UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________

FORM 10-Q

_______________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, ~~2013~~2014

OrOR



o	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: 000-30975

_______________________________

TRANSGENOMIC, INC.

(Exact name of registrant as specified in its charter)

_______________________________



Delaware		~~911789357~~91-1789357
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12325 Emmet Street, Omaha, Nebraska		68164
(Address of principal executive offices)		(Zip Code)

(402) 452-5400

(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 o

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 o

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.



Large accelerated filer	o	Accelerated filer	xo
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	ox

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

As of May 8, ~~2013,~~2014, the number of shares of common stock outstanding was ~~88,245,725.~~7,353,695.

Table of Contents

TRANSGENOMIC, INC.

INDEX




		Page No.

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of March 31, ~~2013~~2014 (Unaudited) and December 31, ~~2012~~2013 (Audited)	3

	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, ~~2013~~2014 and ~~201~~20132	4

	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, ~~2013~~2014 and ~~201~~20132	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, ~~201~~20143	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2013~~2014 and ~~201~~20132	7

	Notes to Unaudited Condensed Consolidated ~~Unaudited~~ Financial Statements	7 8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2021

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

PART II.	OTHER INFORMATION	27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 6.	Exhibits	2827

Signatures		3029

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PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

TRANSGENOMIC, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

March 31,
2013 December 31,
(unaudited) 2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,729
$ 4,497
Accounts receivable, net 7,897
8,081
Inventories, net 4,783
5,092
Other current assets 1,185
1,047
Total current assets 21,594
18,717
PROPERTY AND EQUIPMENT:
Equipment 10,723
10,682
Furniture, fixtures & leasehold improvements 3,861
3,848
14,584
14,530
Less: accumulated depreciation (12,513 ) (12,340 )
2,071
2,190
OTHER ASSETS:
Goodwill 6,918
6,918
Intangibles, net 10,362
10,764
Other assets 453
202
$ 41,398
$ 38,791
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,516
$ 2,052
Accrued compensation 1,125
1,121
Current maturities of long term debt 364
6,171
Accrued expenses 2,826
3,686
Deferred revenue 1,155
1,171
Other liabilities 1,067
1,067
Accrued preferred stock dividend 1,441
1,260
Total current liabilities 9,494
16,528
LONG TERM LIABILITIES:
Long term debt less current maturities 6,069
—
Common stock warrant liability 500
900
Other long-term liabilities 1,266
1,089
Total liabilities 17,329
18,517
STOCKHOLDERS’ EQUITY:
Series A preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding 26
26
Common stock, $.01 par value, 150,000,000 shares authorized, 88,245,725 and 71,645,725 shares issued and outstanding, respectively 887
721
Additional paid-in capital 178,450
170,881
Accumulated other comprehensive income 262
435
Accumulated deficit (155,556 ) (151,789 )
Total stockholders’ equity 24,069
20,274
$ 41,398
$ 38,791



	March 31,
	2014			December 31,
	(unaudited)			2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,743		$	1,626
Accounts receivable, net	6,191			5,314
Inventories, net	4,053			3,957
Other current assets	693			938
Total current assets	12,680			11,835
PROPERTY AND EQUIPMENT:
Equipment	11,304			11,255
Furniture, fixtures & leasehold improvements	3,874			3,874
	15,178			15,129
Less: accumulated depreciation	(13,269		)	(13,126		)
	1,909			2,003
OTHER ASSETS:
Goodwill	6,918			6,918
Intangibles, net	8,899			9,195
Other assets	311			327
	$	30,717		$	30,278
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	—		$	242
Accounts payable	2,661			2,860
Accrued compensation	1,296			1,330
Accrued expenses	1,809			2,037
Deferred revenue	1,212			1,088
Other liabilities	1,068			1,068
Total current liabilities	8,046			8,625
LONG TERM LIABILITIES:
Long-term debt, less current maturities	3,758			6,318
Common stock warrant liability	550			600
Accrued preferred stock dividend	2,216			1,986
Other long-term liabilities	1,855			1,303
Total liabilities	16,425			18,832
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, 4,029,502 and 2,586,205 shares issued and outstanding, respectively	40			26
Common stock, $0.01 par value, 150,000,000 shares authorized, 7,353,695 and 7,353,695 shares issued and outstanding, respectively (1)	73			73
Additional paid-in capital (1)	186,685			179,459
Accumulated other comprehensive income	402			390
Accumulated deficit	(172,908		)	(168,502		)
Total stockholders’ equity	14,292			11,446
	$	30,717		$	30,278

(1) The shares of common stock and additional paid-in capital for all periods presented reflect the one-for-twelve reverse stock split that took effect on January 27, 2014.

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)


	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2013			2012			2014			2013
NET SALES	$	7,374		$	7,206		$	6,251		$	7,374
COST OF GOODS SOLD	3,693			4,102
COST OF GOODS SOLD:							3,757			4,119
Gross profit	3,681			3,104			2,494			3,255
OPERATING EXPENSES:
Selling, general and administrative	6,737			4,994			5,288			6,311
Research and development	764			549			745			764
	7,501			5,543			6,033			7,075
LOSS FROM OPERATIONS	(3,820		)	(2,439		)	(3,539		)	(3,820		)
OTHER INCOME (EXPENSE):
Interest expense, net	(153		)	(273		)	(182		)	(153		)
Change in fair value of warrants	400			—
Warrant revaluation							50			400
Other, net	53			20			—			53
	300			(253		)	(132		)	300
LOSS BEFORE INCOME TAXES	(3,520		)	(2,692		)	(3,671		)	(3,520		)
INCOME TAX EXPENSE	66			4			505			66
NET LOSS	$	(3,586	)	$	(2,696	)	$	(4,176	)	$	(3,586	)
PREFERRED STOCK DIVIDENDS AND ACCRETION	(181		)	(165		)
PREFERRED STOCK DIVIDENDS							(230		)	(181		)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(3,767	)	$	(2,861	)	$	(4,406	)	$	(3,767	)
BASIC AND DILUTED LOSS PER COMMON SHARE(1)	$	(0.04	)	$	(0.05	)	$	(0.60	)	$	(0.54	)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING	84,003,503			62,683,527
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING (1)							7,353,695			7,000,292

(1) Net loss per share and the number of shares used in the per share calculations for all periods presented reflect the one-for-twelve reverse stock split that took effect on January 27, 2014.

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands)


	Three Months Ended
	March 31,						Three Months Ended March 31,
	2013			2012			2014			2013
Net Loss	$	(3,586	)	$	(2,696	)	$	(4,176	)	$	(3,586	)
Other Comprehensive Income (Loss); foreign currency translation adjustment, net of tax	(173		)	61
Other comprehensive income (loss) - foreign currency translation adjustment, net of tax							12			(173		)
Comprehensive Loss	$	(3,759	)	$	(2,635	)	$	(4,164	)	$	(3,759	)

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended
March 31, ~~2013~~2014

(Dollars in thousands, except per share data)


	Preferred Stock			Common Stock														Preferred Stock			Common Stock (1)
	Outstanding Shares	Par Value		Outstanding Shares	Par Value		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total			Outstanding Shares	Par Value		Outstanding Shares	Par Value			Additional Paid-in Capital (1)		Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balance, January 1, 2013	2,586,205	$26		71,645,725	$	721	$	170,881	$	(151,789	)	$	435		$	20,274		2,586,205	$	26	5,970,478	$	64		$	171,538	$	(151,789	)	$	435		$	20,274
Net loss				—	—		—		(3,586		)	—			(3,586		)	—	—		—	—			—		(15,987		)	—			(15,987		)
Foreign currency translation adjustment, net of tax	—	—		—	—		—		—			(173		)	(173		)	—	—		—	—			—		—			(45		)	(45		)
Non-cash stock-based compensation	—	—		—	—		164		—			—			164
Private Placement, net	—	—		16,600,000	166		7,405		—			—			7,571
Stock-based compensation																		—	—		—	—			360		—			—			360
Private placement, net																		—	—		1,383,217	14			7,556		—			—			7,570
Other																		—	—		—	(5		)	5		—			—			—
Dividends on preferred stock	—	—		—	—		—		(181		)	—			(181		)	—	—		—	—			—		(726		)	—			(726		)
Balance, March 31, 2013	2,586,205	$	26	88,245,725	$	887	$	178,450	$	(155,556	)	$	262		$	24,069
Balance, December 31, 2013																		2,586,205	$	26	7,353,695	$	73		$	179,459	$	(168,502	)	$	390		$	11,446
Net loss																		—	—		—	—			—		(4,176		)	—			(4,176		)
Foreign currency translation adjustment, net of tax																		—	—		—	—			—		—			12			12
Stock-based compensation																		—	—		—	—			270		—			—			270
Preferred stock agreement																		1,443,297	14		—	—			6,956		—			—			6,970
Dividends on preferred stock																		—	—		—	—			—		(230		)	—			(230		)
Balance, March 31, 2014																		4,029,502	$	40	7,353,695	$	73		$	186,685	$	(172,908	)	$	402		$	14,292

(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for-twelve reverse stock split that took effect on January 27, 2014.

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


	Three Months Ended
	March 31,						Three Months Ended March 31,
	2013			2012			2014			2013
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss	$	(3,586	)	$	(2,696	)	$	(4,176	)	$	(3,586	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization	744			513			493			744
Non-cash, stock based compensation	164			273
Stock-based compensation							331			164
Provision for losses on doubtful accounts	1,581			474			673			1,581
Provision for losses on inventory obsolescence	—			1			55			—
Warrant revaluation	(400		)	—			(50		)	(400		)
Loss on sale of fixed assets	9			—			—			9
Gain on foreign currency settlement	(62		)	—			—			(62		)
Deferred tax provision							509			—
Changes in operating assets and liabilities:
Accounts receivable	(1,474		)	448			(1,542		)	(1,474		)
Inventories	212			(128		)	(149		)	212
Other current assets	(157		)	(204		)	263			(157		)
Accounts payable	(720		)	(1,057		)	(203		)	(720		)
Accrued expenses	356			(292		)
Other long term liabilities	(1		)	(97		)
Long term deferred income taxes	—			5
Accrued expenses and other liabilities							(70		)	355
Net cash flows used in operating activities	(3,334		)	(2,760		)	(3,866		)	(3,334		)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment	(87		)	(198		)	(45		)	(87		)
Acquisition	(849		)	—			—			(849		)
Change in other assets	(127		)	(67		)
Other assets							(48		)	(127		)
Net cash flows used in investing activities	(1,063		)	(265		)	(93		)	(1,063		)
CASH FLOWS PROVIDED BY USED IN FINANCING ACTIVITIES:
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal payments on capital lease obligations	(104		)	(52		)	(57		)	(104		)
Issuance of common stock and warrants, net	7,570			17,483
Issuance of preferred stock, net							6,970			—
Issuance of common stock, net							—			7,570
Payment of deferred financing costs	(60		)	—			—			(60		)
Proceeds from borrowings	6,433			—			1,400			6,433
Principal payment on note payable	(6,171		)	(82		)	(4,242		)	(6,171		)
Net cash flows provided by financing activities	7,668			17,349			4,071			7,668
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH	(39		)	21			5			(39		)
NET CHANGE IN CASH AND CASH EQUIVALENTS	3,232			14,345			117			3,232
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	4,497			4,946			1,626			4,497
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	7,729		$	19,291		$	1,743		$	7,729
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	262		$	495		$	157		$	262
Income taxes, net	—			2
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Acquisition of equipment through capital leases	$	—		$	12
Dividends accrued on preferred stock	181			165			$	230		$	181
Note Payable converted to Equity	—			3,000
Deferred financing costs in accounts payable	197			—			—			197

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL ~~STATEMENTS—(Continued)~~STATEMENTS

Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013

1. BUSINESS DESCRIPTION

Business Description.

