively, and was $133,592 and $133,592 for the nine months ended September 30, 2013 and 2014, respectively, and is included in the above table. 

The following table summarizes these awards to Mr. Bologna:

					Intrinsic
					Value as of						Remaining
					September 30,				Options		Contractual
Type	Grant Date		Number of Awards		2014		Exercise Price		Exercisable		Term
Restricted Shares of Common Stock		12/21/2011		270,000	$	186,300	$	—		—		7.2
Options		12/21/2011		600,000	$	—	$	1.20		550,000		7.2
Options		12/21/2011		300,000	$	—	$	1.20		300,000		7.2

On March 12, 2014, the Company granted 62,500 shares of restricted common stock, with a value of $86,250, to a vendor in connection with a contract for services. The shares vest monthly in equal installments from April 2014 through December 2014. At September 30, 2014,  41,667 shares had vested. The expense recognized in connection with this grant was $ 28,750 and $57,500 for the three and nine months ended September 30, 2014 , respectively, and is included in general and administrative expense in the stock-based compensation table above.

On July 30, 2014, the Company issued an Initial Warrant to purchase up to  681,090 shares of common stock in connection with the SWK Credit Agreement, and the warrant was recorded as an equity warrant in the balance sheet. The warrant is exercisable , in whole or in part and from time to time, from the date of issuance until and including July 30, 2020 at an exercise price of $0.936 per share, subject to adjustment. The warrant was valued at $ 414,239, or approximately $0.61 per covered share, using a Black-Scholes pricing model with the following assumptions: 2.01% risk free rate, 0% dividend, 101.5% volatility, and six-year expected life. The proceeds received pursuant to the SWK Credit Agreement were allocated to the liability for debt, a debt issuance discount and $377,140 to additional paid-in capital for the warrant. Pursuant to the SWK Credit Agreement, upon funding of the second tranche of the commitment under the agreement, the Company will be required to issue a second warrant to the lenders under the SWK Credit Agreement. The number of common shares that could be purchased under the second warrant will be calculated if and when the Company draws the second tranche of funding. On September 9, 2014, SWK Funding LLC, the initial lender and agent, assigned a portion of the Initial Warrant consisting of the right to purchase 200,321 shares of common stock to SG-Financial, LLC.

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License and Collaborative Agreements

9 Months Ended

Sep. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [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 $49,407 and a credit of $229,388 for the three months ended September 30, 2013 and 2014, respectively, and $240,421 and a credit of $207,977 for the nine months ended September 30, 2013 and 2014, respectively. The Company recorded the credit to royalty expense in the quarter ended September 30, 2014 to adjust accrued liabilities to management’s current estimate of amounts due under the license agreement. Changes to estimates of factors impacting the accrued royalty liability could result in additional adjustments in future periods. 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 $47,158 and $25,946 for the three months ended September 30, 2013 and 2014, respectively and $221,665 and $184,023 for the nine months ended September 30, 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 September 30, 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 September 30, 2013 and 2014 was $182,830 and $0, respectively, and for the nine months ended September 30, 2013 and 2014 was $523,010 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 recognized revenue of $76,792 and $165,169 relating to the GSK agreement for the three months ended September 30, 2013 and 2014, respectively, and $579,606 and $165,169 relating to the GSK agreement for the nine months ended September 30, 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. The Company has met all the milestones in the agreement and earned the three milestone payments of $500,000 each in July 2012, May 2013 and December 2013.

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 $633,543 and $296,250 relating to the services performed for GSK Bio for the three months ended September 30, 2013 and 2014, respectively, and $3,166,288 and $1,017,406 for the nine months ended September 30, 2013 and 2014, respectively.

