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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20112013
OR
¨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)
 
(IRSI.R.S. Employer
Identification Number)
  
12325 Emmet Street
Omaha, NE 68164
 68164
(Address of Principal Executive Offices) (Zip Code)
(402) 452-5400
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01$0.01 per share
(Title of Class)
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes                 No  X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes                 No  X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  X     No           
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes      X           No              
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K             

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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 definitionthe definitions of “accelerated“large accelerated filer”, “large accelerated“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨                   Accelerated Filer ý ¨
Non-Accelerated Filer ¨                     Smaller Reporting Company ¨ý
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)12b-2 of the Act).
Yes                 No      X
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported closing price per share of Common Stock as reported on the OTC Bulletin BoardOTCQB on the last business day of the registrant’s most recently completed second quarter was approximately $86.2$35.3 million.
At March 13, 2012,24, 2014, the registrant had 71,625,7257,353,695 shares of Common Stockcommon stock outstanding.


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TRANSGENOMIC, INC.
Index to Form 10-K for the Fiscal Year Ended December 31, 20112013

 
    
PART I   
 Item 1.Business
4
 Item 1A.Risk Factors
9
 Item 1B.Unresolved Staff Comments
1314
 Item 2.Properties
1315
 Item 3.Legal Proceedings
1315
 Item 4.Mine Safety Disclosures
1415
PART II   
 Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
1516
 Item 6.Selected Consolidated Financial Data
1718
 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
1819
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk
2930
 Item 8.Financial Statements and Supplementary Data 
  Report of Independent Registered Public Accounting Firm
3031
  Consolidated Balance Sheets as of December 31, 20112013 and 20102012
3133
  Consolidated Statements of Operations for the Years Ended December 31, 2011, 20102013, 2012 and 20092011
3234
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2013, 2012 and 2011
35
  Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2011, 20102013, 2012 and 20092011
3336
  Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 20102013, 2012 and 20092011
3437
  Notes to the Consolidated Financial Statements for the Years Ended December 31, 2011, 20102013, 2012 and 20092011
3539
 Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
5863
 Item 9A.Controls and Procedures
5863
 Item 9B.Other Information
5964
PART III   
 Item 10.Directors, Executive Officers and Corporate Governance
5964
 Item 11.Executive Compensation
64
 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
64
 Item 13.Certain Relationships and Related Transactions, and Director Independence
7964
 Item 14.Principal Accounting Fees and Services
8164
PART IV   
 Item 15.Exhibits, Financial Statement Schedules
8165
  
SIGNATURES
8769

This Annual Report on Form 10-K references the following registered trademarks which are the property of Transgenomic, Inc.: Transgenomic, WAVE, WAVEMAKER, MutationDiscovery.com, OPTIMASE, DNASEP,® Cartridges, OLIGOSEP, RNASEP, WAVE® System, WAVEMAKER® Software, TRANSGENOMIC® OPTIMIZED, SURVEYOR, FAMILION and the Globe Logo®; MutationDiscovery.com® Website, OLIGOSEP® Cartridges for Systems and Reagents, OPTIMASE® Polymerase, RNASEP® Cartridges, WAVE OPTIMIZED® reagents, WAVE® MD Systems, MitoScreenScoliScoreTM Kits,. The following trademarks are the property of Transgenomic, Inc.: Advancing Personalized Medicine, the helix logo, ProtocolWriterTM Software, NavigatorTM Software, THE POWER OF DISCOVERY® for Lab Reagents and Educational Programs, SURVEYOR® Nuclease, and FAMILION®.Navigator. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.



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PART I
FORWARD-LOOKING STATEMENTS
This report,Annual Report on Form 10-K (this “Annual Report”), including Management’s Discussion & Analysis of Financial Condition and Results of Operations, 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, business strategy, industry conditions and key trends, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, expected financial and other benefits from our organizational restructuring activities, actions of governments and regulatory factors affecting our business and other risks as described in our reports filed with the Securities and Exchange Commission (the "SEC"“SEC”). 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 of such 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 thethese forward-looking statements that we make for a number of reasons including those described in Item 1A, “Risk Factors,” and other factors identified by cautionary language used elsewhere in this report.Annual Report.
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.

Reverse Stock Split
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 this Annual Report have, where applicable, been adjusted retroactively to reflect this reverse stock split.
The following discussion should be read together with our financial statements and related notes contained in this report.Annual Report. Results for the year ended December 31, 20112013 are not necessarily indicative of results that may be attained in the future.

Item 1.Our Business
Transgenomic, Inc.(“we”, “us”, “our Company” or “Transgenomic”) is a global biotechnology company advancing personalized medicine in the detection and treatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. We have threeOur operations are organized and reviewed by management along its product lines and presented in the following two complementary business segments.segments;
Clinical Laboratories.Laboratory Services. Our clinical laboratories specialize in genetic testing for cardiology, neurology, mitochondrial disorders and oncology. LocatedOur Patient Testing laboratories located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA)(“CLIA”) as high complexity labslaboratories and our Omaha facility is also accredited by the College of American Pathologists (CAP)(“CAP”).
Pharmacogenomics Services. Our Contract Research OrganizationBiomarker Identification laboratory located in Omaha, Nebraska also provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by our pharmaceutical customers. This lab specializescompanies. Our laboratories employ a variety of genomic testing service technologies, including ICE COLD-PCR technology. ICE COLD-PCR is a proprietary platform technology that can be run in pharmacogenomic, biomarkerany laboratory with standard PCR technology and mutation discovery research serving the pharmaceutical and biomedical industries worldwide for disease research, drug and diagnostic development and clinical trial support.that enables detection of multiple unknown mutations
•
Diagnostic Tools. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,500 WAVE Systems as of December 31, 2011. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.

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from virtually any sample type including tissue biopsies, blood, cell-free DNA (“cfDNA”) and circulating tumor cells (“CTCs”) at levels greater than 1,000-fold higher than standard DNA sequencing techniques.
Genetic Assays and Platforms. Our proprietary product is the WAVE® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of Contents
the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.
Segment information related to revenues, a performance measure of profit, capital expenditures, and total assets is contained in Footnote 14- “Operating Segment and Geographic Information” to our accompanying consolidated financial statements.

Business Strategy
Our primary goal is to provide products and services to biomedical researchers, physicians, medical institutions and diagnostic and pharmaceutical companies that are tied to advancements in the field of genomics and, increasingly, personalized medicine. Advances in genomics have fueled our efforts to understand individual differences in disease susceptibility, disease progression and response to therapy.
The markets in which we compete require a wide variety of technologies, products and capabilities. The combination of technological complexity and rapid change within our markets makes it difficult for a single company to develop all of the technological solutions that it desires to offer within its family of products and services. We work to broaden the range of products and services we deliver to customers in target markets through acquisitions, investments and alliances. We employ the following strategies to address the need for new or enhanced products and services:
Developing new technologies and products internallyinternally;
AcquireAcquiring all or parts of other companiescompanies;
Entering into joint-development efforts with other companiescompanies; and
Reselling other companies' products'companies' products.
Our strategy is to leverage the synergies of our three divisions,segments, capitalizing on discoveries in our R&DResearch and Pharmacogenomic Services labsDevelopment (“R&D”) and Biomarker Identification laboratories to create “kits” or assays to distribute through our Tools division,Genetic Assays and Platforms segment, as well as tests to conduct in our Clinical Laboratories.Patient Testing laboratories.
We will continue to develop new technologies, such as our ICECOLD-PCR,ICE COLD-PCR, and capitalize on our expertise and intellectual properties to develop new ground-breakingunique tests, such as our PGxPredict®:CLOPIDOGRELCardioPredict Panel. We also continue to cultivate new and expanded relationships with industry leaders across the globe, such as A. MenariniPerkin Elmer in our ToolsGenetic Assays and Platforms business, PDI in our Patient Testing laboratories and a list ofseveral medical research facilities working with our two laboratory divisions.Laboratory Services segment.
We continue to evaluate a range of acquisition targets, including smaller single-test labs as well aslaboratories, larger private and public entities as well asand divisions of entities. We acquired the FamilionFAMILION business in December 2010 and quicklythe ScoliScoreTM assay technology in September 2012, and we have integrated itboth into our existing business, and believe we are skilled at such acquisition integrations.business.
Products
Our highly specialized genetics service and expertise are delivered by our Pharmacogenomic Services LaboratoryBiomarker Identification laboratory in Omaha, NENebraska and in our Clinical Laboratory Improvement Act (CLIA)-certified Clinical LaboratoriesCLIA-certified Patient Testing laboratories in Omaha and New Haven, CT.Connecticut. Our Pharmacogenomics LabBiomarker Identification laboratory supports pharmaceutical companies in their clinical trials, primarily phasePhase II and phasePhase III trials. Our Clinical Laboratories divisionPatient Testing laboratories support medical professionals in the diagnosis and treatment of patients, primarily in the specialties of Cardiology Neurology and OncologyNeurology with a range of tests within each medical specialty.
In cardiology, our FAMILION® family of tests focuses on detecting mutations that can cause cardiac channelopathies, cardiomyopathies and other rare, potentially lethal heart conditions. The specific diseases include Long QT Syndrome (LQTS), Familial Atrial Fibrillation (AF)(FAF), Hypertrophic Cardiomyopathy (HCM), and Dilated Cardiomyopathy (DCM). By reducing uncertainty and finding the specific genetic causes of cardiac channelopathies and cardiomyopathies, the FAMILION tests can:
Help diagnose a patient's diseasedisease;
Guide treatment optionsoptions; and
Determine whether family members are at riskrisk.

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Also in cardiology, our PGxPredict®:CLOPIDOGRELCardioPredict Panel seeks to identify the best treatment options for patients with heart disease. Certain genes in the panel identify the approximately 50% of patients with a genetic deficiency that prevents them from receiving the expected pharmacological benefit from clopidogrel (Plavix®). Information from the PGxPredict®:CLOPIDOGRELCardioPredict Panel can be used by the health care provider to ensure the most appropriate anti-platelet therapy istherapies are being used in an effort to reduce adverse cardiac events.
In Neurology, we have a focus on mitochondrial disorders and epilepsy and epilepsy-like diseases. We employ a wide variety of technologies, including proprietary technologies such as the WAVE, and industry standards such as Sanger sequencing and next generation sequencing. In 20112013, we introduced the NuclearMitome test,whole exome sequencing, which is based on next-generation sequencing, currently runand which specialists use to diagnose and treat exceptionally difficult to identify neurological disorders in patients.
ScoliScore™ is the first clinically validated and commercially available saliva-based multi-gene test that provides a partner lab at Seattle Children's Hospital.highly accurate assessment of the likelihood of spinal curve progression for individuals diagnosed with Adolescent Idiopathic Scoliosis (“AIS”), or an abnormal lateral curve of the spine. The ScoliScore™ Test identifies patients that will not progress to a severe curvature of the spine and reduces those patients’ need for repeated doctor visits, physical examinations and, most importantly, years of exposure to radiation from frequent X-Rays.
Our oncology tests are focused heavily on genetic mutations commonly associated with the major cancer types - Lung, Colorectal, Breast and Prostate. We primarily test for mutations in the K-RAS, N-RAS,KRAS, NRAS, BRAF and PIK3CA genes, all associated with the most common cancers. We also offer tests for hereditary cancer-predisposing syndromes.
Our lablaboratory expertise is leveraged into our Diagnostic Tools division,Genetic Assays and Platforms segment, which focuses on assembly and delivery of highly sensitive mutation detection equipment, primarily our WAVE WAVEmce,platform. We also sell WAVE MCE and Hanabi instruments, as well as the

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bioconsumables, including test kits, used in these instruments for molecular testing and cytogenetics. TransgenomicOur equipment systems offer discovery and detection of genetic variationvariations at close to 100% sensitivity, making them among the most sensitive and accurate technologies for detection of known and unknown mutations and single nucleotide polymorphisms (SNPs). These equipment systems are used throughout the world to screen for a large variety of diseases. More than 350 human genes have been screened entirely or partly by Direct High Pressure Liquid Chromatography (DHPLC), the underlying technology used by our equipment systems. A multitude of other applications are being used with WAVE Systems in such diverse areas as plant genomics, microbial analysis and drug sensitivity.
We continue to leverage the synergies of the three divisions,two segments, capitalizing on discoveries in our R&D and Pharmacogenomic Services labsBiomarker Identification laboratories to create “kits” or test assays to distribute through our Tools division,Genetic Assays and Platforms segment, as well as tests to conduct in our Clinical Laboratories.Patient Testing laboratories.
Sales and Marketing
Our Sales and Support team consists of regionally based sales people, service engineers and applications scientists to support our sales and marketing activities worldwide. We have sold our products to customers in over 50 countries. We use a direct sales and support staff for sales in the U.S. and Europe. For the rest of the world, we sell our products through dealers and distributors within local markets. We have over 35 dealers and distributors.
Customers
Physicians requesting genetic tests for their patients are our primary source of revenues for laboratory services. Fees for laboratory testing services rendered for these physicians are billed either to the physician, the patient or the patient’s third-party payer such as an insurance company Medicare or Medicaid.Medicare. Billings are typically on a fee-for-service basis. The patient or third-party payer is billed at our patient fee schedule. Commercial insurance providers are billed at contracted rates or other generally accepted market reimbursement rates. Revenues received from Medicare and Medicaid billings are based on government established fee schedules and reimbursement rules.
Our customers include a number of large, established pharmaceutical, biotech and commercial companies as well as leading academic and medical institutions. In addition, our customers also include a number of large, established pharmaceutical, biotech and commercial companiesinstitutions both in the U.S. and abroad. No customer accounted for more than 10% of our consolidated net sales for the years ended December 31, 2011, 20102013, 2012 or 2009.2011. Information regarding the revenues attributable to U.S. and international markets is set forth in Note PFootnote 14 - “Operating Segment and Geographic Information” to the footnotes to our accompanying consolidated financial statements.
Research and Development
We continue to invest in research and development in order to remain competitive and to take advantage of new business opportunities as they arise. We maintain a program of research and development with respect to platform technologies, such as ICE COLD-PCR, instruments, test kits and services, engaging existing and new technologies to create scientific and medical

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applications that will add value to patient care as well as significant commercial value. Major areas of focus include the (i) development of ICE COLD-PCR application for ultra high sensitivity mutation detection in any tissue samples (fresh, frozen, FNA, FFPE, etc.) or body fluids (plasma, serum, ascites); (ii) development of a new strategy for mutation detection and sequence confirmation using microcapillary electrophoresis; (iii) development of SURVEYOR® Nuclease based oncology mutation detection kits utilizing multiple instrument platforms for aid in therapeutic treatment decisions for cancers such as colorectal, melanoma non smalland non-small cell lung; (ii) a new discovery in high sensitivity DNA mutation detection for Sanger Sequencing; (iii)(iv) use of commercially available assays and the development of ICE COLD-PCR applicationscustom assays for ultra-high sensitivity mutation detection of somatic mutations in any tissuecancer samples (fresh, frozen, FNA, FFPE, etc.) and body fluids (plasma, serum, ascites); (iv) a “toolbox” of mitochondrial DNA assays to assess damage, copy number, deletion and mutation for applications ranging from toxicology to diabetes to aging;using Next Generation Sequencing; and (v) development of a biomarker for FC Gamma receptor to aid in the selection of therapeutic options for monoclonal antibody cancer drugs. For the years ended December 31, 2011, 20102013, 2012 and 2009,2011, our research and development expenses were $2.23.2 million, $2.32.5 million and $3.22.2 million, respectively.
Manufacturing
We manufacture bioconsumable products including our test kits, separation columns, liquid reagents and enzymes. The major components of our WAVE Systems are manufactured for us by a third party. We integrate our hardware and software with these third party manufactured components. Our manufacturing facilities for WAVE Systems and bioconsumables are located in Omaha, Nebraska and San Jose, California.
Intellectual Property

To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade-secret laws, license agreements' contractual provisions and confidentiality agreements. Our WAVE Systems and related consumables are protected by patents and in-licensed technologies that expire in various periods beginning in 2012and continuing through 2030. Our ICE COLD-PCR platform technology is protected by in-licensed patents that expire in various periods through 2031. As part of the FAMILION Acquisition,acquisition in 2010, we acquired exclusive rights to the FAMILION family of

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genetic tests for inherited disease, including the patents protecting this technology. As we expand our product offerings, we also extend our patent development efforts to protect such product offerings. Established competitors, as well as companies that purchase and enforce patents and other intellectual property, may already have patents covering similar products. There is no assurance that we will be able to obtain patents covering our products, or that we will be able to obtain licenses from such companies on favorable terms or at all. However, while patents are an important element of our success, our business as a whole is not significantly dependent on any one patent.

We will continue to file patent applications, seek new licenses, take advantage of available copyright and trademark protections and implement appropriate trade-secret protocols to protect our intellectual property. Despite these precautions, there can be no assurance that misappropriation of our products and proprietary technologies will not occur.

 
In addition to our own products, we distribute or act as a sales agent for OEM Equipment developed by third parties. Our rights to those third-party products and the associated intellectual property rights are limited by the terms of the contractual agreement between us and the respective third-party.

 
Although we believe that our developed and licensed intellectual property rights do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against us. Further, there can be no assurance that intellectual property protection will be available for our products in allthe U.S or foreign countries.

 
Like many companies in the biotechnology and other high-tech industries, third parties have in the past and may in the future assert claims or initiate litigation related to patent, copyright, trademark or other intellectual property rights to business processes, technologies and related standards that are relevant to us and our customers. These assertions have increased over time as a result of the general increase in patent claims assertions, particularly in the United States. Third parties may also claim that their intellectual property rights are being infringed by our customers' use of a business process method that utilizes products in conjunction with other products, which could result in indemnification claims against us by our customers. Any claim against us, with or without merit, could be time-consuming, result in costly litigation, cause product delivery delays, require us to enter into royalty or licensing agreements or pay amounts in settlement, or require us to develop alternative non-infringing technology. We could also be required to defend or indemnify our customers against such claims. A successful claim by a third-party of intellectual property infringement by us or one of our customers could compel us to enter into costly royalty or license agreements, pay significant damages or even stop selling certain products and incur additional costs to develop alternative non-infringing technology.
Government Regulation
    We are subject to a variety of federal, state and municipal environmental and safety laws based on our use of hazardous materials in both manufacturing and research and development operations. We believe that we are in material compliance with applicable environmental laws and regulations. If we cause contamination to the environment, intentionally or unintentionally,

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we could be responsible for damages related to the clean-up of such contamination or individual injury caused by such contamination. We cannot predict how changes in laws and regulations will impact how we conduct our business operations in the future or whether the costs of compliance will increase in the future.

Regulation by governmental authorities in the United States and other countries is not expected to be a significant factor in the manufacturing, labeling, distribution and marketing of our products and systems

systems. Please see the section entitled "Risk Factors" for other risks associated with the United States government.
Competition
The markets in which we operate are highly competitive and characterized by rapidly changing technological advances. A number of our competitors possess greater resources than us and may be able to develop and offer a greater breadth of products and/or services, coupled with significant marketing and distribution capabilities. We compete principally on the basis of uniquely enabling scientific technical advantages in specific but significant market segments.
Our Laboratory Services divisionsegment faces competition from a number of companies offering contract DNA sequencing and other genomic analysis services, including Genzyme, SeqWright and others. In addition, several clinical diagnostics service providers, such as Labcorp, Quest, GeneDx and Baylor College of Medicine, also offer related laboratory services. Finally, additional competition arises from academic core laboratory facilities. Competition for our WAVE System arises primarily from DNA sequencing and genotyping technologies. Competitors in these areas, among others, include Applied Biosystems, Qiagen, Roche, Sequenom and others.Illumina. Competition for some of our non-WAVE consumable products comes from numerous well-diversified life sciences reagents providers, including, among others, Invitrogen, Qiagen, Roche, Stratagene and Promega.

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Employees
As of December 31, 20112013 and 2010,2012, we had employees focused in the following areas of operation:
 December 31, December 31,
 2011 2010��2013 2012
Manufacturing and Laboratory 68
 62
 76
 86
Sales, Marketing and Administration 92
 88
 86
 105
Research and Development 9
 12
 9
 11
 169
 162
 171
 202

Of our 171 total employees as of December 31, 2013, a total of 165 were full-time employees.

Our employees were employed in the following geographical locations:
 December 31, December 31,
 2011 2010 2013 2012
United States 148
 136
 151
 181
Europe (other than the United Kingdom) 10
 15
 10
 10
United Kingdom 11
 10
 10
 11
Canada —
 1
 169
 162
 171
 202
General Information
We were incorporated in Delaware on March 6, 1997. Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164 (telephone: 402-452-5400). This facility houses ourcertain administrative staff and laboratories. We maintain manufacturing facilities in Omaha, Nebraska and San Jose, California. We maintain research and development offices in Omaha, Nebraska. We maintain laboratories in Omaha, Nebraska and New Haven, Connecticut that have been certified under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA").CLIA. Our New Haven facility also houses certain administrative operations.

Our Internet website is located at http://www.transgenomic.com. The information on our website is not a part of this annual report.Annual Report. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the UniteUnited States Securities and Exchange Commission ("SEC"). Our SEC reports can be accessed through the investor relations section of our Internet website.

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The public may also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC's Internet website is located at http://www.sec.gov.