Transgenomic, Inc. is a global biotechnology company advancing personalized medicine in the detection and treatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. ~~We have~~Our operations are organized and reviewed by management along our product lines and presented in the following two complementary business segments:

Laboratory Services. Our ~~clinical~~ laboratories specialize in genetic testing for cardiology, neurology, mitochondrial disorders and oncology. Our ~~clinical~~Patient Testing laboratories located in New Haven, Connecticut and Omaha, Nebraska are certified under the Clinical Laboratory Improvement Amendment ~~(CLIA)~~ as high complexity labs and our Omaha facility is also accredited by the College of American ~~Pathologists (CAP).~~Pathologists. Our Biomarker Identification laboratory located in Omaha, Nebraska also provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by pharmaceutical companies. Our laboratories employ a variety of genomic testing service technologies, including ICE COLD-PCR technology. ICE COLD-PCR is a proprietary platform technology that can be run in any laboratory with standard PCR technology and that enables detection of multiple unknown mutations from virtually any sample type including tissue biopsies, blood, cell-free DNA (“cfDNA”) and circulating tumor cells ~~(CTCs)~~ at levels greater than 1,000-fold higher than standard DNA sequencing techniques.

•

~~Diagnostic Tools. Our proprietary product is the WAVE~~^® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR^®

Genetic Assays and Platforms. Our proprietary product is the WAVE® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

The condensed consolidated balance sheet as of December 31, ~~2012~~2013 was derived from our audited balance sheet as of that date. The accompanying condensed consolidated financial statements as of and for the three months ended March 31, ~~2013~~2014 and ~~2012~~2013 are unaudited and reflect all adjustments (consisting of only normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2012~~2013 contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March ~~14, 2013.~~27, 2014. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Following approval of our shareholders, on January 15, 2014, our Board of Directors approved a reverse split of our common stock, par value $0.01, at a ratio of one-for-twelve. This reverse stock split became effective on January 27, 2014 and, unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split.

Principles of Consolidation.

The consolidated financial statements include the accounts of Transgenomic, Inc. and ~~its~~our wholly owned subsidiary. All inter-company balances and transactions have been eliminated in consolidation.

Risks and Uncertainties.

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2014 and 2013

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

Use of Estimates.

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments require considerable judgment by

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~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three Months Ended March 31, 2013 and 2012~~

management. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements.

Reclassifications.

Certain prior ~~year~~period amounts of selling, general and administrative expenses have been reclassified to cost of goods sold in order to conform to the current ~~year presentation regarding segment reporting.~~period presentation. These reclassifications had no effect on previously reported net earnings.

Fair Value.

Unless otherwise specified, book value approximates fair market value. The common stock warrant liability is recorded at fair value. See Note 9 - ~~"Fair Value".~~“Fair Value” to the notes to our accompanying unaudited condensed consolidated financial statements for additional information.

Cash and Cash Equivalents.

Cash and cash equivalents include cash and investments with original maturities at the date of acquisition of three months or less.

Concentrations of Cash.

From time to time, we may maintain a cash position with financial institutions in amounts that exceed federally insured limits. We have not experienced any losses on such accounts as of March 31, ~~2013~~2014.

Accounts Receivable.

The following is a summary of activity for the allowance for doubtful accounts during the three months ended March 31, ~~2013~~2014 and ~~2012~~2013:


	Dollars in Thousands									Dollars in Thousands
	Beginning Balance		Provision		Write Offs			Ending Balance		Beginning Balance		Provision		Write-Offs			Ending Balance
Three Months Ended March 31, 2014										$	3,838	$	673	$	(971	)	$	3,540
Three Months Ended March 31, 2013	$	2,171	$	1,581	$	(1,203	)	$	2,549	$	2,171	$	1,581	$	(1,203	)	$	2,549
Three Months Ended March 31, 2012	$	1,088	$	474	$	(483	)	$	1,079

While payment terms are generally 30 days, we have also provided extended payment terms in certain cases. In addition, we operate globally and the payment terms for some of our international customers may be greater than 90 days. Accounts receivable are carried at original invoice amount and shown net of allowance for doubtful accounts and contractual allowances. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. We determine the allowance for doubtful accounts by assigning a consistent reserve percentage to each accounts receivable aging category and contractual allowances by regularly evaluating individual customer ~~receivables and considering a customer’s financial condition, credit history and current economic conditions.~~payment history. Accounts receivable are written off when deemed ~~uncollectible. Recoveries~~uncollectible and all collection efforts have been exhausted. During the three months ended March 31, 2014, in accordance with our stated policy, we wrote-off approximately $1.0 million of accounts receivable, ~~previously written off are recorded when received.~~related to services rendered in prior year periods, determined to be uncollectible.

Inventories.

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2014 and 2013

Inventories are stated at the lower of cost or market net of allowance for obsolete inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process, which approximates the first-in, first-out (FIFO) method.

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~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three Months Ended March 31, 2013 and 2012~~

The following is a summary of activity for the allowance for obsolete inventory during the three months ended March 31, ~~2013~~2014 and ~~2012~~2013:


	Dollars in Thousands									Dollars in Thousands
	Beginning Balance		Provision		Write Offs			Ending Balance		Beginning Balance		Provision		Write-Offs			Ending Balance
Three Months Ended March 31, 2014										$	799	$	55	$	(5	)	$	849
Three Months Ended March 31, 2013	$	616	$	—	$	(5	)	$	611	$	616	$	—	$	(5	)	$	611
Three Months Ended March 31, 2012	$	511	$	1	$	(3	)	$	509

We determine the allowance for obsolescence by evaluating inventory quarterly for items deemed to be slow moving or obsolete.

Property and Equipment.

Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed byusing the straight-line method over the estimated useful lives of the related assets as follows:



Leasehold improvements	1 to 10 years
Furniture and fixtures	3 to 7 years
Production equipment	3 to 7 years
Computer equipment	3 to 7 years
Research and development equipment	2 to 7 years

Depreciation expense related to property and equipment was $~~0.2~~0.1 million and ~~$0.2~~$0.2 million ~~during the three months ended~~ ~~March 31, 2013~~ ~~and~~ ~~2012, respectively. Included in depreciation~~ for the three months ended March 31, ~~2013~~2014 and ~~2012~~2013, respectively. Included in depreciation for each of the three months ended March 31, 2014 and 2013 was $0.1 million ~~and less than~~ ~~$0.1 million, respectively,~~ related to equipment acquired under capital leases.

Goodwill.

Goodwill is the excess of the purchase price over fair value of assets acquired and is not amortized. Goodwill is tested for impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may impact goodwill. Impairment occurs when the carrying value is determined to be not recoverable, thereby causing the carrying value of the goodwill to exceed its fair value. If impaired, the asset’s carrying value is reduced to its fair value. No events have transpired in the three months ended March 31, ~~2013~~2014 that would require an impairment analysis prior to our scheduled review.

~~Stock Based~~Stock-Based Compensation.

All ~~stock options awarded~~stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of March 31, ~~2013~~2014 had vesting periods of one or three years from the date of grant. None of the stock options outstanding at March 31, ~~2013~~2014 are subject to performance or market-based vesting conditions.

We measure and recognize compensation expense for all stock-based awards made to employees and ~~directors, including stock options.~~directors. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ~~ratably~~ over the service period of the ~~awards (generally the vesting period).~~awards.

During the three months ended March 31, ~~2013~~2014, and 2013, we recorded compensation expense of ~~$0.2~~$0.3 million and $0.2 million, respectively, within selling, general and administrative expense. As of March 31, ~~2013~~2014, there was $~~0.5~~1.9 million of unrecognized compensation expense related to unvested stock ~~options,~~awards, which is expected to be recognized over a weighted-average period of nearly three years.

We granted ~~307,500~~199,080 stock options during the quarter ended March 31, 2014. The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates

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Three Months Ended March 31, 2014 and 2013

of 1.72% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 4.29 years, based on expected exercise activity behavior; and volatility of 104.71% based on the historical volatility of our common stock over a time that is consistent with the expected life of the option. Forfeitures of 1% were also assumed.

Included in the stock awards outstanding as of March 31, 2014 were stock appreciation rights with respect to 83,333 and 55,000 shares of common stock for our Chief Executive Officer and Chief Financial Officer, respectively. These rights will vest over three years and have an exercise price of $4.32 per share, which is equal to the fair value of one share of our common stock on the date of grant, which was September 30, 2013.

We granted 25,625 stock options during the quarter ended March 31, 2013. The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing ~~model. The Black-Scholes~~ model with the following ~~assumptions was used to estimate the fair value of the options:~~assumptions: risk-free interest rates of ~~0.8%~~0.78% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 4.55 years, based on expected exercise activity behavior; and volatility of 105.77% based on the historical volatility of our common stock over a time that is consistent with the expected life of the option. Forfeitures of 4.07% were also assumed.

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~~Three Months Ended March 31, 2013 and 2012~~

~~During the~~ ~~three~~ ~~months ended~~ ~~March 31, 2012, we recorded compensation expense of~~ ~~$0.3 million~~ ~~within selling, general and administrative expense. As of~~ ~~March 31, 2012, there was~~ ~~$0.8 million~~ ~~of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of nearly three years.~~

~~We granted~~ ~~100,000~~ ~~stock options during the quarter ended~~ ~~March 31, 2012~~. The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing model. The Black-Scholes model with the following assumptions was used to estimate the fair value of the options: risk-free interest rates of ~~0.8%~~ ~~based on the U.S. Treasury yield in effect at the time of grant; dividend yields of~~ ~~zero~~ ~~percent; expected lives of~~ ~~eight~~ ~~years, based on expected exercise activity behavior; and volatility of~~ ~~109%~~ ~~based on the historical volatility of our common stock over a time that is consistent with the expected life of the option. Forfeitures of~~ ~~1.64%~~ ~~were also assumed.~~

Net Sales Recognition.

Revenue is realized and earned when all of the following criteria are met:

Persuasive evidence of an arrangement ~~exists,~~exists;

Delivery has occurred or services have been ~~rendered,~~rendered;

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

Collectability is reasonably assured.

~~Net sales from~~For our Laboratory Services segment, net sales from Patient Testing labs are recognized ~~on samples collected from patients of health care providers and individuals who take part in clinical trials. Revenue is recognized from patients of health care providers~~ on an individual test basis and ~~occurs~~take place when the test report is completed, reviewed and sent to the ~~client. Sales are recorded at our list price~~client less ~~a provision~~the reserve for insurance, ~~and~~ Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with ~~these tests.~~our Patient Testing services. Adjustments to the allowances, based on actual receipts from third party ~~payers,~~payors, are ~~recorded upon settlement. For clinical trials~~reflected in the estimated contractual allowance applied prospectively. In our Biomarker Identification labs, we perform services on a project by project ~~basis and~~basis. When we receive payment in advance, we recognize revenue when ~~services are delivered.~~we deliver the service. These projects typically do not extend beyond one year. At each of March 31, ~~2013~~2014 and December 31, ~~2012~~2013, deferred ~~revenue~~net sales associated with ~~clinical trials for which we have received payment in advance of performing services was~~ ~~$0.1 million~~ ~~and~~ ~~$0.2 million, respectively, and was~~pharmacogenomics research projects, included in the balance sheet in deferred ~~revenue.~~revenue was $0.2 million.

Net sales of products in our ~~Diagnostic Tools~~Genetic Assays and Platforms segment are recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product under a purchase order. Our sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. We also enter into various service contracts that cover installed instruments. These contracts ~~for which payment is received at the time of execution,~~ cover specific time periods, and net sales associated with these contracts are deferred and recognized ratably over the service period. At March 31, ~~2013~~2014 and December 31, ~~2012~~2013, deferred net revenue associated with our service contracts was $~~1.1~~1.0 million and $~~1.0~~0.9 million, respectively, and iswas included in the balance sheet in deferred revenue.

Taxes collected from customers and remitted to government agencies for specific sales transactions are recorded net of any sales tax collected with no effect on the income statement.

Common Stock Warrants.

~~Our~~Certain of our issued and outstanding warrants to purchase common stock do not qualify to be treated as equity and, accordingly, are recorded as a liability ("(“Common Stock Warrant ~~Liability"~~Liability”). The Common Stock Warrant Liability was initially recorded at fair value using a Monte Carlo simulation model. We are required to present these instruments at fair value at each reporting date and any changes in fair values are recorded as an adjustment to earnings. The Common Stock Warrant Liability is considered a Level Three financial instrument for purposes of fair value measurement. See Note 9 - ~~"Fair Value".~~“Fair Value” to the notes to our accompanying unaudited condensed consolidated financial statements for additional information.