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Sale of Common Stock (Tables)

9 Months Ended

Sep. 30, 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		(5,000,000)		(5,500,000)
Balance, September 30, 2014 (unaudited)		—	$	—

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Loss Per Share (Tables)

9 Months Ended

Sep. 30, 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				Nine Months
	Ended September 30,				Ended September 30,
	2013		2014		2013		2014
	(Unaudited)				(Unaudited)
Numerator:
Net loss	$	(2,718,126)	$	(3,643,946)	$	(4,839,585)	$	(10,287,300)
Numerator for basic and diluted earnings per share	$	(2,718,126)	$	(3,643,946)	$	(4,839,585)	$	(10,287,300)
Denominator:
Denominator for basic and diluted earnings per share — weighted-average shares		33,137,368		38,732,896		32,911,836		38,728,454
Basic and diluted loss per share	$	(0.08)	$	(0.09)	$	(0.15)	$	(0.27)

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Sale of Common Stock

9 Months Ended

Sep. 30, 2014

Stockholders Equity Note [Abstract]

Sale of Common Stock

10. Sale of Common Stock

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 September 30, 2014.

As of December 31, 2012, the Company had 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. During the quarter ended June 30, 2014, the restriction was eligible for removal from the remaining 5,000,000 restricted September Shares. Therefore, as of December 31, 2013 and September 30, 2014, a total of $5,500,000 and $0, respectively, of common stock relating to 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		(5,000,000)		(5,500,000)
Balance, September 30, 2014 (unaudited)		—	$	—

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Income Taxes

9 Months Ended

Sep. 30, 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.

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Segment Information

9 Months Ended

Sep. 30, 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 September 30,				Nine Months Ended September 30,
	2013		2014		2013		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Net revenue:
United States	$	3,277,279	$	4,159,921	$	11,234,719	$	11,584,184
Europe		632,168		305,070		3,178,393		1,051,546
Japan		182,830		—		617,270		5,430
	$	4,092,277	$	4,464,991	$	15,030,382	$	12,641,160

	December 31, 2013		September 30, 2014
			(Unaudited)
Long-lived assets:
United States	$	2,701,805	$	2,216,755

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2014

Significant Accounting Policies [Line Items]

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 September 30, 2014 were $1,892,384 and $769,294, respectively. There were no allowances for doubtful accounts recorded against these pharmaceutical accounts receivable at December 31, 2013 and September 30, 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 $2,204,177 as of December 31, 2013 and September 30, 2014, respectively. The Company’s bad debt expense for the three months ended September 30, 2013 and 2014 was $688,205 and $1,604,320, respectively, and for the nine months ended September 30, 2013 and 2014 was $1,506,654 and $4,266,013, respectively.

ResponseDX^® accounts receivable as of December 31, 2013 and September 30, 2014, consisted of the following:

	December 31,		September 30,
	2013		2014
			(Unaudited)
Net Medicare receivable	$	2,422,611	$	2,377,560
Net Private Payor receivable		4,315,587		5,946,423
		6,738,198		8,323,983
Allowance for doubtful accounts		(2,404,659)		(2,204,177)
Total	$	4,333,539	$	6,119,806

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 for the three months ended September 30, 2013 and 2014 of $1,550,765 and $547,406, respectively and for the nine months ended September 30, 2013 and 2014 of $6,200,295 and $1,724,069, 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 Current Procedural Terminology (“CPT”).

The following details ResponseDX^® revenue for the periods indicated:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	(Unaudited)				(Unaudited)
	2013		2014		2013		2014
Net Medicare revenue	$	956,716	$	857,786	$	3,379,405	$	3,378,203
Net Private Payor revenue		1,584,796		3,059,799		5,450,682		7,538,888
Net ResponseDX® revenue	$	2,541,512	$	3,917,585	$	8,830,087	$	10,917,091

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 testing service providers such as the Company. As a result of these cost containment measures and increased administrative resources required to address these measures, the Company continues to experience elongated time to collect payments and non-payment from payors. There can be no assurance that these measures and any 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 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 updated payment rates for some, but not all, of the CPT codes used by the Company.

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 an analysis that considered our historical patterns of revenue by payor in conjunction with the fluctuations we experienced in the three and nine months ended September 30, 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 October 31, 2014, CMS released CMS-1612-FC, a new final rule with comment period (the “Final Rule”) entitled “Medicare Program; Revisions to Payment Policies under the Physician Fee Schedule, Clinical Laboratory Fee Schedule, Access to Identifiable Data for the Center for Medicare and Medicaid Innovation Models & Other Revisions to Part B for CY 2015”. The Final Rule which was initially proposed on July 3, 2014 contains a number of provisions including new and modified CPT codes that may adversely impact the level of reimbursement for certain tests offered by the Company, including fluorescent in-situ hybridization (“FISH”) tests for which the Company receives reimbursement from the Medicare program beginning on January 1, 2015. Although we are still assessing the Final Rule, if it is enacted as drafted, it will materially impact our FISH reimbursements for 2015. The Final Rule is subject to a 60 days comment period, ending on December 30, 2014.