Executive Officers of the Registrant

Craig J. Tuttle. Paul Kinnon.Mr. Tuttle,Kinnon, age 59,50, has served as our President and Chief Executive Officer and a Director since 2006.September 2013. Mr. Kinnon has more than 20 years of global leadership experience in innovative life science and diagnostics companies. From 2004January through August 2013, he provided consulting services to 2005,the life science sector as a Partner at Arch Global Research. During a portion of this time, Mr. TuttleKinnon provided consulting services to us. From January 2007 to December 2012, Mr. Kinnon was President, and Chief Operating Officer of Duke Scientific. From 1999 to 2003, Mr. Tuttle served as President and Chief Executive Officer and a Director of ZyGEM Corporation Limited, a biotechnology company, where he transformed the company from a regional enzyme provider into a leader in integrated microfluidic technologies for forensic and clinical diagnostic applications. From May 2006 to June 2007, Mr. Kinnon was Vice President & General Manager Environmental Diagnostics (later expanded to Applied Biotech,Markets) at Invitrogen Corporation (now Life Technologies), a high growth life sciences and diagnostics firm, and from October 2004 until April 2006, he was Vice President, Global Strategic Alliances at Invitrogen. Previously, Mr. Kinnon also held business, sales and marketing roles of increasing responsibility at Guava Technologies, Inc. The Board selected Mr. Tuttle to serve as a director because he is the Company's Chief Executive Officer. He has expansive knowledge and experience in the biotech industry, as well as relationships with chief executives, Cellomics, Inc. and other senior managementlife science companies. Mr. Kinnon earned his Bachelor of Sciences degree in Applied Chemistry at biotechnology companies and leading research institutions.
Chad M. Richards.    Mr. Richards, age 42, joined the Company in October 2007 as Senior Vice President, Sales and Marketing and was promoted to Chief Commercial Officer in January 2011. Before joining the Company, Mr. Richards was the National Sales Director for Anatomic Pathology with Quest Diagnostics. During his career with Quest Diagnostics, Mr. Richards held a variety of sales management roles in both their physician and hospital business segments. Before joining Quest Diagnostics, Mr. Richards held different marketing and sales management roles with Roche Diagnostics Ventana Medical Systems Division, one of the world’s leading developers and manufacturers of immunohistochemistry and in-situ hybridization instruments and

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reagent systems. Before embarking on a career in diagnostics, Mr. Richards servedCoventry University in the United States Marine Corps.Kingdom and holds a Diploma of Marketing.
Brett L. Frevert.Mark P Colonnese. Mr. Frevert,Colonnese, age 49,58, was appointed as our Executive Vice President and Chief Financial Officer by the Board in September 2012. Mr. Colonnese has nearly 30 years of Directors on June 28, 2010. Mr. Frevert servesexperience in leading business growth and financial strategies for life sciences companies. He most recently served as Executive Vice President, Commercial Operations and Chief Financial Officer pursuantat Salutria Pharmaceuticals, LLC, a privately-held, development-stage pharmaceutical company from April 2009 to the terms a letter agreement with CFO Systems, LLC (“CFO Systems”) and Brett L. Frevert. Under the letter agreement CFO Systems provides financial and consulting servicesAugust 2012. Prior to us. Since 2004that, Mr. Frevert has been Managing Director of CFO Systems, which he founded. During that time he hasColonnese served as CFOan executive in a number of several Midwestern companies,capacities at AtheroGenics, Inc., a development-stage pharmaceutical company, from January 1999 to April 2009, including SEC registrantsExecutive Vice President, Commercial Operations and private companies. Prior to founding CFO Systems, Mr. Frevert was Chief Financial Officer from May 2006 to April 2009, as Senior Vice President of a regional real estate firmFinance and also served as InterimAdministration and Chief Financial Officer since 2002, and as Vice President of First Data Europe.Finance and Administration and Chief Financial Officer since 1999. Prior to joining AtheroGenics, Mr. Frevert began his career with Deloitte & Touche, serving primarily SEC-registered clients in the foodColonnese served as Senior Vice President and insurance industries.Chief Financial Officer at Medaphis Corporation and has also held executive positions at Applied Analytical Industries, Inc. and Schering-Plough Corporation. Mr. Colonnese is a Certified Public Accountant.

Item 1A.Risk Factors
We have a history of operating losses and may incur losses in the future.
We have experienced annual losses from continuing operations since inception of our operations. Our operating loss for the years ended December 31, 2011, 20102013, 2012 and 2009 were2011 was $3.015.8 million, $3.69.5 million and $1.93.0 million, respectively. These historical losses have been due principally to the high levels of research and development expenses and sales and marketing expenses that we have incurred in order to develop and market our products, the fixed nature of our manufacturing costs restructuring charges, impairment charges and merger and acquisition costs.
Our future capital needs are uncertain and we may need to raise additional funds in the future.

Our future capital needs are uncertain and we may need to raise additional funds in the future through debt or equity offerings. Our future capital requirements will depend on many factors, including, but not limited to:
revenue generated by sales of our products;
expenses incurred in manufacturing and selling our products;
costs of developing new products or technologies;
costs associated with capital expenditures;
the number and timing of acquisitions and other strategic transactions; or
working capital requirements related to growing new acquisitions or existing business.
Governmental payers and health care plans have taken steps to control costs.

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Medicare, Medicaid and private insurers have increased their efforts to control the costs of health care services, including clinical testing services. They may reduce fee schedules or limit/exclude coverage for types of tests that we perform. Medicaid reimbursement varies by state and is subject to administrative and billing requirements and budget pressures. We expect efforts to reduce reimbursements, impose more stringent cost controls and reduce utilization of testing services will continue. These efforts, including changes in law or regulations, may have a material adverse impact on our business.
We might enter into new acquisitions that are difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.
Our success will depend in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. We expect to seek to acquire businesses, technologies or products that will complement or expand our existing business, including acquisitions that could be material in size and scope. Any acquisition we might make in the future might not provide us with the benefits we anticipated upon entering into the transaction. Any future acquisitions involve various risks, including:
 
Difficulties in integrating the operations, technologies, products and personnel of the acquired entities;
The risk of diverting management’s attention from normal daily operations of the business;
Potential difficulties in completing projects associated with in-process research and development;
Risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
Initial dependence on unfamiliar supply chains or relatively small supply partners;
Unexpected expenses resulting from the acquisition;
Potential unknown liabilities associated with acquired businesses;
Insufficient revenues to offset increased expenses associated with the acquisition; and
The potential loss of key employees of the acquired entities.
An acquisition could result in the incurrence of debt, restructuring charges or largesignificant one-time write-offs. Acquisitions also could result in goodwill and other intangible assets that are subject to impairment tests, which might result in future impairment charges. Furthermore, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted.
From time to time, we might enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and potentially significant out-of-pocket costs. If we fail to evaluate and execute acquisitions accurately, we could fail to achieve our anticipated level of growth and our business and operating results could be adversely affected.
Continued weaknessWeakness in U.S. or global economic conditions could have an adverse effect on our businesses.
The economies of the United States and other regions of the world in which we do business have experienced significant weakness, which, in the case of the U.S., has recently resulted in significant unemployment and slower growth in economic activity. A continued decline in economic conditions may adversely affect demand for our services and products, thus reducing our revenue. These conditions could also impair the ability of those with whom we do business to satisfy their obligations to us.
Sales have been variable.
Testing volumes in our Clinical LaboratoryPatient Testing laboratories are dependent on patient visits to doctors’ offices and other providers of

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health care and tendstend to fluctuate on a seasonal basis.fluctuate. Testing volume generally declines during the year-end holiday periods, other major holidays and the summer.
Our Pharmacogenomics Services depends on Also, our laboratories perform project-based work that changes from quarter to quarter. Therefore, comparison of the results of successive quarters may not accurately reflect trends or results for the full year.
Changes in payer mix could have a material adverse impact on our net sales and profitability.
Testing services are billed to physicians, patients, government payors such as Medicare, Medicaid and insurance companies. Tests may be billed to different payers depending on a particular patient’s medical insurance coverage. IncreasesGovernment payers have increased their efforts to control the cost, utilization and delivery of health care services as well as reimbursement for laboratory testing services. Further reductions of reimbursement for Medicare and Medicaid services or changes in policy regarding coverage of tests or other requirements for payment, such as prior authorization or a physician or qualified practitioner’s signature on test requisitions, may be implemented from time to time. Reimbursement for the laboratory services component of our business is also subject to statutory and regulatory reduction. Reductions in the reimbursement rates and changes in payment policies of other third-party payers may occur as well. Such changes in the past have resulted in reduced payments as well as added costs and have decreased test utilization for the clinical laboratory industry by adding more complex new regulatory and administrative

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requirements. As a result, increases in the percentage of services billed to government payorspayers could have an adverse impact on our net sales.
Governmental payersWe may experience temporary disruptions and health care plansdelays in processing biological samples at our facilities.
We may experience delays in processing biological samples caused by software and other errors. In early 2012, our laboratory information management system ("LIMS") installed in our New Haven, Connecticut laboratory testing facility experienced a software failure that resulted in reduced sample processing capacity. Although we have taken stepsreviewed and improved our internal procedures to control costs.
Medicare, Medicaidsecure proper function of the LIMS and private insurers have increased their efforts to controlwe believe that the costs of health care services, including clinical testing services. They may reduce fee schedules or limit/exclude coverage for types of testsfull sample processing capacity has been restored, there are no assurances that we perform. Medicaid reimbursement varies by state and is subject to administrative and billing requirements and budget pressures. We expect efforts to reduce reimbursements, impose more stringent cost controls and reduce utilization of testing services will continue. These efforts, including changesnot experience future temporary delays or disruptions in lawprocessing samples at our New Haven, Connecticut facility or regulations, mayat our other facilities. Any delay in processing samples could have a materialan adverse impacteffect on our business.business, financial condition and results of operations.
Our Laboratory requireslaboratories require ongoing CLIA certification.
CLIA extended federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally approved accreditation agency. CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories must also undergo proficiency testing and are subject to inspections.
The sanctions for failure to comply with CLIA requirements include suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could have a material adverse effect on us.
We believe that we are in compliance with all applicable laboratory requirements, but no assurances can be given that our laboratories will pass all future certification inspections.
Failure to comply with HIPAA could be costly.
The Health Insurance Portability and Accountability Act (HIPAA)("HIPAA") and associated regulations protect the privacy and security of certain patient health information and establish standards for electronic health care transactions in the United States. These privacy regulations establish federal standards regarding the uses and disclosures of protected health information. Our Molecular Labs are subject to HIPAA and its associated regulations. If we fail to comply with these laws and regulations we could suffer civil and criminal penalties, fines, exclusion from participation in governmental health care programs and the loss of various licenses, certificates and authorizations necessary to operate our Laboratory ServicesPatient Testing business. We could also incur liabilities from third party claims.
Our business could be adversely impacted by health care reform.
Government attention to the health care industry in the United States is significant and may increase. The Patient Protection and Affordable Care Act passed by Congress and signed into law by the President in March 2010 could adversely impact our business. While certain portions of the legislation have already gone into effect, the ultimate impact of the legislation on the health care industry is still unknown, itand the overall impact on our business is likely to be extensive and could result in significant change.changes to our business and our customers' businesses.
We may be subject to client lawsuits.
Providers of clinical testing services may be subject to lawsuits alleging negligence or other legal claims. Potential suits could involve claims for substantial damages. Litigation could also have an adverse impact on our client base and reputation. We maintain liability insurance coverage for certain claims that could result from providing or failing to provide clinical testing services, including inaccurate testing results and other exposures. Our insurance coverage limits our maximum recovery on individual claims and, therefore, there is no assurance that such coverage will be adequate.
Market demand is outside of our control.
There are many factors that affect the market demand for our products and services that we cannot control. Demand

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for our WAVE System is affected by the needs and budgetary resources of research institutions, universities, hospitals and others who use the WAVE System for genetic-variation research. The WAVE System represents a significant expenditure by these types of customers and often requires a long sales cycle. Similarly, the sales cycle for the OEM Equipment that we sell can be lengthy.


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The sale of our products and business operations in international markets subjects us to additional risks.
During the past several years, international sales have represented a significant portion of our total net sales. As a result, a major portion of our net sales are subject to risks associated with international sales and operations. These risks include:
 
payment cycles in foreign markets are typically longer than in the U.S., and capital spending budgets for research agencies can vary over time with foreign governments;
changes in foreign currency exchange rates can make our products more costly in local currencies since our foreign sales are typically paid for in British Pounds or the Euro;
the potential for changes in U.S. and foreign laws or regulations that result in additional import or export restrictions, higher tariffs or other taxes, more burdensome licensing requirements or similar impediments to our ability to sell products and services profitably in these markets; and
the fluctuation of foreign currency to the USU.S. Dollar and the Euro to the British Pound can cause our net sales and expenses to increase or decrease, which adds risk to our financial statements.
Our WAVE System includes hardware components and instrumentation manufactured by a single supplier and if we are no longer able to obtain these components and instrumentation our ability to manufacture our products could be impaired.
We rely on a single supplier, Hitachi High Technologies America, to provide the basic instrument modules used in our WAVE Systems. While other suppliers of instrumentation are available, we believe that our arrangement with Hitachi offers strategic advantages. We have successfully converted the latest model of WAVE Systems to utilize Hitachi’s newest instrument line. If we were required to seek alternative sources of supply, it could be time consuming and may require significant and costly modification of our WAVE System. Also, if we were unable to obtain instruments from Hitachi in sufficient quantities or in a timely manner, our ability to manufacture our products could be impaired, which could limit our future net sales.
The current economy may causeOur dependence on our suppliers of productsexposes us to not be able to perform.certain risks.
We rely on various suppliers for products and materials needed to produce our products. In the event that they would be unable to deliver those items due to product shortage or business closure, we may be unable to deliver our products to our customers timely or may need to increase our prices. The current economy poses additional risk of our suppliers’ ability to continue their businesses as usual.
Our markets are very competitive.
Many of our competitors have greater resources than we do and may enjoy other competitive advantages. This may allow them to more effectively market their products to our customers or potential customers, to develop products that make our products obsolete or to produce and sell products less expensively than us. As a result of these competitive factors, demand for and pricing of our products and services could be negatively affected.

Our patents may not protect us from others using our technology which could harm our business and competitive position.
Patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, we cannot be certain that others will not independently develop similar or alternative products or technology, duplicate any of our products, or, if patents are issued to us, design around the patented products developed by us. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were adverse to us, our competitors could be free to use our technology. We may not be able to obtain additional patents for our technology, or if we are able to do so, patents may not provide us with adequate protection or be commercially beneficial. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.
We cannot be certain that other measures taken to protect our intellectual property will be effective.
We rely upon trade secrets, copyright and trademark laws, non-disclosure agreements and other contractual provisions for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If such measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be

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reduced.
We are dependent upon licensed technologies and may need to obtain additional licenses in the future to offer our products and remain competitive.

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We have licensed key components of our technologies from third parties. If these agreements were to terminate prematurely due to our breach of the terms of these licenses or we otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell a substantial portion of our products. In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive. If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new products that we need to remain competitive.
The protection of intellectual property in foreign countries is uncertain.
A significant percentage of our sales are to customers located outside the U.S. Patent and other intellectual property laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may need to bring proceedings to defend our patent rights or to determine the validity of our competitors’ foreign patents. These proceedings could result in substantial cost and diversion of our efforts. Finally, some of our patent protection in the U.S. is not available to us in foreign countries due to the laws of those countries.
Our products could infringe on the intellectual property rights of others.
There are a significant number of U.S. and foreign patents and patent applications submitted for technologies in, or related to, our area of business. As a result, any application or exploitation of our technology by us could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. This may lead others to assert patent infringement or other intellectual property claims against us. We could incur substantial costs in litigation if we are required to defend against intellectual property claims by third parties.
Our failure to comply with any applicable government regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations.
Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state, local and international laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot assure you that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.
Our common stock is deemedWe may need additional capital to be “penny stock”finance our growth or to compete, which may make it more difficultcause dilution to existing stockholders or limit our flexibility in conducting our business activities.
We currently anticipate that existing cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated needs for investorsworking capital, operating expenses and capital expenditures for at least the next twelve months. However, we may need to sell their shares dueraise additional capital in the future to suitability requirements.
Our common stock is classified as a “penny stock” under the rules of the SEC. The SEC has adopted Rule 3a51-1 that establishes the definition of a “penny stock” for the purposes relevantfund expansion, respond to competitive pressures or acquire complementary businesses, technologies or services. Such additional financing may not be available on terms acceptable to us as anyor at all. To the extent that we raise additional capital by issuing equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share,securities, our stockholders may experience substantial dilution, and to the extent we engage in additional debt financing, if available, we may become subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires that:
a brokeradditional restrictive covenants that could limit our flexibility in conducting future business activities. If additional financing is not available or dealer approve a person’s account for transactions in penny stocks; and
the brokernot available on acceptable terms, we may not be able to fund our expansion, promote our brands, take advantage of acquisition opportunities, develop or dealer receives from the investor a written agreementenhance services or respond to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
obtain financial information and investment experience objectives of the person; and
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which is in highlight form:
sets forth the basis on which the broker or dealer made the suitability determination; and
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

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Generally, brokers may be less willing to execute transactions in securities subject to “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.competitive pressures.
We may issue a substantial amount of our common stock to holders of options and warrants and this could reduce the market price for our stock.
At December 31, 2011,2013, we had obligations to issue 17,648,2733,785,709 shares of common stock upon exercise of outstanding stock options, warrants or conversion rights. In March 2014, we completed a private placement, pursuant to which we issued 1,443,297 shares of Series B convertible preferred stock, which is initially convertible into shares of our common stock at a rate of 1-for-1, subject to certain adjustments. The issuance of these additionalunderlying shares of common stock may be dilutive to our current shareholdersstockholders and could negatively impact the market price of our common stock.
Our common stock is thinly traded and a large percentage of our shares are held by a small group of unrelated, institutional owners.
At December 31, 2011,2013, we had 49,625,7257,353,695 shares of common stock outstanding. The sale of a significant number of shares into the public market has the potential to cause significant downward pressure on the price of our common stock. This is particularly the case if the shares being placed into the market exceed the market’s ability to absorb the stock. This presents an opportunity for short sellers to contribute to the further decline of our stock price. If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders

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of the stock to sell their shares, thereby contributing to sales of stock in the market. In addition, the large concentration of our shares held by a small group of stockholders could result in increased volatility in our stock price due to the limited number of shares available in the market.

Failure to comply with covenants in our loan agreement withaffiliates of Third Security, LLC could adversely affect us.

Our revolving line of credit and term loan with affiliates of Third Security, LLC (the “Lenders”) are governed by a Loan and Security Agreement, which contains affirmative and negative covenants. Under the term loan, we are required to maintain a minimum liquidity ratio and achieve a minimum amount of revenue, and we also agreed not to (i) pledge or otherwise encumber our assets other than to the Lenders, (ii) enter into additional borrowings or guarantees, (iii) repurchase our capital stock, or (iv) enter into certain mergers or acquisitions without the Lenders' consent. To secure the repayment of amounts borrowed under the revolving line of credit and term loan, we granted the Lenders a security interest in all of our assets. Failure to comply with the covenants under the loan agreement would be an event of default under the loan agreement that, if not cured or waived, would give the Lenders the right to cease making additional advances, accelerate repayment of all sums due and take action to collect the amounts owed to them, including foreclosing on their security interest, which would have a material adverse effect on our financial condition and results of operations.
 
Item 1B.Unresolved Staff Comments
None.
 

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Item 2.Properties
We currently lease facilities throughout the world under non-cancellablenon-cancelable leases with various terms. The following table summarizes certain information regarding our leased facilities. Annual rent amounts presented in the table are reflected in thousands.
 
Location Function 
Square
Footage
 
2012
Scheduled
Rent
 
Lease Term
Expires
 Function 
Square
Footage
 
2014
Scheduled
Rent
 
Lease Term
Expires
Omaha, Nebraska WAVE and Consumable Manufacturing 25,000
 $139
 July 2016 WAVE and Consumable Manufacturing 25,000
 $145
 July 2016
San Jose, California Consumable Manufacturing 9,110
 $57
 February 2016 Consumable Manufacturing 9,110
 $60
 February 2016
Glasgow, Scotland 
Multi Functional (1)
 5,059
 $36
 March 2017 
Multi Functional (1)
 5,059
 $37
 May 2017
Omaha, Nebraska 
Multi Functional (1)
 18,265
 $204
 July 2022 
Multi Functional (1)
 18,265
 $213
 July 2022
Omaha, Nebraska 
Multi Functional (1)
 4,410
 $39
 May 2017
New Haven, Connecticut Laboratory 22,459
 $472
 March 2018 
Multi Functional (1)
 22,459
 $441
 June 2018
 
(1)Multi Functional facilities include functions related to manufacturing, services, sales and marketing, research and development and/or administration.

We believe that these facilities are adequate to meet our current and planned needs. We believe that if additional space is needed in the future, we could find alternate space at competitive market rates without a substantial increase in cost.


Item 3.Legal Proceedings.
We are subject to a number of claims of various amounts which 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.


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Item 4.Mine Safety Disclosures

Not applicable.


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PART II


Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information.    Share price information for our common stock is available on the OTC Bulletin BoardOTCQB under the symbol TBIO.OB.“TBIO”. The following table sets forth the high and low closing prices for our common stock during each of the quarters of 20112013 and 20102012. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
 High Low High Low
Year Ended December 31, 2011    
Year Ended December 31, 2013    
First Quarter $0.90
 $0.61
 $8.64
 $4.68
Second Quarter $1.75
 $0.82
 $5.88
 $3.72
Third Quarter $1.77
 $1.00
 $5.64
 $4.20
Fourth Quarter $1.44
 $1.07
 $7.32
 $4.68
Year Ended December 31, 2010    
Year Ended December 31, 2012    
First Quarter $0.88
 $0.61
 $16.20
 $13.80
Second Quarter $0.86
 $0.49
 $13.56
 $9.36
Third Quarter $0.59
 $0.33
 $12.84
 $9.00
Fourth Quarter $0.71
 $0.32
 $11.64
 $6.48

Company Stock Price Performance Graph.The following graph compares five-year cumulative total returns    We are a smaller reporting company, as defined by Rule 12b-2 of the Company, the NASDAQ Composite Index and the NASDAQ Biotechnology Stock Index. The graph assumes $100 was invested in the common stock of Transgenomic, Inc. and each index as of December 31, 2006 and that all dividends were re-invested.
The information contained in this Stock Performance Graph section shall not be deemed to be "soliciting material" or "filed" or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, exceptand are not required to provide the extent that the Company specifically incorporates it by reference into a document filedinformation required under

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this item.

the Securities Act of 1933 (the "Securities Act") or the Securities Exchange Act of 1934.
Holders.    At December 31, 20112013, there arewere 49,625,7257,353,695 shares of our common stock outstanding and approximately 2,800210 holders of record.
Dividends.    We have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Dividends on our common stock will be paid only if and when declared by our Board of Directors.Board. The Board’s ability to declare a dividend is subject to limits imposed by Delaware corporate law. Additionally, pursuant to each of the Certificate of Designation of Series A Convertible Preferred Stock, as amended, and the Certificate of Designation of Series B Convertible Preferred Stock, we are prohibited from declaring dividends on our common stock without the prior written consent of the holders of at least two-thirds of the outstanding shares of preferred stock; provided that the Board may declare dividends payable solely in common stock without the prior written consent of the preferred holders. Pursuant to the terms of the Loan Agreement, our Board also may not pay any dividends without the prior consent of the Lenders; provided that our Board may pay dividends solely in common stock without such consent. In determining whether to declare dividends, the Board may consider our financial condition, results of operations, working capital requirements, future prospects and other relevant factors. The holders of our Series A Convertible Preferred Stock (the "Series“Series A Preferred Stock"Stock”) and our Series B Convertible Preferred Stock (the “Series B Preferred Stock”) are entitled to receive quarterly dividends.
Saledividends, which accrue at the rate of Unregistered Securities. On December 29, 2010, the Company issued 2,586,205 shares of Series A Preferred Stock pursuant to applicable exemptions from the registration requirements10% of the Securities Act of 1933. The issuance of such Series A Preferred Stock was in connection with the FAMILION Acquisition. Please refer to the Series A Convertible Preferred Stock Purchase Agreement among the Company and Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC and Third Security Incentive 2010, LLC ("Third Security Investors") dated December 29, 2010.
On November 8, 2011, the Company entered into an Amendment Agreement with the Third Security Investors, which are the holders of all of the outstanding shares of the Company's Series A Preferred Stock. Pursuant to the Amendment Agreement, the Third Security Investors and the Company agreed to amend the Certificate of Designation to eliminate certain features of the Series A Preferred Stock relating to (i) an anti-dilution adjustment to the conversion rate upon which the Series A Preferred Stock is convertible into the Company's common stock and (ii) an optional redemption of the Series A Preferred Stock by the Third Security Investors (the “Certificate Amendment”); subject to the requisite stockholder approval of the Certificate Amendment at the Company's next annual meeting of its stockholders. Pursuant to the Amendment Agreement, the Third Security Investors agreed to voteoriginal price per share per annum for the Series A Preferred Stock and their common stock in favorat the rate of 6% of the Certificate Amendment and agreed to waive their rights to the features oforiginal price per share per annum for the Series AB Preferred Stock, being eliminated by the Certificate Amendment.  In exchange for the Third Security Investors entering into the Amendment Agreement, the Company agreed to issue to the holders an aggregatewhether or not declared, and which compound annually and are cumulative.
Sale of 245,903 shares of common stock having a market value of $0.3 million.Unregistered Securities.
    
