UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________

FORM 10-Q

_______________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~September 30, 2014~~March 31, 2015



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		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	o
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	x

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 ~~October 31, 2014,~~April 21, 2015, the number of shares of common stock outstanding was ~~8,084,471.~~12,161,156.

Table of Contents

TRANSGENOMIC, INC.

INDEX




		Page No.

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of ~~September 30, 2014~~March 31, 2015 (Unaudited) and December 31, ~~2013~~2014 (Audited)	3

	Unaudited Condensed Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~	4

	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2014~~March 31, 2015	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~	7

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2928

Item 4.	Controls and Procedures	2928

PART II.	OTHER INFORMATION	3130

Item 1.	Legal Proceedings	3130

Item 1A.	Risk Factors	3130

Item 6.	Exhibits	3130

Signatures		3332

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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)


	September 30,						March 31,
	2014			December 31,			2015			December 31,
	(unaudited)			2013			(unaudited)			2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	880		$	1,626		$	5,379		$	1,609
Accounts receivable, net	7,506			5,314			8,345			7,627
Inventories, net	3,590			3,957			2,984			3,005
Other current assets	1,714			938			1,524			1,191
Total current assets	13,690			11,835			18,232			13,432
PROPERTY AND EQUIPMENT:
Equipment	11,372			11,255			11,311			11,369
Furniture, fixtures & leasehold improvements	3,874			3,874			3,875			3,877
	15,246			15,129			15,186			15,246
Less: accumulated depreciation	(13,594		)	(13,126		)	(13,891		)	(13,764		)
	1,652			2,003			1,295			1,482
OTHER ASSETS:
Goodwill	6,918			6,918			6,918			6,918
Intangibles, net	8,312			9,195			7,854			7,964
Other assets	276			327			192			210
	$	30,848		$	30,278		$	34,491		$	30,006
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt	$	1,383		$	242		$	523		$	462
Accounts payable	3,379			2,860			5,008			4,871
Accrued compensation	1,075			1,330			980			1,129
Accrued expenses	1,960			2,037			2,368			2,550
Deferred revenue	945			1,088			1,121			1,035
Other liabilities	1,068			1,068			1,067			1,068
Total current liabilities	9,810			8,625			11,067			11,115
LONG TERM LIABILITIES:
Long-term debt, less current maturities	5,611			6,318			7,925			7,375
Common stock warrant liability	400			600			290			145
Accrued preferred stock dividend	2,825			1,986			3,461			3,130
Other long-term liabilities	1,969			1,303			1,703			1,688
Total liabilities	20,615			18,832			24,446			23,453
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
Preferred stock, $0.01 par value, 15,000,000 shares authorized, 4,029,502 shares issued and outstanding							40			40
Common stock, $0.01 par value, 150,000,000 shares authorized, 11,857,078 and 8,084,471 shares issued and outstanding, respectively (1)							119			81
Additional paid-in capital (1)	187,231			179,459			196,540			189,680
Accumulated other comprehensive income	379			390			306			340
Accumulated deficit	(177,490		)	(168,502		)	(186,960		)	(183,588		)
Total stockholders’ equity	10,233			11,446			10,045			6,553
	$	30,848		$	30,278		$	34,491		$	30,006

(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						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2014			2013			2014			2013			2015			2014
NET SALES	$	6,372		$	6,646		$	19,387		$	21,326		$	6,513		$	6,251
COST OF GOODS SOLD:	4,157			4,196			12,285			12,648			3,539			3,757
Gross profit	2,215			2,450			7,102			8,678			2,974			2,494
OPERATING EXPENSES:
Selling, general and administrative	5,581			7,226			16,432			18,519			5,054			5,288
Research and development	641			630			2,171			2,307			567			745
	6,222			7,856			18,603			20,826			5,621			6,033
LOSS FROM OPERATIONS	(4,007		)	(5,406		)	(11,501		)	(12,148		)	(2,647		)	(3,539		)
OTHER INCOME (EXPENSE):
Interest expense, net	(162		)	(155		)	(490		)	(459		)	(190		)	(182		)
Warrant revaluation	(50		)	—			200			600			(145		)	50
Gain on sale of product line	4,114			—			4,114			—
Other, net	(1		)	1			(1		)	54			(13		)	—
	3,901			(154		)	3,823			195			(348		)	(132		)
LOSS BEFORE INCOME TAXES	(106		)	(5,560		)	(7,678		)	(11,953		)	(2,995		)	(3,671		)
INCOME TAX (BENEFIT) EXPENSE	(26		)	(8		)	471			52
INCOME TAX EXPENSE													46			505
NET LOSS	$	(80	)	$	(5,552	)	$	(8,149	)	$	(12,005	)	$	(3,041	)	$	(4,176	)
PREFERRED STOCK DIVIDENDS	(304		)	(181		)	(839		)	(544		)	(331		)	(230		)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(384	)	$	(5,733	)	$	(8,988	)	$	(12,549	)	$	(3,372	)	$	(4,406	)
BASIC AND DILUTED LOSS PER COMMON SHARE (1)	$	(0.05	)	$	(0.78	)	$	(1.22	)	$	(1.73	)	$	(0.36	)	$	(0.60	)
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES OF COMMON STOCK OUTSTANDING (1)	7,353,695			7,353,810			7,353,695			7,237,266			9,392,851			7,353,695

(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 September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2014			2013			2014			2013			2015			2014
Net Loss	$	(80	)	$	(5,552	)	$	(8,149	)	$	(12,005	)	$	(3,041	)	$	(4,176	)
Other comprehensive income (loss) - foreign currency translation adjustment	(45		)	104			(11		)	(69		)	(34		)	12
Comprehensive Loss	$	(125	)	$	(5,448	)	$	(8,160	)	$	(12,074	)	$	(3,075	)	$	(4,164	)

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

~~Nine~~Three Months Ended
~~September 30, 2014~~March 31, 2015

(Dollars in thousands, except per share data)


	Preferred Stock			Common Stock (1)															Preferred Stock			Common Stock (1)
	Outstanding Shares	Par Value		Outstanding Shares	Par Value			Additional Paid-in Capital (1)		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	5,970,478	$	64		$	171,538	$	(151,789	)	$	435		$	20,274
Balance, January 1, 2014																			2,586,205	$	26	7,353,695	$	73	$	179,459	$	(168,502	)	$	390		$	11,446
Net loss	—	—		—	—			—		(15,987		)	—			(15,987		)	—	—		—	—		—		(13,942		)	—			(13,942		)
Foreign currency translation adjustment, net of tax	—	—		—	—			—		—			(45		)	(45		)
Foreign currency translation adjustment																			—	—		—	—		—		—			(50		)	(50		)
Non-cash stock-based compensation																			—	—		—	—		977		—			—			977
Private placement, net																			—	—		730,776	8		2,353		—			—			2,361
Preferred stock agreement																			1,443,297	14		—	—		6,891		—			—			6,905
Dividends on preferred stock																			—	—		—	—		—		(1,144		)	—			(1,144		)
Balance, December 31, 2014																			4,029,502	$	40	8,084,471	$	81	$	189,680	$	(183,588	)	$	340		$	6,553
Net loss																			—	—		—	—		—		(3,041		)	—			(3,041		)
Foreign currency translation adjustment																			—	—		—	—		—		—			(34		)	(34		)
Stock-based compensation	—	—		—	—			360		—			—			360			—	—		—	—		134		—			—			134
Private placement, net	—	—		1,383,217	14			7,556		—			—			7,570			—	—		3,573,899	36		6,353		—			—			6,389
Other	—	—		—	(5		)	5		—			—			—
Conversion of convertible promissory note																			—	—		198,708	2		373		—			—			375
Dividends on preferred stock	—	—		—	—			—		(726		)	—			(726		)	—	—		—	—		—		(331		)	—			(331		)
Balance, December 31, 2013	2,586,205	$	26	7,353,695	$	73		$	179,459	$	(168,502	)	$	390		$	11,446
Net loss	—	—		—	—			—		(8,149		)	—			(8,149		)
Foreign currency translation adjustment, net of tax	—	—		—	—			—		—			(11		)	(11		)
Stock-based compensation	—	—		—	—			881		—			—			881
Preferred stock agreement	1,443,297	14		—	—			6,891		—			—			6,905
Dividends on preferred stock	—	—		—	—			—		(839		)	—			(839		)
Balance, September 30, 2014	4,029,502	$	40	7,353,695	$	73		$	187,231	$	(177,490	)	$	379		$	10,233
Balance, March 31, 2015																			4,029,502	$	40	11,857,078	$	119	$	196,540	$	(186,960	)	$	306		$	10,045

(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)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2014			2013			2015			2014
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss	$	(8,149	)	$	(12,005	)	$	(3,041	)	$	(4,176	)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization	1,570			2,102			553			493
Stock-based compensation	997			168			114			331
Provision for losses on doubtful accounts	2,652			5,205			988			673
Provision for losses on inventory obsolescence	61			19			—			55
Warrant revaluation	(200		)	(600		)	145			(50		)
Loss on sale of fixed assets	—			9			14			—
Gain on foreign currency settlement	—			(62		)
Deferred interest	236			—			60			—
Deferred tax provision	590			—			41			509
Gain on sale of product line	(4,114		)	—
Changes in operating assets and liabilities:
Accounts receivable	(4,858		)	(1,539		)	(1,734		)	(1,542		)
Inventories	187			589			(28		)	(149		)
Other current assets	(281		)	(268		)	(591		)	263
Accounts payable	523			(145		)	144			(203		)
Accrued expenses and other liabilities	(423		)	195			(178		)	(70		)
Net cash flows used in operating activities	(11,209		)	(6,332		)	(3,513		)	(3,866		)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment	(121		)	(510		)	(10		)	(45		)
Acquisition	—			(849		)
Proceeds from sale of product line	3,650			—
Other assets	(56		)	(238		)	10			(48		)
Net cash flows provided by (used in) investing activities	3,473			(1,597		)	—			(93		)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Principal payments on capital lease obligations	(113		)	(264		)	(19		)	(57		)
Issuance of preferred stock, net	6,906			—			—			6,970
Issuance of common stock, net	—			7,570			6,389			—
Payment of deferred financing costs	—			(241		)
Proceeds from borrowings	6,440			6,560			923			1,400
Principal payment on note payable	(6,242		)	(6,171		)	—			(4,242		)
Net cash flows provided by financing activities	6,991			7,454			7,293			4,071
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH	(1		)	(6		)	(10		)	5
NET CHANGE IN CASH AND CASH EQUIVALENTS	(746		)	(481		)	3,770			117
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	1,626			4,497			1,609			1,626
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	880		$	4,016		$	5,379		$	1,743
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	181		$	615		$	67		$	157
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Dividends accrued on preferred stock	$	839		$	544		$	331		$	230
Preferred stock revaluation	(200		)	(600		)

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~

1. BUSINESS DESCRIPTION

Business Description.

Transgenomic, Inc. (“we”, “us”, “our”, the “Company” or “Transgenomic”) is a global biotechnology company advancing personalized medicine infor the detection and treatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. ~~Our~~A key goal is to bring our Multiplexed ICE COLD-PCR (“MX-ICP”) product to the clinical market rapidly through strategic licensing agreements, enabling the use of blood and other bodily fluids for more effective and patient-friendly diagnosis, monitoring and treatment of cancer.