Translation of Foreign Currency.

Our foreign subsidiary uses the local currency of the country in which it is located as its functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. A cumulative translation loss of ~~$0.2 million~~ ~~is reported as other comprehensive income on the accompanying unaudited condensed consolidated statement of comprehensive loss for the three months~~ ~~March 31, 2013. A cumulative translation gain of~~ ~~$0.1 million~~ ~~was reported as accumulated~~

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Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013

Our foreign subsidiary uses the British Pound Sterling, which is the local currency of the country in which it is located, as its functional currency. Its assets and liabilities are translated into U.S. Dollars at the exchange rates in effect at the balance sheet date. A cumulative translation gain of $12,000 was reported as other comprehensive income on the accompanying unaudited condensed consolidated statement of comprehensive loss for the three months ended March 31, 2014. A cumulative translation loss of $0.2 million was reported as accumulated other comprehensive income for the three months ended March 31, ~~2012~~2013. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized less than $0.1 million as foreign currency transaction expense in the determination of net loss for the ~~$0.1~~three months ended March 31, 2014 and less than $0.1 million as foreign currency transaction income in the determination of net loss for the three months ~~ending~~ended March 31, 2013 ~~and less than~~ ~~$0.1 million~~ ~~as foreign currency transaction loss in the determination of net loss for the~~ ~~three~~ ~~months ending~~ ~~March 31, 2012~~.

Loss Per Share.

Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each ~~period.~~of March 31, 2014 and 2013. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to ~~34,668,398~~5,523,975 and ~~28,741,938~~2,889,033 shares of our common stock have been excluded from the computation of diluted loss per share at March 31, ~~2013~~2014 and ~~2012~~2013, respectively. The options, warrants and conversion rights that were exercisable induring the three months ended March 31, 2014 and 2013 ~~and~~ ~~2012~~ were not included because the effect would be anti-dilutive due to the net loss.

Recent ~~accounting pronouncements.~~Accounting Pronouncements.

In ~~February 2013,~~April 2014, the Financial Accounting Standards Board (“FASB”) issued ~~ASU 2013-2,~~Accounting Standards Update No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of ~~Amounts Reclassified Out~~Disposals of ~~Accumulated Other Comprehensive Income ,~~Components of an Entity, which changes the criteria for reporting a discontinued operation. Under this standard, a disposal of part of an organization that ~~required the presentation of significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income~~has a major effect on its operations and financial results is a discontinued operation. This guidance is effective prospectively for us beginning January 1, 2015 with earlier application permitted, but only ~~if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts~~for disposals (or classifications as held for sale) that ~~are~~have not required under GAAP to be reclassified in their entirety to net income, cross-reference to other disclosures that provide additional detail about these amounts is required. ASU 2013-02 is effective for fiscal years beginning after December 15, 2012. The adoption ofbeen reported previously. When adopted, we do not expect this ~~new~~ guidance ~~had no~~will have a material impact on our ~~consolidated financial position,~~ results of operations or ~~cash flows.~~

In March 2013, the FASB released Accounting Standards Update No. 2013-05 ("ASU 2013-05"), Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force). ASU 2013-05 requires that when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. The provisions of ASU 2013-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. When adopted, ASU 2013-05 is not expected to materially impact our condensed consolidated financial statements.position.

3. INVENTORIES

Inventories (net of allowance for obsolescence) consisted of the following:


	Dollars in Thousands						Dollars in Thousands
	March 31, 2013			December 31, 2012			March 31, 2014			December 31, 2013
Finished goods	$	3,725		$	4,057		$	3,022		$	2,978
Raw materials and work in process	1,542			1,547			1,641			1,567
Demonstration inventory	127			104			239			211
	$	5,394		$	5,708		$	4,902		$	4,756
Less allowance for obsolescence	(611		)	(616		)	(849		)	(799		)
Total	$	4,783		$	5,092		$	4,053		$	3,957

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Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013

4. INTANGIBLES AND OTHER ASSETS

Long-lived intangible assets and other assets consisted of the following:


	Dollars in Thousands												Dollars in Thousands
	March 31, 2013						December 31, 2012						March 31, 2014						December 31, 2013
	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Intangibles—acquired technology	$	9,009	$	2,226	$	6,783	$	9,009	$	1,910	$	7,099
Intangibles—technology													$	9,009	$	3,380	$	5,629	$	9,009	$	3,175	$	5,834
Intangibles—assay royalties	1,434		461		973		1,434		410		1,024		1,434		666		768		1,434		614		820
Intangibles—third party payor relationships	367		55		312		367		49		318		367		79		288		367		73		294
Intangibles—tradenames and trademarks	824		145		679		824		115		709		824		263		561		824		233		591
Intangibles—customer relationships	652		22		630		652		11		641		652		65		587		652		54		598
Intangibles—covenants not to compete	184		31		153		184		15		169		184		92		92		184		77		107
Patents	975		293		682		929		280		649		1,202		356		846		1,153		336		817
Intellectual property	170		20		150		170		15		155		170		42		128		170		36		134
	$	13,615	$	3,253	$	10,362	$	13,569	$	2,805	$	10,764	$	13,842	$	4,943	$	8,899	$	13,793	$	4,598	$	9,195




	Estimated Useful Life
~~Acquired technology~~Technology	~~7-8~~7-10 years
Assay royalties	7 years
Third party payor relationships	15 years
Tradenames and trademarks	7 years
Customer relationships	15 years
Covenants not to compete	3 years
Patents	Life of the patent
Intellectual property	7 years

Other assets include U.S. security deposits and deferred tax assets, net of applicable valuation allowances.

Amortization expense for intangible assets was $~~0.5~~0.3 million and $~~0.3~~0.5 million during the three months ended March 31, ~~2013~~2014 and ~~2012~~2013, respectively. Amortization expense for intangible assets is expected to be $1.4 million, $1.3 million, $1.3 million, $1.3 million and $1.0 million for the years ended December 31, 2014, 2015, 2016, 2017 and 2018, respectively.~~$1.7 million~~ ~~in each~~

Based on the length of time our technology is expected to be used and an evaluation of the lives of similar technology in the industry, effective January 1, 2014, we increased the estimated useful lives of certain technologies acquired in 2010 and 2012 from 7 years ~~2013 through 2017.~~to 10 years, which decreased loss from operations by $0.1 million and net loss by $0.1 million, or $0.01 per basic and diluted share, for the three months ended March 31, 2014.

5. DEBT



	Dollars in Thousands
	March 31, 2014		December 31, 2013
Revolving Line of Credit⁽¹⁾	$	—	$	2,560
Term Loan⁽²⁾	3,758		4,000
Total debt, including short-term debt	3,758		6,560
Current maturities of long-term debt	—		(242		)
Long-term debt, net of current maturities	$	3,758	$	6,318

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Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013

~~5. DEBT~~

Dollars in Thousands
March 31, 2013 December 31, 2012
Revolving Line of Credit⁽¹⁾
$ 2,433
$ —
Term Loan⁽²⁾
4,000
—
PGxHealth note payable (the "First Note") ⁽³⁾
—
6,171
Total debt, including short term debt 6,433
6,171
Current maturities of long term debt (364 ) (6,171 )
Long-term debt, net of current maturities $ 6,069
$ —

On March 13, 2013 (the “Effective Date”), we entered into a Loan and Security Agreement with affiliates of Third Security, LLC (the “Lenders”) for (a) a revolving line of credit (the “Revolving Line”) with borrowing availability of up to $4.0 million, subject to reduction based on our eligible accounts receivable, and (b) a term loan (the “Term Loan”) of $4.0 million (the “Loan Agreement”). Proceeds were used to pay off a three year senior secured promissory note payable to PGxHealth, LLC, which was entered into on December 29, 2010 in conjunction with our acquisition of the ~~First Note~~FAMILION family of genetic tests, and for general corporate and working capital purposes.

On August 2, 2013, we entered into an amendment to the Loan Agreement (the “Amendment”). The Amendment, which became effective as of June 30, 2013, reduced our future minimum revenue covenants under the Loan Agreement and modifies the interest rates applicable to the amounts advanced under the Revolving Line.

On November 14, 2013, we entered into a second amendment to the Loan Agreement (the “Second Amendment”). The Second Amendment, which became effective as of October 31, 2013, reduced our future minimum revenue covenants under the Loan Agreement.

On January 27, 2014, we entered into a third amendment to the Loan Agreement (the “Third Amendment”). Pursuant to the Third Amendment, the Lenders agreed to waive certain events of default under the Loan Agreement, and the parties amended certain provisions of the Loan Agreement, including the minimum liquidity ratio that we must maintain during the term of the Loan Agreement.

On March 3, 2014, we entered into a fourth amendment to the Loan Agreement (the “Fourth Amendment”). The Fourth Amendment provides that we will not be required to make any principal or interest payments under the Term Loan for the period from March 1, 2014 through March 31, 2015. Accordingly, pursuant to the Loan Agreement as amended by the Fourth Amendment, the next principal and interest payment under the Term Loan will be due on April 1, 2015.

(1)

Revolving Line of ~~Credit~~Credit. Amounts advanced under the Revolving Line bear interest at an annual rate equal to the greater of (a) 4.25% or (b) the Wall Street Journal prime rate plus 1%. Interest is payable on a monthly basis, with the balance payable at the maturity of the Revolving Line. Under the Amendment, amounts advanced under the Revolving Line bear interest at an annual rate equal to the greater of (x) 6.25% or (y) the Wall Street Journal prime rate plus 3%. The current interest rate is ~~4.25%~~6.25%. Under the Loan Agreement, we paid the Lenders an upfront fee of $20,000, and will pay the Lenders an additional commitment fee of $20,000 on each one year anniversary of the Effective Date during the term of the Revolving Line. In addition, a fee of 0.5% per ~~year~~annum is payable quarterly on the unused portion of the Revolving Line. The Revolving Line matures on September 1, 2016.

(2)

Term ~~Loan~~Loan. We received $4.0 million under the Term Loan on the Effective Date. WePursuant to the terms of the Loan Agreement, as amended by the Fourth Amendment, we are required to make ~~interest-only~~monthly payments ~~under the Term Loan through December 31, 2013 and~~of principal and interest ~~payments~~to the Lenders commencing on ~~a monthly basis, beginning on January~~April 1, ~~2014, over~~ ~~33 months~~ ~~using a straight-line amortization rate. Interest under the Term Loan will accrue at the annual rate of one month LIBOR plus~~ ~~6.1%, subject to a LIBOR floor of~~ 3%.2015. The current interest rate is 9.1%.

We paid the Lenders an upfront fee of $40,000 for the Term Loan, and will pay the Lenders an additional final payment of $120,000 at maturity or prepayment of the Term Loan. In addition, if we repay the Term Loan prior to maturity, we will pay the Lenders a prepayment penalty of 5% of the total outstanding balance under the Term Loan if the prepayment occurs within one year after the Effective Date, 2.5% of the total outstanding balance under the Term Loan if the prepayment occurs between one and two years after the Effective Date, and 1% of the total outstanding balance under the Term Loan if the prepayment occurs thereafter.

Additional Terms

The Loan Agreement contains affirmative and negative covenants. Under the Term Loan, we are required to maintain a minimum liquidity ratio and achieve a minimum amount of revenue, and we also agreed not to (i) pledge or otherwise encumber our assets other than to the Lenders, (ii) enter into additional borrowings or guarantees, (iii) repurchase our capital stock, or (iv) enter into certain mergers or acquisitions without the ~~Lenders'~~Lenders’ consent. WeAdditionally, the Loan Agreement contains a subjective acceleration clause at the discretion of the Lenders. As of March 31, 2014, we were in compliance with all financial ~~covenants as of~~ ~~March 31, 2013~~.covenants.

To secure the repayment of any amounts borrowed under the Revolving Line and the Term Loan, we granted the Lenders a security interest in all of our assets. The occurrence of an event of default under the Loan Agreement could result in the

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Three Months Ended March 31, 2014 and 2013

acceleration of our obligations under the Loan Agreement and would increase the applicable interest rate under the Revolving Line or ~~the~~ Term Loan (or both) by 5%, and permit the Lenders to exercise remedies with respect to the collateral under the Loan Agreement.