2013 Private Placement: On December 30, 2011, the Company entered into a Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with the Third Security Investors in the aggregate amount of $3.0 million. Under the Note Purchase Agreement, the Company sold to the Third Security Investors convertible notes that mature on March 31, 2012.  The Note Purchase Agreement and notes provide for conversion of any amount remaining due to the Third Security Investors under the notes into equity securities of the Company of the same class(es) or series and at the same price as the equity securities of the Company sold in the Company's first sale or issuance of its equity securities after December 30, 2011, in the aggregate amount of at least $3.0 million.  The notes and the equity securities into which the notes are convertible have not been registered under the Securities Act and applicable state securities laws, but have been offered and sold in the United States pursuant to applicable exemptions from registration requirements under the Securities Act and applicable state securities laws.
On February 2, 2012, the CompanyJanuary 24, 2013, we entered into a Securities Purchase Agreement with certain institutional and other accredited investors pursuant to which the Company:we: (i) sold to the investors an aggregate of 19,000,0001,383,333 shares of the Company's common stock at a price per share of $1.00$6.00 for aggregate gross proceeds of approximately $19.0$8.3 million; and (ii) issued to the investors warrants to purchase up to an aggregate of 9,500,000691,656 shares of common stock with an exercise price of $1.25$9.00 per share. The warrants may be exercised, in whole or in part, at any time from February 7, 2012January 30, 2013 until February 7, 2017January 30, 2018 and contain both cash and “cashless exercise” features. The warrants also impose penalties on the Companyus for failure to deliver the shares of common stock issuable upon exercise. The common stock and warrants were offered and sold in transactions exempt from registration under the Securities PurchaseAct, in reliance on Section 4(2) thereof and Rule 506 of Regulation D thereunder. Each investor represented that it was

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an “accredited investor,” as defined in Regulation D, and acquired the common stock, warrants and shares issuable upon exercise of the warrants for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof.

We used the net proceeds from the offering for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.
The above common stock transaction required the repricing and issuance of additional common stock warrants to the holders of warrants issued in our February 2012 common stock and warrant financing. The exercise price 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.
In connection with the January 2013 financing, we also entered into a Registration Rights Agreement also requireswith the filing by the Company ofinvestors (the “2013 Registration Rights Agreement”). The 2013 Registration Rights Agreement required us to file a registration statement with the SEC coveringwithin 45 days of the closing date of the offering for the resale by the investors of all of the common shares, the shares of common stock issuable upon exercise of the warrants, and all shares issuedof common stock issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect thereto. The registration statement was declared effective by the SEC on March 29, 2013.

Lazard Capital Markets LLC served as the lead placement agent for the offering, and issuable under such SecuritiesCraig-Hallum Capital Group LLC acted as co-placement agent. In consideration for services rendered as the placement agents in the offering, we agreed to (i) pay to the placement agents cash commissions equal 7% of the gross proceeds received in the offering, and (ii) reimburse the placement agent for reasonable out-of-pocket expenses, including fees paid to the placement agents' legal counsel, incurred in connection with the offering, which reimbursable expenses shall not exceed $25,000.
2014 Private Placement: On March 5, 2014, Transgenomic entered into a Series B Convertible Preferred Stock Purchase Agreement (the “Series B Purchase Agreement”) with certain accredited investors and/or their affiliates (collectively, the “2014 Investors”), pursuant to which Transgenomic, in a private placement, sold and imposes significant penaltiesissued to the 2014 Investors an aggregate of 1,443,297 shares of the Company’s Series B Convertible 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 $7,000,000. Each share of Series B Preferred Stock issued pursuant to the failureSeries B Purchase Agreement is initially convertible into shares of the Company’s common stock at a rate of 1-for-1, which conversion rate is subject to file suchfurther adjustment as set forth in the Certificate of Designation of Series B Convertible Preferred Stock, as filed with the Secretary of State of the State of Delaware on March 5, 2014. The Series B Preferred Stock was offered and sold in transactions exempt from registration statement by March 23, 2012. The Companyunder the Securities Act, in reliance on Section 4(2) thereof and Rule 506 of Regulation D thereunder. Each investor represented that it was an “accredited investor,” as defined in Regulation D, and acquired the Series B Preferred Stock for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof.
We currently intendsintend to use the net proceeds from the offering for general corporate and working capital purposes, primarily to accelerate development of several of the company'sour key initiatives. The common stock and warrants were issued pursuant to applicable exemptions from registration requirements under the Securities Act and applicable securities law.
As part of the offering and, inIn connection with the conversion of certain convertible promissory notes in the aggregate amount of $3.0 million issued bySeries B financing, the Company on December 30, 2011also entered into a Registration Rights Agreement, dated March 5, 2014, with the 2014 Investors, pursuant to which the Third SecurityCompany granted the 2014 Investors certain demand, “piggy-back” and S-3 registrations rights covering the Third Security Investors collectively received 3,000,000resale of the shares of common stock underlying the Series B Preferred Stock issued pursuant to the Series B Purchase Agreement and warrants to purchase up to 1,500,000all shares of common stock issuable upon any dividend or other distribution with respect thereto.
The 2014 Series B Preferred Stock financing required the same terms asrepricing and issuance of additional common stock warrants to the investors.holders of warrants issued in connection with our February 2012 private placement. The exercise price of these 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 2,540,897.
Information with respect to the securities of the Company as described above sold by the Companyus during the period covered by this Annual Report and thereafter through the date of the filing of this Annual Report with the SEC that were not

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registered under the Securities Act has previously been provided in the Company'sour Current Reports on Form 8-K filed with the SEC on January 25, 2013, January 30, 2013 and March 6, 2012, February 3, 2012 and February 7, 2012.2014.
Issuer PurchasePurchases of Equity Securities.   The CompanyWe made no purchases of itsour common stock during the year ended December 31, 2011.2013. Therefore, tabular disclosure is not presented.


17


Item 6.Selected Consolidated Financial Data.
The selected consolidated balance sheet data as of December 31, 20112013 and 20102012 and the selected consolidated statements of operations data for each year ended December 31, 2011, 20102013, 2012 and 20092011 have been derived from our audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K.Report. The selected consolidated balance sheet data as of December 31, 2009, 20082011, 2010 and 20072009 and the selected consolidated statements of operations data for each year ended December 31, 20082010 and 20072009 have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.Report. Dollar amounts, except per share data, are presented in thousands.
This data should be read together with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the consolidated financial statements and related notes included elsewhere in this Annual Report. The financial information below is not necessarily indicative of the results of future operations. Future results could differ materially from historical results due to maymany factors, including those discussed in Item 1A in the section entitled "Risk Factors."
 Year Ended December 31, Year Ended December 31,
 2011 2010 2009 2008 2007 2013 2012 2011 2010 2009
Statement of Operations Data:                    
Net sales $31,971
 $20,048
 $22,023
 $23,993
 $23,176
Cost of good sold 13,534
 10,284
 10,418
 10,345
 10,483
Net sales:          
Laboratory Services $15,391
 $19,329
 $18,318
 $4,979
 $4,566
Genetic Assays and Platforms 12,153
 12,151
 13,653
 15,069
 17,457
 27,544
 31,480
 31,971
 20,048
 22,023
Cost of goods sold 15,048
 16,470
 13,534
 10,284
 10,418
Gross profit 18,437
 9,764
 11,605
 13,648
 12,693
 12,496
 15,010
 18,437
 9,764
 11,605
Selling, general and administrative 19,150
 10,933
 10,319
 10,795
 11,466
 25,043
 22,023
 19,150
 10,933
 10,319
Research and development 2,218
 2,305
 3,182
 2,465
 3,033
 3,212
 2,491
 2,218
 2,305
 3,182
Restructuring charges (1)
 41
 138
 —
 118
 1,516
 —
 —
 41
 138
 —
Impairment charges (2)
 —
 —
 —
 638
 —
Operating expenses 21,409
 13,376
 13,501
 14,016
 16,015
 28,255
 24,514
 21,409
 13,376
 13,501
Other income (expense) (3)
 (6,765) 628
 18
 86
 1,391
Other income (expense) (2)
 (282) 1,323
 (6,765) 628
 18
Loss before income taxes (9,737) (2,984) (1,878) (282) (1,931) (16,041) (8,181) (9,737) (2,984) (1,878)
Income tax expense 45
 150
 42
 213
 243
 (54) 146
 45
 150
 42
Loss from continuing operations (9,782) (3,134) (1,920) (495) (2,174)
Gain from discontinued operations, net of tax (4)
 —
 —
 —
 —
 1,374
Net loss $(9,782) $(3,134) $(1,920) $(495) $(800)
Net Loss $(15,987) $(8,327) $(9,782) $(3,134) $(1,920)
Preferred stock dividends and accretion (5)(3)
 (1,010) —
 —
 —
 —
 (726) (660) (1,010) —
 —
Net loss available to common stockholders $(10,792) $(3,134) $(1,920) $(495) $(800) $(16,713) $(8,987) $(10,792) $(3,134) $(1,920)
Basic and diluted loss per share:          
From continuing operations $(0.22) $(0.06) $(0.04) $(0.01) $(0.05)
From discontinued operations —
 —
 —
 —
 0.03
 $(0.22) $(0.06) $(0.04) $(0.01) $(0.02)
Basic and diluted loss per share $(2.30) $(1.55) $(2.62) $(0.76)—
$(0.47)
Basic and diluted weighted average shares outstanding 49,362
 49,244
 49,190
 49,190
 49,190
 7,267
 5,785
 4,113
 4,104
 4,099
 As of December 31, As of December 31,
 2011 2010 2009 2008 2007 2013 2012 2011 2010 2009
Balance Sheet Data:                    
Working capital $870
 $6,781
 $10,351
 $11,350
 $11,316
 $3,210
 $3,449
 $870
 $6,781
 $10,351
Total assets 33,562
 32,027
 16,004
 17,556
 19,090
 30,278
 38,791
 33,562
 32,027
 16,004
Total liabilities and mezzanine equity 22,514
 23,527
 4,342
 4,351
 4,988
 18,832
 18,517
 22,514
 23,527
 4,342
Total stockholders' equity (6)
 11,048
 8,500
 11,662
 13,205
 14,102
Total stockholders' equity 11,446
 20,274
 11,048
 8,500
 11,662

(1)Restructuring plans were implemented in 2010, 20082011 and 20072010 to reduce and align our expenses with current business prospects. The plans included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. As a result, restructuring charges were recorded and are included in operating expenses.

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Refer to Note D to the accompanying consolidated financial statements.

(2)Impairment charges
Other income in 2008 relate2012 includes $2.2 million associated with the change in fair value of the common stock warrants. The income related to the impairmentchange in fair value of goodwill.

(3)the common stock warrants is a non-cash item. Other income (expense)expense for all years presented primarily2011 includes interest expense, interest income and in 2011, expense associated with the "SeriesSeries A Preferred Stock"Stock and warrants to purchase shares of Series A Preferred Stock (the "Series A Warrants") of $6.1 million, which is due to the change in fair value of the preferred stock conversion feature. The expense associated with the change in value of the preferred stock conversion feature is a non-cash item. Other income in 2011 and 2010 includes $0.2 million and $0.6 million net of consulting fees, respectively, awarded in a federal grant under the Qualifying Therapeutic Discovery Project Program related to 2009 projects. Other income in 2007 includes $0.9 million from the sale of an investment security and $0.2 million in insurance proceeds related to equipment destroyed in a fire at our Cramlington, England facility.

18

(4)Discontinued Operations include a reclassification of $1.3 million for an adjustment to other comprehensive income related to the closure of the Nucleic Acids segment. In the fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids operating segment which was primarily engaged in the manufacture of phosphoramadites and the raw materials to produce phosphoramadites which are used to produce synthetic DNA. The Nucleic Acids operating segment consisted primarily of a manufacturing facility in Glasgow, Scotland.

income in 2011 and 2010 includes $0.2 million and $0.6 million net of consulting fees, respectively, awarded in a federal grant under the Qualifying Therapeutic Discovery Project Program related to 2009 projects.
  
(5)(3)For
2013 and 2012 includes accrued dividends on Series A Preferred Stock of $0.7 million. 2011 includes accrued dividends on Series A Preferred Stock of $0.6 million and Series A Preferred Stock accretion of $0.4 million.

(6)Reference Footnote Q. "Subsequent Events" to our accompanying consolidated financial statements for a pro forma analysis of our total stockholders' equity as of December 31, 2011 as the result of a private placement offering performed in February 2012 by the Company.




Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Management Discussion and Analysis contains forward-looking statements that involve risks and uncertainties. Please see the section entitled "Forward-Looking Statements" at the beginning of Item 1 and the section entitled "Risk Factors" under Item 1A for important information to consider when evaluating such statements.
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.
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.
Transgenomic, Inc. ("we", "us", "our Company" or "Transgenomic") is a global biotechnology company advancing personalized medicine in the detection and treatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. We have threeOur operations are presented in the following two complementary business segments.
Clinical Laboratories.Laboratory Services. Our clinical laboratories specialize in genetic testing for cardiology, neurology, mitochondrial disorders and oncology. LocatedOur Patient Testing laboratories located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA)(“CLIA”) as high complexity labs and our Omaha facility is also accredited by the College of American Pathologists (CAP)(“CAP”).
Pharmacogenomics Services. Our Contract Research OrganizationBiomarker Identification laboratory located in Omaha, Nebraska also provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by our pharmaceutical customers. This lab specializescompanies. Our laboratories employ a variety of genomic testing service technologies, including ICE COLD-PCR technology. ICE COLD-PCR is a proprietary platform technology that can be run in pharmacogenomic, biomarkerany laboratory with standard PCR technology and mutation discoverythat enables detection of multiple unknown mutations from virtually any sample type including tissue biopsies, blood, cell-free DNA ("cfDNA") and circulating tumor cells (“CTCs”) at levels greater than 1,000-fold higher than standard DNA sequencing techniques.
Genetic Assays and Platforms. Our proprietary product is the WAVE® System, which has broad applicability to genetic variation detection in both molecular genetic research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.
•
Diagnostic Tools. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,500 WAVE Systems as of December 31, 2011. We also distribute bioinstruments produced by other manufacturers

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(“molecular diagnostics. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for bioconsumablesconsumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these bioconsumableconsumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR®SURVEYOR® Nuclease and a range of chromatography columns.
The following discussion should be read together with our financial statements and related notes contained in this report.Annual Report. Results for the year ended December 31, 20112013 are not necessarily indicative of results that may be attained in the future.

19



Executive Summary
20112013 Results

2011 vs. 2010Dollars in Thousands
    
 Years Ended Change
 2011 2010 $     %
Net sales$31,971
 $20,048
 $11,923
 59%
Gross profit18,437
 9,764
 8,673
 89%
Preferred stock and warrant expense6,066
 —
 (6,066) nm
Net loss(9,782) (3,134) (6,648) 212%
Net sales for 2011 increased by $11.9the year ended December 31, 2013 of $27.5 million decreased $3.9 million or 59%13% versus the $31.5 million reported for the year ended December 31, 2012. The sales decrease primarily reflects decreased volume in Laboratory Services while Genetic Assays and Platforms performed at a comparable level compared to 2010. These results include revenues received from the FAMILION acquisitionprior year. The decrease in our Clinical Laboratories segment. During 2011, net sales from Clinical Laboratories increased by $12.4 million compared to 2010. The Clinical Laboratories increaseLaboratory Services is principally a result of lower test volumes particularly in neurology testing.

Gross profit for the revenueyear ended December 31, 2013 decreased to $12.5 million (45% of $11.1sales) versus $15.0 million related to(48% of sales) for the FAMILION acquisition. Net sales from Pharmacogenomics Services increasedyear ended December 31, 2012. Gross margins in 2013 were negatively impacted by $0.9the aforementioned lower test volumes and unfavorable change in product mix in Laboratory Services.

Operating expenses of $28.3 million for 2011 compared to 2010. Net salesthe year ended December 31, 2013 were $3.8 million higher than the comparable 2012 period and primarily reflects higher bad debt expense in Diagnostic Tools were down 9% or $1.4 million for 2011 compared to 2010. Our gross profit margin increased from 49% for 2010 to 58% for 2011. Clinical Laboratories gross margin increased from 41% in 2010 to 59% for 2011. 2013.

Loss from operations was $3.0of $15.8 million for 2011 compared to $3.6the year ended December 31, 2013 versus $9.5 million for 2010.the comparable 2012 period reflects the lower volumes, resultant lower gross profit and high operating expenses.
During 2011,
The Company reported a net loss of $15.9 million in 2013 versus $8.3 million for the Company recorded non-cash expense of $6.1 million associated with the Series A Preferred Stock and Series A Warrants. Such expense is due to the change in fair value of the preferred stock conversion feature.year ended December 31, 2012.

2012 Outlook2013 Overview and Recent Highlights
Transgenomic is advancing personalized medicine in cardiology, oncology, neurology and inherited diseases through our proprietary molecular diagnostic technologies and world-class clinical research services. Today, we are a global leader in molecular diagnostic testing with a family of innovative products.

As pioneers in the molecular diagnostic testing field, it is important to us to assemble a strong leadership team to ensure the development of dynamic strategies and effective execution of those strategies. To that end, in September 2013, Paul Kinnon was hired as President, Chief Executive Officer and Director, replacing Craig J. Tuttle. Mr. Kinnon brings over two decades of business and scientific leadership in the life sciences industries to Transgenomic, with a proven track record of developing and launching life science products. With broad experience covering clinical diagnostic, core life science research and applied markets, his appointment strengthens the executive leadership team and adds significant commercial, operational, and scientific expertise.

In November 2013, Transgenomic appointed Stephen R. Miller as Senior Vice President and General Manager of the Patient Testing Business Unit. Mr. Miller brings over 22 years of experience in the diagnostics and biotechnology industries to Transgenomic. With expertise involving the commercialization of molecular diagnostic tests on a global basis, Mr. Miller also brings in-depth experience in developing and implementing strategic commercialization and reimbursement plans.

With a new focus on commercialization of our intellectual property assets, in the fourth quarter of 2013, we announced two strategic commercialization partnerships. In October, we announced the signing of a U.S. collaboration agreement with PDI, Inc. (Nasdaq: PDII) to commercialize CardioPredict™, a new 10-gene assay panel that identifies specific genes that influence the effectiveness and safety of many commonly used cardiovascular drugs including the platelet inhibitor, clopidogrel; several cholesterol-lowering drugs, known as “statins”; the blood thinner, warfarin; and certain blood pressure lowering drugs, known as beta blockers; among others. Developed by Transgenomic, CardioPredict™ is the most comprehensive assay of its kind currently on the market and can assist physicians with drug selection and dosing decisions.

Under the terms of the strategic collaboration agreement, PDI will be responsible for all U.S.-based marketing and promotion of CardioPredict™, while Transgenomic will be responsible for processing CardioPredict™ in its CLIA lab and all customer support. We believe that strategic partnerships such as this one will allow Transgenomic to globally commercialize our novel assays and clinical tests in order to more effectively address the expanding genetics market.

Shortly thereafter, in November, we announced an agreement with PerkinElmer, Inc. (NYSE: PKI) to market and distribute our oncology diagnostic test portfolio of products in territories outside the United States. Under the terms of the agreement, effective January 1, 2014, PerkinElmer has the non-exclusive right to begin sales, marketing, distribution and field service activities

20


for our line of molecular diagnostic oncology products, including CRC RAScan™ and ACE™ kits, for use on its Caliper LabChip® platform. Europe will be the initial focus of PerkinElmer’s launch.

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

This proprietary technology, which we have named ICE COLD-PCR and developed with the Dana Farber Cancer Institute, is our technological platform with transformative commercial potential for the company. ICE COLD-PCR is a technology we believe has unequalled sensitivity and the potential to revolutionize cancer screening, diagnosis, monitoring, and treatment selection by replacing the need for biopsies. We are aggressively pursuing activities to develop, protect and commercialize this opportunity.

In February 2014, we announced that the U.S. Patent and Trademark Office issued a new patent related to our licensed ICE COLD-PCR technology. This newly issued patent significantly strengthens our intellectual property portfolio and supports the ongoing development of ICE COLD-PCR. We intend to leverage this proprietary asset in both our patient testing business and with our pharmaceutical and biotechnology client companies, especially those looking for low level mutations in blood. The patent will protect the underlying technology until 2031.

In October 2013, we announced the results from an interim analysis of a research collaboration involving ICE COLD-PCR with the MD Anderson Cancer Center. Using Transgenomic’s ultrasensitive ICE COLD-PCR technology, investigators analyzed blood plasma samples collected from 60 patients with colorectal cancer, melanoma, non-small cell lung cancer and several other cancers, and compared them to corresponding samples taken from tumor tissue. The results demonstrated that in a high percentage of patients, the same KRAS and BRAF genetic mutations were detected in cell-free (cf) DNA present in the blood as were originally found in primary tumors. These findings demonstrate the clinical relevance and utility of analyzing cfDNA in blood to detect low level mutations as an alternative to the far more invasive and difficult-to-conduct tissue biopsy.

In June 2013, in a joint announcement with ApoCell, Inc., we announced the results of a research collaboration with the University of Texas MD Anderson Cancer Center that coupled ApoCell's ApoStream™ platform for isolating circulating tumor cells (CTCs) with our ICE COLD-PCR technology to detect signature mutations in CTCs isolated from the blood of lung cancer patients. This small pilot study demonstrated that ICE COLD-PCR technology was able to detect a number of the mutations in CTCs that were found in matched tumors from the same patient. The results were presented at the ASCO 2013 Annual Meeting.

These studies, along with other collaborations currently ongoing at leading research institutes, continue to explore concordance rates between tumor tissue, cfDNA and CTCs isolated from patients using ICE COLD-PCR. The broad use of this innovative technology has the potential to revolutionize cancer screening, diagnosis, monitoring, and therapy selection since it has the ability to perform safer, less invasive, and more frequent assessments of a cancer and its mutations, all through a simple blood draw. We are also completing a review of future diagnostic applications and utility of the ICE COLD-PCR technology and products for commercial applications.

In May 2013, we announced our entry into a collaboration with Amgen, Inc. for the development and launch of CRC RAScan™, a CE-IVD test to screen patients with metastatic colorectal cancer (mCRC) for KRAS and NRAS mutations (collectively referred to as “RAS mutations”). In June 2013, Amgen presented results of a predefined-retrospective subset analysis of a global, multicenter, randomized Phase 3 study at the American Society of Clinical Oncology (ASCO) 2013 Annual Meeting. The RAS mutations outlined in the study, identified using our CE-IVD CRC RAScan™ kits in conjunction with our Surveyor®-Wave® technology, provide physicians with important tumor mutation information that is highly relevant when considering administration of select EGFR inhibitor therapies for metastatic colorectal cancer. The CRC RAScan™ kit provides a single kit solution with superior sensitivity versus any other kit or sequencing method currently available.