MX-ICP is a simple, proprietary technology that amplifies the ability to detect genetic mutations by 100 - 400 fold. This technology has been validated internally on all currently available sequencing platforms, including Sanger, Next Gen Sequencing and Digital PCR. By enhancing the level of detection of genetic mutations and suppressing the normal, “wild-type” DNA, several benefits are provided. It is generally understood that most current technologies are unable to consistently identify mutations that occur in less than approximately 5% of a sample. However, many mutations found at much lower levels, even down to 0.01%, are known to be clinically relevant and can have significant consequences to a patient: both in terms of how they will respond to a given drug or treatment and how a given tumor is likely to change over time. More importantly, in our view, significantly improving the level of detection while using blood, saliva and even urine as a source for DNA, rather than depending on painful, expensive and potentially dangerous tumor biopsies, is an important advancement in patient care with respect to cancer detection, treatment and monitoring of the disease and can result in significant cost savings for the healthcare system by replacing invasive procedures with the simple collection of blood or other bodily fluid. By broadening the types of samples that can be used for testing and allowing all sequencing platforms to provide improved identification of low level mutations, MX-ICP has the potential to make testing much more patient friendly, enable genetic monitoring of disease progression and more effectively guide treatment protocols, and reduce the overall cost of diagnosis and monitoring while also improving patient outcomes.

Currently, our operations are organized and reviewed by management along ~~our~~its major product lines and presented in the following two ~~complementary~~ business ~~segments:~~segments;

Laboratory Services. Our laboratories specialize in genetic testing for cardiology, neurology and mitochondrial disorders, and for oncology. Our Patient Testing laboratories located in New Haven, Connecticut and Omaha, Nebraska are certified under the Clinical Laboratory Improvement Amendment (“CLIA”) as high complexity ~~labs~~laboratories and our Omaha facility is ~~also~~ accredited by the College of American 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 and biotechnology companies. Our laboratories employ a variety of genomic testing service technologies, including ~~ICE COLD-PCR~~our new, high performance MX-ICP technology. ICE COLD-PCR is a proprietary ultra-high sensitivity platform technology ~~that~~with breakthrough potential to enable wide adoption of personalized, precision medicine in cancer and other diseases. It can be run in any laboratory ~~with~~that contains standard PCR ~~technology and that~~systems. MX-ICP enables detection of multiple known and unknown mutations from virtually any sample type, including tissue biopsies, blood, urine, saliva, cell-free DNA (“cfDNA”) and circulating tumor cells (“CTCs”) at levels greater than 1,000-fold higher than standard DNA sequencing techniques. It is easy to implement and use within existing workflows.

Genetic Assays and Platforms. Our proprietary product in this business segment is the WAVE® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute ~~bioinstruments~~bio-instruments 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.~~bio-instruments. 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 a range of chromatography columns.

Going Concern

The condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. The Company has incurred substantial operating losses and has used cash in its operating

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2015 and 2014

activities for the past few years. As of March 31, 2015, the Company had working capital of approximately $7.2 million. The Company’s ability to continue as a going concern is dependent upon a combination of generating additional revenue, improving cash collections, potentially selling underutilized assets and, if necessary, raising necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that the Company will be able to continue as a going concern. These condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern. The Company cannot be certain that additional financing will be available on acceptable terms, or at all, and its failure to raise capital when needed could limit its ability to continue its operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

The condensed consolidated balance sheet as of December 31, ~~2013~~2014 was derived from our audited balance sheet as of that date. The accompanying condensed consolidated financial statements as of and for the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014 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, ~~2013~~2014 contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on ~~March 27, 2014.~~April 15, 2015. The results of operations for the interim periods presented are not necessarily indicative of the results for fiscal year ~~2014.~~2015.

Following approval of our stockholders, 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 condensed consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split.

Principles of Consolidation.

The condensed consolidated financial statements include the accounts of Transgenomic, Inc. and 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 and Nine Months Ended September 30, 2014 and 2013~~

Certain risks and uncertainties are inherent in our day-to-day operations and in the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the 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 management. Actual results could differ from the estimates and assumptions used in preparing these condensed consolidated financial statements.

~~Reclassifications.~~

Certain prior period amounts of selling, general and administrative expenses have been reclassified to cost of goods sold in order to conform to the current 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 109 - “Fair Value” 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.

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2015 and 2014

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 ~~September 30, 2014~~March 31, 2015.

Accounts Receivable.

The following is a summary of activity for the allowance for doubtful accounts during the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014:

Dollars in Thousands

Beginning
Balance
Additions Deductions
Ending
Balance
Three Months Ended September 30, 2014 $ 4,041
$ 1,129
$ (400 ) $ 4,770
Three Months Ended September 30, 2013 $ 2,362
$ 2,769
$ (1,086 ) $ 4,045
Nine Months Ended September 30, 2014 $ 3,838
$ 2,652
$ (1,720 ) $ 4,770
Nine Months Ended September 30, 2013 $ 2,171
$ 4,966
$ (3,092 ) $ 4,045



	Dollars in Thousands
	Beginning Balance		Additions		Deductions			Ending Balance
Three Months Ended March 31, 2015	$	7,947	$	1,532	$	(286	)	$	9,193
Three Months Ended March 31, 2014	$	3,838	$	673	$	(971	)	$	3,540

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. The estimate for contractual allowances is based on contractual terms or historical reimbursement rates and is recorded when revenue is recorded. 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 payment history.~~payor receivables and considering a payor’s financial condition, credit history, reimbursement rates and current economic conditions. Accounts receivable are written off when deemed uncollectible and after all collection efforts have been exhausted. ~~During the nine months ended September 30, 2014, in accordance with our stated policy, we wrote-off approximately~~ ~~$1.7 million~~Recoveries of accounts receivable ~~related to services rendered~~previously written off are recorded as a reduction in ~~prior year periods, determined to be uncollectible.~~bad debt expense when received.

Inventories.

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~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

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

~~Three and Nine Months Ended September 30, 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.

The following is a summary of activity for the allowance for obsolete inventory during the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014:

Dollars in Thousands

Beginning
Balance
Additions Deductions
Ending
Balance
Three Months Ended September 30, 2014 $ 843
$ 6
$ (211 ) $ 638
Three Months Ended September 30, 2013 $ 593
$ 19
$ (3 ) $ 609
Nine Months Ended September 30, 2014 $ 799
$ 61
$ (222 ) $ 638
Nine Months Ended September 30, 2013 $ 616
$ 19
$ (26 ) $ 609



	Dollars in Thousands
	Beginning Balance		Additions		Deductions			Ending Balance
Three Months Ended March 31, 2015	$	628	$	—	$	(27	)	$	601
Three Months Ended March 31, 2014	$	799	$	55	$	(5	)	$	849

The three and nine month periods ended September 30, 2014 each include a deduction of $0.2 million related to inventory that was sold as part of the sale of our Surveyor Kits product line on July 1, 2014 (See Note 3 - “Sale of Product Line” for additional information). 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 using 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 $0.1 million ~~and $0.2 million~~ for each of the three months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014~~, respectively.~~. Included in depreciation expense for each of the three months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014 was $0.1 million related to equipment acquired under capital leases. ~~Depreciation expense related to property~~

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2015 and ~~equipment was $0.4 million and $0.5 million for the nine months ended~~ ~~September 30,~~ 2014 ~~and~~ ~~2013, respectively. Included in depreciation expense for each of the nine months ended~~ ~~September 30, 2014~~ ~~and~~ ~~2013~~ ~~was $0.2 million related to equipment acquired under capital leases.~~

Goodwill.

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 ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 that would require an impairment analysis prior to our scheduled review.

Stock-Based Compensation.

All stock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have 10-year contractual terms. Unvested ~~options~~awards as of ~~September 30, 2014~~March 31, 2015 had vesting periods of one or three years from the date of grant. None of the ~~stock options~~awards outstanding at ~~September 30, 2014~~March 31, 2015 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. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed over the service period of the awards.

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~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

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

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

During the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 and ~~2013,~~2014, we recorded compensation expense of ~~$1.0~~$0.1 million and ~~$0.2~~$0.3 million, respectively, within selling, general and administrative expense. As of ~~September 30, 2014~~March 31, 2015, the unrecognized compensation expense related to unvested stock awards ~~net of estimated forfeitures,~~ was $~~1.0~~0.5 million, which is expected to be recognized over a weighted-average period of ~~1.4~~1.3 years.

We granted ~~23,250~~12,350 stock options during the quarter ended ~~September 30, 2014~~March 31, 2015. The fair value of the stock options granted was estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates of ~~1.66%~~1.61% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of ~~4.42~~4.12 years, based on expected exercise activity behavior; and volatility of ~~82%~~86% based on the historical volatility of our common stock over a time that is consistent with the expected life of the option.

Included in the stock awards outstanding as of ~~September 30, 2014~~March 31, 2015 were stock appreciation rights ~~with respect~~(“SARs”)of 98,333. The SARs grants were issued solely to ~~83,333~~executive officers and ~~55,000 shares of common stock granted to our Chief Executive Officer and former Chief Financial Officer, respectively. These~~these rights will vest over three years from the date of ~~grant 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.~~grant.

Net Sales Recognition.

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

Persuasive evidence of an arrangement exists;

Delivery has occurred or services have been rendered;

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

Collectability is reasonably assured.

For our Laboratory Services segment, net sales from Patient Testing laboratories are recognized on an individual test basis and ~~take~~takes place when the test report is completed, reviewed and sent to the client, less the reserve for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Patient Testing services. Adjustments to the allowances, based on actual receipts from third party payors, are reflected in the estimated contractual allowance applied prospectively. In our Biomarker Identification laboratory, we perform pharmacogenomics research services on a project-by project-basis. When we receive payment in advance, we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At each of ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014, deferred net sales associated with pharmacogenomics research projects included in the balance sheet in deferred revenue was $~~0.2~~0.3 million.

Net sales of products in our 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 cover specific time periods, and net sales associated with these contracts are deferred and recognized ratably over the service period. At ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014, deferred net revenue associated with our service contracts was $~~0.7~~0.9 million and ~~$0.9~~$0.7 million, respectively, and was included in the balance sheet in deferred revenue.

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2015 and 2014

Common Stock Warrants.

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”). 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 109 - “Fair Value” for additional information.

Translation of Foreign Currency.

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 loss of ~~$0.01 million~~thirty-four thousand dollars was reported as other comprehensive loss on the accompanying unaudited

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~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

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

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

condensed consolidated statement of comprehensive loss for the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015. A cumulative translation ~~loss~~gain of ~~$0.1 million~~twelve thousand dollars was reported as accumulated other comprehensive income for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014. 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 ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 and less than $0.1 million as foreign currency transaction ~~income~~expense in the determination of net loss for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014.

Loss Per Share.

Basic loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted loss per share includes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to ~~5,524,030~~8,248,953 and ~~3,727,541~~5,523,975 shares of our common stock have been excluded from the computation of diluted loss per share at ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014, respectively. ~~The options, warrants and conversion rights that were exercisable during the three and nine months ended September 30, 2014 and~~ ~~2013~~These were not included in the computation of diluted loss per share because the effect would be anti-dilutive due to the net loss.