~~(3)~~

~~The First Note was a~~ ~~three~~ ~~year senior secured promissory note payable to PGxHealth, LLC entered into on~~ ~~December 29, 2010~~ ~~in conjunction with our acquisition of the FAMILION family of genetic tests. Interest was payable at~~ ~~10%~~ per year with quarterly interest payments through March 29, 2012. Thereafter, quarterly installments include both principal and interest through December 30, 2013. The First Note was paid in full on March 13, 2013.

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~~Three Months Ended March 31, 2013 and 2012~~

6. COMMITMENTS AND CONTINGENCIES

From time to time we are subject to claims of various amounts, which arise out of the normal course of business. In the opinion of management, the disposition of pending claims will not have a material adverse effect on our financial position, results of operations or cash flows.

We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2022. The future minimum lease payments required under these leases are approximately $0.8 million for the remainder of ~~2013~~, ~~$1.1 million~~ in 2014, $1.0 million in 2015, $0.9 million in 2016, $0.8 million in 2017, $0.5 million in 2018 and $~~1.3~~0.9 million thereafter. Rent expense for each of the three months ended March 31, ~~2013~~2014 and ~~2012~~2013 was $0.2 million ~~and~~ ~~$0.2 million, respectively.~~. At March 31, ~~2013~~2014, firm commitments to vendors totaled $~~2.4~~1.5 million.

7. INCOME TAXES

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. We have statutes of limitation open for federal income tax returns related to tax years ~~2009~~2010 through ~~2012.~~2013. We have state income tax returns subject to examination primarily for tax years ~~2009~~2010 through ~~2012.~~2013. Open tax years related to foreign jurisdictions, primarily the United Kingdom, remain subject to examination for ~~the~~ tax years ~~2009~~2010 through ~~2012.~~2013.

Income tax expense for the three months ended March 31, 2014 was $0.5 million. Income tax expense for the three months ended March 31, 2013 was ~~$0.1 million. Income tax expense for the~~ ~~three~~ ~~months ended~~ ~~March 31, 2012~~ ~~was less than~~ ~~$0.1 million~~.$0.1 million. Our effective tax rate for the three months ended March 31, ~~2013~~2014 was ~~1.88%~~13.76%, which is primarily the result of valuation allowances against the net operating losses for the U.S., which results in us not recording net deferred tax assets in the U.S.

Our goodwill is an indefinite-lived asset which is not amortized for financial reporting purposes. However, goodwill is tax deductible and therefore amortized for tax purposes. As such, deferred income tax expense and a deferred tax liability arise as a result of the tax-deductibility of the goodwill. The resulting deferred tax liability, which is expected to increase over time, will have an indefinite life, resulting in what is referred to as a “naked tax credit.” This deferred tax liability could remain on our balance sheet indefinitely unless there is an impairment of the goodwill (for financial reporting purposes), or there is a disposal of the business to which the goodwill relates. During the three months ended March 31, 2014, the amount of income tax expense related to the tax amortization of goodwill was $0.5 million. Of this amount, $0.4 million related to prior periods.

During each of the three months ended March 31, ~~2013~~2014 and ~~2012~~2013, there were no material changes to the liability for uncertain tax positions.

8. STOCKHOLDERS’ EQUITY

Common Stock.

~~Our Board~~Pursuant to our Third Amended and Restated Certificate of ~~Directors is authorized to issue up to~~Incorporation as amended, we currently have 150,000,000 shares of common stock ~~from time to time, as provided in a resolution or resolutions adopted by our shareholders.~~authorized for issuance.

On February 7,2, 2012, we entered into definitive agreements with institutional and other accredited investors and raised approximately $22.0 million in a private placement financing (the ~~"Private Placement"~~“Private Placement”), which ~~includes~~included an aggregate of $3.0 million in convertible notes issued in December 2011 to entities ~~associated~~affiliated with Third Security, LLC, a related party, that automatically ~~convert~~converted into shares of our common stock and warrants to purchase such common stock on the same terms as all investors in the Private Placement. Pursuant to the purchase agreement, we issued an aggregate of ~~19,000,000~~1,583,333 shares of our common stock at a price per share of $~~1.00~~12.00, as well as five-year warrants to purchase up to an aggregate of ~~11,435,158~~823,333 shares of our common stock with an exercise price of ~~$1.08~~$15.00 per share. In connection with the conversion of the convertible notes issued by us to the entities associated with Third Security, LLC, the entities received an aggregate of ~~3,000,000~~250,000 shares of our common stock and ~~1,736,110~~125,000 warrants on the same terms as all investors in the Private Placement. Craig-Hallum Capital Group LLC served as the sole placement agent for the offering. In consideration for services rendered as the placement agent in the offering, we agreed to (i) pay to the placement agent cash commissions equal to $1,330,000, or 7.0% of the gross proceeds received in the offering, (ii) issue to the placement agent a five-year warrant to purchase up to 31,666 shares of our common stock (representing 2% of the shares sold in

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2014 and 2013

the Private Placement) with an exercise price of $15.00 per share and other terms that are the same as the terms of the warrants issued in the Private Placement; and (iii) reimburse the placement agent for reasonable out-of-pocket expenses, including fees paid to the placement agent’s legal counsel, incurred in connection with the offering, which reimbursable expenses shall not exceed $125,000. The costs incurred to complete the Private Placement were recorded as a reduction in equity in the amount of $1.5 million. Net proceeds from this offering ~~will be~~were used for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.

On January 24, 2013, we entered into a Securities Purchase Agreement with certain institutional and other accredited investors pursuant to which we: (i) sold to the investors an aggregate of ~~16,600,000~~1,383,333 shares of our common stock at a price per share of ~~$0.50~~$6.00 for aggregate gross proceeds of approximately $8.3 million; and (ii) issued to the investors warrants to purchase up to an aggregate of ~~8,300,000~~691,656 shares of our common stock with an exercise price of ~~$0.75~~$9.00 per share (the ~~"Offering"~~“Offering”). The warrants may be exercised, in whole or in part, at any time from January 30, 2013 until January 30, 2018 and contain both cash and “cashless exercise” features. Affiliates of Third Security, LLC, a related party, purchased an aggregate of ~~6,000,000~~500,000 shares of common stock and warrants to purchase an aggregate of ~~3,000,000~~250,000 shares of common stock in ~~this transaction~~the Offering on the same terms as the other investors. We ~~currently intend to use~~are using the net proceeds from the Offering for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.

In connection with the Offering, we ~~also~~ entered into a registration rights agreement with the investors (the “Registration Rights Agreement”). The Registration Rights Agreement required that we file with the Securities and Exchange Commission a registration statement to register for resale the shares of common stock sold and the shares of common stock issuable upon exercise of the warrants (the

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~~Three Months Ended March 31, 2013 and 2012~~

~~“Warrant~~ “Warrant Shares”) by March 16, 2013. The registration statement was filed with the Securities and Exchange Commission on March 15, 2013 and was declared effective by the Securities and Exchange Commission on March 29, 2013.

The Offering required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale. The exercise price of the warrants decreased from $15.00 per share to $12.96 per share and the number of shares issuable upon exercise of the warrants increased from 948,333 to 1,097,600.

Common Stock Warrants.

During the three months ended March 31, ~~2013~~2014 and ~~2012,~~2013, we issued warrants to purchase ~~10,091,268~~115,432 and ~~11,380,000~~840,928, shares of common stock, ~~respectively, and none~~respectively. None of the issued warrants were ~~exercised.~~exercised during such periods. The warrants issued in 2014 were issued due to repricing requirements contained in the warrants issued in the private placement in 2013. Included in the warrants issued in 2013 were ~~8,300,000~~691,656 warrants issued in connection with the ~~sales of common stock on January 24, 2013~~Offering and ~~1,791,268~~149,272 warrants issued due to repricing requirements contained in the ~~February 2012 warrant agreement.~~warrants issued in the Private Placement. Warrants to purchase an aggregate of ~~26,643,676~~2,335,348 shares of common stock were outstanding at March 31, ~~2013~~2014.


Warrant Holder	Issue Year	Expiration	Underlying Shares	Exercise Price	Issue Year	Expiration	Underlying Shares	Exercise Price
Affiliates of Third Security, LLC⁽¹⁾	2010	December 2015	5,172,408	$0.58	2010	December 2015	431,027	$6.96
Various Institutional Holders⁽²⁾	2012	February 2017	11,435,158	$1.08	2012	February 2017	1,052,820	$11.73
Affiliates of Third Security, LLC⁽²⁾	2012	February 2017	1,736,110	$1.08	2012	February 2017	159,845	$11.73
Various Institutional Holders⁽³⁾	2013	January 2018	5,300,000	$0.75	2013	January 2018	441,656	$9.00
Affiliates of Third Security, LLC⁽³⁾	2013	January 2018	3,000,000	$0.75	2013	January 2018	250,000	$9.00
			26,643,676				2,335,348


(1)	This warrant was issued in connection with the issuance of warrants to purchase shares of our Series A Preferred Stock to affiliates of Third Security, LLC in December 2010. The number of underlying shares shown reflects the number of shares of common stock issuable upon conversion of the shares of Series A Preferred Stock for which this warrant is currently exercisable.

(2)

These ~~Warrants were issued in connection with the private placement completed in February 2012. Warrants were repriced and additional~~ warrants were issued in connection with the ~~warrants issued with the private placement~~Private Placement completed in ~~January 2013.~~February 2012 and are classified as a liability in our financial statements. See Footnote 9 - Fair Value. These warrants also contain certain anti-dilution provisions that provide for an adjustment to the exercise price and number of shares issuable upon exercise of the warrant in the event that we engage in certain issuances of shares of our common stock at a price lower than the exercise price of the warrant.


(3)	These warrants were issued in connection with the ~~private placement~~Offering, which was completed in January 2013.

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Three Months Ended March 31, 2014 and 2013

Issuance of Series B Preferred Stock

On March 5, 2014, we entered into a Series B Convertible Preferred Stock Purchase Agreement (the “Series B Purchase Agreement”) with affiliates of Third Security, LLC (the “2014 Third Security Investors”), pursuant to which we, in a private placement, sold and issued an aggregate of 1,443,297 shares of our Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”) at a price per share of $4.85 for an aggregate purchase price of approximately $7.0 million. Each share of Series B Preferred Stock issued pursuant to the Series B Purchase Agreement is initially convertible into shares of our common stock at a rate of 1-for-1, which conversion rate is subject to further adjustment as set forth in the Certificate of Designation of Series B Convertible Preferred Stock.

In connection with the Series B financing, we also entered into a Registration Rights Agreement, dated March 5, 2014, with the 2014 Third Security Investors, pursuant to which we granted certain demand, “piggy-back” and S-3 registrations rights covering the resale of the shares of common stock underlying the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement and all shares of common stock issuable upon any dividend or other distribution with respect thereto.

The Series B financing required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale. The exercise price of the warrants decreased from $12.96 per share to $11.73 per share and the number of shares issuable upon exercise of the warrants increased from 1,097,600 to 1,212,665.

9. FAIR VALUE

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

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

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

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

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

Debt.

Our long term debt is considered a Level 3 liability for which book value approximates fair market value due to the variable interest rate it bears.

Common Stock Warrant ~~Liability~~Liability.

~~Our~~Certain of our issued and outstanding warrants to purchase shares of common stock do not qualify to be treated as equity, and accordingly are recorded as a liability. The Common Stock Warrant Liability represents the fair value of the ~~11.4~~1.2 million warrants issued in February 2012. We are required to record these instruments at fair value at each reporting date and changes are recorded as a non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our Statement of Operations. Management does not believe that this liability will be settled by a use of cash.

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~~Three Months Ended March 31, 2013 and 2012~~

The Common Stock Warrant Liability is considered a Level 3 financial instrument and is valued using a Monte Carlo simulation. This method is well suited to ~~value~~valuing options with non-standard features, such as anti-dilution protection. A Monte Carlo simulation model uses repeated random sampling to simulate significant uncertainty in inputs. Assumptions and inputs used in the valuation of the common stock warrants are broken down into four sections: Static Business Inputs; Static Technical Inputs; Simulated Business ~~Inputs:~~Inputs; and Simulated Technical Inputs.