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 (“PCR”), 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.

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”) and, as discussed below, on July 30, 2014, the agreement was amended. The line of credit is collateralized by the Company’s pharmaceutical, Private Payor and Medicare receivables. As of September 30, 2014, the maximum amount the Company can draw from the line of credit was $2,000,000 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. The interest rate charged to the Company was 5% through July 2014 and was 5.5% from August 2014 through September 2014. As needed from time to time, the Company may draw on this line to use for general corporate purposes. As of December 31, 2013 and September 30, 2014, the Company had drawn $1,000,000 and $1,500,000, respectively, against the line of credit. The line of credit is subject to various financial covenants. At September 30, 2014, the Company was in compliance with the covenants. Historically, however, the Company has been out of compliance with the covenants from time to time, and the Company has received waivers and forbearance agreements from the Bank.

As of December 31, 2013, the line of credit under the credit agreement was classified as a non-current liability on the accompanying condensed consolidated balance sheets as the line of credit had a maturity date of March 7, 2015, which was greater than one year from the date of the balance sheet. As of September 30, 2014, the line of credit under the credit agreement was classified as a non-current liability because the Waiver and Sixth Amendment to Loan and Security Agreement extended the maturity of the facility to July 25, 2016.

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.

On July 30, 2014, in connection with entering into a credit agreement with SWK Funding LLC discussed below, the Company and the Bank entered into a Waiver and Sixth Amendment to Loan and Security Agreement (the “Sixth Amendment”). The Sixth Amendment waived previous defaults under the loan agreement, modified the financial covenants, extended the maturity of the loan to July 25, 2016, modified the interest rate to the prime rate published by the Wall Street Journal plus 2.25% per annum, and implemented a pre-payment fee of $40,000. At September 30, 2014, the interest rate charged to the Company was 5.5%. The financial covenants under the Sixth Amendment include a revenue covenant and a liquidity covenant that conform with and are cross defaulted with the revenue covenant and liquidity covenant of the SWK Credit Agreement. The Company will pay a closing fee of $10,000 for the Sixth Amendment on July 18, 2015, approximately one year from the date of the closing.

SWK Term Loan

SWK Term Loan

On July 30, 2014 (the “Closing Date”), the Company entered into a credit agreement (the “SWK Credit Agreement”) with SWK Funding LLC, as the administrative agent (the “Agent” or “SWK”), and the lenders (including SWK) party thereto from time to time (the “Lenders”). The SWK Credit Agreement provides for a multi-draw term loan to the Company (the “Loan”) up to a maximum principal amount of $12,000,000 (the “Loan Commitment Amount”). On the Closing Date, the Lenders advanced the Company an amount equal to $8,500,000 which is due and payable on July 30, 2020 (the “Term Loan Maturity Date”) or such earlier date on which the Loan Commitment Amount is terminated pursuant to the terms of the SWK Credit Agreement.

The Loan bears interest at a rate equal to the LIBOR Rate (as defined in the SWK Credit Agreement) plus an applicable margin of 12.5% per annum, subject to a one percent (1.0%) LIBOR floor. Interest on the Loan is due and payable in arrears (i) on the forty-fifth (45th) day following the last calendar day of each of the months of September, December, March, and June, commencing on November 15, 2014, (ii) upon a prepayment of the Loan and (iii) on the Term Loan Maturity Date. At September 30, 2014, the interest rate charged to the Company was 13.5%. Upon the earlier of (a) the Term Loan Maturity Date or (b) full repayment of the Loan, the Company is also required to pay an exit fee. On September 9, 2014, SWK, in its capacity as the initial Lender, assigned part of its interests under the SWK Credit Agreement to SG-Financial, LLC (“SG”). Pursuant to the assignment, SG was assigned $2,500,000 of the $8,500,000 Closing Date initial advance to the Company and $1,029,412 of the subsequent term loan commitment. Pursuant to the assignment, as of the effective date of the assignment, SG is a party to the SWK Credit Agreement as a Lender.

