2. Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Response Genetics, Ltd., a Scottish corporation (the "Subsidiary"), which was incorporated in November 2006. The Subsidiary had no employees or active operations in 2012. All significant intercompany transactions and balances have been eliminated in consolidation.

Reclassification

Certain reclassifications have been made to prior period amounts to conform to current period presentation of gross profit in the statement of operations. These reclassifications did not have an impact on the Company's financial condition as of December 31, 2012 nor statement of operations for the period ended March 31, 2012.

Cash and Cash Equivalents

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

Accounts Receivable

Pharmaceutical Accounts Receivable

The Company invoices its clients as specimens are processed and any other contractual obligations are met. The Company's contracts with clients typically require payment within 45 days of the date of invoice. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its clients to make required payments. The Company specifically analyzes accounts receivable and historical bad debts, client credit, current economic trends and changes in client payment trends when evaluating the adequacy of the allowance for doubtful accounts. Account balances are charged-off against the allowance when it is probable the receivable will not be recovered. To date, the Company's pharmaceutical customers have primarily been large pharmaceutical companies. As a result, bad debts from pharmaceutical accounts receivable to date have been minimal. Pharmaceutical company accounts receivable as of December 31, 2012 and March 31, 2013 were $2,549,665 and $1,917,601, respectively. There were no allowances for doubtful accounts recorded against these pharmaceutical accounts receivable at December 31, 2012 and March 31, 2013.

ResponseDX^® Accounts Receivable

ResponseDX^® accounts receivable are recorded from two primary payors: (1) Medicare and (2) third party payros such as commercial insurance and private payors or self-pay ("Private Payors"). ResponseDX^® accounts receivable are recorded at established billing rates less an estimated billing adjustment, based on reporting models utilizing historical cash collection percentages and updated for current effective reimbursement factors. Management performs ongoing valuations of accounts receivable balances based on management's evaluation of historical collection experience and industry trends. Based on the historical experience for our Medicare and Private Payor accounts, management has determined, based on a detailed analysis, that accounts receivable associated with certain billings are unlikely to be collected. Therefore, the Company has recorded an allowance for doubtful accounts of $991,990 and $1,048,864 as of December 31, 2012 and March 31, 2013. The Company's bad debt expense for the three months ended March 31, 2012 and 2013 was $178,065 and $468,463, respectively.

ResponseDX^® accounts receivable as of December 31, 2012 and March 31, 2013, consisted of the following:

	December 31, 2012			March 31, 2013
				(Unaudited)
Net Medicare receivable	$	890,936		$	1,449,049
Net Private Payor receivable		2,924,412			2,951,765
		3,815,348			4,400,814
Allowance for doubtful accounts		(991,990	)		(1,048,864	)
Total	$	2,823,358		$	3,351,950

Property and Equipment

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

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

Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations. The Company has capitalized costs related to the development of database software (see Note 3). The portion of this database placed into service is amortized in accordance with ASC 350-40, Internal-Use Software. The amortization period is five years using the straight-line method.

Revenue Recognition

Pharmaceutical Revenue

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

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

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

The Company recorded revenue from pharmaceutical clients of $1,029,842 and $2,441,693 for the three months ended March 31, 2012 and 2013, respectively.

ResponseDX^® Revenue

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

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

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

The following details ResponseDX^® revenue for the three months ended March 31, 2012 and 2013:

	Three Months
	Ended March 31,
	(Unaudited)
	2012		2013

Net Medicare revenue	$	1,460,318	$	1,344,215

Private Payor revenue		1,485,643		1,838,283

Other		5,841		-

Net ResponseDX ^® revenue	$	2,951,802	$	3,182,498

Cost-Containment Measures

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

Regulatory Matters

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

Medicare reimbursement rates are subject to regulatory changes and government funding restrictions. In January 2013, the initial 2013 annual Medicare fee schedule update was announced which included proposed changes to Medicare reimbursement rates that significantly reduced the reimbursement rates for certain of the testing services we provide. The Company is participating with other impacted organizations to provide guidance to the local Medicare Administrative Contractor ("MAC") that may result in adjustments to the proposed reimbursement rates to better reflect the value of the services being performed. As a result of this guidance, the local MAC updated certain pricing on or about April 3, 2013 which reflected an increase in many of the tests originally priced in January 2013. It is anticipated that continued guidance provided to Medicare and the local MAC by impacted organizations will result in additional fee increases during 2013. If, however, the current level of reduction in reimbursement rates is adopted as is, it may have a material adverse effect on the Company's operations.