Recent Accounting Pronouncements.

In ~~April~~May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for reporting a discontinued operation. Under this standard, a disposal of part of an organization that 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 for disposals (or classifications as held for sale) that have not been reported previously. When adopted, we do not expect that this guidance will have a material impact on our financial condition, results of operations or cash flows.

~~In May 2014, the FASB issued ASU~~ 2014-09, Revenue from Contracts with Customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer. ~~This~~ ASU 2014-09 will replace most existing revenue recognition guidance in generally accepted accounting principles in the U.S. when it becomes effective on January 1, 2017. Early application is not permitted, but the standard permits the use of either the retrospective or cumulative effect transition method. We have not selected a transition method and are currently evaluating the impact this guidance will have on our financial condition, results of operations and cash flows.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect to early adopt this guidance and do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, rather than as a deferred charge asset. ASU No. 2015-03 is effective for us January 1, 2016. ASU 2015-03 is not expected to have a material impact on our condition, results of operations or cash flows.

3. ~~SALE OF PRODUCT LINE~~INVENTORIES

On July 1, 2014, we entered into a Surveyor Kit Patent, Technology, and Inventory Purchase Agreement (the “Purchase Agreement”) with Integrated DNA Technologies, Inc. (“IDT”). Pursuant to the Purchase Agreement, on July 1, 2014, we transferred and sold to IDT allInventories (net of our right, title and interest in and to our Surveyor Kits product line and related technology, including, without limitation, all patents, patent applications, licenses, technology, know-how and trademarks relating to the Surveyor Kits product line technology and our inventory of Surveyor products (collectively, the “Surveyor Technology”).

~~In consideration~~allowance for ~~the purchase~~obsolescence) consisted of the Surveyor Technology, IDT paid us an initial payment of $3.65 million. IDT will pay us an additional amount equal to an aggregate of $600,000 in four equal installments, the first of which was required to be made by, and was received on, October 1, 2014, and the last of which must be made by July 1, 2015. Additionally, if net sales of the Surveyor Kits by IDT exceed a certain threshold during the period beginning on October 1, 2014 and ending on September 30, 2015, IDT will be obligated to pay us an additional earn-out payment equal to a percentage of the net sales exceeding the threshold that is in the middle double digits.following:

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~

Pursuant to the Purchase Agreement, IDT granted us a worldwide, irrevocable, exclusive, fully paid-up, royalty-free, transferable right and license to the Surveyor Technology for clinical uses, including, without limitation, the provision of diagnostic and pharmaceutical services and any other clinical uses in connection with our Laboratory Services segment.

~~In the quarter ended September 30, 2014, we recorded a gain on the sale of the Surveyor Technology of approximately $4.1 million, based on the net proceeds in excess of the total divested net assets.~~

~~4. INVENTORIES~~

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


	Dollars in Thousands						Dollars in Thousands
	September 30, 2014			December 31, 2013			March 31, 2015			December 31, 2014
Finished goods	$	2,555		$	2,978		$	2,108		$	2,139
Raw materials and work in process	1,384			1,567			1,263			1,302
Demonstration inventory	289			211			214			192
	$	4,228		$	4,756		$	3,585		$	3,633
Less allowance for obsolescence	(638		)	(799		)	(601		)	(628		)
Total	$	3,590		$	3,957		$	2,984		$	3,005

5.4. INTANGIBLES AND OTHER ASSETS

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



	Dollars in Thousands
	March 31, 2015						December 31, 2014
	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Intangibles—technology	$	9,009	$	4,201	$	4,808	$	9,009	$	3,995	$	5,014
Intangibles—assay royalties	1,434		870		564		1,434		819		615
Intangibles—third party payor relationships	367		104		263		367		98		269
Intangibles—tradenames and trademarks	824		380		444		824		351		473
Intangibles—customer relationships	652		109		543		652		98		554
Intangibles—covenants not to compete	184		153		31		184		138		46
Patents	1,188		345		843		1,198		385		813
Intellectual property	466		108		358		266		86		180
	$	14,124	$	6,270	$	7,854	$	13,934	$	5,970	$	7,964

Dollars in Thousands
September 30, 2014 December 31, 2013
Cost
Accumulated
Amortization

Net Book
Value
Cost
Accumulated
Amortization

Net Book
Value
Intangibles—technology $ 9,009
$ 3,790
$ 5,219
$ 9,009
$ 3,175
$ 5,834
Intangibles—assay royalties 1,434
768
666
1,434
614
820
Intangibles—third party payor relationships 367
92
275
367
73
294
Intangibles—tradenames and trademarks 824
321
503
824
233
591
Intangibles—customer relationships 652
87
565
652
54
598
Intangibles—covenants not to compete 184
123
61
184
77
107
Patents 1,209
384
825
1,153
336
817
Intellectual property 266
68
198
170
36
134
$ 13,945
$ 5,633
$ 8,312
$ 13,793
$ 4,598
$ 9,195

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~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

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

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




	Estimated Useful Life
Technology	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 ~~$0.3~~$0.4 million and ~~$0.5~~$0.3 million during the three months ended ~~September 30,~~March 31, 2015 and 2014, ~~and~~ ~~2013, respectively. Amortization expense for intangible assets was $1.0 million and $1.4 million during the nine months ended September 30, 2014 and 2013,~~ respectively. Amortization expense for intangible assets is expected to be $1.4 million, $1.4 million, ~~$1.3~~$1.4 million, ~~$1.3~~$1.1 million and ~~$1.0~~$0.9 million for the years ending December 31, ~~2014,~~ 2015, 2016, 2017, 2018 and ~~2018,~~2019, respectively.

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 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 September 30, 2014.

~~6. DEBT~~

Dollars in Thousands
September 30, 2014 December 31, 2013
Revolving Line of Credit⁽¹⁾
$ 3,000
$ 2,560
Term Loan⁽²⁾
3,994
4,000
Total debt, including short-term debt 6,994
6,560
Current maturities of long-term debt (1,383 ) (242 )
Long-term debt, net of current maturities $ 5,611
$ 6,318

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” and, together with the Revolving Line, the “Loan Agreement”) of~~ ~~$4.0 million~~. 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 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 modified 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.

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~

5. DEBT

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. The interest on the debt that is being deferred, and not paid, is being capitalized as part of the Term Loan. As of September 30, 2014, the amount of interest that has been capitalized is $0.2 million.

On October 22, 2014, we entered into a fifth amendment to the Loan Agreement (the “Fifth Amendment”). Pursuant to the Fifth Amendment, the parties amended certain provisions of the Loan Agreement, including reducing the minimum liquidity and revenue covenants under the Loan Agreement. The Fifth Amendment also reduced the aggregate amount that we may borrow under the Revolving Line from $4.0 million to $3.0 million. See Note 13 - “Subsequent Events” for additional information.



	Dollars in Thousands
	March 31, 2015			December 31, 2014
Revolving Line of Credit⁽¹⁾	$	3,000		$	3,000
Term Loan⁽²⁾	4,148			4,087
Convertible Promissory Notes ⁽³⁾	1,300			750
Total debt	8,448			7,837
Current portion of long-term debt	(523		)	(462		)
Long-term debt, net of current maturities	$	7,925		$	7,375

(1)

Revolving Line of Credit. Amounts advanced under the Revolving Line initially bore 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 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 annum is payable quarterly on the unused portion of the Revolving Line. The Revolving Line matures on September 1, 2016.

(2)

Term Loan. We received $4.0 million under the Term Loan on the Effective Date. Pursuant to the terms of the Loan Agreement, as amended by the ~~Fourth~~Sixth Amendment (as defined in “-Revolving Line and Term Loan” below), we ~~are required~~made a principal payment of approximately $149,000 on April 1, 2015 and then will not be obligated to make monthly payments of principal ~~and interest~~ to the Lenders ~~commencing on~~until April 1, ~~2015.~~2016. 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.~~Loan.

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 (a) pledge or otherwise encumber our assets other than to the Lenders, (b) enter into additional borrowings or guarantees, (c) repurchase our capital stock, or (d) enter into certain mergers or acquisitions without the Lenders’ consent. Additionally, the Loan Agreement contains a subjective acceleration clause at the discretion of the Lenders. As of ~~September 30, 2014,~~March 31, 2015, we were in compliance with all financial covenants of the Loan Agreement, as amended by the ~~Fifth~~Sixth Amendment.

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

(3) Convertible Promissory Notes. The Notes accrue interest at a rate of 6% per year and mature on December 31, 2016. On April 21, 2015, $375,000 of the March 31, 2015 balance was converted into 304,078 shares of Company common stock in accordance with the terms of the Initial Note.

Revolving Line and Term Loan.

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” and, together with the Revolving Line, the “Loan Agreement”) of $4.0 million. Proceeds were used to pay off a three year senior secured promissory note payable

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to PGxHealth, LLC, which was entered into on December 29, 2010 in conjunction with our acquisition of the FAMILION family of genetic tests, and for general corporate and working capital purposes.

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. The interest on the debt that is being deferred, and not paid, is being capitalized as part of the Term Loan. As of March 31, 2015, the amount of interest that has been capitalized is $0.4 million.

On April 1, 2015, we entered into a sixth amendment to the Loan Agreement (the “Sixth Amendment”). The Sixth Amendment provides, among other things, that (i) the Lenders will waive specified events of default under the terms of the Loan Agreement, (ii) commencing as of April 1, 2015, we will make monthly interest payments to the Lenders, (iii) we will not be obligated to make monthly payments of principal to the Lenders until April 1, 2016, (iv) we will be required to make an initial prepayment of a portion of the loan balance in the amount of approximately $149,000 on April 1, 2015 and one or more additional prepayments to the Lenders under the Loan Agreement upon the occurrence of certain events, as defined in the Loan Agreement, and (v) we will not be required to comply with the minimum liquidity ratio under the terms of the Loan Agreement until the earliest to occur of a specified event, as defined in the Loan Agreement, or March 31, 2016. The Sixth Amendment also extends the time period in which we must provide certain reports and statements to the Lenders and amends the circumstances pursuant to which we may engage in certain sales or transfers of its business or property without the consent of the Lenders. See Note 12 - “Subsequent Events” for additional information.

Convertible Promissory Notes.

On December 31, 2014, we entered into an Unsecured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with an accredited investor (the “Investor”) pursuant to which we agreed to issue and sell to the Investor in a private placement an unsecured convertible promissory note (the “Initial Note”). We issued the Initial Note in the aggregate principal amount of $750,000 to the Investor on December 31, 2014. The Initial Note accrues interest at a rate of 6% per year and matures on December 31, 2016. Under the Initial Note, the outstanding principal and unpaid interest accrued under the Initial Note is convertible into shares of common stock of the Company as follows: (i) commencing upon the date of issuance of the Initial Note (but no earlier than January 1, 2015), the Investor is entitled to convert, on a one-time basis, up to 50% of the outstanding principal and unpaid interest accrued under the Initial Note, into shares of common stock of the Company at a conversion price equal to the lesser of (a) the average closing price of the common stock on the principal securities exchange or securities market on which the Company’s common stock is then traded (the “Market”) for the 20 consecutive trading days immediately preceding the date of conversion, and (b) $2.20 (subject to adjustment for stock splits, stock dividends, other distributions, recapitalizations and the like); and (ii) commencing February 15, 2015, the Investor is entitled to convert, on a one-time basis, any or all of the remaining outstanding principal and unpaid interest accrued under the Initial Note, into shares of common stock of the Company at a conversion price equal to 85% of the average closing price of the Company's common stock on the Market for the 15 consecutive trading days immediately preceding the date of conversion.