Static Business Inputs include: our equity value, which was estimated using our stock price of $~~0.40~~4.58 as of March 31, ~~2013~~2014; the amount of the down-round ~~financing,~~financing; the timing of the down-round ~~financing,~~financing; the expected exercise period of ~~3.9~~2.86 years from

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2014 and 2013

the valuation ~~date~~date; and the fact that no other potential fundamental transactions are expected during the term of the common stock warrants.

Static Technical Inputs include: volatility of ~~57.5%~~50% and the risk-free interest rate of ~~0.57%~~0.9% based on the 4three-year U.S. Treasury yield interpolated from the 3 ~~year~~three-year and 5 ~~year~~five-year U.S. Treasury bonds.

Simulated Business Inputs include: the probability of down-round financing, which was estimated to be 25% for simulated equity values below the down-round financing cut-off point.

Simulated Technical Inputs include: our equity value, which in periods 1-10 follows a geometric Brownian motion and is simulated over 10 independent six-month periods; and a down-round financing event that was randomly simulated in an iteration based on the 25% discrete probability of a down-round financing for those iterations where our simulated equity value at the expected timing of down-round financing was below the down-round financing cut-off point.

During the three months ended March 31, ~~2013~~2014, the changes in the fair value of the liability measured using significant unobservable inputs (Level 3) was comprised of the following:


	Dollars in Thousands			Dollars in Thousands
	For the Three Months Ended			For the Three Months Ended
	March 31, 2013			March 31, 2014			March 31, 2013
Beginning balance at January 1, 2013	$	900
Beginning balance at January 1				$	600		$	900
Total gains or losses:
Recognized in earnings	(400		)	(50		)	(400		)
Balance at March 31, 2013	$	500
Balance at March 31				$	550		$	500

Dollars in Thousands
For the Three Months Ended
March 31, 2012
Beginning balance at January 1, 2012 $ —
Additions 3,100
Total gains or losses:
Recognized in earnings —
Balance at March 31, 2012 $ 3,100

The change in unrealized gains or losses of Level 3 liabilities iswas included in earnings and iswas reported in other income (expense) in our Statement of Operations.

10. STOCK OPTIONS

Stock Options.

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



	Number of Options		Weighted-Average Exercise Price
Balance at January 1, 2014	565,028		$	7.19
Granted	199,080		5.53
Forfeited	(18,623	)	4.80
Expired	(545	)	14.28
Balance at March 31, 2014	744,940		$	6.80
Exercisable at March 31, 2014	165,260		$	12.21

During the three months ended March 31, 2014, we granted options to purchase 199,080 shares of our common stock at a weighted-average exercise price of $5.53 per share under our 2006 Equity Incentive Plan (the “Plan”). Options to purchase an aggregate of 25,625 shares of our common stock were granted during the three months ended March 31, 2013.

Stock Appreciation Rights (“SARs”)

The following table summarizes SARs activity under the Plan during the three months ended March 31, 2014:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013

~~10. STOCK OPTIONS~~



	Number of Options	Weighted-Average Exercise Price
Balance at January 1, 2014	138,333	$	4.32
Balance at March 31, 2014	138,333	$	4.32
Exercisable at March 31, 2014	—	$	—

~~The following table summarizes stock option activity during the~~ ~~three~~ ~~months ended~~

All SARs outstanding were issued solely to our executive officers.

As of March 31, ~~2013~~:

Number of
Options

Weighted Average
Exercise Price
Balance at January 1, 2013 4,353,167
$ 1.05
Granted 307,500
0.57
Exercised —
—
Forfeited (40,334 ) (1.16 )
Expired —
—
Balance at March 31, 2013 4,620,333
$ 1.02
Exercisable at March 31, 2013 2,852,310
$ 1.04

~~During the~~ ~~three~~ ~~months ended~~ ~~March 31, 2013, we granted options exercisable~~2014, 138,333 shares subject to ~~purchase~~ ~~307,500~~ ~~shares of common stock at a weighted average~~outstanding SARs were expected to vest. The weighted-average exercise price of ~~$0.57~~ ~~per share under our 2006 Equity Incentive Plan. Options to purchase an~~these options was $4.32 and the aggregate intrinsic value was less than $0.1 million with a remaining weighted-average contractual life of ~~100,000~~ ~~shares of common stock were granted during the~~ ~~three~~ ~~months ended~~ ~~March 31, 2012~~.4.25 years.

11. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Our chief operating decision-maker is our Chief Executive Officer, who regularly evaluates our performance based on net sales and net loss before taxes. The preparation of this segment analysis requires management to make estimates and assumptions around expenses below the gross profit level. While we believe the segment information to be directionally correct, actual results could differ from the estimates and assumptions used in preparing this information.

~~The accounting policies of the segments are the same as the policies discussed in Note 2 – "Summary of Significant Accounting Policies".~~

In the first quarter of 2013, we consolidated our Clinical Laboratories and Pharmacogenomic Services business segments into a single segment and, going forward, it will be referred to as our Laboratory Services segment. We ~~now~~ have two reportable operating segments, Laboratory Services and ~~Diagnostic Tools. Accordingly,~~Genetic Assays and Platforms. These lines of business are complementary with the Biomarker Identification labs driving innovation and leading to kit production in our Genetic Assays and Platforms segment ~~results of the prior period have been reclassified to reflect these changes.~~and new tests in our Patient Testing labs.

Segment information for the three months ended March 31, ~~2013~~2014 and ~~2012~~2013 is as follows:


	Dollars in Thousands									Dollars in Thousands
	2013									Three Months Ended March 31, 2014
	Laboratory Services			Diagnostic Tools			Total			Laboratory Services			Genetic Assays and Platforms			Total
Net Sales	$	4,427		$	2,947		$	7,374		$	3,688		$	2,563		$	6,251
Gross Profit	2,193			1,488			3,681			1,632			862			2,494
Net Loss before Taxes	(3,085		)	(435		)	(3,520		)	(2,984		)	(687		)	(3,671		)
Income Tax Expense	—			66			66
Income Tax Expense (Benefit)										509			(4		)	505
Net Loss	$	(3,085	)	$	(501	)	$	(3,586	)	$	(3,493	)	$	(683	)	$	(4,176	)
Depreciation/Amortization	$	563		$	181		$	744		$	440		$	53		$	493
Interest Expense, net	$	135		$	18		$	153		$	(107	)	$	(75	)	$	(182	)

	March 31, 2013									March 31, 2014
Total Assets	$	30,366		$	11,032		$	41,398		$	22,446		$	8,271		$	30,717

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Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013



	Dollars in Thousands									Dollars in Thousands
	2012									Three Months Ended March 31, 2013
	Laboratory Services			Diagnostic Tools			Total			Laboratory Services			Genetic Assays and Platforms			Total
Net Sales	$	4,001		$	3,205		$	7,206		$	4,427		$	2,947		$	7,374
Gross Profit	1,648			1,456			3,104			2,193			1,062			3,255
Net Income (Loss) before Taxes	(2,087		)	(605		)	(2,692		)
Income Tax Expense (Benefit)	—			4			4
Net Income (Loss)	$	(2,087	)	$	(609	)	$	(2,696	)
Net Loss before Taxes										(3,085		)	(435		)	(3,520		)
Income Tax Expense										—			66			66
Net Loss										$	(3,085	)	$	(501	)	$	(3,586	)
Depreciation/Amortization	$	448		$	65		$	513		$	563		$	181		$	744
Interest Expense, net	$	252		$	21		$	273		$	(135	)	$	(18	)	$	(153	)

	March 31, 2012									March 31, 2013
Total Assets	$	30,595		$	16,589		$	47,184		$	30,366		$	11,032		$	41,398

Net sales for the three months ended March 31, ~~2013~~2014 and ~~2012~~2013 by country were as follows:


	Dollars in Thousands
	Three Months Ended				Dollars in Thousands
	March 31,				Three Months Ended March 31,
	2013		2012		2014		2013
United States	$	5,348	$	4,724	$	4,763	$	5,348
Italy	455		799		385		455
All Other Countries	1,571		1,683		1,103		1,571
Total	$	7,374	$	7,206	$	6,251	$	7,374

Other than the countries specifically identified above, no other country individually accounted for more than 5% of total net sales.

~~More than~~Approximately ~~95%~~99% of our long-lived assets are located within the United States.

12. SUBSEQUENT EVENTS

Events or transactions that occur after the balance sheet date, but before the financial statements are complete, are reviewed to determine if they should be recognized. We have no material subsequent events to disclose.

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

Forward-Looking Information

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

You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons including those described in Part II, Item 1A, “Risk Factors,” of this report and in Part I, Item 1A, ~~"Risk Factors"~~“Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2012,~~2013, which we filed with the Securities and Exchange Commission on March ~~14, 2013.~~27, 2014.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements, related notes and Management’s Discussion &and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2012~~2013, which we filed with the Securities and Exchange Commission on March ~~14, 2013.~~27, 2014. Results for the three months ended March 31, ~~2013~~2014 are not necessarily indicative of results that may be attained in the future.

Overview

We are a global biotechnology company advancing personalized medicine in the detection and treatment of cancer and inherited diseases through our proprietary molecular technologies and clinical and research services. We have two complementary business segments:

Laboratory Services. Our ~~clinical~~ laboratories specialize in genetic testing for cardiology, neurology, mitochondrial disorders and oncology. Our ~~clinical~~Patient Testing laboratories located in New Haven, Connecticut and Omaha, Nebraska are certified under the Clinical Laboratory Improvement Amendment ~~(CLIA)~~or, CLIA, as high complexity labs and our Omaha facility is also accredited by the College of American ~~Pathologists (CAP).~~Pathologists. Our Biomarker Identification laboratory located in Omaha, Nebraska also provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by pharmaceutical companies. Our laboratories employ a variety of genomic testing service technologies, including ICE COLD-PCR technology. ICE COLD-PCR is a proprietary platform technology that can be run in any laboratory with standard PCR technology and that enables detection of multiple unknown mutations from virtually any sample type including tissue biopsies, blood, cell-free DNA, or cfDNA, and circulating tumor cells, ~~(CTCs)~~or CTCs, at levels greater than 1,000-fold higher than standard DNA sequencing techniques.

•

~~Diagnostic Tools. Our proprietary product is the WAVE~~^® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR^®

Genetic Assays and Platforms. Our proprietary product is the WAVE® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute bioinstruments produced by other manufacturers, or OEM Equipment, through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.

~~First Quarter 2013 Overview~~

~~Table of Contents~~

We are advancing personalized medicine in cardiology, oncology, and inherited diseases through our proprietary molecular technologies and world-class clinical research services. Today, we are a global leader in cardiac genetic testing with a family of innovative products, including the C-GAAP test (Clopidogrel Genetic Absorption Activation Panel). We are proud to report that Transgenomic was recently awarded the 2013 Governor's Bioscience Award in April 2013. The Bioscience Award recognizes companies that have made significant contributions to the bioscience industry in Nebraska.

In the first quarter of 2013, we consolidated our Clinical Laboratories and Pharmacogenomic Services business segments into a single segment and, going forward, it will be referred to as our Laboratory Services segment. We continue to anticipate growth in both our Laboratory Services and Diagnostic Tools segments, as we commercialize new technologies and tests we have developed internally, in-licensed, or acquired, and as we expand into other markets and regions worldwide.

In the Laboratory Services unit, ScoliScore™, our newest acquisition, is the first clinically validated, saliva-based multi-gene diagnostic test that identifies patients who will not progress to a severe curvature of the spine, thereby reducing those patients' need for repeated doctor visits, physical examinations and, most importantly, years of exposure to radiation from frequent X-Rays.