CRC RAScan™ utilizes the DNA mismatch-cutting enzyme SURVEYOR Nuclease assay, developed exclusively by us. The SURVEYOR Nuclease assay can detect mutations at higher levels of sensitivity than stand-alone Sanger sequencing. CRC RAScan™ results can also be used to inform marginal or difficult to resolve sequencing results. Additionally, in gene regions where mutations exist at low frequencies, prescreening with CRC RAScan™ affords a cost and time-efficient workflow, as only CRC RAScan™ positive samples are advanced to the more complex and expensive Sanger sequencing analysis. In late 2013, Transgenomic also introduced CRC RASseq™, a CE-IVD mutation detection test kit for RAS mutations using traditional Sanger DNA sequencing systems.


21


We continue to progress our commercial collaboration with the Medical College of Wisconsin, a world-renowned institution with a robust presence in genomics and genetic testing. As a result of this collaboration, we have recently launched a number of new offerings addressing neurological and mitochondrial disorders, including whole exome testing, using a next generation sequencing platform.

In 2013, we consolidated our Patient Testing Laboratories and our Biomarker Identification Laboratory into a single business segment, which we now refer to as our Laboratory Services segment. We continue to anticipate continued growth in 2012 in all three ofboth our business units, Clinical Labs, PharmacogenomicLaboratory Services and Diagnostic Tools,Genetic Assays and Platforms segments, as we commercialize new assay technologies and tests we have developed internally, in-licensed, or in-licensed,acquired, and as we expand into other markets and regions worldwide.The foundation of these efforts was a successful 2011, driven by top line growth and the continued benefit of our FAMILION acquisition. Revenues increased by 59% to $32 million for the year ended December 31, 2011.
Our FAMILION franchise, which we acquired in December 2010, includes eleven tests for inherited cardiac disorders.  We continue to believe that there is significant opportunity to expand this business based on increased use of existing tests and the launch of new products into the marketplace.  In May, the Heart Rhythm Society issued new diagnostic guidelines supporting the use of some of our key cardiac tests. In November 2011, we launched two new genetic tests at the annual American Heart Association meeting. These include our PGxPredict:CLOPIDOGREL Panel, a uniquely comprehensive test to predict a patient's response to clopidogrel (Plavix®), the most widely prescribed antiplatelet drug used to reduce the risks of death, stroke and heart attack, and a test for familial atrial fibrillation.
The clopidogrel response test, in particular, is a significant opportunity for Transgenomic, as it is the only test which analyzes the genes CYP2C19 and ABCB1 to help predict a patient's ability to absorb and metabolize clopidogrel. Clopidogrel is taken in an inactive form, known as a prodrug, and must be absorbed through the intestine and then metabolized by the liver to form the active drug in a process controlled by these genes. Patients with dysfunctional or lower functioning ABCB1 or CYP2C19 are at heightened risk for cardiovascular events than patients with normal protein function due to poorer availability of the active drug.

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The risk associated with dysfunctional or lower functioning CYP2C19 prompted the FDA in 2010 to add a black box warning to the clopidogrel label.
In March of 2012, Transgenomic announced the publication of a new study by researchers at Vanderbilt University in the journal “Clinical Pharmacology and Therapeutics.” This large, independent study, the third such study examining CYP2C19 and ABCB1, demonstrated the importance of both genes in determining which patients would benefit from treatment with clopidogrel and which should pursue alternative treatment. ABCB1 is proprietary to Transgenomic, protected by an issued patent in Europe and pending patent in the US. There are approximately 6 million new patients prescribed Plavix each year, of which about 47% will not fully benefit from their therapy because of genetic variations in either CYP2C19 or ABCB1. This highlights a need for broad-based testing, and represents a potential multi-billion dollar opportunity for Transgenomic's Clinical Laboratories division.
In June 2011, we launched our Nuclear Mitome Test, a 400-gene screen of the nuclear genes linked to mitochondrial function that provides useful clinical information in understanding the underlying genetic causes of this spectrum of diseases. This test has been well-received by mitochondrial experts and physicians already and is assisting them to better diagnose this serious and difficult to discern set of disorders.
In our Pharmacogenomics Services Unit, we continue to perform cancer pathway gene mutation analysis and other associated genomics service testing for a number of pharmaceutical companies: both for pre-clinical drug discovery projects and phase II and III clinical trials.  Although we may experience variability in quarter-to-quarter revenues based on the timing of projects or when specimens may arrive, we continue to experience growth in this area of the business.  We can now analyze a patient's blood serum rather than a tumor to detect DNA mutations, using our ultra-sensitive DNA mutation detection technology, termed “ICE COLD-PCR”. This is a significant achievement, and we believe it should lead to faster growth of our pharmacogenomics research services as pharmaceutical companies adopt this novel approach for both drug and disease research.
In addition to ICE COLD-PCR, which offers sensitivity improvements as much as 1,000 times higher than routine DNA testing technology, we have recently discovered a technique to further improve mutation detection sensitivity of standard Sanger sequencing. We have termed this new discovery “BLOCker-Sequencing” and we are combining this new discovery with our ICE COLD-PCR program to bring what we believe to be the most accurate and sensitive mutation detection technology available in the market today.


Results of Continuing Operations
Net Sales.
Net sales consisted of the following:
2011 vs. 2010Dollars in Thousands
    
 Years Ended Change
 2011 2010 $     %
Clinical Laboratories$16,038
 $3,606
 $12,432
 345 %
Pharmacogenomic Services2,280
 1,373
 907
 66 %
Diagnostic Tools13,653
 15,069
 (1,416) (9)%
Total net sales$31,971
 $20,048
 $11,923
 59 %
2013 vs. 2012Dollars in Thousands
    
 Year Ended December 31, Change
 2013 2012 $     %
Laboratory Services$15,391
 $19,329
 $(3,938) (20)%
Genetic Assays and Platforms12,153
 12,151
 2
 — %
Total net sales$27,544
 $31,480
 $(3,936) (13)%
Clinical LaboratoriesLaboratory Services net sales increaseddecreased $12.43.9 million during the year ended December 31, 20112013, compared to the same period in 20102012. Of this increaseRevenue decreased in 2013 compared to 2012 primarily due to overall lower test volumes, primarily in Neurology testing. The decline in revenue $11.1 million is due to revenue from the FAMILION family of genetic tests, which we acquired on December 29, 2010. In addition, our revenue increasedwas partially offset by $1.3 million in our neurology family of tests due to the mix of test performed and the average revenue per test.higher contract work associated with a collaboration agreement.
Pharmacogenomic Services had netGenetic Assays and Platforms sales of $2.3 million during the year ended December 31, 20112013, which were even with the level achieved in 2012. The change in sales was the result of modestly lower instruments sales in 2013 offset by an increase in our sales of Bioconsumables.
2012 vs. 2011Dollars in Thousands
    
 Year Ended December 31, Change
 2012 2011 $     %
Laboratory Services$19,329
 $18,318
 $1,011
 6 %
Genetic Assays and Platforms12,151
 13,653
 (1,502) (11)%
Total net sales$31,480
 $31,971
 $(491) (2)%
Laboratory Services net sales increased $0.91.0 million during the year ended December 31, 2012, compared to the same period in 2010. The increase is2011 due to the completion ofhigher test volumes, and a significant project with a pharmaceutical company client. Pharmacogenomics Services netmodest shift towards higher priced tests driven by sales have peaks due to the nature of project-related services performed on behalf of our clients. Each period for Pharmacogenomics Services should be considered on a stand alone basisrecently launched NuclearMitome, C-GAAP and is not indicative of future net sales.ScoliScoreTM tests.

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Diagnostic ToolsGenetic Assays and Platforms net sales decreased $1.41.5 million, or 9%11%, during the year ended December 31, 20112012, as compared to the same period in 2010. The decrease was due to fewer systems sold in the year ended December 31, 2011. We sold thirteen WAVE Systemsmore instruments in 2012 than in 2011, comparedbut there was a shift in sales to twenty-fiveour distributor at lower distributor prices, which resulted in 2010. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. Lower WAVE System sales are offset by slightly higher OEM Equipment sales in 2011. We sold fourteen OEM Equipment instruments in the year ended December 31, 2011 compared to ten in the same period in 2010.lower sales. Bioconsumables net sales were down $0.6$0.7 million, during the year ended December 31, 20112012 compared to the same period in 20102011 due to lower volume in Europe.
2010 vs. 2009Dollars in Thousands
    
 Years Ended Change
 2010 2009 $     %
Clinical Laboratories$3,606
 $3,541
 $65
 2 %
Pharmacogenomic Services1,373
 1,025
 348
 34 %
Diagnostic Tools15,069
 17,457
 (2,388) (14)%
Total net sales$20,048
 $22,023
 $(1,975) (9)%
Clinical Laboratories net sales were consistent during the year ended December 31, 2010, compared to the same period in 2009.
Pharmacogenomic Services had net sales of $1.4 million during the year ended December 31, 2010, which increased $0.3 million compared to the same period in 2009. The increase is due to an increase in the number of clients and average revenue billed per client for the year ended December 31, 2010 compared to same period in 2009. Pharmacogenomics Services net sales have peaks due to the nature of project-related services performed on behalf of our clients. Each period for Pharmacogenomics Services should be considered on a stand alone basis and is not indicative of future net sales.
Diagnostic Tools net sales decreased $2.4 million, or 14%, during the year ended December 31, 2010 as compared to the same period in 2009. The decrease was due to fewer instruments sold in the year ended December 31, 2010. We sold twenty-five WAVE instruments in 2010 compared to thirty-two WAVE instruments in 2009. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. We sold ten OEM Equipment instruments in the year ended December 31, 2010 compared to eleven in the same period in 2009. Bioconsumables net sales were down $0.5 million, during the year ended December 31, 2010 compared to the same period in 2009 due to lower volume our European market offset by higher volume in our U.S. market.
Costs of Goods Sold.
Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation) as well as the wholesale price we pay manufacturers of OEM Equipment that we distribute. It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Clinical Laboratories and PharmacogenomicsLaboratory Services operations.
Gross Profit.

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

2011 vs. 2010Dollars in Thousands
    
 Years Ended Margin %
 2011 2010 2011   2010
Clinical Laboratories$9,478
 $1,481
 59% 41 %
Pharmacogenomic Services1,050
 (43) 46% (3)%
Diagnostic Tools7,909
 8,326
 58% 55 %
Gross profit$18,437
 $9,764
 58% 49 %
2013 vs. 2012Dollars in Thousands
    
 Year Ended December 31, Margin %
 2013 2012 2013 2012
Laboratory Services$6,820
 $9,316
 44% 48%
Genetic Assays and Platforms5,676
 5,694
 47% 47%
Gross profit$12,496
 $15,010
 45% 48%
Gross profit was $18.412.5 million, or 58%45%, of total net sales during the year ended December 31, 20112013, compared to $9.8

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15.0 million, or 49%48%, during the same period of 20102012. During the year ended December 31, 2013, the gross margin for Laboratory Services was $6.8 million, or 44%, as compared to $9.3 million, or 48%, in the same period of 2012. The gross profit decline primarily reflects the lower test volumes noted above. Lower overall costs were more than offset by the sales decline. Genetic Assays and Platforms gross margin remained consistent in the year ended December 31, 2013 compared to the same period of 2012.
2012 vs. 2011Dollars in Thousands
    
 Year Ended December 31, Margin %
 2012 2011 2012 2011
Laboratory Services$9,316
 $10,528
 48% 57%
Genetic Assays and Platforms5,694
 7,909
 47% 58%
Gross profit$15,010
 $18,437
 48% 58%
Gross profit during the year ended December 31, 2012 was $15.0 million, or 48%, of total net sales, compared to $18.4 million, or 58%, during the same period of 2011. During the year ended December 31, 2011,2012, the gross margin for Clinical LaboratoriesLaboratory Services was $9.3 million, or $9.5 million49%, or 59%, as compared to $1.5$10.5 million,, or 41%,57% in the same period of 2010.2011. The year ended December 31, 2011 includeschange in the gross profit from sales of the FAMILION family of genetic tests, which we acquired on December 29, 2010. Pharmacogenomics Services gross margin increased from a loss of less than $0.1 million, or (3)%, for the year ended December 31, 20102012 is attributable to $1.1 million, or 46% fora change in the year ended December 31, 2011. Pharmacogenomics Services have a relatively fixed-cost base so any increase or decrease in revenue directly impacts gross margins. In addition,mix of tests performed and higher operating supplies, wages and software costs were loweras we increased capacity in 2012 compared to 2011. Diagnostic Toolsour anticipation of higher volume from our newly launched tests. Genetic Assays and Platforms gross margin increaseddecreased to 58%47% in the year ended December 31, 20112012 from 55%58% in the same period of 20102011 due to the changeshift to sales to our distributor at lower prices resulting in mix of types of instruments sold.
2010 vs. 2009Dollars in Thousands
    
 Years Ended Margin %
 2010 2009 2010 2009
Clinical Laboratories$1,481
 $1,523
 41 % 43%
Pharmacogenomic Services(43) 205
 (3)% 20%
Diagnostic Tools8,326
 9,877
 55 % 57%
Gross profit$9,764
 $11,605
 49 % 53%
Gross profit was $9.8 million or 49% of total net sales during the year ended December 31, 2010, compared to $11.6 million, or 53%, during the same period of 2009. During the years ended December 31, 2010 and 2009, thelower gross margin for Clinical Laboratories was $1.5 million for both years and 41% and 43%, respectively. Pharmacogenomics Services gross margin decreased from $0.2 million, or 20% for the year ended December 31, 2009 to a loss of less than $0.1 million, or (3)% for the year ended December 31, 2010. The erosion in the Pharmacogenomics Services gross margin in 2010 compared to 2009 is due to higher operating supplies costs in 2010. Diagnostic Tools gross margin decreased to 55% for the year ended December 31, 2010 from 57% in the same period of 2009 due to lower bioconsumable sales, which also have a relatively fixed-cost base.margins.
Operating expenses.
The following table summarizes operating expenses further described below for the years ended December 31, 2011, 20102013, 2012 and 2009:2011:
Dollars in ThousandsDollars in Thousands
      
Years EndedYear Ended December 31,
2011 2010 2009 2013 2012 2011
Selling, general and administrative$19,150
 $10,933
 $10,319
 $25,043
 $22,023
 $19,150
Research and development2,218
 2,305
 3,182
 3,212
 2,491
 2,218
Restructuring charges41
 138
 —
 —
 —
 41
Total$21,409
 $13,376
 $13,501
 $28,255
 $24,514
 $21,409
Selling, General and Administrative Expenses.
Selling, general and administrative expenses consist primarily of personnel costs, marketing, travel and entertainment costs, professional fees, bad debt expense and facility costs. In addition, the effect of foreign currency revaluation is included here. Our selling, general and administrative costs increased to $19.225.0 million, or 60% of net sales, from $10.9 million, or 55% of net sales, during the year ended December 31, 20112013 compared to$22.0 million for the same period in 2010.2012. The increase in selling, general and administrative costs primarily relates to a $3.0 million higher bad debt provision in 2013 as compared to 2012. In addition, the increased costs include severance costs in 2013 related to staffing reductions in the second quarter and an executive termination in the third quarter.

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Our selling, general and administrative costs increased to $22.0 million, from $19.2 million, during the year ended December 31, 2012 compared to 2011. The increase in our selling, general and administrative costs is due primarily to (i) $4.9 million in expenses related to the FAMILION family of genetic tests, which we acquired on December 29, 2010, (ii) $1.0 million in expense related to the vesting of the employee stock option grants, (iii)included $1.2 million in amortizationadditional employee related expenses incurred to increase the size of our sales force to support the acquired intangibleslaunch of both C-GAAP and (iv)ScoliScoreTM and higher marketing materials expenses. In addition, our bad debt expense of $1.7 million. Losses from foreign currency revaluation for the year ended December 31, 2011 were less than $0.1provision was $0.7 million compared to losses of $0.3 million for the same period in 2010.
Selling, general and administrative expenses increased as a percentage of net sales from 47% in 2009 to 55% in 2010. Forhigher during the year ended December 31, 2010 we incurred $0.8 million in expenses related2012 compared to our acquisition of the FAMILION family of genetic tests. Selling, general and administrative expenses would have been $10.1 million for the year ended December 31, 2010 excluding the deal costs to acquire the FAMILION family of genetic tests which would be comparable to selling, general and administrative expenses for the year ended December 31, 2009 of 2011.$10.3 million. Losses from foreign currency revaluation

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were $0.3 million in each of the periods ended December 31, 2010 and 2009. We recorded restructuring charges of $0.1 million in 2010 related to the consolidation of research and development into our facilities in Omaha, Nebraska which included closing the Gaithersburg, Maryland facility and the elimination of positions in our manufacturing group. There were no restructuring charges in 2009.
Research and Development Expenses.
Research and development expenses include primarily personnel costs, intellectual property legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. During the year ended December 31, 20112013 and 20102012 these costs totaled $2.23.2 million and $2.32.5 million, respectively. Research and development expenses totaled 7%12% and 11%8% of net sales during the yearyears ended December 31, 2013 and 2012, respectively. The increase is due in part to activities related to converting a number of our tests to a more efficient Next Generation Sequencing instrument platform, activities related to our programs validating the use of ICE COLD-PCR, and expanding our portfolio of tests and kits and the platforms on which they are performed.
During the years ended December 31, 20112012 and 2010, respectively. The decrease is due primarily to the consolidation of our2011 research and development activities in Omaha, Nebraska, the benefit which is partially offset by legal costs to defend a patent.
totaled $2.5 million and $2.2 million, respectively. Research and development expenses totaled $2.3 million during the year ended December 31, 2010 compared to $3.2 million during the same period of 2009, a decrease of $0.9 million or 28%. The decrease is primarily due to expenses in 2009 related to collaboration expenses for NuroPro assay development related to the diagnosis of Alzheimer’s8% and Parkinson’s diseases, the development of high sensitivity mutation detection technology called Cold-PCR and purchases of samples related to research work in progress. As a percentage of net sales, research and development expenses totaled 11% and 14%7% of net sales during the years ended December 31, 20102012 and 20092011, respectively. Research and development costs are expensed in the year in which they are incurred.
Other Income (Expense).
The following table summarizes other income (expense) for the years ended December 31, 2011, 20102013, 2012 and 2009:2011:
Dollars in ThousandsDollars in Thousands
      
Years EndedYear Ended December 31,
2011 2010 2009 2013 2012 2011 
Interest income (expense)$(958) $(4) $15
 
Expense on preferred stock and warrants(6,066) —
 —
 
Interest expense$(642) $(888) $(958) 
Preferred stock and warrants expenses—
 —
 (6,066) 
Income from change in fair value of warrants300
 2,200
 —
 
Other, net259
 632
 3
 60
 11
 259
 
Total other income (expense), net$(6,765) $628
 $18
 $(282) $1,323
 $(6,765) 
Other expense, net for the year ended December 31, 2013 totaled $0.3 million. Other expense, net included interest expense, offset by the income associated with the change in fair value of the common stock warrants. The income associated with the common stock warrants is a non-cash item.
Other income, net for the year ended December 31, 2012 totaled $1.3 million. Other income, net included the income associated with the change in fair value of the common stock warrants, offset by interest expense.
Other expense, net for the year ended December 31, 2011 totaled $6.8 million.$6.8 million. Other expense, includesnet included interest expense as well as the expense associated with the Series A Preferred Stock and Series A Warrants, which is due to (i) the change in fair value of the preferred stock conversion feature and (ii) the consideration given to the owners of the Series A Convertible Preferred Stock in exchange for the Series A Preferred Stock Certificate Amendment. The expenses associated with the Series A Preferred Stock are non-cash items. Other income (expense) includes an award of a federal grant under the Qualifying Therapeutic Discovery Project of $0.2 million, net of consulting fees.
Other income in the year ended December 31, 2010 includes $0.6 million, net of consulting gees, relating to an award of a federal grant under the Qualifying Therapeutic Discovery Project. Other income for the year ended December 31, 2009 was less than $0.1 million.
Income Tax Expense (Benefit). Expense.
Income tax (benefit) expense recorded during the years ended December 31, 2011, 20102013, 2012 and 20092011 related to income taxes in states, foreign countries and other local jurisdictions and totaled less than$(0.1) million, $0.1 million, $0.2 million, and less than $0.1 million, respectively. The effective tax rate for the year ended December 31, 20112013 is 0.5%0.3%, which is primarily the result of valuation allowances against net operating losses for the United States, partially adjusted by permanent differences related to inter-company foreign currency exchange of our subsidiary outside the United States. The effective tax rate for the years ended December 31, 20102012 and 20092011 were 5.0%negative 1.8% and 2.2%negative 0.5%, respectively.
A net deferred tax liability was recorded during 2011 and 2010 relating to the UK income taxes of less than $0.1 million . We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate taxable income in future periods and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. Our net operating loss carry-forwards from continuing andof $121.7 million will

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discontinued operations of $104.4 million will expire at various dates from 20122018 through 2031,2033, if not utilized. We also had state income tax loss carry-forwards from continuing and discontinued operations of $46.0$33.0 million at December 31, 2011.2013. These carry-forwards will also expire at various dates from 2018 to 2033 if not utilized.
Liquidity and Capital Resources
Our working capital positions at December 31, 20112013 and 20102012 were as follows (in thousands):
 