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On January 15, 2015, the Company entered into a purchase agreement with seven accredited investors (the “Additional Investors”) and, on January 20, 2015, issued and sold to the Additional Investors, in a private placement, notes (the “Additional Notes”) in an aggregate principal amount of $925,000. The Additional Notes have the same terms and conditions as the Initial Note.

7.6. 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 $~~0.3~~0.8 million for the remainder of~~2014~~, ~~$1.0 million~~ in 2015, $0.9 million in 2016, $0.8 million in 2017, $0.5 million in 2018, $0.2 million in 2019 and $~~0.9~~0.6 million thereafter.

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Rent expense for each of the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014 was $~~0.7~~0.2 million ~~and $0.8 million, respectively.~~. At ~~September 30, 2014~~March 31, 2015, firm commitments to vendors totaled $~~1.5~~1.2 million.

8.7. 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 ~~2010~~2011 through ~~2013.~~2014. We have state income tax returns subject to examination primarily for tax years ~~2010~~2011 through ~~2013.~~2014. Open tax years related to foreign jurisdictions, primarily the United Kingdom, remain subject to examination for tax years ~~2010~~2011 through ~~2013.~~2014.

Income tax expense for the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 was ~~$0.5 million~~forty-six thousand. dollars. Income tax expense for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 was ~~$0.1~~$0.5 million. Our effective tax rate for the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 was ~~6.14%~~1.50%, which is primarily the result of valuation allowances against the net operating losses for the U.S. and results in us not recording net deferred tax assets in the U.S.

Our goodwill is an indefinite-lived asset that 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 ~~nine~~three months ended ~~September 30, 2014,~~March 31, 2015, the amount of income tax expense related to the tax amortization of goodwill was ~~$0.6~~less than $0.1 million. ~~Of this amount, $0.4 million related to prior periods.~~

During each of the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014, there were no material changes to the liability for uncertain tax positions.

9.8. STOCKHOLDERS’ EQUITY

Common Stock.

Pursuant to our Third Amended and Restated Certificate of Incorporation, as amended, we currently have 150,000,000 shares of common stock authorized for issuance.

On February 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”), which included an aggregate of $3.0 million in convertible notes issued in December 2011 to entities affiliated with Third Security, LLC, a related party, that automatically 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 1,583,333 shares of our common stock at a price per share of $12.00, as well as five-year warrants to purchase up to an aggregate of 823,333 shares of our common stock with an exercise price of $15.00 per share. In connection with the conversion of the convertible notes issued by us to the entities ~~associated~~affiliated with Third Security, LLC, the entities received an aggregate of 250,000 shares of our common stock and 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 (a) pay to the placement agent cash commissions equal to $1,330,000, or 7.0% of the gross proceeds received in the offering; (b) issue to the

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placement agent a five-year warrant to purchase up to 31,666 shares of our common stock (representing 2% of the shares sold in 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 (c) 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 were not to 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 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: (a) sold to the investors an aggregate of 1,383,333 shares of our common stock at a price per share of $6.00 for aggregate gross proceeds of approximately $8.3 million; and (b) issued to the investors warrants to purchase up to an aggregate of 691,656 shares of our common stock with an exercise price of $9.00 per share (the “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 500,000 shares of common stock

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and warrants to purchase an aggregate of 250,000 shares of common stock in the Offering on the same terms as the other investors. Net proceeds from the Offering were used for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.

In connection with the Offering, we 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 “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 Private Placement. 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.

On October 22, 2014, we entered into a Securities Purchase Agreement with certain accredited investors (the “October 2014 Investors”), pursuant to which we, in a private placement, issued and sold to the October 2014 Investors (the “2014 Private Placement”) an aggregate of 730,776 shares of our common stock at a price per share of $3.25 for an aggregate purchase price of approximately $2.4 million, and warrants to purchase up to an aggregate of 365,388 shares of our common stock with an initial exercise price of $4.00 per share that are exercisable for the period from April 22, 2015 through April 22, 2020. In connection with the 2014 Private Placement, we also issued a warrant to purchase up to an aggregate of 9,230 shares of our common stock to one advisor. The warrants issued in the 2014 Private Placement include both cash and “cashless exercise” features.

The 2014 Private Placement 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 $11.73 per share to $10.86 per share and the number of shares issuable upon exercise of the warrants increased from 1,212,665 to 1,309,785.

On December 31, 2014, we entered into the Note Purchase Agreement with the Investor pursuant to which we agreed to issue and sell the Initial Note to the Investor (the “Note Private Placement”). See Note 5 - “Debt-Convertible Promissory Notes” for additional information regarding the terms of the Initial Note. Pursuant to the terms of the Note Purchase Agreement, we are subject to certain registration obligations and we may be required to effect one or more other registrations to register for resale the shares of our common stock issued or issuable under the Initial Note in connection with certain “piggy-back” registration rights granted to the Investor.

The Note Private Placement 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 2012 warrants decreased from $10.86 per share to $10.25 per share and the number of shares issuable upon exercise of the warrants increased from 1,309,785 to 1,387,685.

On January 15, 2015, the Company entered into a purchase agreement with the Additional Investors and, on January 20, 2015, issued and sold to the Additional Investors, in a private placement, the Additional Notes in an aggregate principal amount of $925,000 (the “Additional Note Private Placement”). The Additional Notes have the same terms and conditions as the Initial Note.

The Additional Note Private Placement required the repricing and issuance of additional common stock warrants to the investors in the Company’s February 2012 common stock and warrant financing. The exercise price of these warrants decreased

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from $10.25 per share to $9.59 per share and the number of shares issuable upon exercise of the warrants increased from 1,387,685 to 1,483,161.

On February 27, 2015, the Company entered into a purchase agreement with Craig-Hallum Capital Group LLC (the “Underwriter”) relating to the Company’s sale and issuance of 3,573,899 shares of the Company’s common stock and corresponding warrants to purchase up to 714,780 shares of the Company’s common stock (the “2015 Offering”). Each share of common stock was sold in combination with a warrant to purchase 0.20 of a share of common stock. The purchase price to the public for each share of common stock and accompanying warrant was $1.95.

The purchase price paid by the Underwriter to the Company for the common stock and accompanying warrants was $1.8135. The net proceeds from the 2015 Offering, after deducting the Underwriter’s discount and other estimated 2015 Offering expenses, were approximately $6.2 million.

The accompanying warrants are exercisable immediately upon their initial issuance date at an exercise price of $2.24 per share and will expire five years from the date of issuance. The exercise price will also be subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock.

The 2015 Offering required the repricing and issuance of additional common stock warrants to the investors in the Company’s February 2012 common stock and warrant financing. The exercise price of these warrants decreased from $9.59 per share to $7.56 per share and the number of shares issuable upon exercise of the warrants increased from 1,483,161 to 1,881,396.

Common Stock Warrants.

During the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 and ~~2013,~~2014, we issued warrants to purchase ~~115,065~~1,208,491 and ~~840,928~~115,432 shares of common stock, respectively. None of the issued warrants were exercised during such periods. The warrants issued in the ~~nine~~three months ended ~~September 30, 2014 were~~March 31, 2015 included 493,711 warrants issued due to repricing requirements ~~contained in~~of the Private Placement and 717,780 warrants issued in connection with the 2015 Offering. The warrants issued in ~~2013 included warrants to purchase 691,656 shares of common stock, which~~the three months ended March 31, 2014 were ~~issued in connection with the Offering, and warrants to purchase 149,272 shares of common stock, which were~~all issued due to repricing requirements ~~contained in the warrants issued in~~of the Private Placement. Warrants to purchase an aggregate of ~~2,335,348~~4,093,477 shares of common stock were outstanding at ~~September 30, 2014~~March 31, 2015.


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	431,027	$6.96	2010	December 2015	431,027	$6.96
Various Institutional Holders⁽²⁾	2012	February 2017	1,052,820	$11.73	2012	February 2017	1,633,390	$7.56
Affiliates of Third Security, LLC⁽²⁾	2012	February 2017	159,845	$11.73	2012	February 2017	248,006	$7.56
Various Institutional Holders⁽³⁾	2013	January 2018	441,656	$9.00	2013	January 2018	441,656	$9.00
Affiliates of Third Security, LLC⁽³⁾	2013	January 2018	250,000	$9.00	2013	January 2018	250,000	$9.00
Various Institutional Holders⁽⁴⁾					2014	April 2020	374,618	$4.00
Various Institutional Holders⁽⁵⁾					2015	February 2020	714,780	$2.24
			2,335,348				4,093,477


(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 and are classified as a liability in our financial statements. See Note 109 - “Fair Value” for additional information. 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 Offering, which was completed in January 2013.


(4)	These warrants were issued in connection with the 2014 Private Placement, which was completed in October 2014.


(5)	These warrants were issued in connection with the 2015 Offering, which was completed in February 2015.

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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.

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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 Private Placement. 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.

~~10.~~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;

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

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

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.

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 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.

The Common Stock Warrant Liability is considered a Level 3 financial instrument and is valued using a Monte Carlo simulation model. This method is well suited to 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; and Simulated Technical Inputs.

Static Business Inputs include: our equity value, which was estimated using our stock price of $~~3.77~~1.44 as of ~~September 30, 2014~~March 31, 2015; the amount of the down-round financing; the timing of the down-round financing; the expected exercise period of ~~2.36~~1.86 years from

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the valuation 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 ~~55%~~89% and the risk-free interest rate of ~~0.83%~~0.53% based on the ~~2.5~~2-year U.S. Treasury yield interpolated from the ~~two-year~~one-year and ~~three-year~~two-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~~weekly periods; and a down-round financing event that was randomly simulated in an iteration

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based on the 25% discrete probability of a down-round financing for those iterations where our simulated equity value at the expected timing of a down-round financing event was below the down-round financing cut-off point.

During the three months ended ~~September 30, 2014~~March 31, 2015 and ~~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
For the Three Months Ended
September 30, 2014 September 30, 2013
Beginning balance at July 1 $ 350
$ 300
Total gains or losses:

Recognized in earnings 50
—
Balance at September 30 $ 400
$ 300

~~During the nine months ended September 30, 2014 and 2013, 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 Nine Months Ended						For the Three Months Ended
	September 30, 2014			September 30, 2013			March 31, 2015		March 31, 2014
Beginning balance at January 1	$	600		$	900		$	145	$	600
Total gains or losses:
Recognized in earnings	(200		)	(600		)	145		(50		)
Balance at September 30	$	400		$	300
Balance at March 31							$	290	$	550

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

~~11.~~10. STOCK OPTIONS

Stock Options.