The market for ScoliScore is significant, with nearly 100,000 children and adolescents, usually between the ages of 8 and 15, entering the medical system annually with scoliosis. At any one time there are at least 400,000 patients being monitored for the disease until they reach spinal maturity. Only a small percentage, roughly 3%, of these children will progress to severe scoliosis, a severe curvature of the spine that would require surgical intervention, yet all of them will be followed clinically and screened with repeated x-rays throughout their childhood and adolescent development to monitor their condition. The elevated risk and incidence of cancer these children face as a result of these repeated x-rays is well documented. ScoliScore is the only test on the market that can determine whether these patients will not progress to a severe curvature of the spine requiring surgical correction. The ScoliScore test determines a risk profile for each patient based on their unique genetics and extent of curvature when first profiled. Since the vast majority of children will not develop severe scoliosis, the risk profile can then be used by the treating or monitoring physician to direct safer and more cost-effective monitoring, including fewer x-rays. This translates into tremendous cost savings in terms of individual lives and to our healthcare system.

In support of ScoliScore, we have expanded our sales team, are collaborating with key opinion leaders in the field to expand awareness, collate patient data for publications that demonstrate the clinical utility of the test, and are actively working with payers to expand coverage and reimbursement. We are also initiating marketing campaign efforts to reach patients and their families to educate them about the risks from repeated x-rays. We expect ScoliScore will contribute to revenue growth throughout 2013 and beyond.

We also continue to provide increased sales and marketing support behind our proprietary C-GAAP test. C-GAAP is a simple but comprehensive saliva test that more accurately predicts a patient's response to Plavix® (clopidogrel). This innovative test analyzes markers in two important genes to identify patients who are at a genetically increased risk of major adverse cardiovascular events due to diminished effectiveness of Plavix. Clopidogrel is the most widely prescribed antiplatelet drug used worldwide to reduce the risks of death, stroke and heart attack in heart disease patients. Patients with dysfunctional CYP2C19 and ABCB1 genes treated with clopidogrel exhibit a 50% increase in major adverse cardiovascular event rates than do patients with normal CYP2C19 and ABCB1 genetic function. Our C-GAAP is the only assay on the market that includes both genes in the test.

We continue to expand the commercial reach of our cardiology platform through the growth of our FAMILION franchise, which currently includes thirteen tests designed to detect for the vast number of genetic mutations that can cause cardiac disorders. The comprehensive nature of our FAMILION genetic tests demonstrates our commitment to setting the standard for cardiac genetic testing today.

We continue to progress our commercial collaboration with the Medical College of Wisconsin Laboratories, a world-renowned institution with a robust presence in genomics and genetic testing. MCW conducts our proprietary NuclearMitome Test which employs next-generation sequencing technology to identify mutations in 448 genes and, to date, represents the most comprehensive genetic test available for mitochondrial disorders. Mitochondrial disorders are notoriously difficult to diagnose because they affect multiple organ systems, including the liver, the brain and nervous system, kidneys, and cardiovascular system. This collaboration allows us to rapidly expand the commercial use of this innovative test and to commence building out our offerings in whole genome and exome testing.

Other services that we offer in our Laboratory Services business include performing genetic testing involving cancer pathway gene mutation analysis and other associated genomics testing services for a number of pharmaceutical companies: both for pre-clinical drug discovery projects and Phase II and III clinical trials.

Also in the Laboratory Services unit, we continue to advance ICE COLD-PCR, our breakthrough mutation detection technology that enables unmatched sensitivity and complete DNA mutation detection using standard sequencing equipment. The extremely high sensitivity of ICE COLD-PCR enables detection of mutations from virtually any sample type including tissue

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~~biopsies,~~

First Quarter 2014 Overview and Recent highlights

Transgenomic, Inc. is a global biotechnology company advancing personalized medicine in cardiology, oncology, and inherited diseases through state-of-the-art diagnostic technologies, such as its revolutionary ICE COLD-PCR^TM and its unique genetic tests provided through its Patient Testing business. The company also provides specialized clinical and research services to biopharmaceutical companies developing targeted therapies, and sells equipment, reagents and other consumables for applications in molecular testing and cytogenetics. Transgenomic's diagnostic technologies are designed to improve medical diagnoses and patient outcomes.

The Company’s strategy seeks to optimize, through channel partnerships, the commercial potential of our assets aimed at large genetic testing markets. Doing so allows us to focus resources on our areas of strength, including developing and marketing tests for rare genetic disorders in the U.S., where we are a market leader, marketing and selling our instrument lines focused on genetic and cytogenetics analyses, and most importantly, developing biomarkers, genetic tests and companion diagnostics using proprietary technology that is unequaled in the identification and detection of low-level mutations.

During the first quarter, we continued to make good progress in implementing key initiatives to leverage our products, our distinctive technologies and our infrastructure and expertise with the goal of achieving leadership in the rapidly growing field of personalized medicine, by providing innovative genetic tests for cancer and other diseases that improve patient outcomes and reduce costs.

There were a number of positive developments this quarter. The Company achieved a major goal when we were notified that we would be uplisting to the NASDAQ Capital Market. Transgenomic began trading on NASDAQ on May 9, 2014, under the ticker TBIO. The company’s move to a major organized stock exchange is important symbolically, signaling our emergence as a technology-based company, and we expect it to benefit Transgenomic shareholders through the Company’s greater visibility, access to capital, and increased share liquidity.

Our corporate infrastructure was also strengthened during the first quarter when we successfully completed a financing on favorable terms by raising $7.0 million via a convertible preferred stock placement with affiliates of Third Security, LLC, the life sciences investment firm founded by well-known investor R.J. Kirk. This infusion of new money allowed us to pay down our revolving credit line, enabling the company to access cash using this facility when needed. During the quarter, we also implemented a reverse stock split intended to rationalize our capital structure and facilitate our uplisting to the NASDAQ Capital Market.

We recruited an outstanding addition to the Board this quarter - Dr. Michael Luther, who has had a distinguished career as a researcher, manager and senior executive at leading life sciences organizations, including major pharmaceutical companies and top tier research services firms.

As noted, we expect our ICE COLD-PCR technology to play a key role in our personalized medicine strategy. ICE COLD-PCR has transformative potential. It is a technology we believe has unequaled sensitivity and the potential to revolutionize cancer screening, diagnosis, monitoring, and treatment selection since it has the ability to enable safer, less invasive, and more frequent assessments of cancer and its mutations, all through a simple blood draw, thereby substituting “liquid biopsies” for invasive and ~~circulating tumor cells (CTCs).~~ costly physical biopsies. We are actively pursuing a number of activities to develop, protect and commercialize this opportunity.

In February 2014, we announced that the U.S. Patent and Trademark Office issued a new patent related to our licensed ICE COLD-PCR technology. This newly issued patent significantly strengthens our intellectual property portfolio and supports the ongoing development of ICE COLD-PCR. We intend to leverage this proprietary asset in both our Patient Testing business and with our pharmaceutical and biotechnology client companies. The patent protects the underlying technology until 2031.

The broad use of this innovative technology has the potential to revolutionize cancer screening, diagnosis, monitoring, and therapy ~~selection since it has~~selection. It enables the ~~ability to perform safer, less invasive,~~detection of both known and ~~more frequent assessments~~unknown mutant DNA at very high sensitivity and is a key enabling technology for the practical implementation of targeted therapy and personalized medicine. The potential of the technology was highlighted by the hundreds of potential strategic partners, genomic researchers, academic scientists and others who participated in a ~~cancer~~webinar we conducted during the quarter on the ICE COLD PCR technology. We are also completing a review of future diagnostic applications and ~~its mutations, all through a simple blood sample.~~

~~The~~utility of the ICE COLD-PCR technology ~~exclusively licensed~~and products for commercial applications.

The first quarter included a number of other developments emblematic of our new strategy. A key element is working with a variety of partners and collaborators to leverage our assets and market reach, and to enhance our technologies and product offerings. The quarter was bookended by ~~us for DNA sequencing analysis, was developed in~~complementary transactions. We started with a collaboration with Horizon Discovery enabling us

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to further strengthen the ~~Dana-Farber Cancer Institute~~genetic tests and clinical diagnostic kits that are the foundation of our business, through access to their state-of-the-art controls. This collaboration is ~~supported by multiple validation studies confirming reproducible mutation detection up~~also expected to ~~1,000~~provide strategic opportunities that could significantly benefit Transgenomic’s biomarker identification business and our diagnostics kits.

Just after the quarter ended we announced that we would be providing clinical genetic testing services to ~~10,000 times more sensitive than traditional sequencing~~Raptor Pharmaceuticals for a novel agent to treat inherited mitochondrial disorders. This is a good example of our goal of becoming the “Go To” provider for biomarker discovery and ~~PCR techniques. In addition~~genetic testing designed to ~~our ongoing study with The University of Texas MD Anderson Cancer Center evaluating ICE COLD-PCR in several cancer types, in the second half of 2012 we initiated several new collaborations for~~improve clinical ~~validation of this breakthrough platform technology.~~diagnoses and outcomes. We expect ~~that the results~~to build a broad portfolio of ~~the MD Anderson study will be announced later this year. We have also received an NIH STTR grant to study blood testing for pancreatic cancer~~these types of commercial relationships with ~~colleagues at the University~~a variety of ~~Nebraska Medical Center.~~pharmaceutical and biotechnology companies.

We continue to pursue clinical trial projects from several top-tier pharmaceutical companies, and we believe these relationships and project successes will drive growth during 2013 as we begin to realize larger study contracts and opportunities to develop tests that support oncology drug treatment and patient selection. Over the long term, we believe our expertise with ICE COLD-PCR, combined with our expanding number of tests, will further contribute to our pharma partner and clinical trial projects and the advancement of “blood biopsies” for selecting or verifying treatment for cancer patients without the need for an expensive, invasive tissue biopsy.

In the Diagnostic Tools business, our instrument sales continue to translate into incremental revenue from consumables and service contract sales, providing compounded and repeating revenue. In 2012, we achieved CE IVD Mark registration in Europe for the diagnostic use of our proprietary WAVE MCE System and SURVEYOR® Scan KRAS Kit. This kit contains a simple, yet highly sensitive test to identify mutations in the KRAS gene, which are key determinants of the effectiveness of modern cancer drugs. Gaining the CE IVD Mark expands the market reach significantly by allowing product sales in the European Union.

Uncertainties

We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. We have been able to historically finance our operating losses through borrowings or from the issuance of additional equity. At March 31, ~~2013~~2014, we had cash and cash equivalents of $~~7.7~~1.7 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs for at least the next 12 months.

The uncertainty of ~~the~~ current general economic conditions could negatively impact our business in the future. There are many factors that affect the market demand for our products and services that we cannot control. Demand for our ~~Diagnostic Tools~~Genetic Assays and Platforms business is affected by the needs and budgetary resources of research institutions, universities and hospitals. The instrument purchase represents a significant expenditure by these types of customers and often requires a long sales cycle. These customers may not have the funding available to purchase our instruments. Competition and new instruments in the marketplace also may impact our sales. Our Laboratory Services business is dependent upon reimbursement from government and private ~~payers~~payors that continually look for ways to reduce costs, including by unilaterally reducing reimbursement for services such as those that we provide. The government issued new reimbursement codes in 2013, which were set at pricing levels that were generally lower than the levels for identical tests in 2012. Certain private payors also used the issuance of the new codes as an opportunity to unilaterally lower their reimbursement rates. There are no assurances that reimbursements from certain of these providers will remain at levels that will allow us to be profitable.

We have translation risk that occurs when transactions are consummated in a currency other than British Pound Sterling, which is the functional currency of our foreign subsidiary. These transactions, which are most often consummated in Euros, must be translated into British Pound Sterling. In addition, results of operations and the balance sheet of our foreign subsidiary are translated from British Pound Sterling to our reporting currency, which is the U.S. Dollar. As a result, we are subject to exchange rate risk. Fluctuations in foreign exchange rates could impact our business and financial results.