  December 31,  
  2011 2010 Change
Current assets (including cash and cash equivalents of $4,946 and $3,454 respectively)
 $17,198
 $15,034
 $2,164
Current liabilities 16,328
 8,253
 (8,075)
Working capital $870
 $6,781
 $(5,911)
Working capital decreased from 2010 to 2011 primarily due to the following: 1) current maturities of long term debt increased $3.7 million, 2) the Company accrued dividends payable on its Series A Preferred Stock totaling $0.6 million, and 3) selected liability accounts including accounts payable, accrued compensation and other accrued liabilities increased on a net basis between year ends.
  December 31,  
  2013 2012 Change
Current assets (including cash and cash equivalents of $1,626 and $4,497 respectively)
 $11,835
 $18,717
 $(6,882)
Current liabilities 8,625
 15,268
 6,643
Working capital $3,210
 $3,449
 $(239)
On December 30, 2011, the CompanyMarch 5, 2014, Transgenomic entered into a Series B Convertible Promissory NotePreferred Stock Purchase Agreement (the “Purchase Agreement”) with certain accredited investors and/or their affiliates (collectively, the Third Security“Investors”), pursuant to which Transgenomic, in a private placement, sold and issued to the Investors in thean aggregate amount of $3.0 million that automatically converted into1,443,297 shares of the Company's common stock and warrants to purchase such common stock on the same terms as all investors in the private placement described below.
On February 3, 2012 the Company entered into definitive agreements with institutional and other accredited investors to raise approximately $19.0 million (before offering costs and selling agent commissions) in a private placement. The funding occurred in February 2012. Pursuant to the terms of the private placement, we issued an aggregate of 19,000,000 shares of the Company's common stockSeries B Convertible Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), at a price per share of $1.00 as well as five-year warrants to purchase up to$4.85 (the “Shares”) for an aggregate purchase price of 9,500,000approximately $7,000,000 (the “Private Placement”). Each share of Series B Preferred Stock issuable pursuant to the Purchase Agreement is initially convertible into shares of the Company’s common stock, with an exercise pricepar value $0.01 per share (the “Common Stock”), at a rate of $1.25 per share. As part of the private placement financing and in connection with the1-for-1, which conversion of the convertible notes issued by the Companyrate is subject to the Third Security Investors, we issued an aggregate of 3,000,000 shares of common stock and 1,500,000 warrants on the same termsfurther adjustment as all investorsset forth in the private placement.Certificate of Designation of Series B Convertible Preferred Stock.
Please see the section entitled "Contractual Obligations and Other Commitments" that follows shortly in this document and Footnote G.5 "Debt" to theour accompanying consolidated financial statements for additional information regarding the Company'sour outstanding debt and debt servicing obligations. Additionally, see following paragraph describing subsequent funding received.
At December 31, 2011,2013, we had cash and cash equivalents of $4.9$1.6 million and in February 2012weMarch 2014 we received approximately $17.5$7.0 million in gross proceeds in connection with the private placement.Series B Convertible Preferred Stock Purchase Agreement. We believe that existing sources of liquidity as of December 31, 20112013 along with the net proceeds of the February 2012 private placement,March 2014 sale of Preferred Stock, are sufficient to meet expected cash needs. Accordingly, we believe we have sufficient liquidity to continue our operations for at least the foreseeable future.next 12 months.
Analysis of Cash Flows
The following table presents a summary of our cash flows:
(amounts in thousands)(amounts in thousands)
2011 2010 20092013 2012 2011
Net cash provided by (used for):     
Net cash provided by (used in):     
Operating activities$220
 $(1,718) $1,267
$(8,473) $(10,204) $220
Investing activities(508) (6,226) (377)(1,766) (4,878) (508)
Financing activities1,726
 5,761
 —
7,370
 14,604
 1,726
Effect of exchange rates on cash54
 (5) (19)(2) 29
 54
Net increase (decrease) in cash and cash equivalents$1,492
 $(2,188) $871
$(2,871) $(449) $1,492
Net Change in Cash and Cash Equivalents. Cash and cash equivalents decreased by $2.9 million, decreased by $0.4 million and increased by $1.5 million duringfor the periods ending December 31, 2013, 2012 and 2011, decreased by $2.2 million during 2010 and increased by $0.9 million during 2009.respectively.
Cash Flows Provided By (Used In) Operating Activities. During 2011, the Company recorded non-cash, stock-based compensation expense totaling $1.0We used cash for operating activities of $8.5 million and $6.1$10.2 million during 2013 and 2012, respectively. We provided cash from operating activities of non-cash expense associated with the Series A Preferred Stock and

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Series A Warrants. The Company recorded non-cash, stock-based compensation expense of $0.0 million and $0.2 million during 20102011. In 2013, cash flows used in operating activities of $8.5 million reflects the Company's cash loss from operations and 2009, respectively. The Company recorded depreciationan increase in accounts receivable of $2.8 million as a result of a slow-down in collections in Laboratory Services and amortization expense totaling $2.1high fourth quarter shipments in Genetic Assays and Platforms. A decrease in inventory of $1.1 million $0.7related to higher instrument sales and better inventory management partially offset the operating use. During 2012, the cash flows used in operating activities of $10.2 million includes an increase in accounts receivable of $2.9 million related to higher levels of past due receivables and $0.9an increase in inventories of $1.4 million duringto purchase additional OEM instruments in anticipation of future sales, coupled with the cash loss from operations. In 2011, 2010the cash provided of $0.2 million reflects cash income from operations offset by an increase in accounts receivable and 2009, respectively.inventory.

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Cash Flows Used In Investing Activities. During 2010,2013, the Company utilized $1.8 million of cash for investing activities, primarily related to additions to property, plant and equipment and patents of $0.9 million and final payment related to the 2012 acquisition of $0.9 million. During 2012, we acquired the FAMILION familyintangible assets of genetic tests ScoliScoreTM for $6.0$4.4 million, $3.6 million of which we paid in cash consideration. The Company2012. We recorded purchases of property and equipment totaling $0.2$0.9 million $0.2 and $0.2 million during 2012 and $0.4 million during 2011 2010 and 2009,, respectively.
Cash Flows Used inProvided By Financing Activities. During 2013, we recorded net proceeds from a private placement with institutional and accredited investors of $7.6 million, received proceeds from borrowings of $6.6 million and recorded principal payments of $6.2 million to settle the PGxHealth note payable. During 2012, we recorded net proceeds from a private placement with institutional and accredited investors of $17.5 million. We recorded principal payments on notes payable totaling $2.6 million during 2012. During 2011, the Companywe recorded proceeds from short term notes payable totaling $3.0 million. During 2010,In 2011, cash provided by financing activities reflects the Company raised $6.0 million in the issuance Series A Preferred Stock and Series A Warrants, which was used in the financingexcess of the acquisition of FAMILION. The Company recorded principal payments on capital leases totaling $0.4 million and $0.1 million during 2011 and 2010, respectively. The Company recorded principal payments on notes payable totaling $0.9 million during 2011.borrowings over payments.

    
Contractual Obligations and Other Commitments
As of At December 31, 2011,2013, our contractual obligations and other commitments were as follows:
    
(Amounts in thousands)(Amounts in thousands)
2012 2013 2014 2015 2016 After 2016 Total2014 2015 2016 2017 2018 After 2018 Total
Short term debt(1)
$3,082
 $—
 $—
 $—
 $—
 $—
 $3,082
Long term debt(1)
3,703
 4,937
 —
 —
 —
 —
 8,640
$242
 $1,879
 $4,439
 $—
 $—
 $—
 $6,560
Interest(1)
900
 307
         1,207
180
 493
 325
 —
 —
 —
 998
Capital lease obligations(2)
378
 312
 97
 —
 —
 —
 787
160
 37
 3
 1
 —
 —
 201
Operating lease obligations(3)
1,103
 1,023
 978
 914
 866
 2,094
 6,978
1,097
 1,013
 880
 763
 485
 862
 5,100
Purchase obligations(4)
1,271
 —
 —
 —
 —
 —
 1,271
887
 —
 —
 —
 —
 —
 887
$10,437
 $6,579
 $1,075
 $914
 $866
 $2,094
 $21,965
$2,566
 $3,422
 $5,647
 $764
 $485
 $862
 $13,746

(1) See Note GFootnote 5 - Debt"Debt" to our accompanying consolidated financial statements.
(2) See Note HFootnote 6 - Capital Leases"Capital Leases" to our accompanying consolidated financial statements.
(3) These amounts represent non-cancellable operating leases for equipment, vehicles and operating facilities
(4) These amounts represent purchase commitments, including all open purchase orders

At December 31, 2013 , we had unrecognized tax benefits of $0.3 million. A reasonable estimate of the timing related to the $0.3 million is not possible.


Off Balance Sheet Arrangements
At December 31, 20112013 and 2010,2012, 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.

Critical Accounting Policies
Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and they require significant or complex judgments on the part of management. The preparation of 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 reported 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. 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 judgment or estimates may vary under different assumptions or circumstances. The following are certain critical accounting policies that may involve the use of judgment or estimates.

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Allowance for Doubtful Accounts and Contractual Allowances.
While payment terms are generally 30 days, we have also provided extended payment terms of up to 90 days in certain cases. We operate globally and some of the international payment terms maycan 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 and contractual allowances by regularly evaluating individual customerpayor receivables and considering a customer’spayor's financial condition, credit history, reimbursement rates and current economic conditions. Accounts receivable are written off when deemed uncollectible.uncollectible and after all collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded as a reduction in bad debt expense when received.

Inventories.
Inventories are stated at the lower of cost or market net of allowance for obsolete and slow moving 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. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional write-downs of the inventory may be required.

Property and Equipment.
Property and equipment are carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets.

Goodwill.Goodwill is the excess of the purchase price over fair value of assets acquired and is not amortized.
Goodwill is tested for impairment annually.annually utilizing a combination of income and market approaches. The income approach applies a discounted cash flow methodology to the Company's future period projections and the market approach uses market available information on the Company. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may impact goodwill. Impairment occursmay occur when the carrying value is determined to be not recoverable thereby causing the carrying value of the goodwill to exceedreporting unit exceeds its fair value. If impaired, the asset’s carrying value is reduced toof the reporting unit exceeds its fair value.value, the fair value of all identifiable tangible and intangible assets and liabilities is determined as part of a hypothetical purchase price allocation to determine the amount of goodwill impairment. No impairment existed at December 31, 2011 and 2010.of goodwill has occurred to date.
Intangibles.Intangibles
Intangible Assets.
Intangible assets include intellectual property, patents and acquired products. At December 31, 2013, the Company revised its estimate of useful lives on certain intangible assets which will cause amortization expense in 2014 to be $0.4 million lower.
1. Intellectual Property.    Initial costs paid to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.
2. Patents.    We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.
3. Acquired Products.    As a part of the FAMILION acquisition and acquisition of certain intangible assets from Axial, we acquired technology, in process technology, trademarks/tradenames, customer relationships, covenants not to compete and third party relationships. These costs will be amortized straight linepursuant to the straight-line method over their estimated economic life of seven to eight years. See Footnote F.4 "Intangibles and Other Assets" to our accompanying consolidated financial statements.
The Company reviews itsWe review our amortizable long lived assets annually for impairment or whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss wouldmay be recordedneeded if the sum of the future undiscounted cash flows is less than the carrying amount of the asset.asset (group). The amount of the loss would be determined by comparing the fair market valuesvalue of the asset to the carrying amount of the asset.asset (group). No loss has been recorded during the years ended December 31, 20112013, 2012 or 2010. In 2009, we2011. 

Common Stock Warrants.
Our issued and outstanding 2012 warrants to purchase common stock do not qualify to be treated as equity, and accordingly, are recorded less than $0.1 million relatedas 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 accelerated amortization on two license agreements that we terminatedpresent these instruments at fair value at each reporting date

27


and any changes in the first quarter of 2010.fair values are recorded as an adjustment to earnings. The Common Stock Warrant Liability is considered a level three financial instrument. See Footnote 12 "Fair Value" to our accompanying consolidated financial statements.
Indefinite lived assets will be tested for impairment on an annual basis or when a significant event occurs, which may impact impairment. We recorded no impairment during the year ended December 31, 2011, 2010 or 2009.
Preferred Stock.   
Prior to the 2011 modification, the Series A Preferred Stock met the definition of mandatorily redeemable stock as it was preferred capital stock which was redeemable at the option of the holder and therefore was reported outside of equity. The Series A Preferred Stock was accreted to its redemption value. Prior to the 2011 modification, the warrants to purchase shares of Series A WarrantsPreferred Stock issued in December 2010 (the “Series A Warrants”) did not qualify to be treated as equity and, accordingly, waswere recorded as a liability. A preferred stock conversion feature was embedded within the Series A Preferred Stock that met the definition of a derivative. The Series A Preferred Stock, Series A WarrantsWarrant liability and Series A Preferred Stock conversion feature were all recorded separately and were initially recorded at fair value using the Black ScholesBlack-Scholes model. We were required to record these instruments at fair value at each reporting date and changes were recorded as an adjustment to earnings. The Series A Warrant liability and Series A Preferred Stock conversion feature were considered level threeLevel 3 financial instruments.
We entered into a transaction with the holders of the Series A Preferred Stock (the "Series“Series A Holders"Holders”), pursuant to an

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Agreement Regarding Preferred Stock (the “Amendment Agreement”), in which the Series A Holders agreed to (i) waive their rights to enforce the anti-dilution and redemption features of the Series A Preferred Stock and (ii) at the next annual shareholderstockholder meeting, vote to amend the Certificate of Designation for the Series A Preferred Stock to remove the anti-dilution and redemption features of the Series A Preferred Stock. In exchange, the Companywe issued shares of common stock to the Series A Holders having an aggregate market value of $0.3 million. Our stockholders approved the amendments to the Certificate of Designation for the Series A Preferred Stock at the 2012 Annual Meeting of Stockholders held on May 23, 2012, and we filed the Certificate of Designation for the Series A Preferred Stock with the Delaware Secretary of State on May 25, 2012.
As a result of the Amendment Agreement, the value of the Series A Preferred Stock and Series A Warrant,Warrants, including the Series A Preferred Stock conversion feature and Series A Warrant liability, were reclassified into shareholdersstockholders' equity as of the date of the Amendment Agreement.

Stock Based Compensation.
All stock options awardedstock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of December 31, 20112013 had vesting periods of one or three years from date of grant. None of the stock options outstanding at December 31, 20112013 are subject to performance or market-based vesting conditions.
We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date for stock options and for Stock Appreciation Rights ("SAR") is based on the calculated mark-to-market value of the awards at quarter end, with both expensed ratably over the service period of the awards (generallyawards. The values are determined using the vesting period).Black-Scholes methodology.

Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized. Our liability for uncertain tax positions was $0.3 million and $0.3 million as of December 31, 2013 and 2012, respectively.  We recorded less than $0.1 million of additional uncertain tax positions during the current year. We had no material unrecognized tax benefits, interest or penalties during fiscal 20112013 or fiscal 2010,2012, and we do not anticipate any such items during the next twelve months. Our policy is to record interest and penalties directly related to income taxes as income tax expense in the Consolidated Statements of Operations.

Net Sales Recognition.
Revenue is realized and earned when all of the following criteria are met:
Persuasive evidence of an arrangement existsexists;
Delivery has occurred or services have been renderedrendered;
The seller’s price to the buyer is fixed or determinable,determinable; and
Collectability is reasonably assured.

NetIn Laboratory Services, net sales from our Clinical LaboratoriesPatient Testing labs are recognized on an individual test basis and takestake 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 Clinical Laboratories.Patient Testing services. Adjustments to the allowances, based on actual receipts from third party payers, are recorded upon settlement.
reflected in the estimated contractual allowance applied prospectively. In our Pharmacogenomics Services,Biomarker Identification labs, we perform 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.

28


Net sales of Diagnostic ToolsGenetic Assays and Platforms products 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.
Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.

Research and Development.
Research and development and various collaboration costs are charged to expense when incurred.

Translation of Foreign Currency.
Our foreign subsidiary uses the local currency of the country in which it is located as its functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average rates during the period.

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Comprehensive Income.
Accumulated other comprehensive income at December 31, 2011, 20102013, 2012 and 20092011 consisted of foreign currency translation adjustments, net of applicable tax of zero. We deem our foreign investments to be permanent in nature and do not provide for taxes on currency translation adjustments arising from converting investments in a foreign currency to U.S. dollars.tax. During 2011, we reclassified $1.3 million from accumulated other comprehensive income (loss) to accumulated deficit with no effect on total stockholders' equity or net loss.
Earnings
Loss Per Share.
Basic earnings per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include 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.

Recent Accounting Pronouncements

Recently adopted accounting pronouncements.

In October 2009,February 2013, the Financial Accounting Standards Board ("FASB"(the “FASB”) issued ASU Accounting Standards Update (“ASU”)No. 2009-13, Revenue Recognition (ASC 605)2013-02, Comprehensive Income (Topic 220): Multiple-Deliverable Revenue Arrangements (a consensusReporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. The amendments in the Update do not change the current requirements for reporting net income or other comprehensive income in financial statements. The new amendments will require an organization to present (either on the face of the FASB Emerging Issues Task Force);statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income if the item reclassified is required under generally accepted accounting principles in the U.S. (“U.S. GAAP”) to be reclassified to net income in its entirety in the same reporting period. Additionally, for other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP to provide additional detail about those amounts. For public companies, the amendments were effective for yearsreporting periods beginning after JuneDecember 15, 2010. Vendors often provide multiple products and/or services to their customers as part of a single arrangement. These deliverables may be provided at different points in time or over different time periods. The existing guidance regarding how and whether to separate these deliverables and how to allocate the overall arrangement consideration to each was originally captured in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, which is now codified at ASC 605-25, Revenue Recognition – Multiple-Element Arrangements. The issuance of ASU 2009-13 amends ASC 605-25 and represents a significant shift from the existing guidance that was considered abuse-preventative and heavily geared toward ensuring that revenue recognition was not accelerated. The application of this new guidance is expected to result in accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting.2012. Our adoption of ASU No. 2009-13this guidance did not have a material impact on our consolidated financial statements.

In October 2009, theFebruary 2013 FASB issued ASU No. 2009-14,2013-04, Software (ASC 985): Certain RevenueObligations Resulting from Joint and Several Liability Arrangements That Include Software Elements (a consensusfor Which the Total Amount of the FASB Emerging Issues Task Force)Obligation Is Fixed at the Reporting Date (; effective for years beginning after June 15, 2010. “ASU 2009-14 modifies the existing scope guidance in ASC 985-605, 2013-04Software Revenue Recognition”, for revenue arrangements with tangible products that include software elements. This modification was made primarily due to the changes in ASC 605-25 noted previously, which further differentiated the separation). ASU 2013-04 requires reporting and allocation guidance applicable to non-software arrangements as compared to software arrangements. Prior to the modification of ASC 605-25, the separation and allocation guidance for software and non-software arrangements was more similar. Under ASC 985-605, which was originally issued as AICPA Statement of position 97-2, Software Revenue Recognition, an arrangement to sell a tangible product along with software was considered to be in its scope if the software was more than incidental to the product as a whole. Our adoption of ASU No. 2009-14 did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements, effective for years beginning after December 15, 2010. The guidance requires the disclosure of roll forward activities on purchases, sales, issuance,obligations resulting from joint and settlementsseveral liability arrangements within the scope of Subtopic 405-40 for which the total amount of the assets and liabilities measured using significant unobservable inputs (Level Three fair value measurements). We adoptedobligation is fixed at the new disclosure provisions with the filing of our Form 10-Q for the three months ended March 31, 2011.

In December 2010, the FASB issued an Accounting Standards Update (“ASU”) to address diversity in practice in interpreting the pro forma revenue and earnings disclosure requirements for business combinations. Thereporting date. For public companies, ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the current year business combination(s) had occurred as of the beginning of the comparable prior annual reporting period. We prospectively adopted this ASU effective January 1, 2011, with no material impact on our consolidated financial statements.

Recently issued accounting pronouncements not yet adopted.
In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance2013-04 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 20112013. The guidance in ASU 2013-04 is to be applied retrospectively for those obligations resulting from joint and will have presentation changes only.several liability arrangements within the scope of Subtopic 405-40 that exist at the beginning of an entity’s fiscal year of adoption. Earlier application is permitted. When adopted, ASU 2013-04 is not expected to materially impact our consolidated financial statements.

In July 2011,March 2013, the FASB issued guidance onreleased ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the presentationCumulative Translation Adjustment upon Derecognition of net patient service revenue. The new guidance requiresCertain Subsidiaries or Groups of Assets within a changeForeign Entity or of an Investment in presentationa Foreign Entity (a consensus of the statementFASB Emerging Issues Task Force)(“ASU 2013-05”). ASU 2013-05 provides that, when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of operations by reclassifyingassets that is a nonprofit activity or a business within a foreign entity, the provision for bad debts associated with patient service

28
Tableparent is required to release any related cumulative translation adjustment into net income. The provisions of Contents

revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, enhanced disclosure about policies for recognizing revenue and assessing bad debtsASU 2013-05 are required. Disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts will be required. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We are in the final stages of analyzing this presentation of net patient service revenue.2013. When adopted, ASU 2013-05 is not expected to materially impact our consolidated financial statements.
In September 2011,July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides explicit guidance on intangibles including goodwill and other intangibles.the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The new guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 20112013, with an option for early adoption. We intend to adopt this guidance at the beginning of our first quarter of fiscal year 2014, and is expected todo not expect the adoption of this standard will have noa material impact on our consolidated financial statements.

Impact of Inflation


29


We do not believe that inflation has had a material effect on our current business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, for example, if the cost of our materials or the cost of shipping our products to customers were to incur substantial increases as a result of the rapid rise in the cost of oil, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Item 7A.Quantitative and Qualitative Disclosure about Market Risk.
Foreign Currency Translation Risk. Sales of products in foreign countriesWe are mainly completed in either British Pounds Sterling or the Euro. Additionally, the British Pound Sterling is the functional currency of our wholly owned subsidiary, Transgenomic Limited. Results of operations and the Balance Sheet are translated from the functional currencya smaller reporting company, as defined by Rule 12b-2 of the subsidiarySecurities Exchange Act of 1934, as amended, and are not required to our reporting currency ofprovide the US Dollar. Results of operations for the Company’s foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. In addition, we have revaluation risk which occurs when the transaction is consummated in a currency other than the British Pound Sterling. This transaction must be revalued within the Transgenomic Limited ledger, whose functional currency is the British Pound Sterling. The majority of the transactions oninformation required under this ledger are in Euro. As a result we are subject to exchange rate risk and we do not currently engage in foreign currency hedging activities.item.




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Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders
Transgenomic, Inc.

We have audited the accompanying consolidated balance sheetssheet of Transgenomic, Inc. and Subsidiary (the Company) as of December 31, 2011 and 2010,2013 and the related consolidated statements of operations, stockholders'comprehensive loss, shareholders’ equity, and cash flowsflow for each of the three years in the periodyear then ended December 31, 2011. We also have audited2013. These financial statements are the Company's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizationsresponsibility of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting.Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company'seffectiveness of the Company’s internal control over financial reportingreporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transgenomic, Inc. and Subsidiary at December 31, 2013, and the consolidated results of their operations and their cash flows for the year then ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.


/s/ Ernst & Young LLP
Hartford, CT
March 27, 2014

31




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Transgenomic, Inc.


We have audited the accompanying consolidated balance sheet of Transgenomic, Inc. and Subsidiary as of December 31, 2012, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for the years ended December 31, 2012 and 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includedmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Transgenomic, Inc. and Subsidiary as of December 31, 2011 and 2010,2012, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2012 and 2011, in conformity with accounting principlesU.S. generally accepted in the United States of America. Also in our opinion, Transgenomic, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.accounting principles.



