2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries; Columbia Laboratories Bermuda Ltd., Columbia Laboratories France SA , Columbia Laboratories UK Ltd, and Molecular Profiles Limited. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

For comparability purposes, certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year’s presentation within the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows.

Basis of Presentation

On July 26, 2013, Columbia’s Board of Directors set a ratio of 1-for-8 for its previously approved reverse stock split which took effect on August 9, 2013. The reverse stock split was approved by Columbia’s shareholders at its annual meeting of shareholders on May 1, 2013. All share and per share amounts relating to the common stock, stock options and common stock warrants included in the financial statements and accompanying footnotes have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an equal amount to the reduction in par value of common stock to additional paid-in capital. The reverse stock split did not result in a retroactive adjustment to the share amounts for any of the classes of the Company’s preferred stock.

Segments

The Company currently operates in one segment; the development and analysis of pharmaceuticals, clinical trial manufacturing of pharmaceutical products for its pharmaceutical company customers and the potential development of pharmaceutical products for its behalf. In certain foreign countries, these products may be classified as medical devices or cosmetics by those countries’ regulatory agencies. See Note 13 for information on foreign operations.

The Company acquired Molecular Profiles, Ltd, a UK-based provider of pharmaceutical development, clinical trial manufacturing, and advanced analytical and consulting services to the pharmaceutical industry, on September, 12, 2013. The Company views the manufacturing of clinical trial drug supplies for its pharmaceutical company clients and the manufacture of CRINONE for our license partner to be seamless activities and have therefore sought to capture synergies by transferring all operational activities related to its historic business to Molecular Profiles. These activities, including management of CRINONE manufacturing, quality assurance and logistics and, management of our intellectual property estate are now fully integrated into and managed out of its Nottingham, U.K. facility.

Prior to the Company’s acquisition of Molecular Profiles, the Company had invested heavily in an approximate quadrupling of its capacity. This capacity expansion necessarily has increased the overall cost-base of the Nottingham operations. As such the Chief Executive Officer, Chief Operating Decision Maker (CODM), currently focuses his decision making attention on the expansion of the Company’s revenue base.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures at the date of the financial statements during the reporting period. Significant estimates are used for, but are not limited to revenue recognition, sales return reserves, allowance for doubtful accounts, inventory reserve, impairment analysis of goodwill and intangibles including their useful lives, deferred tax assets, liabilities and valuation allowances, common stock warrant valuations, and fair value of stock options. On an ongoing basis, management evaluates its estimates. Actual results could differ from those estimates.

Foreign Currency

The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at current exchange rates and revenue and expense items are translated at average rates of exchange prevailing during the period. The functional currency of Columbia’s foreign subsidiaries is considered to be the local currency for each entity and, accordingly, translation adjustments for these subsidiaries are included in accumulated other comprehensive income within stockholders’ equity. Certain intercompany and third party foreign currency-denominated transactions generated foreign currency re-measurement loses of approximately $47,000, $0.1 million and $0.3 million during the years ended December 31, 2013, 2012 and 2011, respectively, which are included in other expense, net in the consolidated statements of operations.

Cash Equivalents

The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents.

Short Term Investments

Investments consist of U.S. Treasury and agency securities. The Company’s investments are classified as available-for-sale and are recorded at fair value, based upon quoted market prices. Unrealized temporary adjustments to fair value are included on the balance sheet in a separate component of stockholders’ equity as unrealized gains and losses and reported as a component of accumulated other comprehensive income. No gains or losses on investments are realized until shares are sold or a decline in fair value is determined to be other-than-temporary. If a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is established.

Fair Value of Financial Instruments

U.S. GAAP establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets and liabilities.

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

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

The fair value of short term investments are determined based on quoted market prices on the balance sheet date and are classified as a level 1 investment. At December 31, 2012, short-term investments totaled $15.4 million. There were no short-term investments at December 31, 2013.