In addition, on the Closing Date, the Company issued to the Agent a warrant (the “Initial Warrant”) to purchase up to 681,090 shares of the Company's common stock. The Initial Warrant is exercisable, in whole or in part and from time to time, from the date of issuance until and including July 30, 2020 at an exercise price of $0.936 per share, subject to adjustment. The Initial Warrant was valued at $414,239, or approximately $0.61 per covered share, using a Black-Scholes pricing model with the following assumptions: 2.01% risk free rate, 0% dividend, 101.5% volatility, and six-year expected life. The value of the warrant was recorded on the balance sheet as discussed below. On September 9, 2014, the Agent assigned a portion of the Initial Warrant consisting of the right to purchase 200,321 shares of common stock to SG-Financial, LLC.

For accounting purposes, the proceeds received in the transaction were allocated to the liability for debt, a debt issuance discount and additional paid-in capital for the warrant based upon the relative fair value of the loan and the warrant. The amounts recorded in the financial statements were $8,500,000 for loan liability, $576,161 for debt issuance discount and $377,140 to additional paid-in capital for the warrant. Additionally, the Company recorded deferred loan issuance costs of $187,092 for investment banker fees and legal fees incurred to enter into the SWK Credit Agreement. The debt issuance discount and the deferred issuance costs are being amortized to interest expense over the six-year term of the loan.

The remaining $3,500,000 of the Loan Commitment Amount (the “Subsequent Term Loan”) may be advanced to the Company upon written request to the Agent during the period beginning on the Closing Date and ending February 28, 2016 provided that (i) no default or event of default has occurred or is continuing under the SWK Credit Agreement, (ii) the aggregate revenue recognized by the Company and any of its subsidiaries during any period of four (4) consecutive fiscal quarters ending prior to December 31, 2015 exceeds a certain dollar amount threshold and (iii) the Agent has received an executed warrant (the “Subsequent Term Loan Warrant”) to purchase a number of shares of common stock equal to the number obtained when the principal amount of the Subsequent Term Loan is multiplied by 7.5% and the product is divided by the exercise price of such warrant. The exercise price of the Subsequent Term Loan Warrant will be equal to 1.2 times the lower of (a) the average closing price of the common stock on the previous 20 trading days before the closing date of the Subsequent Term Loan, or (b) the closing price of the common stock on the last trading day prior to such Subsequent Term Loan’s closing date. The Subsequent Term Loan Warrant will be exercisable for a period of six years from the closing date of the Subsequent Term Loan, subject to adjustment. Upon issuance, the Agent may exercise the Subsequent Term Loan Warrant on a cashless basis at any time. In the event the Lender exercises the Subsequent Term Loan Warrant on a cashless basis we will not receive any proceeds. The exercise price of the Subsequent Term Loan Warrant is subject to customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like.

The Company may prepay the Loan, in whole or in part, upon five business days’ written notice provided that a prepayment premium is paid to the Lenders as set forth in the SWK Credit Agreement. The Company is required to prepay the Loan with any net cash proceeds received from certain types of dispositions of assets described in the SWK Credit Agreement. The Company is also required to make certain revenue-based payments on the Company’s quarterly revenues, applied in the following priority: (i) first, to the payment of all fees, costs, expenses and indemnities due and owing to the Agent under the SWK Credit Agreement, (ii) second, to the payment of all fees, costs, expenses and indemnities due and owing to the Lenders under the SWK Credit Agreement, (iii) third, to the payment of all accrued but unpaid interest until paid in full, (iv) fourth, for each revenue-based payment date after August 2016, to the payment of all principal of the Loan up to an aggregate amount of $750,000 on any such payment date and (v) fifth, all remaining amounts to the Company.

The SWK Credit Agreement contains customary affirmative and negative covenants for credit facilities of its type, including covenants that limit the Company’s ability to pay dividends or redeem outstanding equity interests, incur additional indebtedness, grant additional liens, engage in any other type of business, make investments, merge, consolidate or sell all or substantially all of its assets and enter into transactions with related parties. The SWK Credit Agreement also contains certain financial covenants, including certain minimum aggregate revenue requirements.