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Results of Operations

Net sales for the three months ended March 31, ~~2013~~2014 ~~increased~~decreased by $~~0.2~~1.1 million, or 2%15%, compared to the same period in ~~2012~~2013. During the three months ended March 31, ~~2013~~2014, net sales from our Laboratory Services segment ~~increased~~decreased by $~~0.4~~0.7 million compared to the same three month period in ~~2012~~2013. Net sales in our ~~Diagnostic Tools~~Genetic Assays and Platforms segment decreased ~~$0.3~~$0.4 million for the three months ended March 31, ~~2013~~2014 compared to the same period in ~~2012~~2013. Our gross profit margin ~~increased~~decreased to ~~50%~~40% for the three months ended March 31, ~~2013~~2014 from ~~43%~~44% for the three months ended March 31, ~~2012~~2013. Loss from operations was $3.5 million for the three months ended March 31, 2014 compared to $3.8 million for the three months ended March 31, 2013 ~~compared to~~ ~~$2.4 million~~ ~~for the~~ ~~three~~ ~~months ended~~ ~~March 31, 2012~~.

Three Months Ended March 31, ~~2013~~2014 and ~~2012~~2013

Net Sales. Net sales for the three months ended March 31, ~~2013~~2014 ~~increased~~decreased by $~~0.2~~1.1 million, or 2%15%, compared to the same period ofin ~~2012~~2013. Net sales performance in each of ~~the~~our segments was as follows:


	Dollars in Thousands									Dollars in Thousands
	Three Months Ended									Three Months Ended
	March 31,				Change					March 31,				Change
	2013		2012		$			%		2014		2013		$			%
Laboratory Services	$	4,427	$	4,001	$	426		11	%	$	3,688	$	4,427	$	(739	)	(17	)%
Diagnostic Tools	2,947		3,205		(258		)	(8	)%
Genetic Assays and Platforms										2,563		2,947		(384		)	(13	)%
Total Net Sales	$	7,374	$	7,206	$	168		2	%	$	6,251	$	7,374	$	(1,123	)	(15	)%

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Laboratory Services net sales ofdecreased $~~4.4 million~~ ~~increased~~ ~~$0.4~~0.7 million, or ~~11%~~ ~~during the three months ended~~ ~~March 31, 2013~~ ~~compared to the same period in~~ ~~2012~~. Laboratory Services net sales increased compared to last year due to higher test volumes, largely reflecting higher sales of our Nuclear Mitome diagnostic test, sales of our recently launched ScoliScore^TM ~~and C-GAAP tests and a modest shift towards higher priced tests.~~

~~Diagnostic Tools net sales of~~ ~~$2.9 million~~ ~~decreased~~ ~~$0.3 million, or~~ 8%17%, during the three months ended March 31, ~~2013~~2014 as compared to the same period in ~~2012, as we sold fewer instruments in the~~ ~~first~~ ~~quarter of~~ 2013 ~~than in the~~ ~~first~~ ~~quarter of~~ ~~2012~~. The ~~decline~~decrease reflects a higher than usual level of sales in ~~instrument sales~~the first quarter of 2013 that resulted from working down a backlog of Nuclear Mitome tests from the previous year. This decrease was partially offset by ~~higher~~increased test volume in our core Laboratory Services business for the three months ended March 31, 2014 as compared to the first quarter of 2013.

Genetic Assays and Platforms net sales were $2.6 million for the three months ended March 31, 2014, which represented a decrease of ~~consumables.~~$0.4 million as compared to the same period in 2013. The decrease in net sales was due to lower instrument sales.

Cost of Goods Sold. Cost of goods sold includes material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Laboratory Services operations.

Gross Profit. Gross profit and gross margins for each of our business segments were as follows:


	Dollars in Thousands								Dollars in Thousands
	Three Months Ended								Three Months Ended
	March 31,				Margin %				March 31,				Margin %
	2013		2012		2013		2012		2014		2013		2014		2013
Laboratory Services	$	2,193	$	1,648	50	%	41	%	$	1,632	$	2,193	44	%	50	%
Diagnostic Tools	1,488		1,456		50	%	45	%
Genetic Assays and Platforms									862		1,062		34	%	36	%
Gross Profit	$	3,681	$	3,104	50	%	43	%	$	2,494	$	3,255	40	%	44	%

Gross profit was $~~3.7~~2.5 million, or ~~50%~~40% of total net sales, during the first quarter of ~~2013~~,2014, compared to $~~3.1~~3.3 million, or ~~43%~~44% of total net sales, during the same period of ~~2012~~2013. During the three months ended March 31, ~~2013~~2014, the gross margin for Laboratory Services was ~~50%~~44% as compared to ~~41%~~50% in the same period of ~~2012~~2013. In ~~2013,~~ the ~~higher margins reflect higher average sales prices, as well as improved margins on~~first quarter of 2014, the lower gross margin largely resulted from lower volumes, related to the Nuclear Mitome ~~tests. Diagnostic Tools~~tests and to our contract lab group. The gross margin ~~increased~~for Genetic Assays and Platforms decreased to ~~50%~~34% for the three months ended March 31, ~~2013~~2014 from ~~45%~~36% in the same period of ~~2012~~2013, due to ~~the mix of~~fewer instruments sold. ~~In 2012, there were more instruments sold to distributors, which carry lower margins.~~

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Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel costs, professional fees, facility costs and ~~facility costs.~~bad debt provisions. Our selling, general and administrative costs ~~increased~~decreased $~~1.7~~1.0 million to $~~6.7~~5.3 million from $~~5.0~~6.3 million during the three month period ended March 31, ~~2013~~2014 as compared to the same period in ~~2012~~2013. ~~We had higher sales costs~~The decrease is due to ~~the increase~~a lower bad debt provision recorded in the ~~size~~first quarter of 2014 as compared to the first quarter of 2013 and lower salaries and employee related costs in our Laboratory Services sales force, resulting from our adoption of our new channel strategy in the second half of 2013 that relies on partners, rather than our in-house sales ~~force~~team, to ~~support C-GAAP and the launch of ScoliScore~~^TM~~. We also had higher bad debt expense during the three months ended~~ ~~March 31, 2013~~.market products that have different customer call points than our core offerings.

Research and Development Expenses. Research and development expenses primarily include personnel costs, intellectual property fees, outside services, collaboration expenses, supplies and facility costs and are expensed in the period in which they are incurred. For the three months ended March 31, ~~2013~~2014 and ~~2012~~2013, these costs totaled $~~0.8~~0.7 million and $~~0.5~~0.8 million, respectively. ~~The increase in research and development costs is due in part to activities related to converting a number of our tests to a more efficient Next Generation Sequencing instrument platform.~~ Research and development expenses totaled ~~10%~~12% and 8%10% of net sales during the three months ended March 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Other Income (Expense). Other expense for each of the three months ended March 31, ~~2013~~2014 and ~~2012~~2013 includes interest expense of $0.2 million ~~and~~ ~~$0.3 million, respectively.~~. In addition, other income includes the revaluation of the common stock warrants, which is due to the change in fair ~~value.~~value of the common stock warrant liability. The income associated with the change in fair value of the warrants is a non-cash item.

Income Tax ~~Expense.~~Expense/(Benefit). Income tax expense for the three months ended March 31, ~~2013~~2014 and ~~2012~~2013 was ~~$0.1~~$0.5 million, and ~~less than~~ $0.1 million, ~~respectively, primarily~~respectively. The income tax expense for the three months ended March 31, 2014 includes $0.5 million of deferred income tax expense as we established a deferred tax liability related to the tax deductibility of our goodwill, which is an indefinite-lived asset. We expect this deferred income ~~earned by our foreign subsidiary.~~tax expense to be approximately $0.2 million annually going forward.

Liquidity and Capital Resources

Our working capital positions at March 31, ~~2013~~2014 and December 31, ~~2012~~2013 were as follows:

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	Dollars in Thousands							Dollars in Thousands
	March 31, 2013		December 31, 2012		Change			March 31, 2014		December 31, 2013		Change
Current assets (including cash and cash equivalents of $7,729 and $4,497, respectively)	$	21,594	$	18,717	$	2,877
Current assets (including cash and cash equivalents of $1,743 and $1,626, respectively)								$	12,680	$	11,835	$	845
Current liabilities	9,494		16,528		(7,034		)	8,046		8,625		(579		)
Working capital	$	12,100	$	2,189	$	9,911		$	4,634	$	3,210	$	1,424

Historically, we have operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. We have been able to finance our operating losses through borrowings or from the issuance of additional equity. At March 31, ~~2013~~2014, we had cash ~~and cash equivalents~~on hand of $~~7.7~~1.7 million. ~~We believe~~On March 3, 2014, we entered into a fourth amendment to the Loan and Security Agreement dated March 13, 2013, entered into among us and affiliates of Third Security, LLC, or the Loan Agreement. The fourth amendment provides that ~~existing sources of liquidity are sufficient~~we will not be required to ~~meet expected cash needs~~make any principal or interest payments under the term loan governed by the Loan Agreement for the period from March 1, 2014 through March 31, 2015. Accordingly, pursuant to the Loan Agreement, as amended by the fourth amendment, the next ~~12 months.~~principal and interest payment under the term loan will be due on April 1, 2015. On ~~January 30, 2013,~~March 5, 2014, we sold and issued ~~16,600,000~~an aggregate of 1,443,297 shares of ~~common stock~~our Series B Convertible Preferred Stock at a price per share of ~~$0.50, as well as five year warrants to purchase up to~~$4.85 for an aggregate ~~of 8,300,000 shares of common stock with an exercise~~purchase price of $0.75 per share. On March 13, 2013, we entered into a loan and security agreement with affiliates of Third Security, LLC for a revolving line of credit with borrowing availability of up to $4.0 million, subject to reduction based on our eligible accounts receivable, and a term loan of $4approximately $7.0 million. ~~Proceeds~~Net proceeds were used to ~~extinguish the debt with PGxHealth~~pay down a revolving credit line, which can be redrawn by us, and for working capital purposes. ~~However, we~~We cannot be certain that we will be able to increase our net sales, further reduce our expenses or raise additional capital. However, we believe that existing sources of liquidity as of March 31, 2014, along with the net proceeds of the March 2014 sale of Series B Convertible Preferred Stock, are sufficient to meet expected cash needs. Accordingly, we ~~may not~~believe we have sufficient ~~sources of~~ liquidity to continue our operations ~~indefinitely.~~for at least the next twelve months.

Please see Note 5 ~~"Debt"~~- “Debt” and Note 6 ~~"Commitments~~- “Commitments and ~~Contingencies"~~Contingencies” to the notes to our accompanying unaudited condensed consolidated financial statements for additional information regarding our outstanding debt and debt servicing obligations.

Analysis of Cash Flows

Three Months EndedMarch 31, ~~2013~~2014 and ~~2012~~2013

Net Change in Cash and Cash Equivalents. Cash and cash equivalents increased by $0.1 million during the three months ended March 31, 2014 compared to a decrease of $3.2 million during the three months ended March 31, 2013 ~~compared to an increase of~~ ~~$14.3 million~~ ~~during the~~ ~~three~~ ~~months ended~~ ~~March 31, 2012~~. During the three months ended March 31, ~~2013~~2014, we used cash of $~~3.3~~3.9 million in operating activities and $~~1.1~~0.1 million in investing activities, which was offset by cash provided by financing activities of $~~7.7~~4.1 million. In the three months ended March 31, ~~2012~~2013, net cash used in operating activities was $~~2.8~~3.3 million, and net cash used in investing activities was $~~0.3~~1.1 million, which was offset by cash provided by financing activities of $~~17.3~~7.7 million.

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Cash Flows Used In Operating Activities. Cash flows used in operating activities totaled $3.9 million during the three months ended March 31, 2014 compared to cash flows used in operating activities of $3.3 million during the three months ended March 31, 2013 ~~compared to cash flows used in operating activities of~~ ~~$2.8 million~~ ~~during the~~ ~~three~~ ~~months ended~~ ~~March 31, 2012~~. The cash flows used in operating activities in the first ~~quarter~~three months of ~~2013 include~~2014 included the net loss of $4.2 million and an increase in accounts receivable of $1.5 million ~~and decrease in accounts payable of~~ ~~$0.7 million~~, offset by non-cash items, including ~~the warrant revaluation of~~ ~~$0.4 million, provision for losses on doubtful accounts of~~ ~~$1.6 million, stock option expense of~~ ~~$0.2 million~~ ~~and depreciation and amortization of~~ ~~$0.7 million. The cash flows used in operating activities in the first quarter of 2012 include the net loss and decrease in accounts payable of~~ ~~$1.1 million, offset by the non-cash items, which include~~ the provision for losses on doubtful accounts of $~~0.5~~0.7 million, stock option expense of $0.3 million and depreciation and amortization of $0.5 million. The cash flows used in operating activities in the first three months of 2013 included the net loss of $3.6 million and an increase in accounts receivable of $1.5 million, offset by non-cash items, including the provision for losses on doubtful accounts of $1.6 million, stock option expense of $0.2 million and depreciation and amortization of $0.7 million.