The estimated fair value of the common stock warrant liability resulting from the October 2009 registered direct offering of 1,362,500 shares of the common stock and warrants to purchase 681,275 shares of common stock was $0.4 million and $1.2 million as of December 31, 2013 and 2012, respectively. These values were determined by using the Black-Scholes option pricing model which is based on the Company’s stock price at measurement date, exercise price of this common stock warrant, risk-free rate and historical volatility, and are classified as a Level 2 measurement. During the years ended December 31, 2013, 2012 and 2011, the Company recorded income of $0.8 million, $7.0 million and expense of $2.2 million, respectively, to adjust the value of the common stock warrant liability to market.


	2013			2012			2011
Stock Price	$	6.61		$	5.12		$	20.00
Exercise Price	$	12.16		$	12.16		$	12.16
Risk free interest rate		0.20	%		0.25	%		0.36	%
Expected term		1.25 years			2.25 years			3.25 years
Dividend yield		—			—			—
Expected volatility		61.32	%		103.10	%		83.24	%

The fair value of accounts receivable and accounts payable approximate their carrying amount. The Company’s long-term debt is carried at amortized cost which approximates fair value based on current market pricing of similar debt instruments and is categorized as a Level 2 measurement.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Components of inventory cost include materials, labor and manufacturing overhead. Inventories consist of the following:


	December 31,
	2013		2012
Raw materials	$	770,523	$	685,578
Work in process		774,578		1,308,399
Finished goods		1,038,354		632,629

Total	$	2,583,455	$	2,626,606

Reserves for excess and obsolete inventory were $0.2 million and $1.1 million at December 31, 2013 and 2012, respectively.

Columbia’s excess and obsolescence reserve policy is to establish inventory reserves when conditions exist which suggest that the inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for products and market conditions. Columbia only manufactures products to customer orders. Columbia regularly evaluates the ability to realize the value of inventory based upon a combination of factors. Assumptions used in determining management’s estimates of future product demand may prove to be incorrect, in which case the provision required for excess and obsolete inventory would have to be adjusted in the future.

Columbia purchases raw material components from sole source suppliers. A delay in the production capabilities of these vendors could cause a delay in Columbia’s manufacturing, and a possible loss or revenues, which would adversely affect operating results.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are reported at their outstanding unpaid principal balances reduced by allowances for doubtful accounts. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers’ ability to pay and current economic trends. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectable.

Accounts receivable allowance activity consisted of the following for the years ended December 31:


	2013		2012		2011
Balance at beginning of year	$	100,000	$	100,000	$	100,000
Additions		12,174		—		—
Deductions		—		—		—

Balance at end of year	$	112,174	$	100,000	$	100,000

Columbia’s accounts receivable balance, net of allowance for doubtful accounts, was $7.2 million as of December 31, 2013, compared with $1.2 million as of December 31, 2012. Included in the accounts receivable balance at December 31, 2013 were $2.8 million of unbilled accounts receivable. There is no unbilled accounts receivable as of December 31, 2012. Columbia’s unbilled accounts receivable is derived from the milestones completed on the pharmaceutical development service contracts as of the balance sheet date.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Leasehold improvements are amortized over the lesser of the useful life or the term of the leases. Depreciation is computed on the straight-line basis over the estimated useful lives of the respective assets, as follows:


		Years
Machinery and equipment		3-10
Furniture and fixtures		3-5
Computer equipment and software		3
Buildings and leasehold improvements		Up to 39
Land		Indefinite

Costs of major additions and improvements are capitalized and expenditures for maintenance and repairs that do not extend the term of the assets are expensed. Upon sale or disposition of property and equipment, the cost and related accumulated depreciation are eliminated from the accounts and any resultant gain or loss is credited or charged to operations.