The SWK Credit Agreement includes customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, default under certain other indebtedness, certain insolvency or bankruptcy events, the occurrence of certain material judgments, the institution of any proceeding by a government agency or a change of control of the Company that it is not otherwise permitted under the SWK Credit Agreement.

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 September 30, 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 September 30, 2013 and 2014, nominal amounts of interest and penalties were recorded in the Condensed Consolidated Statement 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 and nine months ended September 30, 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 September 30, 2013 and 2014 were $10,924 and $26,979, respectively, and for the nine months ended September 30, 2013 and 2014 were $14,247 and $53,239, 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 September 30, 2014, the Company had $5,826,536 in cash and cash equivalents that exceeded federally insured limits. At September 30, 2014, $11,838 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 September 30,								Nine Months Ended September 30,
	2013				2014				2013				2014
	(Unaudited)								(Unaudited)
			Percent				Percent				Percent				Percent
			of Total				of Total				of Total				of Total
	Revenue		Revenue		Revenue		Revenue		Revenue		Revenue		Revenue		Revenue
GlaxoSmithKline entities:
GlaxoSmithKline, LLC	$	76,792	*	%	$	165,169	*	%	$	579,606	*	%	$	165,169	*	%
GlaxoSmithKline Biologicals S.A.		633,543	16			296,250	*			3,166,288	21			1,017,406	*
Total GlaxoSmithKline entities	$	710,335	17		$	461,419	10		$	3,745,894	25	%	$	1,182,575	*
Medicare, net of contractual allowances	$	956,716	23	%	$	857,786	19	%	$	3,379,405	23	%	$	3,378,203	27	%

* 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 September 30, 2014
						(Unaudited)
			Percent of					Percent of
	Receivable		Total			Receivable		Total
	Balance		Receivables			Balance		Receivables
GlaxoSmithKline entities:
GlaxoSmithKline LLC	$	597,937		*	%	$	145,654		*	%
GlaxoSmithKline Biologicals S.A.	$	544,298		*	%	$	470,957		*	%
Total GlaxoSmithKline entities	$	1,142,235		13	%	$	616,611		*	%
Medicare, net of contractual allowances	$	2,422,611		28	%	$	2,377,560		26	%

* 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. The Company made approximately 87% of its reagent purchases from three suppliers during the three months ended September 30, 2013 and made approximately 76% of its reagent purchases from three suppliers during the three months ended September 30, 2014. The Company made approximately 90% of its reagent purchases from four suppliers during the nine months ended September 30, 2013 and made approximately 69% of its reagent purchases from two suppliers during the nine months ended September 30, 2014.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which modifies how all entities recognize revenue, and consolidates into one Accounting Standards Codification ("ASC") Topic (ASC Topic 606, Revenue from Contracts with Customers) the current guidance found in ASC Topic 605, Revenue Recognition, and various other revenue accounting standards for specialized transactions and industries. The core principle of the guidance is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In achieving this objective, an entity must perform five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations of the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also clarifies how an entity should account for costs of obtaining or fulfilling a contract in a new ASC Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers.

ASU 2014-09 is effective for public companies for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is not permitted. ASU 2014-09 may be applied using either a full retrospective approach, in which all years included in the financial statements are presented under the revised guidance, or a modified retrospective approach. Under the modified retrospective approach, financial statements will be prepared using the new standard for the year of adoption, but not for prior years. Under this method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance by the company and disclose all line items in the year of adoption as if they were prepared under the old revenue guidance. We will adopt ASU 2014-09 on January 1, 2017 and are currently evaluating the impact that this adoption will have on our consolidated financial statements. At this time, the Company has not determined the transition method that will be used.

In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-09”). ASU 2014-15 provides guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. The Company has not yet determined the impact of this guidance on the Company's consolidated financial statements

Royalty Agreements [Member]

Significant Accounting Policies [Line Items]

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 net sales price as defined in the agreement 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 of net sales price as defined in the agreement 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. Based upon the most recent analyses, the Company reduced the accrued liability during the quarter ended September 30, 2014 to an amount that management believes represents the amounts due under the USC license agreement. Management believes the accrued liability could be further revised in future periods based upon interactions with licensors.