/s/ McGladrey & Pullen, LLP

Omaha, Nebraska
March 14, 20122013






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TRANSGENOMIC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 20112013 and 20102012
(Dollars in thousands except per share data)
    
 2011 2010
ASSETS   
CURRENT ASSETS:   
Cash and cash equivalents$4,946
 $3,454
Accounts receivable (net of allowances for bad debts of $1,088 and $334, respectively)7,573
 7,601
Inventories (net of allowances for obsolescence of $511 and $518, respectively)3,859
 3,344
Other current assets820
 635
Total current assets17,198
 15,034
PROPERTY AND EQUIPMENT:   
Equipment10,143
 9,820
Furniture, fixtures & leasehold improvements3,682
 3,479
 13,825
 13,299
Less: accumulated depreciation(11,969) (11,697)
 1,856
 1,602
OTHER ASSETS:   
Goodwill6,440
 6,275
Intangibles (net of accumulated amortization of $1,437 and $519, respectively)7,966
 8,962
Other assets102
 154
 $33,562
 $32,027
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)   
CURRENT LIABILITIES:   
Accounts payable$2,609
 $1,360
Accrued compensation1,133
 875
Short term debt3,082
 989
Current maturities of long term debt3,703
 —
Accrued expenses3,839
 3,231
Other Liabilities1,042
 1,628
Current portion of lease obligations320
 170
Accrued preferred stock dividend600
 —
Total current liabilities16,328
 8,253
LONG TERM LIABILITIES:   
Long term debt less current maturities4,937
 8,640
Preferred stock conversion feature—
 1,983
Preferred stock warrant liability—
 2,351
Other long-term liabilities1,249
 843
Total liabilities22,514
 22,070
Redeemable Series A convertible preferred stock, $.01 par value, 3,879,307 shares authorized, 0 and 2,586,205 shares issued and outstanding, respectively—
 1,457
STOCKHOLDERS’ EQUITY:   
Series A preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 and 0 shares issued and outstanding, respectively26
 —
Common stock, $.01 par value, 100,000,000 shares authorized, 49,625,725 and 49,289,672 shares issued and outstanding, respectively501
 498
Additional paid-in capital152,987
 139,730
Accumulated other comprehensive income336
 1,589
Accumulated deficit(142,802) (133,317)
Total stockholders’ equity11,048
 8,500
 $33,562
 $32,027
    
 2013 2012
ASSETS   
CURRENT ASSETS:   
Cash and cash equivalents$1,626
 $4,497
Accounts receivable (net of allowances for doubtful accounts of $3,838 and $2,171, respectively)5,314
 8,081
Inventories (net of allowances of $799 and $616, respectively)3,957
 5,092
Other current assets938
 1,047
Total current assets11,835
 18,717
PROPERTY AND EQUIPMENT:   
Equipment11,255
 10,682
Furniture, fixtures & leasehold improvements3,874
 3,848
 15,129
 14,530
Less: accumulated depreciation(13,126) (12,340)
 2,003
 2,190
OTHER ASSETS:   
Goodwill6,918
 6,918
Intangibles (net of accumulated amortization of $4,598 and $2,805, respectively)9,195
 10,764
Other assets327
 202
 $30,278
 $38,791
LIABILITIES AND STOCKHOLDERS’ EQUITY   
CURRENT LIABILITIES:   
Accounts payable$2,860
 $2,052
Accrued compensation1,330
 1,121
Current maturities of long term debt242
 6,171
Accrued expenses2,037
 3,686
Deferred revenue1,088
 1,171
Other current liabilities1,068
 1,067
Total current liabilities8,625
 15,268
LONG TERM LIABILITIES:   
Long term debt less current maturities6,318
 —
Common stock warrant liability600
 900
Other long-term liabilities1,303
 1,089
Accrued preferred stock dividend1,986
 1,260
Total liabilities18,832
 18,517
STOCKHOLDERS’ EQUITY:   
Series A preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding, respectively26
 26
Common stock, $.01 par value, 150,000,000 shares authorized, 7,353,695 and 5,970,477 shares issued and outstanding, respectively (1)73
 64
Additional paid-in capital (1)179,459
 171,538
Accumulated other comprehensive income390
 435
Accumulated deficit(168,502) (151,789)
Total stockholders’ equity11,446
 20,274
 $30,278
 $38,791
(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for-twelve reverse stock split which took effect on January 27, 2014.

See notes to consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 20112013, 20102012 and 20092011
(Dollars in thousands except per share data)
 
          
          
2011 2010 20092013 2012 2011
NET SALES$31,971
 $20,048
 $22,023
$27,544
 $31,480
 $31,971
COST OF GOODS SOLD13,534
 10,284
 10,418
15,048
 16,470
 13,534
Gross profit18,437
 9,764
 11,605
12,496
 15,010
 18,437
OPERATING EXPENSES:          
Selling, general and administrative19,150
 10,933
 10,319
25,043
 22,023
 19,150
Research and development2,218
 2,305
 3,182
3,212
 2,491
 2,218
Restructuring charges41
 138
 —
—
 —
 41
21,409
 13,376
 13,501
28,255
 24,514
 21,409
LOSS FROM OPERATIONS(2,972) (3,612) (1,896)(15,759) (9,504) (2,972)
OTHER INCOME (EXPENSE):          
Interest income (expense), net(958) (4) 15
Interest expense, net(642) (888) (958)
Expense on preferred stock(6,066) —
 —
—
 —
 (6,066)
Warrant revaluation300
 2,200
 —
Other, net259
 632
 3
60
 11
 259
(6,765) 628
 18
(282) 1,323
 (6,765)
LOSS BEFORE INCOME TAXES(9,737) (2,984) (1,878)(16,041) (8,181) (9,737)
INCOME TAX EXPENSE45
 150
 42
INCOME TAX (BENEFIT)EXPENSE(54) 146
 45
NET LOSS$(9,782) $(3,134) $(1,920)$(15,987) $(8,327) $(9,782)
PREFERRED STOCK DIVIDENDS AND ACCRETION(1,010) —
 —
(726) (660) (1,010)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS$(10,792) $(3,134) $(1,920)$(16,713) $(8,987) $(10,792)
BASIC AND DILUTED LOSS PER COMMON SHARE$(0.22) $(0.06) $(0.04)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING49,361,632
 49,243,839
 49,189,672
BASIC AND DILUTED LOSS PER COMMON SHARE (1)$(2.30) $(1.55) $(2.62)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING (1)7,266,642
 5,784,785
 4,113,469
(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 which took effect on January 27, 2014.
See notes to consolidated financial statements.


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TRANSGENOMIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended December 31, 2013, 2012 and 2011
(Dollars in thousands)

  2013 2012 2011
Net Loss $(15,987) $(8,327) $(9,782)
Other Comprehensive Loss; foreign currency translation adjustment, net of tax (45) 99
 54
Comprehensive Loss $(16,032) $(8,228) $(9,728)
       

See notes to consolidated financial statements.



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TRANSGENOMIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 20112013, 20102012 and 20092011
(Dollars in thousands except share data)
Preferred Stock Common Stock        Preferred Stock Common Stock        
Outstanding
Shares
 
Par
Value
 
Outstanding
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 Total
Outstanding
Shares
 
Par
Value
 
Outstanding
Shares (1)
 
Par
Value (1)
 
Additional
Paid-in
Capital (1)
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 Total
Balance, January 1, 2009—
 —
 49,189,672
 $497
 $139,501
 $(128,263) $1,470
 $13,205
Balance, December 31, 2010—
 $—
 4,107,473
 $46
 $140,182
 $(133,317) $1,589
 $8,500
Net loss—
 —
 —
 —
 —
 (1,920) (1,920) (1,920)—
 —
 —
 —
 —
 (9,782)   (9,782)
Other comprehensive income (loss):               
Foreign currency translation adjustment, net of tax—
 —
 —
 —
 —
 —
 175
 175
—
 —
 —
 —
 —
 —
 54
 54
Comprehensive loss            $(1,745)  
Non-cash stock-based compensation—
 —
 —
 —
 202
 —
 —
 202
Balance, December 31, 2009—
 —
 49,189,672
 $497
 $139,703
 $(130,183) $1,645
 $11,662
Net loss—
 —
 —
 $—
 $—
 $(3,134) $(3,134) $(3,134)
Other comprehensive income (loss):            

  
Foreign currency translation adjustment, net of tax—
 —
 —
 —
 —
 —
 (56) (56)
Comprehensive loss            $(3,190)  
Non-cash stock-based compensation—
 —
 —
 —
 (14) —
 —
 (14)—
 —
 —
 —
 1,010
 —
 —
 1,010
Issuance of shares of stock—
 —
 100,000
 1
 41
 —
 —
 42
—
 —
 7,513
 —
 24
 —
 —
 24
Balance, December 31, 2010—
 —
 49,289,672
 $498
 $139,730
 $(133,317) $1,589
 $8,500
Preferred stock accretion—
 —
 —
 —
 —
 (410) —
 (410)
Amendment of preferred stock agreement2,586,205
 26
 20,492
 —
 12,226
 —
 —
 12,252
Dividends on preferred stock—
 —
 —
 —
 —
 (600) —
 (600)
Reclassification of other comprehensive income (loss)—
 —
 —
 —
 —
 1,307
 (1,307) —
Balance, December 31, 20112,586,205
 $26
 4,135,478
 $46
 $153,442
 $(142,802) $336
 $11,048
Net loss—
 —
 —
 —
 —
 (9,782) (9,782) (9,782)—
 —
 —
 —
 —
 (8,327)   (8,327)
Other comprehensive income (loss):               
Foreign currency translation adjustment, net of tax—
 —
 —
 —
 —
 —
 54
 54
—
 —
 —
 —
 —
 —
 99
 99
Comprehensive loss            $(9,728)  
Non-cash stock-based compensation—
 —
 —
 —
 1,010
 —
 —
 1,010
—
 —
 —
 —
 731
 —
 —
 731
Issuance of shares of common stock—
 —
 90,150
 1
 23
 —
 —
 24
—
 —
 1,667
 —
 10
 —
 —
 10
Preferred stock accretion—
 —
 —
 —
 —
 (410) —
 (410)
Amendment of preferred stock agreement2,586,205
 26
 245,903
 2
 12,224
 —
 —
 12,252
Reclassification of other comprehensive income (loss)—
 —
 —
 —
 —
 1,307
 (1,307) —
Private Placement, net—
 —
 1,833,333
 18
 17,355
 

 

 17,373
Dividends on preferred stock—
 —
 —
 —
 —
 (600) —
 (600)—
 —
 —
 —
 —
 (660) —
 (660)
Balance, December 31, 20112,586,205
 $26
 49,625,725
 $501
 $152,987
 $(142,802) $336
 $11,048
Balance, December 31, 20122,586,205
 $26
 5,970,478
 $64
 $171,538
 $(151,789) $435
 $20,274
Net loss—
 —
 —
 —
 —
 (15,987)   (15,987)
Foreign currency translation adjustment, net of tax—
 —
 —
 —
 —
 —
 (45) (45)
Non-cash stock-based compensation—
 —
 —
 —
 360
 —
 —
 360
Private Placement, net—
   1,383,217
 14
 7,556
 —
   7,570
Dividends on preferred stock—
 —
 —
 —
 —
 (726) —
 (726)
Other—
 —
 —
 (5) 5
 —
 —
 —
Balance, December 31, 20132,586,205
 $26
 7,353,695
 $73
 $179,459
 $(168,502) $390
 $11,446
(1) The common stock shares and additional paid-in capital for all periods presented reflect the one-for-twelve reverse stock split which took effect on January 27, 2014.
See notes to consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 20112013, 20102012 and 20092011
(Dollars in thousands)
2011 2010 20092013 2012 2011
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:          
Net loss$(9,782) $(3,134) $(1,920)$(15,987) $(8,327) $(9,782)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:          
Depreciation and amortization2,101
 708
 852
2,748
 2,278
 2,101
Non-cash, stock based compensation1,010
 (14) 202
462
 731
 1,010
Provision for losses on doubtful accounts1,738
 28
 (8)5,548
 2,468
 1,738
Provision for losses on inventory obsolescence48
 100
 482
217
 129
 48
Preferred stock revaluation6,066
 —
 —
—
 —
 6,066
Changes in operating assets and liabilities:     
Warrant revaluation(300) (2,200) —
Loss on disposal of fixed assets9
 23
 —
Deferred income taxes62
 (25) (133)
Other(62) —
 —
Changes in operating assets and liabilities, net of acquisitions:     
Accounts receivable(2,212) 44
 1,121
(2,757) (2,913) (2,212)
Inventories(620) (3) 808
908
 (1,373) (620)
Prepaid expenses and other current assets243
 95
 (60)122
 (209) 243
Accounts payable1,028
 364
 60
801
 (576) 1,028
Accrued liabilities332
 92
 (401)(371) 96
 332
Other long term liabilities401
 (24) 109
127
 (306) 401
Long term deferred income taxes(133) 26
 22
Net cash flows provided by (used in) operating activities220
 (1,718) 1,267
(8,473) (10,204) 220
CASH FLOWS USED IN INVESTING ACTIVITIES:          
Acquisitions—
 (6,000) —
(849) (3,551) —
Purchase of property and equipment(231) (192) (351)(605) (882) (231)
Purchase of short term investments—
 (8,994) —
Proceeds from the sale of short term investments—
 8,994
 —
Change in other assets(277) (34) (26)(312) (445) (277)
Net cash flows used in investing activities(508) (6,226) (377)(1,766) (4,878) (508)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:     
Issuance of preferred stock and related warrants—
 6,000
 —
Stock issuance costs—
 (209) —
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:     
Proceeds from note payable3,000
 —
 —
6,560
 —
 3,000
Principal payments on capital lease obligations(391) (72) —
(348) (328) (391)
Issuance of common stock24
 42
 —
Principal payment on note payable(907) —
 —
Payment of deferred financing costs(241) —
 —
Issuance of common stock and related warrants, net7,570
 17,483
 24
Principal payments on note payable(6,171) (2,551) (907)
Net cash flows provided by financing activities1,726
 5,761
 —
7,370
 14,604
 1,726
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH54
 (5) (19)(2) 29
 54
NET CHANGE IN CASH AND CASH EQUIVALENTS1,492
 (2,188) 871
(2,871) (449) 1,492
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD3,454
 5,642
 4,771
4,497
 4,946
 3,454
CASH AND CASH EQUIVALENTS AT END OF PERIOD$4,946
 $3,454
 $5,642
$1,626
 $4,497
 $4,946
SUPPLEMENTAL CASH FLOW INFORMATION     
Cash paid during the period for:     
Interest$732
 $7
 $—
Income taxes, net108
 29
 163
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION     
Acquisition of equipment through capital leases$756
 $394
 $—
Dividends accrued on preferred stock600
 —
 —
Common stock issued for elimination of derivatives on preferred stock300
 —
 —
Goodwill purchase price adjustment165
 —
 —

37


SUPPLEMENTAL CASH FLOW INFORMATION     
Cash paid during the period for:     
Interest$724
 $964
 $732
Income taxes, net9
 123
 108
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION     
Acquisition of equipment through capital leases$—
 $175
 $756
Dividends accrued on preferred stock726
 660
 600
Note payable converted to Equity—
 3,000
 —
Acquisition of intangibles—
 849
 —
Common stock issued for elimination of derivatives on preferred stock—
 —
 300
Goodwill purchase price adjustment—
 —
 165
See notes to consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2011, 20102013, 2012 and 20092011




A.1.BUSINESS DESCRIPTION
Business Description.
Transgenomic, Inc.("we", "us","our Company" or "Transgenomic") is a global biotechnology company advancing personalized medicine in the detection and treatment of cancer and inherited diseases through its proprietary molecular technologies and world-class clinical and research services. Our operations are organized and reviewed by management along its product lines and presented in the following threetwo complementary business segments.
Clinical Laboratories.Laboratory Services. Our clinical laboratories specialize in genetic testing for cardiology, neurology, mitochondrial disorders and oncology. LocatedOur Patient Testing laboratories located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA)(“CLIA”) as high complexity labs and our Omaha facility is also accredited by the College of American Pathologists (CAP)(“CAP”).
Pharmacogenomics Services. Our Contract Research OrganizationBiomarker Identification laboratory located in Omaha, Nebraska also provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by pharmaceutical companies. Our laboratories employ a variety of genomic testing service technologies, including ICE COLD-PCR technology. ICE COLD-PCR is a proprietary platform technology that can be run in any laboratory with standard PCR technology and that enables detection of multiple unknown mutations from virtually any sample type including tissue biopsies, blood, cell-free DNA ("cfDNA") and circulating tumor cells (“CTCs”) at levels greater than 1,000-fold higher than standard DNA sequencing techniques.
Genetic Assays and Platforms. Our proprietary product is the WAVE® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our pharmaceutical customers. This lab specializes in pharmacogenomic, biomarkersales and mutation discovery research servingdistribution 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 pharmaceuticalcontinued operation of the bioinstruments. We develop, manufacture and biomedical industries world-wide for disease research, drugsell these consumable products. In addition, we manufacture and diagnostic developmentsell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and clinical trial support.a range of chromatography columns.
•
Diagnostic Tools. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,500 WAVE Systems as of December 31, 2011. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.

B.2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly owned subsidiary. All inter-company balances and transactions have been eliminated in consolidation.
Risks and Uncertainties.
Certain risks and uncertainties are inherent in our day-to-day operations and to the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the financial statements.

Use of Estimates.

The preparation of 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. The key estimates included in the consolidated financial statements include stock option valuations, goodwill and intangible valuations, accounts receivable and inventory valuations, warrant valuations and contractual allowances. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements.

Basis of Presentation.
Reclassifications.
Certain prior yearOn January 15, 2014, the Board of Directors of the Company approved a reverse split of the Company's common stock, par value $0.01, at a ratio of one-for twelve. This reverse stock split became effective on January 27, 2014 and, unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split. Additionally, accrued preferred stock dividends have been reclassified in orderre-classed to conform to the current year presentation.

39
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


Fair Value.
Unless otherwise specified, book value approximates fair market value. The Company's Level 1 financial instruments include cash and cash equivalents. The Company's Level 3 financial instruments include the common stock warrant liability, preferred stock warrant liability and conversion feature, and debt. Due to its variable interest component, debt approximates fair value.  The common stock warrant liability and Series A Convertible Preferred Stock (“Series A Preferred StockStock”) warrant liability and conversion feature and Series A Warrant liability are recorded at fair value.  See Footnote N.12 Fair Value.

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

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. Such investments presently consist of temporary overnight investments

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 December 31, 20112013.
Accounts Receivable.
The following is a summary of activity for the allowance for doubtful accounts during the yearyears ended December 31, 201120102013, 2012 and 20092011:  

 Dollars in Thousands
 
Beginning
Balance
 Provision Write Offs 
Ending
Balance
Year Ended December 31, 2011$334
 $1,738
 $(984) $1,088
Year Ended December 31, 2010$310
 $28
 $(4) $334
Year Ended December 31, 2009$388
 $(8) $(70) $310
 Dollars in Thousands
 
Beginning
Balance
 Provision Write Offs 
Ending
Balance
Year ended December 31, 2013$2,171
 $5,548
 $(3,881) $3,838
Year ended December 31, 2012$1,088
 $2,468
 $(1,385) $2,171
Year ended December 31, 2011$334
 $1,738
 $(984) $1,088

While payment terms are generally 30 days, we have also provided extended payment terms of up to 90 days in certain cases. We operate globally and some of the international payment terms maycan 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 and contractual allowances by regularly evaluating individual customerpayor receivables and considering a customer’spayor's financial condition, credit history, reimbursement rates and current economic conditions. Accounts receivable are written off when deemed uncollectible.uncollectible and after all collection efforts have been exhausted. Recoveries of accounts receivable previously written off are recorded as a reduction in bad debt expense when received.
Inventories.
Inventories are stated at the lower of cost or market net of allowance for obsolete and slow moving 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. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional write-downs of the inventory may be required.

The following is a summary of activity for the allowance for obsolete inventory during the year ended December 31, 20112013, 20102012 and 20092011: 


40
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


 Dollars in Thousands
 
Beginning
Balance
 Provision Write Offs 
Ending
Balance
Year Ended December 31, 2011$518
 $48
 $(55) $511
Year Ended December 31, 2010$507
 $100
 $(89) $518
Year Ended December 31, 2009$108
 $482
 $(83) $507
 Dollars in Thousands
 
Beginning
Balance
 Provision Write Offs 
Ending
Balance
Year ended December 31, 2013$616
 $217
 $(34) $799
Year ended December 31, 2012$511
 $129
 $(24) $616
Year ended December 31, 2011$518
 $48
 $(55) $511
We determine the allowance for obsolescence by evaluating inventory quarterly for items deemed to be slow moving or obsolete.

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

Property and Equipment.
Property and equipment are carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets as follows:
 
Leasehold improvements1 to 10 years
Furniture and fixtures3 to 7 years
Production equipment3 to 7 years
Computer equipment3 to 7 years
Research and development equipment2 to 7 years
Depreciation expense related to property and equipment during the years ended December 31, 20112013, 20102012 and 20092011 was $0.6$0.6 million $0.4, $0.8 million and $0.6$0.6 million, respectively. Included in depreciation for the years ended December 31, 20112013, 20102012 and 20092011 was $0.2$0.3 million less than $0.1, $0.3 million and $0.0$0.2 million, respectively, related to equipment acquired under capital leases.
Goodwill.
Goodwill is the excess of the purchase price over fair value of assets acquired and is not amortized. Goodwill is tested for impairment annually.annually utilizing a combination of income and market approaches. The income approach applies a discounted cash flow methodology to the Company's future period projections and the market approach uses market available information on the Company. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may impact goodwill. Impairment occursmay occur when the carrying value is determined to be not recoverable thereby causing the carrying value of the goodwill to exceedreporting unit exceeds its fair value. If impaired, the asset’s carrying value is reduced toof the reporting unit exceeds its fair value.value, the fair value of all identifiable tangible and intangible assets and liabilities is determined as part of a hypothetical purchase price allocation to determine the amount of goodwill impairment. No impairment existed at December 31, 2011 and 2010.of goodwill has occurred to date.
Intangibles.
IntangiblesIntangible assets include intellectual property, patents and acquired products. At December 31, 2013, the Company revised its estimate of useful lives on certain intangible assets which will cause amortization expense in 2014 to be $0.4 million lower.
1. Intellectual Property.    Initial costs paid to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.
2. Patents.    We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life beginning on the date the patent is issued.
3. Acquired Products.    As a part of the FAMILION acquisition and acquisition of certain intangible assets from Axial, we acquired technology, in process technology, trademarks/tradenames, customer relationships, covenants not to compete and third party relationships. These costs will be amortized straight linepursuant to the straight-line method over their estimated economic life of seven to eight years. See Footnote F.4 "Intangibles and Other Assets" to our accompanying consolidated financial statements.
The Company reviews itsWe review our amortizable long lived assets annually for impairment or whenever events indicate that the carrying amount of the asset (group) may not be recoverable. An impairment loss wouldmay be recordedneeded if the sum of the future undiscounted cash flows is less than the carrying amount of the asset.asset (group). The amount of the loss would be determined by comparing the fair market valuesvalue of the asset to the carrying amount of the asset.asset (group). No loss has been recorded during the years ended December 31, 20112013, 2012 or 2010. In 2009, we recorded less than $0.1 million related to accelerated amortization on two license agreements that we terminated in the first quarter of 2010.2011. 

41
TRANSGENOMIC, INC. AND SUBSIDIARY
Indefinite lived assets will be tested for impairment on an annual basis or when a significant event occurs, which may impact impairment. We recorded no impairment during the year endedNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011 2010 or 2009.