Columbia continually evaluates whether events or circumstances have occurred that indicate that the remaining useful life of its long-lived assets may warrant revision or that the carrying value of these assets may be impaired. Columbia evaluates the realizability of its long-lived assets based on profitability and cash flow expectations for the related asset. Any write-downs are treated as permanent reductions in the carrying amount of the assets. Based on this evaluation, Columbia believes, as of each balance sheet date presented, none of Columbia’s long-lived assets were impaired.

In the fourth quarter of 2012, the Company recorded an impairment charge on the net carrying value of certain machinery and equipment that was acquired in anticipation of increased capacity requirements for Progesterone production in anticipation of the approval of the preterm birth indication. The company recorded a loss of $0.9 million which was recorded in general and administrative expense in the consolidated statements of operations.

Concentration of Risk

The Company has two major customers – Actavis and Merck Serono. See Note 13 for customer and product concentrations.

The Company depends on one supplier for a key excipient (ingredient) used in its products and one supplier for one of the active pharmaceutical ingredients.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a business combination. The Company does not amortize its goodwill, but instead tests for impairment annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying value of the asset.

The Company has adopted ASU 2011-08, Intangibles—Goodwill and Other, and amendment to ASC 350, which updates how an entity will evaluate its goodwill for impairment. The guidance provides entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. If further testing is required, the test for impairment continues with the two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value (Step 1). To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value is compared to the implied fair value (Step 2). To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.

The Company has concluded that its business represents one reporting unit for goodwill impairment testing. The Company has performed its annual test for impairment on the first day of the fourth quarter beginning in 2013. The Company has determined that its goodwill is not impaired as of December 31, 2013.

Intangible Assets

The Company capitalizes and includes in intangible assets the costs of trademark, developed technology and customer relationships. Intangible assets are recorded at fair value and stated net of accumulated amortization. The Company amortizes its intangible assets that have finite lives using either the straight-line or accelerated method, based on the useful life of the asset over which it is expected to be consumed utilizing expected undiscounted future cash flows. Amortization is recorded over the estimated useful lives ranging from 3 to 7 years. The Company evaluates the realizability of its definite lived intangible assets whenever events or changes in circumstances or business conditions indicate that the carrying value of these assets may not be recoverable based on expectations of future undiscounted cash flows for each asset group. If the carrying value of an asset or asset group exceeds its undiscounted cash flows, the Company estimates the fair value of the assets, generally utilizing a discounted cash flow analysis based on the present value of estimated future cash flows to be generated by the assets using a risk-adjusted discount rate. To estimate the fair value of the assets, the Company uses market participant assumptions pursuant to ASC 820, Fair Value Measurements. If the estimate of an intangible asset’s remaining useful life is changed, the Company will amortize the remaining carrying value of the intangible asset prospectively over the revised useful life.

Income Taxes

Deferred tax assets or liabilities are determined based on timing differences between when income and expense items are recognized for financial statement purposes versus when they’re recognized for tax purposes, as measured by enacted tax rates. A valuation allowance is provided against deferred tax assets in circumstances where management believes it is more likely than not that all or a portion of the assets will not be realized. The Company has provided a full valuation allowance against its net domestic deferred tax assets as of December 31, 2013 and 2012.

Accumulated Other Comprehensive (Loss) Income

Changes to accumulated other comprehensive (loss) income during the year ended December 31, 2013 were as follows:


	Unrealized Gain on Marketable Securities, net of tax			Translation Adjustment		Accumulated Other Comprehensive (Loss) Income
Balance – December 31, 2012	$	97,220		$	186,001	$	283,221
Current period other comprehensive (loss) income		(80,223	)		1,183,870		1,103,647
Amounts reclassified from accumulated other comprehensive (loss) income		(16,997	)		—		(16,997	)

Balance – December 31, 2013	$	—		$	1,369,871	$	1,369,871

Revenue Recognition and Sales Returns Reserves

Revenues include product revenues, which primarily consist of sales of CRINONE to Merck Serono, royalty revenues, which primarily consist of royalty revenues from Actavis on sales of CRINONE, service revenues, which primarily consist of analytical and consulting services, pharmaceutical development services and clinical trial drug manufacturing services and other revenues.