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

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

Cost of Revenue

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

License Fees

The Company licenses technology for the extraction of RNA and DNA from FFPE tumor specimens from the University of Southern California ("USC") in exchange for royalty fees on revenue generated by use of the technology. These royalties are calculated as a fixed percentage of revenue that we generate from use of the technology licensed from USC. Total license fees expensed in cost of revenue under the license agreement with USC were $56,502 and $104,105 for the three months ended March 31, 2012 and 2013, respectively. We also maintain a non-exclusive license to use Roche Molecular Systems, Inc.'s ("Roche") PCR, homogenous PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage royalty fee for revenue that we generate through use of this technology. Royalties expensed in cost of revenue under the Roche agreement totaled $63,468 and $90,145 for the three months ended March 31, 2012 and 2013, respectively.

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

Research and Development

The Company expenses costs associated with research and development activities as incurred. Research and development costs are expensed as incurred and classified as research and development costs. Certain costs such as lab supplies and reagents that cannot be specifically identified are allocated based on the number of samples processed in total by the lab and R&D departments in total. Research and development costs include employee costs (salaries, payroll taxes, benefits, and travel), equipment depreciation and warranties and maintenance, laboratory supplies, primers and probes, reagents, patent costs and occupancy costs.

Line of Credit

On July 14, 2011, the Company entered into a line of credit agreement with Silicon Valley Bank (the "Bank"). The agreement has been amended most recently on March 7, 2013. The line of credit is collateralized by the Company's pharmaceutical and Medicare receivables. The amended maximum amount that can be borrowed from the credit line is $2,000,000. As of March 31, 2013, the amount the Company can draw from the loan was equal to the lesser of (i) the Company's calculated borrowing base, which was 80% of certain of the Company's accounts receivable, or (ii) the amount available under the credit line. Prior to the line of credit's first amendment on December 14, 2011, the Bank issued letters of credit up to a maximum amount of $500,000. Any issued letters of credit reduced the amount available to borrow under the line of credit on a dollar for dollar basis. As of March 31, 2013, the interest fees associated with this line of credit were set at the prime rate plus 1%. For the period ended March 31, 2013, the rate being charged to the Company was 5%. As needed from time to time, the Company may draw on this line of credit for use for general corporate purposes. As of December 31, 2012 and March 31, 2013, the Company has drawn $1,000,000 against the line of credit and no letters of credit were outstanding. The line of credit is subject to various financial covenants and, as of March 31, 2013, the Company was in compliance with these covenants. However, prior to the most recent amendment on March 7, 2013, the Company was not in compliance with certain covenants. The September 28, 2012 amendment provided forbearance for the failure to comply with these certain covenants through November 30, 2012, and modified the covenants to include a requirement that the Company maintain account balances at the Bank totaling a minimum of $4,000,000 during the covered forbearance period. The December 6, 2012 amendment to the agreement extended the forbearance for the failure to comply with these certain covenants and the requirement for the Company to maintain account balances at the Bank totaling a minimum of $4,000,000 through December 31, 2012. In addition, pursuant to the March 7, 2013 amendment, the Bank waived the Company's existing breach of financial covenants under the credit agreement and the parties restructured the line of credit to provide that, among other things: (i) the revolving line of credit's maturity date was extended to March 7, 2015, (ii) the fee for the unused portion of the revolving line of credit was reduced from 0.375% to 0.250% per annum of the average unused portion of the revolving line of credit, (iii) the Company must continue to meet certain reporting requirements including providing financial statements and a certificate of compliance with the terms and conditions of the credit agreement by an authorized officer to the Bank within 45 days of the last day of each calendar quarter, provided that if the Company has less than $4,000,000 in its account at the Bank at any time during such calendar quarter, the Company must provide the financial statements and the certificate of compliance within 30 days of the end of such calendar quarter and providing a monthly report on revenues realized from private payors, (iv) the financial covenants were amended and restated to require the Company to maintain a ratio of quick assets to current liabilities of 1:50 to 1:00 and meet certain specified minimum adjusted earnings before interest, taxes, depreciation and amortization requirements as defined in the amendment and measured on a monthly basis and (v) the Bank is granted certain additional inspection of books, records and collateral rights.