Cash Flows Used In Investing Activities. Cash flows used in investing activities totaled $~~1.1~~0.1 million during the three months ended March 31, ~~2013~~2014 compared to cash flows used in investing activities of $~~0.3~~1.1 million during the same period of ~~2012~~2013. Cash flows used in investing activities in the first ~~quarter~~three months of ~~2013~~ ~~include payments made in connection with the acquisition of ScoliScore~~^TM ~~assets of~~ ~~$0.8 million~~,2014 included purchases of property and equipment of $~~0.1 million~~ ~~and additions to our patents of~~ ~~$0.1 million~~45,000. Cash flows used in investing activities in the first ~~quarter~~three months of ~~2012~~ ~~include~~2013 included payments made in connection with the acquisition of ScoliScore assets of $0.8 million and purchases of property and equipment ~~of $0.2 million and additions to our patents~~ of $0.1 million.

Cash Flows Provided by Financing Activities. Cash flows provided by financing activities ~~were~~totaled $~~7.7~~4.1 million for the three months ended March 31, ~~2013~~2014. Cash flows provided by financing activities during the three months ended March 31, ~~2013~~2014 included the proceeds from the issuance of ~~16.6 million shares of our common stock. Cash flows used in financing activities were for~~Series B Convertible Preferred Stock, partially offset by net payments on our debt and capital lease obligations. Cash flows provided by financing activities ~~were~~ ~~$17.3 million~~ ~~for~~during the three months ended March 31, ~~2012. Cash provided by financing activities during the three months ended March 31, 2012~~2013 included the proceeds from the issuance of ~~19.0 million shares of~~common stock and net borrowing on our ~~common stock. Cash flows used in financing activities were for~~debt, partially offset by payments on ~~debt and~~our capital lease obligations.

Off-Balance Sheet Arrangements

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At each of March 31, ~~2013~~2014 and December 31, ~~2012~~2013, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations outside the normal course of business as compared to those disclosed in our Annual Report on Form 10-K for the year ended December ~~31,2012.~~31, 2013, filed with the Securities and Exchange Commission on March 27, 2014.

Critical Accounting Policies and Estimates

Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2012~~2013, filed with the Securities and Exchange Commission on March ~~14, 2013.~~27, 2014.

Recently Issued Accounting Pronouncements

Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2012~~2013, filed with the Securities and Exchange Commission on March ~~14, 2013.~~27, 2014. There have been no changes to those accounting pronouncements listed except as noted in Note 2 - ~~Summary~~“Summary of Significant Accounting ~~Policies~~Policies” to the notes to our accompanying unaudited condensed consolidated financial statements contained in this report.

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Impact of Inflation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~Foreign Currency Translation Risk~~

~~Sales of products in foreign countries~~We are mainly completed in either the Euro or the British Pound Sterling. Additionally, the British Pound Sterling is the functional currency of our wholly owned subsidiary, Transgenomic Limited. Results of operations and the balance sheet are translated from the functional currencya smaller reporting company, as defined by Rule 12b-2 of the ~~subsidiary~~Securities Exchange Act of 1934, as amended, and are not required to ~~our reporting currency of~~provide the U.S. Dollar. Results of operations for our foreign subsidiary are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. In addition, we have revaluation risk, which occurs when the transaction is consummated in a currency other than the British Pound Sterling. This transaction must be revalued by Transgenomic Limited, as its functional currency is the British Pound Sterling. The majority of the transactions consummated by Transgenomic Limited are in Euros. As a result, we are subject to exchange rate risk and we do not currently engage in foreign currency hedging activities.

Based on our overall foreign currency exchange rate exposures at March 31, 2013, we believe that a 10% change in foreign currency exchange rates would [not] be expected to have a material effect on our future operating results or cash flows, depending on which foreign currency exchange rates change and depending on the directional change (either a strengthening or weakening against the U.S. Dollar). ~~If our foreign operations grow, our exposure to foreign currency exchange rate risk may become more significant.~~

information required under this item.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Management performed, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the ~~"Exchange Act"~~“Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act ~~are~~is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange ~~Commission's~~Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, ~~2013~~2014, our disclosure controls and procedures were ~~effective.~~effective at the reasonable assurance level.

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended March 31, ~~2013~~2014 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

We are subject to a number of claims of various amounts that arise out of the normal course of our business. In our opinion, the disposition of pending claims will not have a material adverse effect on our financial position, results of operations or cash flows.


Item 1A.	Risk Factors

There have been no material changes in our risk factors from those previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2012~~2013 that was filed with the Securities and Exchange Commission on March ~~14, 2013.~~27, 2014.

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Item 6.	Exhibits


(a)	Exhibits



2.1**†2.1			Asset Purchase Agreement among the Registrant, Scoli Acquisition Sub, Inc. and Axial Biotech, Inc. dated August 27, 2012 (incorporated by reference to Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q filed on November 8, 2012).

3.1			Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q ~~(Registration No. 000-30975)~~ filed on November 14, 2005).

3.2			~~Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) to the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on May 25, 2007)~~

~~3.3~~			Certificate of Designation of Series A Convertible Preferred Stock dated as of December 28, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)

~~3.4~~			Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K ~~(Registration No. 000-30975)~~ filed on May 29, 2012).

~~3.5~~3.3			Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on January 28, 2014).

3.4			Certificate of Amendment of Certificate of Designation of Series A Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.1 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K ~~(Registration No. 000-30975)~~filed on March 6, 2014).

3.5			Certificate of Designation of Series B Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014).

3.6			Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) to the Registrant’s Current Report on Form 8-K filed on May ~~29, 2012)~~25, 2007).

4.1			Form of Certificate of the ~~Registrant's~~Registrant’s Common Stock (incorporated by reference to Exhibit 4 to the ~~Registrant's~~Registrant’s Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).

4.2			Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-111442) filed on December 22, 2003)

~~4.3~~			Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-111442) filed on December 22, 2003)

~~4.4~~			Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-114661) filed on April 21, 2004)

~~4.5~~			Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004 (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-114661) filed on April 21, 2004)

~~4.6~~			Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-3 (Registration No. 333-118970) filed on September 14, 2004)

~~4.7~~			Common Stock Purchase Warrant by and between the Registrant and Oppenheimer & Co., Inc. dated October 27, 2005 (incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed on March 31, 2006)

~~4.8~~			Form of Series A Convertible Preferred Stock Warrant issued to Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.2 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K ~~(Registration No. 000-30975)~~ filed on January 4, 2011).

~~4.9~~4.3			Registration Rights Agreement, dated December 29, 2010, by and among the Registrant, Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.3 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K ~~(Registration No. 000-30975)~~ filed on January 4, 2011).

~~4.10~~4.4			First Amendment to Registration Rights Agreement dated November 8, 2011 (incorporated by reference to Exhibit 4.2 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K filed on November 14, 2011).

~~4.11~~4.5			Secured Promissory Note, issued December 29, 2010 by the Registrant in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.4 to the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)

~~4.12~~			Secured Promissory Note, issued December 29, 2010 by the Registrant in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.5 to the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)

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~~4.13~~			Convertible Promissory Note by and between the Registrant and Third Security Senior Staff 2008 LLC dated December 30, 2011 (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 6, 2012)

~~4.14~~			Convertible Promissory Note by and between the Registrant and Third Security Staff 2010 LLC dated December 30, 2011 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on January 6, 2012)

~~4.15~~			Convertible Promissory Note by and between the Registrant and Third Security Incentive 2010 LLC dated December 30, 2011(incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 6, 2012)

~~4.16~~			Form of Warrant issued by the Registrant to the Third Security Entities on February 7, 2012 (incorporated by reference to Exhibit 10.2 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K filed on February 7, 2012).

~~4.17~~4.6			Form of Warrant issued by the Registrant to the Investors on February 7, 2012 (incorporated by reference to Exhibit 10.3 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K filed on February 7, 2012).

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~~4.18~~

4.7		Form of Registration Rights Agreement entered into by and among the Registrant, the Third Security Entities and the Investors dated February 2, 2012 (incorporated by reference to Exhibit 10.4 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K filed on February 7, 2012).

~~10.1~~4.8		~~Securities Purchase~~Registration Rights Agreement, entered into by and among the Registrant and the Investors, dated January 24, 2013 (incorporated by reference to Exhibit ~~10.1~~10.3 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K/A filed on January 31, 2013).

~~10.2~~4.9		Form of Warrant issued by the Registrant to the Investors on January 30, 2013 (incorporated by reference to Exhibit 10.2 to the ~~Registrant's~~Registrant’s Current Report on Form 8-K/A filed on January 31, 2013).

4.10		Registration Rights Agreement, dated as of March 5, 2014, by and among the Registrant, Third Security Senior Staff 2008 LLC, Third Security Staff 2014 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014).

*10.1		The Registrant’s 2006 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 28, 2014).

10.2		Limited Waiver and Third Amendment to Loan and Security Agreement among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated January 27, 2014 (incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed on March 27, 2014).

10.3		~~Registration Rights Agreement, by and among the Registrant and the Investors, dated January 24, 2013 (incorporated by reference~~ Fourth Amendment to ~~Exhibit 10.3 to the Registrant's Current Report on Form 8-K/A filed on January 31, 2013)~~

~~10.4~~		Forbearance Agreement, dated February 7, 2013, by and between the Registrant and Dogwood Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on February 8, 2013)

~~10.5~~		Loan and Security Agreement among ~~the Registrant,~~Transgenomic, Inc., Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated March ~~13, 2013~~3, 2014 (incorporated by reference to Exhibit ~~10.39~~10.1 to the ~~Registrant's Annual~~Registrant’s Current Report on Form ~~10-K~~8-K filed on March ~~14, 2013)~~6, 2014).

~~10.6#~~10.4		~~Amendment No. 1 to Employment~~ Series B Convertible Preferred Stock Purchase Agreement, ~~Extension,~~ dated ~~February 27, 2013,~~as of March 5, 2014, by and ~~between~~among Transgenomic, Inc. and Third Security Senior Staff 2008 LLC, Third Security Staff 2014 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 10.2 to the ~~Registrant and Craig J. Tuttle~~

~~10.7#~~	Registrant’s Current Report on Form 8-K filed on March 6, 2014).	~~Amendment No. 1 to Employment Agreement, dated February 27, 2013, by and between the Registrant and Mark P. Colonnese~~

31.1		Certification of ~~Craig J. Tuttle,~~Paul Kinnon, President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended

31.2		Certification of Mark P. Colonnese, Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended

32.1		Certification of ~~Craig J. Tuttle,~~Paul Kinnon, President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended

32.2		Certification of Mark P. Colonnese, Executive Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended

101.INS		XBRL Instance Document *

101.SCH		XBRL Taxonomy Extension Schema Document *

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document *

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *

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** †			Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this agreement have been omitted. The Registrant agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
*			Denotes exhibit that constitutes a management contract, or compensatory plan or arrangement.

#			~~Indicates management contract or compensatory plan.~~

*			Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under these sections.

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SIGNATURES

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




		TRANSGENOMIC, INC.

Date:	May ~~9, 2013~~15, 2014	By:	/S/ ~~CRAIG J. TUTTLE~~PAUL KINNON
			~~Craig J. Tuttle~~Paul Kinnon President and Chief Executive Officer

Date:	May 15, 2014	By:	/S/ MARK P. COLONNESE
			Mark P. Colonnese Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

3029



	Number of Options		Weighted Average Exercise Price
Balance at January 1, 2013	4,353,167		$	1.05
Granted	307,500		0.57
Exercised	—		—
Forfeited	(40,334	)	(1.16		)
Expired	—		—
Balance at March 31, 2013	4,620,333		$	1.02
Exercisable at March 31, 2013	2,852,310		$	1.04