The following table summarizes stock option activity during the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015:


	Number of Options		Weighted-Average Exercise Price		Number of Options		Weighted-Average Exercise Price
Balance at January 1, 2014	565,028		$	7.19
Balance at January 1, 2015					685,984		$	6.56
Granted	237,546		5.32		12,350		2.01
Forfeited	(57,034	)	5.23		(6,141	)	5.25
Expired	(545	)	14.28		(46,399	)	10.20
Balance at September 30, 2014	744,995		$	6.75
Exercisable at September 30, 2014	264,089		$	9.50
Balance at March 31, 2015					645,794		$	6.22
Exercisable at March 31, 2015					308,870		$	7.83

During the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015, we granted options to purchase ~~237,546~~12,350 shares of our common stock at a weighted-average exercise price of $~~5.32~~2.01 per share under our 2006 Equity Incentive Plan, as amended (the “Plan”). Options to purchase an aggregate of ~~494,417~~199,080 shares of our common stock were granted during the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014.

As of ~~September 30, 2014,~~March 31, 2015, there were ~~264,089~~308,870 options exercisable and ~~480,906~~604,285 options were vested or expected to vest, all with an aggregate intrinsic value of zero.

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Stock Appreciation Rights (“SARs”)

The following table summarizes SARs activity under the Plan during the ~~nine~~three months ended ~~September 30, 2014:~~March 31, 2015:

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Number of
Options

Weighted-Average
Exercise Price
Balance at January 1, 2014 138,333
$ 4.32
Balance at September 30, 2014 138,333
$ 4.32
Exercisable at September 30, 2014 47,033
$ 4.32



	Number of Options	Weighted-Average Exercise Price
Balance at January 1, 2015	98,333	$	4.14
Balance at March 31, 2015	98,333	$	4.14
Exercisable at March 31, 2015	42,083	$	4.32

All outstanding SARs were issued solely to our executive officers.

As of ~~September 30, 2014, 47,033~~March 31, 2015, 42,083 shares subject to outstanding SARs were exercisable and ~~91,300~~98,333 shares were vested or expected to vest. The weighted-average exercise price of these SARs was ~~$4.32~~$4.14 per share and the aggregate intrinsic value was zero.

~~12.~~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.

We have two ~~complementary~~ reportable operating segments, Laboratory Services and Genetic Assays and Platforms.

Segment information for the three months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014 was as follows:


	Dollars in Thousands									Dollars in Thousands
	Three Months Ended September 30, 2014									Three Months Ended March 31, 2015
	Laboratory Services			Genetic Assays and Platforms			Total			Laboratory Services			Genetic Assays and Platforms			Total
Net Sales	$	4,063		$	2,309		$	6,372		$	4,871		$	1,642		$	6,513
Gross Profit	1,781			434			2,215			2,696			278			2,974
Net (Loss) Income before Taxes	(3,305		)	3,199			(106		)
Income Tax Expense (Benefit)	41			(67		)	(26		)
Net (Loss) Income	$	(3,346	)	$	3,266		$	(80	)
Net Loss before Taxes										(2,110		)	(885		)	(2,995		)
Income Tax Expense										41			5			46
Net Loss										$	(2,151	)	$	(890	)	$	(3,041	)
Depreciation/Amortization	$	544		$	45		$	589		$	507		$	46		$	553
Interest Expense, net	$	92		$	70		$	162		$	142		$	48		$	190

	September 30, 2014									March 31, 2015
Total Assets	$	23,998		$	6,850		$	30,848		$	27,563		$	6,928		$	34,491

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~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

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

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

Dollars in Thousands
Three Months Ended September 30, 2013
Laboratory Services Genetic Assays
and Platforms Total
Net Sales $ 4,112
$ 2,534
$ 6,646
Gross Profit 1,776
674
2,450
Net Loss before Taxes (4,375 ) (1,185 ) (5,560 )
Income Tax Expense (Benefit) —
(8 ) (8 )
Net Loss $ (4,375 ) $ (1,177 ) $ (5,552 )
Depreciation/Amortization $ 606
$ 65
$ 671
Interest Expense, net $ 96
$ 59
$ 155

September 30, 2013
Total Assets $ 23,648
$ 9,532
$ 33,180

~~Segment information for the nine months ended~~ ~~September 30, 2014~~ ~~and~~ ~~2013~~ ~~was as follows:~~

Dollars in Thousands
Nine Months Ended September 30, 2014
Laboratory Services Genetic Assays
and Platforms Total
Net Sales $ 11,594
$ 7,793
$ 19,387
Gross Profit 4,903
2,199
7,102
Net (Loss) Income before Taxes (9,565 ) 1,887
(7,678 )
Income Tax Expense (Benefit) 590
(119 ) 471
Net (Loss) Income $ (10,155 ) $ 2,006
$ (8,149 )
Depreciation/Amortization $ 1,422
$ 148
$ 1,570
Interest Expense, net $ 282
$ 208
$ 490

Dollars in Thousands
Nine Months Ended September 30, 2013
Laboratory Services Genetic Assays
and Platforms Total
Net Sales $ 12,551
$ 8,775
$ 21,326
Gross Profit 5,822
2,856
8,678
Net Loss before Taxes (9,641 ) (2,312 ) (11,953 )
Income Tax Expense —
52
52
Net Loss $ (9,641 ) $ (2,364 ) $ (12,005 )
Depreciation/Amortization $ 1,815
$ 287
$ 2,102
Interest Expense, net $ 314
$ 145
$ 459

~~Net sales for the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2014~~ ~~and~~ ~~2013~~ ~~by country were as follows:~~




	Dollars in Thousands
	Three Months Ended March 31, 2014
	Laboratory Services			Genetic Assays and Platforms			Total
Net Sales	$	3,688		$	2,563		$	6,251
Gross Profit	1,632			862			2,494
Net Loss before Taxes	(2,984		)	(687		)	(3,671		)
Income Tax Expense (Benefit)	509			(4		)	505
Net Loss	$	(3,493	)	$	(683	)	$	(4,176	)
Depreciation/Amortization	$	440		$	53		$	493
Interest Expense, net	$	107		$	75		$	182

	March 31, 2014
Total Assets	$	22,446		$	8,271		$	30,717

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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2015 and 2014 ~~and 2013~~

Net sales for the three months ended March 31, 2015 and 2014 by country were as follows:


	Dollars in Thousands				Dollars in Thousands				Dollars in Thousands
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2014		2013		2014		2013		2015		2014
United States	$	5,102	$	5,095	$	14,735	$	16,241	$	5,509	$	4,763
Italy	301		398		1,023		1,225		177		385
All Other Countries	969		1,153		3,629		3,860		827		1,103
Total	$	6,372	$	6,646	$	19,387	$	21,326	$	6,513	$	6,251

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

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

~~13.~~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.

~~Issuance of Common Stock~~

On October 22, 2014, we entered into a Securities Purchase Agreement with certain accredited investors (the “Investors”), pursuant to which we, in a private placement, issued and sold to the Investors (the “2014 Private Placement”) an aggregate of 730,776 shares of our common stock at a price per share of $3.25 for an aggregate purchase price of approximately $2.375 million, and warrants to purchase up to an aggregate of 365,388 shares of our common stock with an initial exercise price of $4.00 per share that are exercisable for the period from April 22, 2015 through April 22, 2020. In connection with the 2014 Private Placement, we also issued a warrant to purchase up to an aggregate of 9,230 shares of our common stock to one advisor. The warrants issued in the 2014 Private Placement include both cash and “cashless exercise” features.

Amended Loan and Security Agreement

On ~~October 22, 2014, we~~April 1, 2015, the Company entered into the ~~Fifth~~Sixth Amendment. The Sixth Amendment provides, among other things, that (i) the Lenders will waive specified events of default under the terms of the Loan Agreement, (ii) commencing as of April 1, 2015, the Company will make monthly interest payments to the ~~Loan Agreement. The Fifth Amendment reduces: (i) our future minimum liquidity~~Lenders, (iii) the Company will not be obligated to make monthly payments of principal to the Lenders until April 1, 2016, (iv) the Company will be required to make an initial prepayment of a portion of the loan balance in the amount of approximately $149,000 on April 1, 2015 and ~~revenue covenants~~one or more additional prepayments to the Lenders under the Loan Agreement upon the occurrence of certain events, as defined in the Loan Agreement, and ~~(ii)~~(v) the ~~aggregate amount we may borrow~~Company will not be required to comply with the minimum liquidity ratio under the ~~Revolving Line from $4.0 million~~terms of the Loan Agreement until the earliest to ~~$3.0 million.~~occur of a specified event, as defined in the Loan Agreement, or March 31, 2016. The Sixth Amendment also extends the time period in which the Company must provide certain reports and statements to the Lenders and amends the circumstances pursuant to which the Company may engage in certain sales or transfers of its business or property without the consent of the Lenders.

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

Forward-Looking Information

This Quarterly Report on Form 10-Q, 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, the competitive environment and related market conditions, actions of governments and regulatory factors affecting our business, retaining key employees and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or the negative versions of these terms and other similar expressions.

You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons, including those described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2013,~~2014, which we filed with the Securities and Exchange Commission on ~~March 27, 2014.~~April 15, 2015.

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 Quarterly Report on Form 10-Q 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, ~~2013~~2014, which we filed with the Securities and Exchange Commission on ~~March 27, 2014.~~April 15, 2015. Results for the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 are not necessarily indicative of results that may be attained in the future.

Overview

~~We are~~

Transgenomic, Inc. (“we”, “us”, “our”, the “Company” or “Transgenomic”) is a global biotechnology company advancing personalized medicine infor the detection and treatment of cancer and inherited diseases through ~~our~~its proprietary molecular technologies and world-class clinical and research services. WeA key goal is to bring our Multiplexed ICE COLD-PCR (“MX-ICP”) product to the clinical market rapidly through strategic licensing agreements, enabling the use of blood and other bodily fluids for more effective and patient-friendly diagnosis, monitoring and treatment of cancer.

Currently, our operations are organized and reviewed by management along major product lines and presented in the following two ~~complementary~~ business segments:

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Genetic Assays and Platforms. Our proprietary product in this business segment is the WAVE® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute ~~bioinstruments~~bio-instruments produced by other manufacturers or (“OEM ~~Equipment,~~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.~~bio-instruments. 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 a range of chromatography ~~columns.~~columns

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~~Third~~First Quarter ~~2014~~2015 Overview and Recent Highlights

We are a global biotechnology company advancing personalized medicine in cardiology, oncology and inherited diseases through state-of-the-art diagnostic technologies, such as our revolutionary multiplexed ~~ICE COLD-PCR~~ICE-COLD PCR^TM, or MX-ICP, technology and state-of-the-art genetic tests provided through our Laboratory Services segment. We also provide specialized clinical and research services to biopharmaceutical companies developing targeted therapies and sell equipment, reagents and other consumables for applications in molecular testing and cytogenetics.