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Property and Equipment and Intangible Assets (Schedule of Future Minimum Lease Payments under Capital Leases) (Details) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Property, Plant and Equipment [Line Items]
Years ending December 31, 2014	$ 29,418
Years ending December 31, 2015	117,673
Years ending December 31, 2016	63,216
Years ending December 31, 2017	16,364
Years ending December 31, 2018	16,364
Years ending Thereafter	9,547
Total minimum lease payments	252,582
Less amount represented by interest	(35,387)
Less current portion	(92,505)	(157,238)
Capital lease obligation, net of current portion	$ 124,690	$ 136,419

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Stock Options, Restricted Stock and Warrants (Tables)

9 Months Ended

Sep. 30, 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 and nine months ended September 30, 2013 and 2014 using the Black-Scholes model with the following weighted average assumptions:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2014		2013				2014
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Risk free interest rate		1.37	%	1.78-1.91	%		0.90-1.40	%		1.78-1.91	%
Expected dividend yield		—		—			—	%		—	%
Expected volatility		107.4	%	98.4-103.3	%		102.1-107.4	%		98.4-103.3	%
Expected term **(in years)		5.0		5.5-6.0			5.0-6.0	%		5.5-6.0
Forfeiture rate		7.0	%	7.0	%		7.0	%		7.0	%

Summary of Stock Option Activity

The following table summarizes the stock option activity for the 2006 Plan for the  nine months ended  September 30, 2014:

			Weighted
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
	Shares		Price		Life (Years)	Value
Outstanding, December 31, 2013		2,288,076	$	1.83	8.4	$	1,082
Granted (Unaudited)		755,250	$	0.88	9.8		—
Exercised (Unaudited)		(20,000)	$	1.16	7.8		7,605
Expired (Unaudited)		(13,211)		1.36	8.5		—
Forfeited (Unaudited)		(210,227)	$	1.13	—		—
Outstanding, September 30, 2014 (Unaudited)		2,799,888	$	1.63	8.0	$	—
Exercisable, September 30, 2014 (Unaudited)		1,187,587	$	2.29	6.7	$	—

Schedule of Options Outstanding

The following table provides additional information regarding options outstanding under the 2006 Plan as of September 30, 2014 (unaudited):

		Options Outstanding				Options Exercisable
				WA				WA
				Remaining				Remaining
		Number of		Contractual		Number of		Contractual
Exercise Price		Options		Term		Options		Term
$	0.88		712,125		9.8		24,439		9.8
	1.00 to 1.99		1,572,763		8.3		694,813		7.7
	2.00 to 2.99		297,500		6.9		250,835		6.7
	3.00 to 3.99		71,000		3.8		71,000		3.8
	4.29		11,500		2.9		11,500		2.9
	7.00		135,000		2.7		135,000		2.7
			2,799,888		8.1		1,187,587		6.7

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				Nine Months Ended
	September 30,				September 30,
	( Unaudited )
	2013		2014		2013		2014
Cost of revenue	$	12,600	$	12,164	$	40,984	$	36,341
Research and development		8,075		1,373		26,833		38,461
Sales and marketing		6,493		4,905		19,466		51,318
General and administrative		74,293		32,157		208,022		533,130
Totals	$	101,461	$	50,599	$	295,305	$	659,250

Schedule of Awards to Mr. Bologna

The following table summarizes these awards to Mr. Bologna:

					Intrinsic
					Value as of						Remaining
					September 30,				Options		Contractual
Type	Grant Date		Number of Awards		2014		Exercise Price		Exercisable		Term
Restricted Shares of Common Stock		12/21/2011		270,000	$	186,300	$	—		—		7.2
Options		12/21/2011		600,000	$	—	$	1.20		550,000		7.2
Options		12/21/2011		300,000	$	—	$	1.20		300,000		7.2

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Summary of Significant Accounting Policies (Schedule of ResponseDX Accounts Receivable) (Details) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Allowance for doubtful accounts	$ (2,204,177)	$ (2,404,659)
Total	6,889,100	6,225,923
ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Accounts receivable	8,323,983	6,738,198
Allowance for doubtful accounts	(2,204,177)	(2,404,659)
Total	6,119,806	4,333,539
ResponseDX [Member] | Medicare [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Accounts receivable	2,377,560	2,422,611
Private Payor [Member] | ResponseDX [Member]
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Accounts receivable	$ 5,946,423	$ 4,315,587