As of December 31, 2012, the line of credit under the credit agreement was classified as a current liability of the Company on the accompanying balance sheet as the line of credit had a maturity date less than one year from December 31, 2012. As of March 31, 2013, the maturity date of the line of credit has been extended to March 7, 2015 and therefore the line of credit is classified as a non-current liability.

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

Income Taxes

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

ASC 740, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2012 and March 31, 2013, the Company does not have a liability for unrecognized tax benefits. The Company recognizes interest and penalties associated with tax matters as part of the income tax provision and includes accrued interest and penalties with the related tax liability in the balance sheet. For the periods ended March 31, 2012 and 2013, interest and penalties totaling $0 and $107, respectively, were recorded in the Consolidated Statement of Operations.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Stock Compensation, Share-Based Payment. Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value estimated in accordance with the provisions of ASC 718. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting period. As further described in Note 7, certain awards granted to Thomas Bologna, the Company's Chairman and Chief Executive Officer, were recognized based on an accelerated vesting basis triggered by market conditions rather than a straight-line basis.

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

Management Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements have been made for revenue, allowances for doubtful accounts, impairment of long-lived assets, depreciation of property and equipment and stock-based compensation. Actual results could differ materially from those estimates.

Long-lived Assets

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

Foreign Currency Translation

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

Comprehensive Loss

The components of comprehensive loss are accumulated net loss and unrealized foreign currency translation adjustments for the three months ended March 31, 2012 and 2013.

Fair Value of Financial Instruments

Cash and cash equivalents are stated at cost, which approximates fair market value. Cash equivalents consist of money market accounts, with fair values estimated based on quoted market prices. Debt balances are stated at historical amounts less principal payments, which approximate fair market value. The Company believes interest rates in its debt agreements are commensurate with lender risk profiles for similar companies. For additional information see Note 12.

Advertising Costs

The Company markets its services through its advertising activities in trade publications and on the internet. Advertising costs are included in selling and marketing expenses on the statements of operations and are expensed as incurred. Advertising costs for the three months ended March 31, 2012 and 2013 were $8,881 and $0, respectively.

Concentration of Credit Risk and Clients and Limited Suppliers

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. All of the Company's non-interest bearing cash balances were fully insured at December 31, 2012 due to a temporary federal program in effect from December 31, 2011 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning on January 1, 2013, federal insurance coverage reverted to $250,000 per depositor at each financial institution, and the Company's non-interest bearing cash balances again exceeded federally insured limits. There were no funds in interest-bearing accounts that exceeded the federally insured limits as of March 31, 2013. At March 31, 2013, $7,236 of cash was held outside of the United States and is uninsured.

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

	Three Months Ended March 31,
	2012					2013
	(Unaudited)					(Unaudited)
	Revenue		Percent of Total Revenue			Revenue		Percent of Total Revenue
Abbott Molecular, Inc.	$	32,466		1	%	$	910,182		15	%
GlaxoSmithKline LLC and GlaxoSmithKline Biologicals S.A.	$	719,087		18	%	$	1,356,384		23	%
Medicare, net of contractual allowances	$	1,460,318		37	%	$	1,376,900		23	%

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

	As of December 31, 2012					As of March 31, 2013
	( Unaudited )					( Unaudited )
	Receivable Balance		Percent of Total Receivables			Receivable Balance		Percent of Total Receivables

Abbott Molecular, Inc.	$	377,296		5.9	%	$	697,622		10.5	%
GlaxoSmithKline LLC and GlaxoSmithKline Biologicals S.A.	$	1,691,144		26.6	%	$	712,477		10.8	%
Medicare, net of contractual allowances	$	890,936		14.0	%	$	1,449,049		22.9	%

Many of the supplies and reagents used in the Company's testing process are procured from a limited number of suppliers. Any supply interruption or an increase in demand beyond the suppliers' capabilities could have an adverse impact on the Company's business. Management believes it can identify alternative sources, if necessary, but it is possible such sources may not be identified in sufficient time to avoid an adverse impact on its business. Refer also to Note 6 for further discussion regarding these supply agreements. The Company purchases certain laboratory supplies and reagents primarily from two suppliers. Purchases from these two suppliers accounted for approximately 68% and 65% of the Company's reagent purchases for the three months ended March 31, 2012 and 2013, respectively.