Common Stock Warrants.
Our issued and outstanding 2012 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 3 financial instrument. See Footnote 12 - Fair Value.
Preferred Stock.   
Prior to the 2011 modification, the Series A Preferred Stock met the definition of mandatorily redeemable stock as it was preferred capital stock which was redeemable at the option of the holder and therefore was reported outside of equity. The Series A Preferred Stock was accreted to its redemption value. Prior to the 2011 modification, the warrants to purchase shares of series A Preferred Stock (“Series A WarrantsWarrants”) did not qualify to be treated as equity and accordingly, waswere recorded as a liability. A preferred stock conversion feature was embedded within the Series A Preferred Stock that met the definition of a derivative. The Series A Preferred Stock, Series A WarrantsWarrant liability and Series A Preferred Stock conversion feature were all recorded separately and were initially recorded at fair value using the Black ScholesBlack-Scholes model. We were required to record these instruments at fair value at each reporting date and changes were recorded as an adjustment to earnings. The Series A Warrant liability and Series A Preferred Stock conversion feature were

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

considered level threeLevel 3 financial instruments.
WeIn November 2011, we entered into a transaction with the holders of the Series A Preferred Stock (the "Series“Series A Holders"Holders”), pursuant to an Agreement Regarding Preferred Stock (the “Amendment Agreement”), in which the Series A Holders agreed to (i) waive their rights to enforce the anti-dilution and redemption features of the Series A Preferred Stock and (ii) at the next annual shareholderstockholder meeting, vote to amend the Certificate of Designation for the Series A Preferred Stock to remove the anti-dilution and redemption features of the Series A Preferred Stock. In exchange, the Companywe issued shares of common stock to the Series A Holders having an aggregate market value of $0.3 million.$0.3 million. Our stockholders approved the amendments to the Certificate of Designation for the Series A Preferred Stock at the 2012 Annual Meeting of Stockholders held on May 23, 2012, and we filed the Certificate of Designation for the Series A Preferred Stock with the Delaware Secretary of State on May 25, 2012.
As a result of the Amendment Agreement, the value of the Series A Preferred Stock and Series A Warrant,Warrants, including the Series A Preferred Stock conversion feature and Series A Warrant liability, were reclassified into shareholdersstockholders' equity as of the date of the Amendment Agreement.
Expense on Preferred Stock.
For 2011, we recorded expense associated with the Series A Preferred Stock and Series A Warrants of $6.1 million, which is due to the change in fair value of the Series A Preferred Stock conversion feature and Series A Warrant liability of $5.8 million and the issuance of $0.3 million in common stock to the investors of Series A Preferred Stock. The expense associated with the change in value of the Series A Preferred Stock conversion feature is a non-cash item. There was no expense on preferred stock in 2013 or 2012.
Stock Based Compensation.
All stock options awardedstock-based awards to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of December 31, 20112013 had vesting periods of one or three years from date of grant. None of the stock options outstanding at December 31, 20112013 are subject to performance or market-based vesting conditions.
We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period).awards.

Income Taxes.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized. We had no material unrecognized tax benefits, interest, or penalties during fiscal 2011 or fiscal 2010,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and we do not anticipate any such items during the next twelve months.2011


realized. Our policy is to record interest and penalties directly related to income taxes as income tax expense in the Consolidated Statements of Operations.
Net Sales Recognition.
Revenue is realized and earned when all of the following criteria are met:
Persuasive evidence of an arrangement existsexists;
Delivery has occurred or services have been renderedrendered;
The seller’s price to the buyer is fixed or determinable,determinable; and
Collectability is reasonably assured.

NetIn Laboratory Services, net sales from our Clinical LaboratoriesPatient Testing labs are recognized on an individual test basis and takestake 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 Clinical Laboratories.Patient Testing services. Adjustments to the allowances, based on actual receipts from third party payers, are recorded upon settlement.
reflected in the estimated contractual allowance applied prospectively. In our Pharmacogenomics Services,Biomarker Identification labs, we perform 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. When we receive payment in advance, we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At December 31, 20112013 and 2010,2012, deferred net sales associated with pharmacogenomics research projects, included in the balance sheet in other accrued expenses,deferred revenue, was $0.1$0.2 million and less than $0.1$0.2 million, respectively.
Net sales of Diagnostic ToolsGenetic Assays and Platforms products 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

December 31, 20112013 and 2010,2012, deferred net sales, mainly associated with our service contracts, included in the balance sheet in accrued expensesdeferred revenue was approximately $1.3$0.9 million and $1.4$1.0 million, respectively.
Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.
Research and Development.
Research and development and various collaboration costs are charged to expense when incurred.
Preferred Stock.
The Series A Preferred Stock met the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported outside of equity. The Series A Preferred Stock is accreted to its redemption value. The Series A Warrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A Preferred Stock that meets the definition of a derivative. The Series A Preferred Stock, Series A Warrants liability and Series A Preferred Stock conversion feature are all recorded separately and were initially recorded at fair value using the Black Scholes model. We are required to record these instruments at fair value at each reporting date and changes will be recorded as an adjustment to earnings. The Series A Warrant liability and Series A Preferred Stock conversion feature are considered level three financial instruments.
We entered into a transaction with the holders of the Series A Preferred Stock (the "Series A Holders"), pursuant to an Agreement Regarding Preferred Stock (the “Amendment Agreement”), in which the Series A Holders agreed to (i) waive their rights to enforce the anti-dilution and redemption features of the Series A Preferred Stock and (ii) at the next annual shareholder meeting, vote to amend the Certificate of Designation for the Series A Preferred Stock to remove the anti-dilution and redemption features of the Series A Preferred Stock. In exchange, the Company issued shares of common stock to the Series A Holders having an aggregate market value of $0.3 million.
As a result of the Amendment Agreement, the value of the Series A Preferred Stock and Series A Warrant, including the Series A Preferred Stock conversion feature and Series A Warrant liability, were reclassified into shareholders equity as of the date of the Amendment Agreement.
Translation of Foreign Currency.
Our foreign subsidiary uses the local currency of the country in which it is located as its functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. A translation gainloss of $0.1 million is reported in other comprehensive income on the accompanying consolidated balance sheet as of December 31, 20112013. A translation lossgain of $0.1 million was reported in other comprehensive income on the accompanying consolidated balance sheet as of December 31, 2010.2012. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized foreign currency translation income of less than $0.1million, $0.3$0.1 million for the year ended December 31, 2013 and $0.3 million as foreign currency transactiontranslation loss in the determination of net lossless than $0.1 million for each of the years ending ended December 31, 2011, 20102012 and 2009, respectively.
Expense on Preferred Stock.
For 2011, we recorded expense associated with the Series A Preferred Stock and Series A Warrants of $6.1 million, which is due to the change in fair value of the Series A Preferred Stock conversion feature and Series A Warrants liability of $5.8 million and the issuance of $0.3 million in common stock to the Series A Investors. The expense associated with the change in value of the Series A Preferred Stock conversion feature is a non-cash item. There was no expense on preferred stock in 2010 or 2009.2011.
Other Income.
Other income in the yearsyear ended December 31, 2011 and 2010 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project related to COLD-PCR, Surveyor Scan kit development for detecting key cancer pathway gene mutations and mtDNA damage assays. Income related to this federal grant net of consulting fees was $0.2 millionmillion. There was no such other income in the years ended December 31, 2013 and $0.6 million, respectively.2012.
Comprehensive Income.
Accumulated other comprehensive income at December 31, 2011, 2010 and 2009 consisted of foreign currency translation

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Years Ended December 31, 2011, 20102013, 2012 and 20092011


Accumulated other comprehensive income at December 31, 2013, 2012 and 2011 consisted of foreign currency translation adjustments, net of applicable tax of zero. We deem our foreign investments to be permanent in nature and do not provide for taxes on currency translation adjustments arising from converting investments in a foreign currency to U.S. dollars. During 2011, we reclassified $1.3 million from accumulated other comprehensive income (loss) to accumulated deficit with no effect on total stockholders' equity or net loss.
Earnings Per Share.
Basic earnings per share is calculated based on the weighted-average number of shares of common sharesstock outstanding during each period. Diluted earnings per share include 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.stock, as long as the effect is not anti-dilutive. Options, warrants and conversion rights pertaining to 17,648,273, 18,607,2293,785,709, 2,471,670 and 11,309,8871,470,689 shares of our common stock have been excluded from the computation of diluted earnings per share at December 31, 2013, 2012 and 2011, 2010 and 2009, respectively. The options, warrants and conversion rights that were exercisable in 2011, 20102013, 2012 and 20092011 were not included because the effect would be anti-dilutive due to the net loss.
Recently Issued Accounting Pronouncements.
In October 2009,February 2013, the Financial Accounting Standards Board (the "FASB"“FASB”) issued Accounting Standards Update ("ASU"(“ASU”)No. 2009-13, Revenue Recognition (ASC 605)2013-02, Comprehensive Income (Topic 220): Multiple-Deliverable Revenue Arrangements (a consensusReporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. The amendments in the Update do not change the current requirements for reporting net income or other comprehensive income in financial statements. The new amendments will require an organization to present (either on the face of the FASB Emerging Issues Task Force);statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income if the item reclassified is required under generally accepted accounting principles in the U.S. (“U.S. GAAP”) to be reclassified to net income in its entirety in the same reporting period. Additionally, for other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP to provide additional detail about those amounts. For public companies, the amendments were effective for yearsreporting periods beginning after JuneDecember 15, 2010. Vendors often provide multiple products and/or services to their customers as part of a single arrangement. These deliverables may be provided at different points in time or over different time periods. The existing guidance regarding how and whether to separate these deliverables and how to allocate the overall arrangement consideration to each was originally captured in EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, which is now codified at ASC 605-25, Revenue Recognition – Multiple-Element Arrangements. The issuance of ASU 2009-13 amends ASC 605-25 and represents a significant shift from the existing guidance that was considered abuse-preventative and heavily geared toward ensuring that revenue recognition was not accelerated. The application of this new guidance is expected to result in accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting.2012. Our adoption of ASU No. 2009-13this guidance did not have a material impact on our consolidated financial statements.

In October 2009, theFebruary 2013 FASB issued ASU No. 2009-14, Software (ASC 985): Certain Revenue2013-04, Obligations Resulting from Joint and Several Liability Arrangements That Include Software Elements (a consensusfor Which the Total Amount of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. Obligation Is Fixed at the Reporting Date (“ASU 2009-14 modifies the existing scope guidance in ASC 985-605, Software Revenue Recognition, for revenue arrangements with tangible products that include software elements. This modification was made primarily due to the changes in ASC 605-25 noted previously, which further differentiated the separation2013-04”). ASU 2013-04 requires reporting and allocation guidance applicable to non-software arrangements as compared to software arrangements. Prior to the modification of ASC 605-25, the separation and allocation guidance for software and non-software arrangements was more similar. Under ASC 985-605, which was originally issued as AICPA Statement of position 97-2, Software Revenue Recognition, an arrangement to sell a tangible product along with software was considered to be in its scope if the software was more than incidental to the product as a whole. Our adoption of ASU No. 2009-14 did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements, effective for years beginning after December 15, 2010. The guidance requires the disclosure of roll forward activities on purchases, sales, issuance,obligations resulting from joint and settlementsseveral liability arrangements within the scope of Subtopic 405-40 for which the total amount of the assets and liabilities measured using significant unobservable inputs (Level Three fair value measurements). We adoptedobligation is fixed at the new disclosure provisions with the filing of our Form 10-Q for the three months ended March 31, 2011.

In December 2010, the FASB issued anreporting date. For public companies, ASU to address diversity in practice in interpreting the pro-forma revenue and earnings disclosure requirements for business combinations. The ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the current year business combination(s) had occurred as of the beginning of the comparable prior annual reporting period. We prospectively adopted this ASU effective January 1, 2011, with no material impact on our consolidated financial statements.
In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance2013-04 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 20112013. The guidance in ASU 2013-04 is to be applied retrospectively for those obligations resulting from joint and several liability arrangements within the scope of Subtopic 405-40 that exist at the beginning of an entity’s fiscal year of adoption. Earlier application is permitted. When adopted, ASU 2013-04 is not expected to materially impact our consolidated financial statements.
In March 2013, the FASB released ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)(“ASU 2013-05”). ASU 2013-05 provides that, when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to release any related cumulative translation adjustment into net income. The provisions of ASU 2013-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. When adopted, ASU 2013-05 is not expected to materially impact our consolidated financial statements.
In July 2013, the FASB issued Accounting Standards Update, or ASU, No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. The Company intends to adopt this guidance at the beginning of our first quarter of fiscal year 2014, and does not expect the adoption of this standard will have presentation changes only.a material impact on its financial statements.

3.    INVENTORIES
Inventories (net of allowance for slow moving and obsolescence) consisted of the following:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
Years Ended December 31, 2011, 20102013, 2012 and 2009

In July 2011 the FASB issued guidance on the presentation of net patient service revenue. The new guidance requires a change in presentation of the statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, enhanced disclosure about policies for recognizing revenue and assessing bad debts are required. Disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts will be required. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. We are in the final stages of analyzing this presentation of net patient service revenue.
In September 2011, the FASB issued guidance on intangibles including goodwill and other intangibles. The new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The new guidance is effective for fiscal years beginning after December 15, 2011 and is expected to have no material impact on our consolidated financial statements.

C.    ACQUISITION
In December 2010, we acquired the FAMILION family of genetic tests from PGxHealth, then a subsidiary of Clinical Data, Inc. with a sales price of $18.8 million. We secured $6.0 million of financing from Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (the "Third Security Investors", affiliates of Third Security, LLC, a leading life sciences investment firm, to fund the cash portion of our acquisition. This strategic acquisition provided us with proprietary genetic commercial tests that have an established revenue base, proprietary biomarker assays, an additional CLIA-certified laboratory operation and established test reimbursement and coverage policies that offer access to testing. The acquired assets and liabilities assumed are reported as a component of our laboratory services segment.
Under the terms of the financing with the Third Security Investors, we issued an aggregate of 2,586,205 shares of the Company’s Series A Preferred Stock to the Third Security Investors. Additionally we issued to the Third Security Investors, Series A Warrants to purchase an aggregate of up to 1,293,102 shares of Series A Preferred Stock at an exercise price of $2.32 per share. The shares of Series A Preferred Stock issuable pursuant to the purchase agreement and upon exercise of the Series A Warrants are convertible into shares of our common stock at a conversion price of $0.58 per share, for an aggregate of 15,517,228 million shares of common stock. Upon full exercise of the Series A Warrants, we will receive approximately $3.0 million. These securities were issued for an aggregate purchase price of $6.0 million.
We entered into two notes payable with PGxHealth as a part of the acquisition. The first note is a three year secured promissory note in the amount of $8.6 million with interest accruing at 10%. The second note is a one year secured promissory note for facility improvements of $1.0 million with interest payable at 6.5%. See further information in Note G to the financial statements. Certain liabilities were assumed and various contingent liabilities recorded. The contingent liabilities include payments owed upon the collection of certain accounts receivable, retention bonuses for certain employees and royalties due to vendors based on milestone considerations.
The following table summarizes the consideration for the acquired assets and liabilities assumed at the acquisition date.
  
ConsiderationDollars in Thousands
Cash$6,000
Notes payable9,628
Assumed liabilities452
Contingent liabilities2,736
  
Fair value of consideration transferred$18,816
  
Acquisition related costs included in selling, general and administrative expenses in our Statement of Operations for the year ended December 31, 2010 were $0.8 million. We incurred $0.2 million in acquisition related costs to issue Series A Preferred Stock which were recorded against the proceeds received upon the issuance of such Series A Preferred Stock.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

  
Recognized Amounts of Identifiable Assets Acquired and Liabilities AssumedDollars in Thousands
Working capital, net$3,222
Property and Equipment639
Identifiable intangible assets8,680
  
Total identifiable net assets12,541
Goodwill6,275
  
Total purchase price18,816
  
The fair value of the financial assets acquired includes accounts receivable with a fair value of $3.1 million. The gross amount due is $7.0 million, of which $3.9 million is expected to be uncollectible.
The goodwill arising from the acquisition primarily relates to synergies of the combined companies. The goodwill has been assigned to our Laboratory Services segment and is expected to be deductible for tax purposes.

The intangible assets were each valued separately using valuation approaches most appropriate for each specific asset.

Intangibles—acquired technologyIncome Approach - Multi-period Excess Earnings Method
Intangibles—third party payor relationshipsCost Approach - Replacement Cost Method
Intangibles—assay royaltiesIncome Approach - Multi-period Excess Earnings Method
Intangibles—tradenames and trademarksIncome Approach - Relief from Royalty Method

Income Approach
The income approach is based upon the economic principle of anticipation. In this approach, the value of the subject intangible asset is the present value of the expected economic income to be earned from that intangible asset. This expectation is then converted into a present value through the selection of an investor's required rate of return given the risk and/or uncertainty associated with the subject intangible asset. In valuing an intangible asset using the income approach, the following elements should be considered: (i) remaining useful life, (ii) legal rights, (iii) position of the intangible asset in its respective life cycle, (iv) appropriate capital charges, (v) allocations of income, and (vi) whether any tax amortization benefit should be included in the analysis.

Cost Approach
The cost approach to intangible asset analysis is based upon the economic principles of substitution and price equilibrium. These basic economic principles assert that an investor pay no more for an investment than the cost to obtain an investment of equal utility. Within the cost approach there are several related analytical methods. Two of the most common and widely accepted include the reproduction cost and replacement cost methods. All cost based approaches typically involve a comprehensive analysis of the relevant cost components, which typically include: (i) materials, (ii) labor, (iii) overhead, (iv) intangible asset developer's profit, and (v) an adequate return on the asset developer's capital.

Reproduction cost contemplates the construction of an exact replica of the subject intangible asset. Before appropriate adjustments are made for the purposes of deriving an indication of value, reproduction cost does not consider either the market demand for or the market acceptance of the subject intangible. Therefore, before the requisite adjustments, the reproduction cost estimate does not answer the question of whether anyone would be interested in an exact replica of the subject interest.

Unlike the reproduction cost method, the replacement cost method does consider market demand and market acceptance for the subject intangible. In other words, if there are elements or components of the subject intangible that generate little or no demand, they are not included in the subject intangible.

Excess Earnings Method
The Excess Earnings Method, a form of the Income Approach, reflects the present value of the projected cash flows that are expected to be generated by the intangible asset, less charges representing the contribution of other assets to those cash flows. As

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

part of our analysis, we determined individual rates of return applicable to each acquired asset and estimate the effective “capital charge” to be applied to the earnings of the identified intangibles.

Relief-from-Royalty Method
The Relief-from-Royalty method, a form of the Income Approach, estimates the cost of licensing the acquired intangible asset from an independent third party using a royalty rate. Since the company owns the intangible asset, it is relieved from making royalty payments. The resulting cash flow savings attributed to the owned intangible asset are estimated over the intangible asset's remaining useful life and discounted to present value.
The fair value of the Series A Preferred Stock and related securities issued as a part of the consideration paid was determined on the basis of the closing market price of our common stock on the acquisition date, December 29, 2010.
During 2011, we recorded a net purchase price adjustment of $0.2 million, increasing the amount of goodwill recorded for the purchase transaction, related to the adjustment in valuation of certain working capital accounts acquired.
The following table sets forth the pro-forma revenue and earnings of the combined entity if the acquisition had occurred as of the beginning of our prior fiscal year. No revenue or net income was included in our actual results for the year ended December 31, 2010 or 2009. These pro-forma amounts do not purport to be indicative of the actual results that would have been obtained had the acquisition occurred at that time.
  Dollars in Thousands
  Year Ended December 31,
  2010 2009
Revenue—Supplemental pro-forma results $33,733
 $35,112
Net loss—Supplemental pro-forma results (7,716) (13,071)

D.         RESTRUCTURING CHARGES
In the third quarter of 2010 we made a decision to consolidate our research and development activities in Omaha, Nebraska. We substantially completed the transition at December 31, 2010. We have recognized expenses for restructuring, including but not limited to, severance, facility costs and costs to move equipment from Gaithersburg, Maryland to Omaha, Nebraska. These restructuring charges are attributable to our Clinical Laboratories and Diagnostic Tools segments.
In the fourth quarter of 2010 we had a reduction in workforce of five employees with severance payments of less than $0.1 million which was attributable to our Diagnostic Tools segment.
Restructuring charges include:
  Dollars in Thousands
Costs Incurred in the year ended December 31, 2011 
Cumulative Costs
Incurred at
December 31, 2011
 
Total
Expected  Costs
Severance and related costs $—
 $53
 $53
Facility closure costs 28
 74
 74
Other 13
 52
 52
Restructuring charges $41
 $179
 $179


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009


E.    INVENTORIES
Inventories (net of allowance for obsolescence) consisted of the following:
Dollars in ThousandsDollars in Thousands
December 31,
2011

 
December 31,
2010

December 31,
2013		 December 31,
2012
Finished goods$2,608
 $2,119
$2,978
 $4,057
Raw materials and work in process1,485
 1,531
1,567
 1,547
Demonstration inventory277
 212
211
 104
$4,370
 $3,862
$4,756
 $5,708
Less allowance for obsolescence(511) (518)
Less allowances(799) (616)
Total$3,859
 $3,344
$3,957
 $5,092


F.    INTANGIBLES4.    INTANGIBLE ASSETS AND OTHER ASSETS
Long-lived intangible assets and other assets consisted of the following:
 
 Dollars in Thousands
 December 31, 2011 December 31, 2010
 Cost 
Accumulated
Amortization
 
Net Book
Value
 Cost 
Accumulated
Amortization
 
Net Book
Value
Intangibles—acquired technology$6,535
 $911
 $5,624
 $6,535
 $—
 $6,535
Intangibles—assay royalties1,434
 205
 1,229
 1,434
 —
 1,434
Intangibles—third party payor relationships367
 —
 367
 367
 —
 367
Intangibles—tradenames and trademarks344
 49
 295
 344
 —
 344
Patents703
 267
 436
 511
 245
 266
Intellectual property20
 5
 15
 290
 274
 16
 $9,403
 $1,437
 $7,966
 $9,481
 $519
 $8,962
 Dollars in Thousands
 December 31, 2013 December 31, 2012
 Cost 
Accumulated
Amortization
 
Net Book
Value
 Cost 
Accumulated
Amortization
 
Net Book
Value
Acquired technology$9,009
 $3,175
 $5,834
 $9,009
 $1,910
 $7,099
Assay royalties1,434
 614
 820
 1,434
 410
 1,024
Third party payor relationships367
 73
 294
 367
 49
 318
Tradenames and trademarks824
 233
 591
 824
 115
 709
Customer relationships652
 54
 598
 652
 11
 641
Covenants not to compete184
 77
 107
 184
 15
 169
Patents1,153
 336
 817
 929
 280
 649
Intellectual property170
 36
 134
 170
 15
 155
 $13,793
 $4,598
 $9,195
 $13,569
 $2,805
 $10,764
 
  
 Estimated Useful Life
Intellectual propertyAcquired technology7 – 10 years
Patents7 years
Intangibles—acquired technology7 – 8 years
Intangibles—third party payor relationshipsIndefinite
Intangibles—assayAssay royalties7 years
Intangibles—tradenamesThird party payor relationships15 years
Tradenames and trademarks7 years
Customer relationships15 years
Covenants not to compete3 years
PatentsLife of the patent
Intellectual property7 years
Amortization expense for intangible assets was $1.9 million, $1.4 million and less than $1.3 million during the years ended December 31, 2013, 2012 and 2011. At December 31, 2013, the Company revised its estimate of useful lives on certain intangible assets which will cause amortization expense in 2014 to be $0.4 million lower. Amortization expense for intangible assets for each of the five succeeding fiscal years is expected to be $1.4 million, $1.3 million, $1.3 million, $1.3 million and 1.0 million for the years ended December 31, 2014, 2015, 2016, 2017 and 2018, respectively.
Other assets include U.S. security deposits and deferred tax assets, net of applicable valuation allowances.
Amortization expense for intangible assets was $1.3 million during the year ended December 31, 2011 and less than $0.1 million during each of the years ended December 31, 2010 and 2009. Amortization expense for intangible assets is expected to be $1.2 million in each of the years 2012 through 2017.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
Years Ended December 31, 2011, 20102013, 2012 and 20092011



G.5.         DEBT
  Dollars in Thousands
  Year Ended December 31,
  2011 2010
PGxHealth note payable (the "First Note") (1)
 $8,640
 $8,640
PGxHealth note payable (the "Second Note") (2)
 82
 989
Third Security Convertible Promissory Notes (3)
 3,000
 —
Total debt, including short term debt 11,722
 9,629
Short term debt (3,082) (989)
Current maturities of long term debt (3,703) —
Long-term debt, net of current maturities $4,937
 $8,640
  Dollars in Thousands
  Year Ended December 31,
  2013 2012
Revolving Line (1)
 $2,560
 $—
Term Loan (2)
 4,000
 —
PGxHealth note payable (the “First Note”) (3)
 —
 6,171
Total debt 6,560
 6,171
Current portion of long term debt (242) (6,171)
Long term debt, net of current maturities $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”) of $4.0 million (the “Loan Agreement”). Proceeds were used to pay off the First Note 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, reduces our future minimum revenue covenants under the Loan Agreement and modifies the interest rates applicable to the amounts advanced under the Revolving Line.