Our diagnostic technologies are designed to improve medical diagnoses and patient outcomes. Our strategy aims to optimize, through channel partnerships, the commercial potential of our assets aimed at large genetic testing markets. This allows us to focus resources on our areas of strength, including developing and marketing tests for rare genetic disorders and other genetic-mediated conditions in the U.S., where we are a market leader, and developing biomarkers, genetic tests and companion diagnostics using proprietary technology that is unequalled for the identification and detection of low-level genetic mutations and is a prerequisite for improved diagnosis and treatment of cancer and other diseases.

On ~~July 2, 2014,~~February 27, 2015, we ~~announced that we had~~ entered into ~~an agreement to sell to Integrated DNA Technologies, Inc., or IDT, rights to our Surveyor Kits product line and related technology for~~ a minimum of $4.25 million. As part of the agreement, IDT is exclusively sublicensing rights for all clinical and diagnostic applications of the Surveyor technology back to us. This sale to IDT for the non-core research market has allowed usto generate cash to support our high-potential initiatives and focus resources on our core businesses, while securing access to the Surveyor technology for high-value clinical and pharmaceutical applications.

During the third quarter of fiscal year 2014, we continued to make progress in implementing key initiatives to leverage our products, distinctive technologies and infrastructure and expertise with the goal of achieving leadership in the rapidly growing field of personalized medicine. An important element of our strategy is to focus resources on key growth areas for the company, including the redeployment of underutilized, non-core assets to sharpen our focus and generate non-dilutive resources to help fund our growth. The divestiture of our Surveyor Kits product line in the quarter ended September 30, 2014 illustrates that we are now successfully implementing this strategy. Management has also been more proactive in reaching out to current investors and sharing our story with new investors by participating in a number of investor conferences during the third quarter of fiscal year 2014. Most significantly, after the close of the quarter ended September 30, 2014, we reported two separate developments that we believe mark the start of the commercialization phase of our MX-ICP technology, which has the potential to enable the widespread adoption of personalized medicine for cancer and other serious diseases.

~~Specifically, on October 30, 2014, we announced an important research~~purchase agreement with ~~the University of Melbourne under the direction of renowned molecular pathology researcher Paul Waring. In the first study under this research agreement, Professor Waring and his team are seeking~~Craig-Hallum Capital Group LLC (the “Underwriter”) pursuant to confirm that the ultra-high sensitivity of MX-ICP produces results that are clinically valuable for the routine diagnosis and treatment of cancer. We are optimistic that the study will be successful in validating the practical value of our technology and help differentiate it from results generated with traditional Sanger and next-generation sequencing platforms. In the next phase of the project, the Melbourne researchers will work to validate the ability of MX-ICP to detect cancer mutilations with high sensitivity using liquid biopsies based on patient blood or plasma rather than tumor biopsies. Prior research indicates that our MX-ICP technology should perform well in these studies. We expect these validation studies conducted by the University of Melbourne’s highly respected researchers will be very valuable in helping us to achieve the full clinical and commercial potential of this breakthrough, enabling technology.

~~In addition, during our October 30, 2014 financial results conference call,~~which we reported signing the first commercial agreement with a leading biopharmaceutical company to use our MX-ICP for biomarker identification and drug discovery and development. It is the first of what we expect to be many business relationships we will establish for the use of MX-ICP technology. Our Laboratory Services segment will conduct this initial study using MX-ICP to detect certain cancer-associated mutations using plasma samples from oncology patients. We are optimistic that many researchers in both the biopharmaceutical industry and academia will be eager to use MX-ICP for research and in commercial applications once they have the opportunity to assess its performance first hand.

~~On October 22, 2014, we announced that we had raised gross proceeds of $2.375 million in a private placement financing with a syndicate of new and existing investors. We issued and~~ sold ~~to the investors an aggregate of 730,776~~3,573,899 shares of our common stock ~~at a price per share of $3.25 for an aggregate purchase price of approximately $2.375 million,~~ and corresponding warrants to purchase up to ~~an aggregate of 365,388~~714,780 shares of ~~our~~common stock. Each share of common stock was sold in combination with ~~an initial exercise price of $4.00 per share. In connection with this private placement, we also issued~~ a warrant to purchase up0.20 of a share of common stock. The purchase price to ~~an aggregate of 9,230 shares~~the public for each share of common stock and accompanying warrant was $1.95. The purchase price paid by the Underwriter to ~~one advisor.~~us for the common stock and accompanying warrants was $1.8135. The net proceeds to us, after deducting the Underwriter’s discount and other estimated expenses, were approximately $6.2 million.

On March 11, 2015, we announced an expanded license agreement with Exiqon A/S for access to their proprietary Locked Nucleic Acid (LNA™) oligonucleotides that enhance MX-ICP’s ultra-sensitive detection of ~~the financing will be used~~cancer mutations in tissue and liquid biopsies. The expanded license agreement provides us with worldwide access to LNA oligos for ~~general corporate and working capital purposes, including activities supporting~~use with all of our proprietary ultra-high sensitivity mutation enrichment technologies for analysis of all cancer genes on all platforms.

On April 20, 2015, we announced that our MX-ICP ~~technology. Our goal~~technology is now available to pharmaceutical and biotechnology customers of our Biomarker Identification business unit. MX-ICP is an ultrahigh sensitivity DNA amplification technology that allows the detection of multiple mutations in multiple genes from any sample, either from a tumor biopsy or from liquids such as blood or urine. MX-ICP is validated and available for use on all sequencing platforms.

On April 23, 2015, we announced a revised agreement with ~~this financing was~~Horizon Discovery Group (“Horizon”) to ~~supplement our current cash reserves~~incorporate Horizon’s advanced human genomic reference standards in ~~a limited way, bridging~~out MX-ICP kits on an original equipment manufacturer (OEM) basis, further advancing the ~~gap between~~quality and performance of MX-ICP.

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~~our short-term cash needs and a number of monetization activities we are pursuing that are expected to generate non-dilutive cash in the near-to-mid-term.~~

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 ~~September 30, 2014~~,March 31, 2015, we had cash and cash equivalents of ~~$0.9 million. We believe that our access~~$5.4 million. Our ability to ~~sources~~continue as a going concern is dependent upon a combination of ~~liquidity, including the proceeds from the private placement that was consummated on October 22, 2014, are sufficient~~generating additional revenue, improving cash collections, potentially selling underutilized assets and, if necessary, raising financing to meet ~~expected cash needs for~~our obligations and pay our liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at ~~least~~this time and raises substantial doubt that the ~~next 12 months.~~Company will be able to continue as a going concern.

The uncertainty of 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 the products of our Genetic Assays and Platforms segment 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 segment is dependent upon reimbursement from government and private 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.

Results of Operations

Net sales for the three months ended ~~September 30, 2014~~March 31, 2015 ~~decreased~~increased by $0.3 million, or 4%, compared to the same period in ~~2013~~2014. During the three months ended ~~September 30, 2014~~March 31, 2015, net sales from our Laboratory Services segment ~~decreased~~increased by ~~less than $0.1 million~~32% compared to the same three month period in ~~2013~~2014. Net sales in our Genetic Assays and Platforms segment decreased ~~$0.2 million~~36% for the three months ended ~~September 30, 2014~~March 31, 2015 compared to the same period in ~~2013~~2014. Our gross profit margin ~~decreased~~increased to ~~35%~~46% for the three months ended ~~September 30, 2014~~March 31, 2015 from ~~37%~~40% for the three months ended ~~September 30, 2013~~March 31, 2014. Loss from operations was $~~4.0~~2.6 million for the three months ended ~~September 30, 2014~~March 31, 2015, compared to $~~5.4~~3.5 million for the three months ended ~~September 30, 2013~~March 31, 2014.

Three Months Ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014

Net Sales. Net sales for the three months ended ~~September 30, 2014 decreased~~March 31, 2015 increased by $0.3 million, or 4%, compared to the same period in ~~2013.~~2014. Net sales performance in each of our segments was as follows:


	Dollars in Thousands									Dollars in Thousands
	Three Months Ended									Three Months Ended
	September 30,				Change					March 31,				Change
	2014		2013		$			%		2015		2014		$			%
Laboratory Services	$	4,063	$	4,112	$	(49	)	(1	)%	$	4,871	$	3,688	$	1,183		32	%
Genetic Assays and Platforms	2,309		2,534		(225		)	(9	)%	1,642		2,563		(921		)	(36	)%
Total Net Sales	$	6,372	$	6,646	$	(274	)	(4	)%	$	6,513	$	6,251	$	262		4	%

Net sales for our Laboratory Services segment ~~decreased~~increased by ~~less than $0.1~~$1.2 million, or 1%32%, during the three months ended ~~September 30, 2014~~March 31, 2015 as compared to the same period in ~~2013~~2014. The ~~decrease~~increase reflects ~~lower~~higher sales offrom both patient testing and our contract laboratory ~~services, partially offset by higher sales of patient tests, spurred by a number of new products launched in late 2013.~~services.

Net sales for our Genetic Assays and Platforms segment were $~~2.3~~1.6 million for the three months ended ~~September 30, 2014~~March 31, 2015, which represented a decrease of ~~$0.2~~$0.9 million as compared to the same period in ~~2013~~2014. The decrease in net sales ~~primarily~~ resulted

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from lower bioconsumables sales in the three months ended ~~September 30,~~March 31, 2015 as compared to the same period in 2014, due to the fact that we sold our Surveyor Kits product line at the beginning of the ~~quarter. This decrease was partially offset by higher 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 operations of our Laboratory Services segment.

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

Dollars in Thousands
Three Months Ended
September 30, Margin %
2014 2013 2014 2013
Laboratory Services $ 1,781
$ 1,776
44 % 43 %
Genetic Assays and Platforms 434
674
19 % 27 %
Gross Profit $ 2,215
$ 2,450
35 % 37 %

~~Gross profit was~~ ~~$2.2 million, or~~ ~~35%~~ ~~of total net sales, during the~~ ~~third~~ ~~quarter of 2014, compared to~~ ~~$2.5 million, or~~ ~~37%~~ ~~of total net sales, during the same quarter of~~ ~~2013. During the three months ended~~ ~~September 30, 2014, the gross margin for our Laboratory Services segment was~~ ~~44%, as compared to~~ ~~43%~~ ~~in the same period of~~ ~~2013~~. This increase in gross margin resulted from an increased volume in patient tests during the three months ended September 30, 2014, partially offset by lower volumes in our Biomarker Identification laboratory. The gross margin for our Genetic Assays and Platforms segment decreased to ~~19%~~ ~~for the three months ended~~ ~~September 30, 2014~~ ~~from~~ ~~27%~~ ~~in the same period of 2013 due to decreased revenue resulting from the sale of our Surveyor Kits product line.~~

~~Selling, General and Administrative Expenses.~~ Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel costs, professional fees, facility costs and bad debt provisions. Our selling, general and administrative costs decreased by ~~$1.6 million~~ ~~to $5.6 million~~ ~~from $7.2 million~~ ~~during the three month period ended~~ ~~September 30, 2014~~ ~~as compared to the same period in~~ ~~2013. The decrease was due to a lower bad debt provision in the third quarter of 2014 as compared to the third quarter of 2013, partially offset by higher stock compensation costs.~~

~~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 each of the three months ended ~~September 30, 2014~~ ~~and~~ ~~2013, research and development expenses totaled~~ ~~$0.6 million. Research and development expenses totaled~~ ~~10%~~ ~~and 9% of net sales during the three months ended~~ ~~September 30, 2014~~ ~~and~~ ~~2013, respectively.~~

~~Other Income (Expense).~~ ~~For the three months ended September 30, 2014, other income and expense included other income of $4.1 million which was recorded as a result of the sale of our Surveyor Kits product line during the~~ third quarter of 2014. ~~Other expense for each of the three months ended~~ ~~September 30, 2014~~ ~~and~~ ~~2013~~ ~~includes interest expense of~~ ~~$0.2 million~~. In addition, other expense for the three months ended September 30, 2014 included the revaluation of common stock warrants, which was due to the change in fair value of the common stock warrant liability. The expense associated with the change in fair value of the warrants is a non-cash item.