Revenues from the Company’s pharmaceutical drug service line are recorded as multiple-element arrangements and are evaluated in accordance with the principles of Accounting Standards update (“ASU”) 2009-13, (Revenue Recognition Topic – Multiple Element Arrangements) and Columbia allocates revenue among the elements based upon each element’s relative fair value. These elements are recognized as revenue as the service for each element is performed.

Amounts paid but not yet earned on a project are recorded as deferred revenue until such time as performance is rendered or the obligation to perform the service is completed.

When a sale combines multiple elements upon performance of multiple services, the Company allocates revenue for transactions that include multiple elements to each unit of accounting based on its relative selling price, and recognizes revenue for each unit of accounting when the revenue recognition criteria have been met. The Company follows the selling price hierarchy as outlined in the guidance Revenue Recognition (ASC Topic 605) – Multiple-Deliverable Revenue Arrangements. The guidance provides a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence (“VSOE”), (ii) third-party evidence (“TPE”) if available and when VSOE is not available, and (iii) best estimate of the selling price (“BESP”) if neither VSOE nor TPE is available. The Company uses BESP to determine the standalone selling price for such deliverables. The Company has a process for developing BESP, which incorporates, pricing practices, historical selling prices, the effect of market conditions as well as entity-specific factors. Estimated selling price is monitored and evaluated on a regular basis to ensure that changes in circumstances are accounted for in a timely manner.

Revenues from the sale of products are recorded at the time goods are shipped to customers, except in the case of product shipments to Actavis, which are recognized when received at Actavis’ warehouse. Sales to Merck Serono for CRINONE (progesterone gel) are determined on a country-by-country basis and are the greater of (i) thirty percent (30%) of the net selling price in the country, or (ii) Columbia’s direct manufacturing cost plus 20%. Columbia estimates net selling prices based on historical experience and other current information from Merck Serono; the amounts are reconciled on a quarterly basis when information is received from Merck Serono. Certain quantity discounts apply to annual purchases over 10 million, 20 million, and 30 million units. Columbia accrues an estimated volume discount on a quarterly basis and reconciles it on an annual basis.

Royalty revenues, based on sales by licensees, are recorded as revenues as those sales are made by the licensees.

Revenues from the sales of consulting services are recognized on a straight-line basis over the contract period as services are provided. Payments received by Columbia in advance of performance for services are deferred until earned.

License fees revenues are recognized and recorded as revenues over the estimated development period.

In accordance with the provisions of ASC 605-45, Revenue Recognitions Topic – Principal Agent Considerations, Columbia records shipping and handling costs billed to its customers as a component of revenue, and the underlying expense as a component of cost of revenue.

Columbia collects value added tax from its customers for revenues generated out of the United Kingdom for which the customer is not tax exempt and remits such taxes to the appropriate governmental authorities. Columbia presents its value added tax on a net basis; therefore, these taxes are excluded from revenues.

Columbia is not responsible for returns on international sales. Sales adjustments for international sales are estimated to recognize changes in foreign exchange rates and changes in market prices that may fluctuate within a year. Columbia is responsible for sales returns for products sold to domestic customers prior to both the Actavis Transactions and the sale in April 2011 of STRIANT^® (testosterone buccal system) to Auxilium Pharmaceuticals LLC (“Auxilium”). Revenues from the sale of products to domestic customers were recorded at the time goods were shipped to customers. Except for sales to licensees, Columbia’s return policy allows product to be returned for a period beginning three months prior to the product expiration date and ending twelve months after the product expiration date. Products sold to Merck Serono and Actavis are not returnable to Columbia. Provisions for returns on sales to wholesalers, distributors and retail chain stores were estimated based on a percentage of sales, using such factors as historical sales information, distributor inventory levels and product prescription data, and were recorded as a reduction to sales in the same period as the related sales were recognized. Columbia evaluates its remaining provision for returns on a quarterly basis based on the rate of returns processed and adjusts the provision if its analysis indicates that the provision needs to be adjusted.