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Stock Options, Restricted Stock and Warrants (Schedule of Assumptions Used to Estimate Share-Based Compensation Expense Using Black-Scholes Model) (Details)	3 Months Ended			9 Months Ended		3 Months Ended		9 Months Ended				1 Months Ended	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013		Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014 Maximum [Member]		Sep. 30, 2014 Maximum [Member]		Sep. 30, 2013 Maximum [Member]		Mar. 31, 2000 Minimum [Member]	Sep. 30, 2014 Minimum [Member]		Sep. 30, 2014 Minimum [Member]		Sep. 30, 2013 Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk free interest rate		1.37%		2.01%		1.91%		1.91%		1.40%			1.78%		1.78%		0.90%
Expected dividend yield	0.00%	0.00%		0.00%	0.00%
Expected volatility		107.40%				103.30%		103.30%		107.40%		98.40%	98.40%		98.40%		102.10%
Expected term (in years)		5 years	[1]			6 years	[1]	6 years	[1]	6 years	[1]		5 years 6 months	[1]	5 years 6 months	[1]	5 years	[1]
Forfeiture rate	7.00%	7.00%		7.00%	7.00%

[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.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Cash flows from operating activities:
Net loss	$ (10,287,300)	$ (4,839,585)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	632,121	449,183
Share-based compensation	659,250	295,305
Bad debt expense	4,266,013	1,506,654
Amortization of deferred financing costs and debt discount	23,072	0
Changes in operating assets and liabilities:
Accounts receivable	(4,890,804)	(3,052,701)
Prepaid expenses and other current assets	(15,069)	34,956
Accounts payable	(295,289)	(107,824)
Accrued expenses	(116,841)	174,908
Accrued royalties	(123,954)	457,086
Accrued payroll and related liabilities	(432,499)	102,216
Deferred revenue	0	(483,052)
Net cash used in operating activities	(10,581,300)	(5,462,854)
Cash flows from investing activities:
Purchases of property and equipment	(31,620)	(241,910)
Purchases of software	(54,132)	(137,499)
Cash paid for purchase of assets	0	(200,000)
Net cash used in investing activities	(85,752)	(579,409)
Cash flows from financing activities:
Net proceeds from issuance of debt	8,113,887	0
Net proceeds from issuance of common stock	0	1,702,271
Borrowing on line of credit	500,000	0
Capital lease payments	(137,779)	(133,410)
Proceeds from exercise of stock options	23,200	23,993
Net cash provided by financing activities	8,499,308	1,592,854
Effect of foreign exchange rates on cash and cash equivalents	(21,541)	(2,568)
Net decrease in cash and cash equivalents	(2,189,285)	(4,451,977)
Cash and cash equivalents:
Beginning of period	8,148,599	9,041,478
End of period	5,959,314	4,589,501
Cash paid during the period for:
Interest	80,552	65,949
Supplemental disclosure of non-cash financing activities
Equipment and software acquired under capital leases	61,317	239,150
Assets acquired by issuance of common stock	$ 0	$ 980,000

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Commitments and Contingencies

9 Months Ended

Sep. 30, 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, general and administrative, and research and development expenses was $163,578 and $212,181 for the three months ended September 30, 2013 and 2014, respectively, and was $508,456 and $638,543 for the nine months ended September 30, 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, consisted of the following at September 30, 2014:

Years Ending December 31,	Unaudited
2014	$	296,720
2015		582,018
2016		35,807
Total	$	914,545

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 September 30, 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.

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Summary of Significant Accounting Policies (Schedule of Estimated Useful Lives) (Details)	9 Months Ended
	Sep. 30, 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

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Commitments and Contingencies (Schedule of Future Minimum Lease Payments under Noncancelable Operating Leases) (Details) (USD $)	Sep. 30, 2014
Commitments And Contingencies Disclosure [Line Items]
2014	$ 296,720
2015	582,018
2016	35,807
Total	$ 914,545

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 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, consisted of the following at September 30, 2014:

Years Ending December 31,	Unaudited
2014	$	296,720
2015		582,018
2016		35,807
Total	$	914,545