~~Income Tax Expense (Benefit).~~ ~~Net income tax benefit for the three months ended~~ ~~September 30, 2014~~ and 2013 was less than $0.1 million for both periods. The net income tax benefit for the three months ended September 30, 2014 included approximately $0.1 million of deferred income tax expense for a deferred tax liability related to the tax deductibility of our goodwill, which is an indefinite-lived asset. We expect this deferred income tax expense to be approximately $0.2 million annually going forward.

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

~~Net Sales.~~ ~~Net sales for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2014~~ ~~decreased by~~ ~~$1.9 million, or~~ 9%~~, compared to the same period in~~ ~~2013. Net sales performance in each of our segments was as follows:~~

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Dollars in Thousands
Nine Months Ended
September 30, Change
2014 2013 $ %
Laboratory Services $ 11,594
$ 12,551
$ (957 ) (8 )%
Genetic Assays and Platforms 7,793
8,775
(982 ) (11 )%
Total Net Sales $ 19,387
$ 21,326
$ (1,939 ) (9 )%

~~Net sales for our Laboratory Services segment decreased by~~ ~~$1.0 million, or~~ 8%~~, during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2014~~ ~~as compared to the same period in~~ ~~2013~~. The decrease reflects a decline in contract laboratory service revenues and also resulted from a higher than usual level of sales in the first half of 2013 that resulted from working down a backlog of Nuclear Mitome tests from the previous year. The decrease was partially offset by increased patient testing volume in our core Laboratory Services segment business for the nine months ended September 30, 2014 as compared to the same period of 2013.

~~Net sales for our Genetic Assays and Platforms segment of~~ ~~$7.8 million~~ ~~represented a decrease of~~ ~~$1.0 million, or~~ ~~11%, during the nine months ended~~ ~~September 30, 2014~~ ~~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 operations of our Laboratory Services segment.

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


	Dollars in Thousands								Dollars in Thousands
	Nine Months Ended								Three Months Ended
	September 30,				Margin %				March 31,				Margin %
	2014		2013		2014		2013		2015		2014		2015		2014
Laboratory Services	$	4,903	$	5,822	42	%	46	%	$	2,696	$	1,632	55	%	44	%
Genetic Assays and Platforms	2,199		2,856		28	%	33	%	278		862		17	%	34	%
Gross Profit	$	7,102	$	8,678	37	%	41	%	$	2,974	$	2,494	46	%	40	%

Gross profit was $~~7.1~~3.0 million, or ~~37%~~46% of total net sales, during the ~~nine months ended September 30, 2014,~~first quarter of 2015, compared to $~~8.7~~2.5 million, or ~~41%~~40% of total net sales, during the same ~~period~~quarter of ~~2013~~2014. During the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015, the gross margin for our Laboratory Services segment ~~declined to~~was ~~42%~~55%, as compared to ~~46%~~44% in the same period of ~~2013~~2014~~, as a result of lower sales~~. This increase in gross margin resulted from an increased volume in patient tests during the three months ended March 31, 2015, along with higher volumes in our ~~contract laboratory group, which has a relatively fixed cost structure.~~Biomarker Identification laboratory. The gross margin for our Genetic Assays and Platforms segment decreased to ~~28%~~17% for the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 from ~~33%~~34% in the same period of ~~2013~~2014 due to ~~lower revenues~~decreased revenue resulting from ~~instrument sales.~~the sale of our Surveyor Kits product line in 2014.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel costs, professional fees, facility costs and bad debt provisions. Our selling, general and administrative costs decreased by $~~2.1~~0.2 million to $~~$16.4~~5.1 million from $~~$18.5~~5.3 million during the ~~nine~~three month period ended ~~September 30, 2014~~March 31, 2015 as compared to the same period in ~~2013~~2014. The decrease was due to a lower ~~bad debt provisions~~personnel costs and ~~lower amortization~~stock compensation costs in the first ~~nine months~~quarter of ~~2014~~2015 as compared to the ~~same period~~first quarter of ~~2013, along with lower salaries and employee-related costs in our Laboratory Services segment sales force. These decreases were~~2014, partially offset by ~~increased stock compensation costs.~~a higher bad debt provision.

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 ~~nine~~three months ended ~~September 30, 2014~~ ~~and~~ ~~2013~~March 31, 2015, ~~these costs~~research and development expenses totaled $~~2.2~~0.6 million ~~and~~ ~~$2.3~~as compared to $0.7 million~~, respectively.~~ for the three months end March 31, 2014. Research and development expenses totaled ~~11%~~9% and 12% of net sales during ~~each of~~ the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014., respectively.

Other Income (Expense). For the nine months ended September 30, 2014, net other income included other income of $4.1 million which was recorded as a result of the sale of our Surveyor Kits product line during the third quarter of 2014. In addition, other incomeOther expense for each of the ~~nine~~three months ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014 includes interest expense of $0.2 million. In addition, other expense for the three months ended March 31, 2015 included the revaluation of common stock warrants, which was due to the change in fair value of the common stock warrant liability. The ~~income~~expense associated with the change in fair value of the warrants is a non-cash item. ~~Net other income for each of the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2014~~ ~~and~~ ~~2013~~ ~~included interest expense of~~ ~~$0.5 million~~.

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Income Tax Expense. ~~Net~~Income tax expense for the three months ended March 31, 2015 and 2014 was $0.1 million and $0.5 million, respectively. The income tax expense for the ~~nine~~three months ended ~~September 30,~~March 31, 2014 ~~and 2013 was~~ includes $0.5 ~~million and $0.1 million, respectively. Net income tax expense for the nine months ended September 30, 2014 included approximately $0.6~~ million of deferred income tax expense ~~for~~as we established a deferred tax liability related to the tax deductibility of our goodwill, which is an indefinite-lived asset. WeFor the three months ended March 31, 2015, income tax expense related to this deferred tax liability was less than $0.1 million and we expect this deferred income tax expense to be approximately $0.2 million annually going forward.

Liquidity and Capital Resources

Our working capital positions at ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014 were as follows:


	Dollars in Thousands						Dollars in Thousands
	September 30, 2014		December 31, 2013		Change		March 31, 2015		December 31, 2014		Change
Current assets (including cash and cash equivalents of $880 and $1,626, respectively)	$	13,690	$	11,835	$	1,855
Current assets (including cash and cash equivalents of $5,379 and $1,609, respectively)							$	18,232	$	13,432	$	4,800
Current liabilities	9,810		8,625		1,185		11,067		11,115		(48		)
Working capital	$	3,880	$	3,210	$	670	$	7,165	$	2,317	$	4,848

~~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~~ ~~September 30, 2014, we had cash on hand of~~ ~~$0.9 million. On March 3, 2014, we~~ entered into ~~a fourth amendment to the Loan and Security~~an Unsecured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”), dated ~~March 13, 2013, entered into among us and affiliates of Third Security, LLC~~December 31, 2014, with an accredited investor (the ~~“Loan Agreement”~~“Initial Investor”). The fourth amendment provides that we will not be required to 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 principal and interest payment under the term loan will be due on April 1, 2015. On March 5, 2014, we sold and issued an aggregate of 1,443,297 shares of our Series B Convertible Preferred Stock at a price per share of $4.85 for an aggregate purchase price of approximately $7.0 million. Net proceeds were used to pay down the revolving credit line governed by the Loan Agreement, which can be redrawn by us, and for working capital purposes. On July 1, 2014, we sold our Surveyor Kits product line and related technology for a minimum of $4.25 million, comprised of an initial payment of $3.65 million and an additional amount equal to an aggregate of $600,000 in four equal installments, the first of which was required to be made by October 1, 2014, and the last of which must be made by July 1, 2015. On October 22, 2014, we raised gross proceeds of approximately $2.375 million in a private placement with certain accredited investors, pursuant to which we issued and sold, ~~730,776~~on December 31,

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2014 (the “Initial Closing”), to the Initial Investor in a private placement an unsecured convertible promissory note (the “Initial Note”) in the aggregate principal amount of $750,000.

The Initial Note accrues interest at a rate of 6% per year and matures on December 31, 2016. Under the Initial Note, the outstanding principal and unpaid interest accrued is convertible into shares of common stock of the Company as follows: (i) commencing upon the date of issuance of the Initial Note (but no earlier than January 1, 2015), the Investor is entitled to convert, on a one-time basis, up to 50% of the outstanding principal and unpaid interest accrued under the Initial Note, into shares of common stock of the Company at a conversion price equal to the lesser of (a) the average closing price of the common stock on the principal securities exchange or securities market on which the Company's common stock is then traded (the “Market”) for the 20 consecutive trading days immediately preceding the date of conversion, and (b) $2.20 (subject to adjustment for stock splits, stock dividends, other distributions, recapitalizations and the like); and (ii) commencing February 15, 2015, the Investor is entitled to convert, on a one-time basis, any or all of the remaining outstanding principal and unpaid interest accrued under the Initial Note, into shares of common stock of the Company at a conversion price equal to 85% of the average closing price of the Company's common stock on the Market for the 15 consecutive trading days immediately preceding the date of conversion.

Pursuant to the terms of the Note Purchase Agreement, on January 15, 2015, we entered into a purchase agreement with seven additional accredited investors (the “Additional Investors”) and issued and sold, on January 20, 2015, to the Additional Investors in a private placement (the “Additional Private Placement”) notes in an aggregate principal amount of $925,000 (the “Additional Notes”). The Additional Notes have the same terms and conditions as the Initial Note.

On February 27, 2015, we entered into a purchase agreement with the Underwriter pursuant to which we sold 3,573,899 shares of our common stock ~~at a price per~~and corresponding warrants to purchase up to 714,780 shares of common stock. Each share of ~~$3.25. We cannot be certain that we will be able~~common stock was sold in combination with a warrant to ~~increase our net sales, further reduce our expenses or raise additional capital in~~purchase 0.20 of a share of Common Stock. The purchase price to the ~~future. However, we believe that existing sources~~public for each share of ~~liquidity as of September 30, 2014, along with~~common stock and accompanying warrant was $1.95.

The purchase price paid by the Underwriter to us for the common stock and accompanying warrants was $1.8135. The net proceeds, ~~from~~after deducting the October 2014 private placement, are sufficient to meet expected cash needs. Accordingly, we believe that we have access to sufficient liquidity to continue our operations for at least the next 12 months.Underwriter’s discount and other estimated expenses, were approximately $6.2 million.