An analysis of the reserve for sales returns at December 31, 2012 and 2013 is as follows:


	Total
Balance – December 31, 2011	$	1,429,597
Provision:
Related to current period sales		—
Related to prior period sales		(625,452	)

		(625,452	)

Returns:
Related to prior period sales		(320,280	)

		(320,280	)

Balance – December 31, 2012	$	483,865
Provision:
Related to current period sales		—
Related to prior period sales		(26,120	)

		(26,120	)

Returns:
Related to prior period sales		(319,817	)

		(319,817	)

Balance – December 31, 2013	$	137,928

Deferred Revenue

As part of the acquisition of Molecular Profiles, Columbia assumed a $2.5 million obligation under a grant arrangement with the Regional Growth Fund on behalf of the Secretary of State for Business, Innovation, and Skills in the United Kingdom. Molecular Profiles used this grant to fund the building of its second facility, which includes analytical labs, office space, and a manufacturing facility. As a part of the arrangement, Molecular Profiles is required to create and maintain certain full-time equivalent personnel levels through October 2017. As of December 31, 2013, Molecular Profiles is in compliance with the covenants of the arrangement.

The income from the Regional Growth Fund will be recognized on a decelerated basis through September 30, 2017. As of December 31, 2013, the obligation is valued at $2.6 million due to foreign currency revaluation and is recorded in deferred revenue on the consolidated balance sheets.

Amounts paid but not yet earned on a product are recorded as deferred revenue until such time as performance is rendered or the obligation to perform the service is completed.

License Fees

License revenue consists of up-front, milestone and similar payments under license agreements and is recognized when earned under the terms of the applicable agreements. Milestone payments represent payments for the occurrence of contract-specified events and coincide with the achievement of a substantive element in a multi-element arrangement. License revenue, including milestone payments, is deferred and recognized in revenues over the estimated product life cycle or the length of relevant patents, whichever is shorter.

Research and Development Costs

Research and development consist of salaries and other personnel related expenses including stock-based compensation of employees primarily engaged in research and development activities and materials used and other overhead expenses incurred in connection with conducting the PREGNANT study.

Columbia entered into an agreement with Actavis to collaborate on the development of Progesterone Products, specifically the PREGNANT study. The PREGNANT study expenses consisted of fees for preparation, filing and approval process of the related drug application. Under the terms of the agreement, Columbia performed certain research and development activities, the cost of which was partially funded by Actavis. Columbia recorded $0.4 million and $3.2 million of reimbursements from Actavis as a reduction to research and development expenses in the years ended December 31, 2012 and 2011, respectively. All research and development costs are expensed as incurred.

In 2013, there were no research and development expenses or reimbursements from Actavis as the Company eliminated its research and development activities in 2012.

Stock-based compensation

Columbia follows the fair value recognition provisions of ASC 718, Stock Compensation Topic (ASC 718). Columbia expenses the fair value of stock options over the service period. Columbia records its stock-based compensation expense without a forfeiture rate. Accordingly, Columbia reviews its actual forfeiture rates and aligns its stock compensation expense with the options that are vesting. In December 2012, $0.2 million was credited to stock compensation related to the forfeiture of unvested options.

Columbia recorded stock-based compensation expense of $0.5 million, $0.7 million and $0.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Total stock-based compensation expense was recorded to cost of revenues, and operating expenses based upon the functional responsibilities of the individuals holding the respective options as follows:


	Years Ended December 31,
	2013		2012		2011
Cost of revenues	$	14,558	$	22,804	$	12,227
General and administrative		460,745		605,349		723,034
Research and development		—		40,239		79,259

Total employee stock-based compensation	$	475,303	$	668,392	$	814,520

As of December 31, 2013, total unamortized share-based compensation cost related to non-vested stock options was $0.5 million which is expected to be recognized on a straight-line basis over a weighted average period of 2.2 years.

Cash received from option exercises was $11,000 and $2.6 million during the years ending December 31, 2013 and 2011, respectively. There were no option exercises in the year ended December 31, 2012.

Columbia granted 88,749, 104,375 and 129,375 stock options during the years ended December 31, 2013, 2012 and 2011, respectively.

Stock based compensation for consultants amounted to $0.1 million for both years ending December 31, 2012 and 2011, respectively. There was no stock-based compensation expense recorded for consultants in the year ended December 31, 2013. No tax benefit has been recognized due to the net tax losses during the periods presented.

The Company uses the Black-Scholes option pricing model to determine the estimated fair value for stock-based awards. The weighted-average fair value of the options granted during the years ended December 31, 2013, 2012 and 2011 was $3.52, $3.68 and $10.56, respectively using the following assumptions:


	Years Ended December 31,
	2013	2012	2011
Risk free interest rate	0.71%-0.76%	0.82%	2.11%
Expected term	4.75 years	4.75 years	4.75 years
Dividend yield	—	—	—
Expected volatility	96.52%-97.02%	93.57%	92.72%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Columbia’s estimated expected stock price volatility is based on its own historical volatility. Columbia’s expected term of options granted in the years ended December 31, 2013, 2012 and 2011 was derived from the simplified method. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Net Income Per Common Share

The calculation of basic and diluted income per common and common equivalent share is as follows:


	Years Ended December 31,
	2013			2012			2011
Basic net income per common share
Net income	$	6,703,774		$	9,917,273		$	20,527,192
Less: Preferred stock dividends		(27,500	)		(29,334	)		(30,000	)

Net income applicable to common stock	$	6,676,274		$	9,887,939		$	20,497,192

Basic weighted average number of common shares outstanding		11,259,347			10,914,476			10,790,669

Basic net income per common share	$	0.59		$	0.91		$	1.90

Diluted net income per common share
Net income applicable to common stock	$	6,676,274		$	9,887,939		$	20,497,192
Add: Preferred stock dividends		27,500			29,334			30,000
Less: Fair value of stock warrants for dilutive warrants		(794,280	)		(6,995,099	)		(556,662	)

Net income applicable to dilutive common stock	$	5,909,494		$	2,922,174		$	19,970,530

Basic weighted average number of common shares outstanding		11,259,347			10,914,476			10,790,669
Effect of dilutive securities
Dilutive stock awards		13,784			6,108			169,714
Dilutive warrants		—			—			356,981
Dilutive preferred share conversions		325			142,450			251,280

		14,109			148,558			777,975
Diluted weighted average number of common shares outstanding		11,273,456			11,063,034			11,568,644

Diluted net income per common share	$	0.52		$	0.26		$	1.73

Basic income per common share is computed by dividing the net income, plus preferred dividends by the weighted-average number of shares of common stock outstanding during a period. The diluted earnings per common share calculation gives effect to dilutive options, warrants, convertible notes, convertible preferred stock, and other potential dilutive common stock including selected restricted shares of common stock outstanding during the period. Diluted income per share is based on the treasury stock method and includes the effect from potential issuance of common stock, such as shares issuable pursuant to the exercise of stock options, assuming the exercise of all in-the-money stock options. Common share equivalents have been excluded where their inclusion would be anti-dilutive.

Shares to be issued upon the exercise of the outstanding options and warrants, convertible preferred stock and selected restricted shares of common stock excluded from the income per share calculation amounted to 1,599,551, 1,841,857 and 769,757 for the years ended December 31, 2013, 2012 and 2011, respectively, because the awards were anti-dilutive.

Acquisition Related Expenses

The Company’s acquisition related expenses for 2013 were costs associated with the September 12, 2013 acquisition of Molecular Profiles and a failed transaction in the first quarter of 2013.