Please see Note 65 - “Debt” and Note 76 - “Commitments and Contingencies” to the ~~notes~~Notes to ~~our accompanying unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements for additional information regarding our outstanding debt and debt servicing obligations.

At March 31, 2015, we had cash on hand of $5.4 million. Our current operating plan projects improved operating results, improvement in collection rates and monetization of underutilized assets. As with any operating plan, there are risks associated with our ability to execute it. Therefore, there can be no assurance that we will be able to satisfy our obligations, or achieve the operating improvements as contemplated by the current operating plan. If we are unable to execute this plan, we will need to find additional sources of cash not contemplated by the current operating plan and/or raise additional capital to sustain continuing operations as currently contemplated. We could raise additional funds through various potential sources such as through the sale of assets or sale of debt or equity securities. However, there can be no assurance that the additional funding sources will be available to us at reasonable terms or at all. If we are unable to achieve our operating plan or obtain additional financing, our business would be jeopardized and we may not be able to continue as a going concern.

Analysis of Cash Flows - ~~Nine~~Three Months Ended ~~September 30, 2014~~March 31, 2015 and ~~2013~~2014

Net Change in Cash and Cash Equivalents. Cash and cash equivalents ~~decreased~~increased by ~~$0.7~~$3.8 million during the ~~nine~~three months ended ~~September 30, 2014~~,March 31, 2015, compared to ~~a decrease~~an increase of ~~$0.5~~$0.1 million during the ~~nine~~three months ended ~~September 30, 2013~~.March 31, 2014. During the ~~nine~~three months ended ~~September 30, 2014~~,March 31, 2015, we used cash of ~~$11.2~~$3.5 million in operating activities ~~which was partially offset by cash provided by investing activities of~~ ~~$3.5 million~~and had cash provided by financing activities of ~~$7.0 million~~.$7.3 million. In the ~~nine~~three months ended ~~September 30, 2013~~,March 31, 2014, net cash used in operating activities was $~~6.3~~$3.9 million,, and net cash used in investing activities was ~~$1.6~~$0.1 million,, which was offset by cash provided by financing activities of ~~$7.5 million~~.$4.1 million.

Cash Flows Used in Operating Activities. Cash flows used in operating activities totaled ~~$11.2~~$3.5 million during the ~~nine~~three months ended ~~September 30, 2014~~,March 31, 2015, compared to cash flows used in operating activities of ~~$6.3~~$3.9 million during the ~~nine~~three months ended ~~September 30, 2013~~.March 31, 2014. The cash flows used in operating activities in the first ~~nine~~three months of ~~2014~~2015 included the net loss of ~~$8.1~~$3.0 million and an increase in accounts receivable of ~~$4.9~~$1.7 million,, offset by non-cash items, including the provision for losses on doubtful accounts of ~~$2.7~~$1.0 million,, stock ~~option~~compensation expense of ~~$1.0~~$0.1 million and depreciation and amortization of ~~$1.6 million~~.$0.6 million. The cash flows used in operating activities in the first ~~nine~~three months of ~~2013~~2014 included the net loss of ~~$12.0~~$4.2 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 ~~$5.2~~$0.7 million, stock ~~option~~compensation expense of ~~$0.2~~$0.3 million and depreciation and amortization of ~~$2.1~~$0.5 million.

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Cash Flows Provided by (Used in) Investing Activities. Cash flows provided by investing activities ~~totaled~~ ~~$3.5 million~~was zero during the ~~nine~~three months ended ~~September 30, 2014~~,March 31, 2015, compared to cash flows used in investing activities of ~~$1.6~~$0.1 million during the same period of ~~2013~~. Cash flows provided by investing activities in the first nine months of 2014 included proceeds from the sale of our Surveyor Kits product line of $3.7 million, offset by purchases of property and equipment of ~~$0.1 million~~.2014. Cash flows used in investing activities in the first ~~nine~~three months of ~~2013~~2014 included ~~payments made in connection with the acquisition of ScoliScore assets of $0.8 million and~~ purchases of property and equipment of ~~$0.5 million.~~forty-five thousand dollars.

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Cash Flows Provided by Financing Activities. Cash flows provided by financing activities totaled ~~$7.0~~$7.3 million for the ~~nine~~three months ended ~~September 30, 2014~~,March 31, 2015, which included net proceeds of approximately $6.4 million from our common stock offering in the first quarter of 2015 and $0.9 million from the issuance of unsecured convertible promissory notes in January 2015. Cash flows provided by financing activities during the three months ended March 31, 2014 included proceeds from the issuance of Series B Convertible Preferred Stock, ~~and~~partially offset by net ~~borrowing~~payments on our debt ~~partially offset by payments on our capital lease obligations. Cash flows provided by financing activities during the~~ ~~nine~~ ~~months ended September 30, 2013 included the proceeds from the issuance of common stock~~ and ~~net borrowing on our debt, partially offset by payments on our~~ capital lease obligations.

Off-Balance Sheet Arrangements

At each of ~~September 30, 2014~~March 31, 2015 and December 31, ~~2013~~2014, 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, ~~2013,~~2014, filed with the Securities and Exchange Commission on ~~March 27, 2014.~~April 15, 2015.

Critical Accounting Policies and Estimates

Accounting policies used in the preparation of our 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, ~~2013~~2014, filed with the Securities and Exchange Commission on ~~March 27, 2014.~~April 15, 2015.

Recently Issued Accounting Pronouncements

Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2013~~2014, filed with the Securities and Exchange Commission on ~~March 27,~~April 15, 2014. There have been no changes to those accounting pronouncements listed except as noted in Note 2 - “Summary of Significant Accounting Policies-Recent Accounting Pronouncements” to the ~~notes~~Notes to ~~our accompanying unaudited condensed consolidated financial statements~~Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

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

We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Management performed, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our

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Chief Executive Officer and Interim Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of ~~September 30, 2014~~March 31, 2015, our disclosure controls and procedures were not effective atbecause of the ~~reasonable assurance level.~~material weaknesses in our internal control over financial reporting, as described in Management’s Report On Internal Control Over Financial Reporting in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2014, which continue to exist as of March 31, 2015. Specifically, management determined that we did not maintain effective

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control over proper timing and recognition of revenue and over the elements used in our analysis and evaluation of the allowance for doubtful accounts to ensure that the allowance for doubtful accounts was reasonably stated.

Remediation of Material Weaknesses in Internal Control over Financial Reporting.

We are in the process of improving our controls to remediate the material weaknesses in internal control over financial reporting that existed as of December 31, 2014. The actions we are taking are subject to ongoing senior management review, as well as audit committee oversight. We have hired a divisional controller who will assist in the remediation efforts. The remedial actions include, among other steps, a reconciliation of proof of delivery (fax confirmation) to invoice, to unbilled reports and to error processing queues. In addition, effective for the quarter ended March 31, 2015, an additional review process was added to the allowance for doubtful accounts analysis such that current and historical trends of payments are given more weight in the determination of the allowance amount.

While some of the remediation actions are in process, this will take time to be fully integrated and confirmed to be effective and sustainable. Until the remediation steps are fully implemented and tested, the material weaknesses described above will continue to exist.

Changes in Internal Control over Financial Reporting.

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended ~~September 30, 2014~~March 31, 2015 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, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, ~~2013~~2014 that was filed with the Securities and Exchange Commission on ~~March 27, 2014.~~April 15, 2015.


Item 6.	Exhibits


(a)	Exhibits



†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 filed on November 14, 2005).

3.2			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 May 29, 2012).

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 Current Report on Form 8-K 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 25, 2007).

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

4.2			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 Current Report on Form 8-K filed on January 4, 2011).

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 Current Report on Form 8-K filed on January 4, 2011).

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

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

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

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 Current Report on Form 8-K filed on February 7, 2012).

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

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 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).

*4.11			Form of Warrant to Purchase Common Stock issued by the Registrant to Craig-Hallum Capital Group LLC on February 27, 2015 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on February 27, 2015).

10.1			~~Surveyor Kit Patent, Technology, and Inventory~~ Purchase Agreement ~~dated as of July 1, 2014,~~ by and between the Registrant and ~~Integrated DNA Technologies, Inc.~~ Craig-Hallum Capital Group LLC, dated February 27, 2015 (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed on February 27, 2015).

10.2			Limited Waiver and Sixth Amendment to Loan and Security Agreement by and among the Registrant, Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated April 1, 2015 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 2, 2015).

31.1			Certification of Paul Kinnon, President, Chief Executive Officer and Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended

32.1			Certification of Paul Kinnon, President, Chief Executive Officer and Interim 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
†			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.

*			~~The Registrant has requested confidential treatment with respect to certain portions of the exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.~~

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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:	~~November 12, 2014~~May 14, 2015	By:	/S/ PAUL KINNON
			Paul Kinnon President, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)

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	Dollars in Thousands
	September 30, 2014						December 31, 2013
	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Intangibles—technology	$	9,009	$	3,790	$	5,219	$	9,009	$	3,175	$	5,834
Intangibles—assay royalties	1,434		768		666		1,434		614		820
Intangibles—third party payor relationships	367		92		275		367		73		294
Intangibles—tradenames and trademarks	824		321		503		824		233		591
Intangibles—customer relationships	652		87		565		652		54		598
Intangibles—covenants not to compete	184		123		61		184		77		107
Patents	1,209		384		825		1,153		336		817
Intellectual property	266		68		198		170		36		134
	$	13,945	$	5,633	$	8,312	$	13,793	$	4,598	$	9,195




	Dollars in Thousands
	Three Months Ended September 30, 2013
	Laboratory Services			Genetic Assays and Platforms			Total
Net Sales	$	4,112		$	2,534		$	6,646
Gross Profit	1,776			674			2,450
Net Loss before Taxes	(4,375		)	(1,185		)	(5,560		)
Income Tax Expense (Benefit)	—			(8		)	(8		)
Net Loss	$	(4,375	)	$	(1,177	)	$	(5,552	)
Depreciation/Amortization	$	606		$	65		$	671
Interest Expense, net	$	96		$	59		$	155

	September 30, 2013
Total Assets	$	23,648		$	9,532		$	33,180



	Dollars in Thousands
	Nine Months Ended September 30, 2014
	Laboratory Services			Genetic Assays and Platforms			Total
Net Sales	$	11,594		$	7,793		$	19,387
Gross Profit	4,903			2,199			7,102
Net (Loss) Income before Taxes	(9,565		)	1,887			(7,678		)
Income Tax Expense (Benefit)	590			(119		)	471
Net (Loss) Income	$	(10,155	)	$	2,006		$	(8,149	)
Depreciation/Amortization	$	1,422		$	148		$	1,570
Interest Expense, net	$	282		$	208		$	490



	Dollars in Thousands
	Nine Months Ended September 30, 2013
	Laboratory Services			Genetic Assays and Platforms			Total
Net Sales	$	12,551		$	8,775		$	21,326
Gross Profit	5,822			2,856			8,678
Net Loss before Taxes	(9,641		)	(2,312		)	(11,953		)
Income Tax Expense	—			52			52
Net Loss	$	(9,641	)	$	(2,364	)	$	(12,005	)
Depreciation/Amortization	$	1,815		$	287		$	2,102
Interest Expense, net	$	314		$	145		$	459