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

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

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

(1)
Revolving Line of Credit.Amounts advanced under the Revolving Line bear interest at an annual rate equal to the greater of (a) 4.25% or (b) the Wall Street Journal prime rate plus 1%. Interest is payable on a monthly basis, with the balance payable at the maturity of the Revolving Line. Under the Amendment, amounts advanced under the Revolving Line bear interest at an annual rate equal to the greater of (x) 6.25% or (y) the Wall Street Journal prime rate plus 3%. The current interest rate is 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 Amendment, we are required to make monthly payments of interest to the Lenders commencing on April 1, 2015. The current interest rate is 9.1%.

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

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011



Additional Terms
The Loan Agreement contains affirmative and negative covenants. Under the Term Loan, we are required to maintain a minimum liquidity ratio and achieve a minimum amount of revenue, and we also agreed not to (i) pledge or otherwise encumber our assets other than to the Lenders, (ii) enter into additional borrowings or guarantees, (iii) repurchase our capital stock, or (iv) enter into certain mergers or acquisitions without the Lenders' consent. Additionally, the Loan Agreement contains a subjective acceleration clause at the discretion of the Lenders. As of December 31, 2013, the Company was in compliance with the minimum revenue covenant. The Company was not in compliance with the minimum liquidity ratio. Pursuant to the Third Amendment, the Lenders agreed to waive the event of default.

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

(3)
First Note. The First Note iswas 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 from PGxHealth.tests. Interest iswas payable at 10% per year with quarterly interest payments through March 29, 2012. Thereafter, quarterly installments will includeincluded both principal and interest through December 30, 2013. The First Note was paid in full on March 13, 2013.

(2)The Second Note is a one year senior secured promissory note to PGxHealth, LLC entered into on December 31, 2010 for facility improvements made to the CLIA certified laboratory in New Haven, Connecticut. Interest is payable at 6.5% per year with the principal and interest payable in twelve monthly installments with the final payment made on January 3, 2012.
The entire unpaid balance of both the First Note and the Second Note will become immediately due and payable if: (i) we fail to make timely payments under the Notes; (ii) we make an assignment for the benefit of creditors; (iii) we file for bankruptcy; or (iv) upon any event of default under the Security Agreement. Additionally, under the terms of the First Note, if we consummate an equity financing that involves the receipt by us of net proceeds of not less than $6,000,000, then we shall, upon the consummation of such equity financing, pay to PGxHealth the lesser of: (i) 25% of the gross proceeds received from such financing; and (ii) the then-outstanding balance under the First Note. Under the terms of the Second Note, in the event of a sale of all or substantially all of the assets of the Company, we shall pay PGxHealth the lesser of: (i) 100% of the proceeds, less certain fees, received pursuant to such sale; and (ii) the then-outstanding balance under the Second Note.
The notes are secured by the assets of Transgenomic.

(3) The Third Security Promissory Notes are convertible promissory notes to Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC and Third Security Incentive 2010 LLC entered into on December 30, 2011 with a maturity date of March 31, 2012. Interest is payable at 16% per year. The Third Security Promissory Notes automatically converts into the same class(es) or series and at the same price as the equity securities of the Company sold upon the first sale or issuance of its equity securities, after December 30, 2011, in the aggregate amount of at least $3,000,000, and provides that it shall be due and payable if it has not been converted prior to March 31, 2012. In connection with a private placement conducted by the Company in February 2012, the Third Security Promissory Notes converted into equity securities of the Company on the same terms as issued to investors in the private placement. See Note R to the consolidated financial statements.
The aggregate minimum principal maturities of the debt for each of the following fiscal years following December 31, 2011are as follows:
follows (dollars in thousands):
  
2012$3,703
20134,937
 $8,640
  
  
2014$242
20151,879
20164,439
 $6,560


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009


H.6.    CAPITAL LEASES
 
The following is an analysis of the property acquired under capital leases.
Dollars in ThousandsDollars in Thousands
Asset Balances atAsset Balances at
Classes of Property
December 31,
2011

 
December 31,
2010

December 31,
2013		 December 31,
2012
Equipment$1,052
 $394
$1,514
 $1,323
Less: Accumulated amortization(164) (13)(721) (420)
Total$888
 $381
$793
 $903
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 20112013.
Year ending December 31:

47


Dollars in ThousandsDollars in Thousands
2012$378
2013312
201497
$160
2015—
37
20163
20171
Total minimum lease payments$787
$201
Less: Amount representing interest(99)(17)
Present value of net minimum lease payments$688
$184
The short term portion of our capital leases is included in accrued expenses and the long term portion is included in other long-term liabilities on the Balance Sheet. Included in depreciation for the yearyears ended December 31, 2013, 2012 and 2011 was $0.3 million, 2010$0.3 million and 2009 was $0.2 million, less than $0.1$0.2 million and $0.0 million,, respectively, related to equipment acquired under capital leases.

I.7.    COMMITMENTS AND CONTINGENCIES
We are subject to a number of 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.
Rent expense under all operating leases, was $1.0 million, $1.0 million and $0.9 million in 2013, 2012 and 2011, respectively. We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases , some of which have escalation clauses that expire on various dates through 2022. The future2022. Future minimum lease payments required under thesenon-cancellable operating leases are approximately $1.1 million in 2012, $1.0 million in 2013, $1.0 million in 2014, $0.9 million in 2015 and $0.9 million in 2016. Rent expense for each of the as follows (in thousands):
2014$1,097
20151,013
2016880
2017763
2018485
thereafter862
 $5,100
twelve months endedAt December 31, 20112013, 2010 and 2009 was $0.9 million, $0.8 million and $0.8 million, respectively.
At December 31, 2011, firm commitments to vendors totaled $1.30.9 million.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
Years Ended December 31, 2011, 20102013, 2012 and 20092011



J.8.    INCOME TAXES
The Company’s provision for income taxes for the years ended December 31, 2011, 20102013, 2012 and 20092011 relates to income taxes in states, foreign countries and other local jurisdictions and differs from the amounts determined by applying the statutory Federal income tax rate to loss before income taxes for the following reasons:
 Dollars in Thousands Dollars in Thousands
 2011 2010 2009 2013 2012 2011
Benefit at federal rate $(3,311) $(1,015) $(639) $(5,454) $(2,781) $(3,311)
Increase (decrease) resulting from:            
State income taxes—net of federal benefit 2
 20
 (10) (518) 2
 2
Foreign subsidiary tax rate difference (94) (27) (50) (3) (27) (94)
Tax contingency 28
 45
 48
 23
 22
 28
Net operating loss expiration 988
 —
 1,258
Expiring net operating loss carryforwards —
 1,472
 988
Earnings repatriation —
 1,479
 —
 —
 582
 —
Miscellaneous permanent differences 332
 60
 93
 155
 284
 332
Liability warrants (102) (748) 2,062
Tax credits —
 215
 —
State, net operating loss expiration/true-up 1,179
 —
 —
Other—net (53) 86
 (33) (80) 15
 (53)
Valuation allowance 2,153
 (498) (625) 4,746
 1,110
 91
Current income tax expense $45
 $150
 $42
Total income tax (benefit) expense $(54) $146
 $45
 
 Dollars in Thousands Dollars in Thousands
 2011 2010 2009 2013 2012 2011
Federal:            
Current $16
 $4
 $(58) $—
 $—
 $16
Deferred —
 —
 —
 —
 —
 —
Total Federal $16
 $3
 $(58) $—
 $—
 $16
State:            
Current $3
 $29
 $(16) $—
 $3
 $3
Deferred —
 —
 —
 —
 —
 —
Total State $3
 $29
 $(16) $—
 $3
 $3
Foreign:            
Current $159
 $111
 $(60) $20
 $46
 $159
Deferred (133) 6
 176
 (74) 97
 (133)
Total Foreign $26
 $117
 $116
 $(54) $143
 $26
Total Tax Provision $45
 $150
 $42
 $(54) $146
 $45

The Company’s deferred income tax asset at December 31, 2013 and 2012 is comprised of the following temporary differences:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
Years Ended December 31, 2011, 20102013, 2012 and 20092011



The Company’s deferred income tax asset from continuing and discontinued operations at December 31, 2011 and 2010 is comprised of the following temporary differences:
 Dollars in Thousands Dollars in Thousands
 2011 2010 2013 2012
Deferred Tax Asset:        
Net operating loss carryforward $38,154
 $38,201
 $42,950
 $39,481
Unrealized gain 2,062
 —
Research and development credit carryforwards 1,232
 1,232
 951
 1,017
Deferred net sales 190
 151
Deferred revenue 174
 188
Inventory 184
 188
 275
 224
Other 552
 473
 1,997
 1,111
 42,374
 40,245
 46,347
 42,021
Less valuation allowance (42,294) (40,141) (46,088) (41,342)
Deferred Tax Asset $80
 $104
 $259
 $679
Deferred Tax Liability:        
Uninstalled instruments $2
 $159
Foreign earnings $25
 $398
Property and equipment 186
 300
Deferred Tax Liability $2
 $159
 $211
 $698
Net Deferred Asset (Liability) $78
 $(55) $48
 $(19)

At December 31, 2011,2013, we had total unused federal tax net operating loss carryforwards from continuing and discontinued operations of $104.4$121.7 million of which $1.9 million expires. The expiration dates are as follows (amounts in 2012, $1.8 million expires in 2018, $8.2 million expires in 2019, $9.7 million expires in 2020, $8.2 million expires in 2021, $16.9 million expires in 2022, $16.2 million expires in 2023, $17.4 million expires in 2024, $8.2 million expires in 2025, $6.8 million expires in 2026, $3.2 million expires in 2027, $1.3 million expires in 2028, $2.1 million expires in 2029, and $2.5 million expires in 2031. thousands):
  
2018$1,838
20198,181
20209,662
20218,228
202216,862
202316,173
202417,390
20258,153
20266,792
20273,238
20281,272
2029591
20312,784
20328,358
203312,137
 $121,659

Of these federal net operating loss carryforwards, $5.5$1.2 million were obtained in the acquisition of Annovis, Inc. and may be subject to certain restrictions. Remaining net operating loss carryforwards could be subject to limitations under section 382 of the Internal Revenue Code. At December 31, 2011,2013, we had unused state tax net operating loss carryforwards from continuing and discontinued operations of approximately $46.0$33.0 million that expire at various times beginning in 2012.2014. At December 31, 2011,2013, we had unused research and development credit carryforwards from continuing and discontinued operationscarry-forwards of $1.2$1.0 million that expire at various times between 20122014 and 2024. A net deferred tax liability was recorded during 2011 related to the UK income taxes for less than $0.1 million.2024. A valuation allowance has been provided for the remaining deferred tax assets, due to the cumulative losses in recent years and an inability to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

Our liability for uncertain certain tax positions, which was included in other long term liabilities, was $0.3 million as of December 31, 2013 and 2012.  We recorded less than $0.1 million of additional uncertain tax positions during each of the years

50
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


ended 2013 and 2012. We had no material unrecognized tax benefits, interest or penalties during fiscal 20112013 or 2010,fiscal 2012, and we do not anticipate any such items during the next twelve months. Our policy is to record interest and penalties directly related to income taxes as income tax expense in the Consolidated Statements of Operations. 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 2008, 2009, and 2010.2010 through 2013. We have state income tax returns subject to examination primarily for tax years 20072010 through 2010.2013. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service, state or foreign tax authorities to the extent utilized in a future period. Open tax years related to foreign jurisdictions remain subject to examination. Our primary foreign jurisdiction is the United Kingdom, which has open tax years for 20072010 through 2010.2013.

During the years ended December 31, 2011 and 2010, there were no material changes to the liability for uncertain tax positions. The liability for uncertain tax positions relates to potential uncertain tax positions in foreign jurisdictions.

K.9.        EMPLOYEE BENEFIT PLAN
We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. Prior to Effective October 1, 2010, Transgenomic discontinued matching employee 401(k) contributions. Beginning January 1, 2012, we matchedreinstated matching employee 401(k) contributions. We currently match the employee’semployee's contributions at the rate of 50%100% on

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

the first 6%3% of contributions. Effective October 1, 2010, Transgenomic discontinued matching employee 401(k)contributions and 50% on the next 2% of contributions. We may, at the discretion of our Board of Directors, make additional contributions on behalf of the Plan’s participants. Contributions to the 401(k) plan were $0.0$0.4 million $0.1, $0.3 million and less than $0.1 millionzero for the years ended December 31, 2011, 20102013, 2012 and 2009,2011, respectively.

L.
10.    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 includes an aggregate of $3.0 million in convertible notes (the “Convertible Notes”) issued in December 2011 to entities affiliated with Third Security, LLC (the “Third Security Investors”), a related party, that automatically convert 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 applicable 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 common stock with an exercise price of $15.00 per share. In connection with the conversion of the Convertible Notes, the Third Security Investors received an aggregate of 250,000 shares of 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 (i) pay to the placement agent cash commissions equal to $1,330,000, or 7.0% of the gross proceeds received in the offering, (ii) issue to the placement agent a five-year warrant to purchase up to 31,666 shares of our common stock (representing 2% of the shares sold in the Private Placement) with an exercise price of $15.00 per share and other terms that are the same as the terms of the warrants issued in the Private Placement; and (iii) reimburse the placement agent for reasonable out-of-pocket expenses, including fees paid to the placement agent’s legal counsel, incurred in connection with the offering, which reimbursable expenses shall not exceed $125,000. The costs incurred to complete the Private Placement were recorded as a reduction in equity in the amount of $1.5 million. Net proceeds from this offering have been used for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.
On January 24, 2013, we entered into a Securities Purchase Agreement with certain institutional and other accredited investors pursuant to which we: (i) sold to the investors an aggregate of 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 (ii) 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. The Third Security Investors purchased an aggregate of 500,000 shares of common stock and warrants to purchase an aggregate of 250,000 shares of common stock in the Offering on the same terms as the other investors. We are using the net proceeds from the Offering for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.

51
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


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 SEC 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 by March 16, 2013. The registration statement was filed with the SEC on March 15, 2013 and was declared effective by the SEC on March 29, 2013.
The above common stock transaction required the repricing and issuance of additional common stock warrants to the holders of warrants issued in the February 2012 common stock and warrant sale. The exercise price of the warrants decreased from $15.00 per share to $12.96 per share and the number of shares issuable upon exercise of the warrants increased from 948,333 to 1,097,600.
Common Stock Warrants.
There were 840,939 common stock warrants issued during the 12 months ended December 31, 2013 and none of the issued warrants were exercised. Included in the warrants issued in 2013 were 149,272 warrants issued due to re-pricing requirements of the Private Placement. Common stock warrants issued during the 12 months ended December 31, 2012 were 948,333 and none of the issued warrants were exercised. Warrants to purchase an aggregate of 2,220,281 shares of common stock were outstanding at December 31, 2013.
Warrant Holder Issue Year Expiration 
Underlying
Shares
 
Exercise
Price
Third Security Investors(1)
 2010 December 2015 431,025 $6.96
Various Institutional Holders(2)
 2012 February 2017 952,925 $12.96
Third Security Investors(2)
 2012 February 2017 144,675 $12.96
Various Institutional Holders(3)
 2013 January 2018 441,656 $9.00
Third Security Investors(3)
 2013 January 2018 250,000 $9.00
      2,220,281  
(1)This Warrant was issued in connection with the issuance of warrants to purchase shares of our Series A Preferred Stock to the Third Security Investors 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 Footnote 12 - Fair Value. These warrants also contain certain anti-dilution provisions that provide for an adjustment to the exercise price and number of shares issuable upon exercise of the warrant in the event that we engage in certain issuances of shares of our common stock at a price lower than the exercise price of the warrant.
(3)These warrants were issued in connection with the offering, which was completed in January 2013.
Preferred Stock.
The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Company hasWe have no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.

On December 29, 2010, we entered into a transaction with the Third Security Investors, pursuant to the terms of Series A Convertible Preferred Stock Purchase Agreement (“Series(the “Series A Purchase Agreement”), in which we: (i) sold an aggregate of

52
TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


2,586,205 shares of Series A Preferred Stock at a price of $2.32$2.32 per share; and (ii) issued Series A Warrants to purchase up to an aggregate of 1,293,102 shares of Series A Preferred Stock having an exercise price of $2.32$2.32 per share (the sale of Series A Preferred Stock and issuance of the Series A Warrants hereafter referred to together as the “Financing”). The Series A Warrants may be exercised at any time from December 29, 2010 until December 28, 2015 and containscontain a “cashless exercise” feature. The gross proceeds from the FinancingSeries A financing were $6.0 million.$6.0 million. The $0.2$0.2 million of costs incurred to complete the FinancingSeries A financing were recorded as a reduction in the value of the Series A Preferred Stock. We used the net proceeds from the financing to acquire the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data, Inc. Until the November 2011modifications,2011 modifications, the Series A Preferred Stock met the definition of mandatorily redeemable stock as it iswas preferred capital stock that iswas redeemable at the option of the holder through December 2015 and was reported outside of equity. The Series A Preferred Stock iswas to be accreted to its redemption value of $6.0 million.$6.0 million. Until the November 2011 modifications, the Series A Warrants did not qualify to be treated as equity and, accordingly, waswere recorded as a liability. A preferred stock anti-dilution feature is embedded within the Series A Preferred Stock that meetsmet the definition of a derivative.
 
In connection with the Financing,Series A financing, we filed a Certificate of Designation of Series A Convertible Preferred Stock (the “Certificate“Series A Certificate of Designation”) with the Secretary of State of the State of Delaware, designating 3,879,307 shares of our preferred stock as Series A Preferred Stock. TheAs of December 31, 2013, the Series A Preferred Stock, including the Series A Preferred Stock issuable upon exercise of the Series A Warrants, iswas convertible into shares of our common stock at a rate of 4-for-1, which conversion rate is subject to further adjustment as set forth in the Series A Certificate of Designation. Giving effect to the reverse split of our stock in January 2014, the conversion rate was adjusted to 1-for-3. Certain rights of the holders of the Series A Preferred Stock are senior to the rights of the holders of our common stock. The Series A Preferred Stock has a liquidation preference equal to its original price per share, plus any accrued and unpaid dividends thereon. The holders of the Series A Preferred Stock are entitled to receive quarterly dividends, which accrue at the rate of 10.0%10% of the original price per share per annum, whether or not declared, and which shall compound annually and shall be cumulative. In any calendar quarter in which we have positive distributable cash flow as defined in the Series A Purchase Agreement, we are required to pay from funds legally available a cash dividend in the amount equal to the lesser of 50% of thesuch distributable cash flow as defined in the Series A Purchase Agreement or the aggregate amount of dividends accrued on the Series A Preferred Stock. During the yearyears ended December 31, 2011,2013 and 2012, we recorded $0.6$0.7 million and $0.6 million in accrued dividends.dividends, respectively.
Generally, the holders of the Series A Preferred Stock are entitled to vote together with the holders of common stock, as a single group, on an as-converted basis. However, the Series A Certificate of Designation provides that we shall not perform some activities, subject to certain exceptions, without the affirmative vote of a majority of the holders of the outstanding shares of Series A Preferred Stock. The holders of the Series A Preferred Stock, along with the holders of the Series B Preferred Stock, also are entitled to elect or appoint, as a single group, two (2) of the five (5) directors of the Company.

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Years Ended December 31, 2011, 2010 and 2009

In connection with the Financing,Series A financing, we also entered into a registration rights agreement with the Third Security Investors (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has granted the Third Security Investors certain demand, “piggyback” and S-3 registration rights covering the resale of the shares of common stock underlying the Series A Preferred Stock issued pursuant to the Series A Purchase Agreement and issuable upon exercise of the Series A Warrants and all shares of common stock issuable upon any dividend or other distribution with respect thereto.
In November 2011, we entered into a transaction with the Third Security Investors, pursuant to an Agreement Regarding Preferred Stock (the “Amendment Agreement”), in which the Third Security Investors agreed to (i) waive their rights to enforce the anti-dilution and redemption features of the Series A Preferred Stock and (ii) at the next annual shareholderstockholders' meeting, vote to amend the Series A Certificate of Designation to remove the anti-dilution and redemption features of the Series A Preferred Stock. In exchange, the Company issued shares of common stock to the Third Security Investors having an aggregate market value of $0.3 million.$0.3 million.
As a result of the Amendment Agreement, the valuevalues of the Series A Preferred Stock and Series A Warrants, including the Series A Preferred Stock conversion feature and Series A Warrant liability, were reclassified into shareholdersstockholders' equity as of the date of the Amendment Agreement.
Common Stock.
The Company’s Board of Directors is authorized to issue up to 100,000,000 shares of common stock, from time to time, as provided in a resolution or resolutions adopted by the Board of Directors.
Common Stock Warrants.
No common stock warrants were issued during the year ended December 31, 2011. Laurus Master Fund, Ltd. exercised its warrants during 2011 in a cashless exercise for 60,150 shares of common stock. Warrants to purchase 5,172,408 shares of common stock was outstanding at December 31, 2011.
Warrant Holder Issue Year Expiration 
Underlying
Shares
 
Exercise
Price
Affiliates of Third Security, LLC (1) 2010 December 2015 5,172,408 $0.58
(1)Warrants issued in connection with the Financing. The number of shares shown reflects the post-conversion shares.

M.11.         EQUITY INCENTIVE PLAN
The Company’s 2006 Equity Incentive Plan (the “Plan”) allows the Company to make awards of various types of equity-based compensation, including stock options, dividend equivalent rights (“DERs”), stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance units, performance shares and other awards, to employees and directors of the Company. TheAs of December 31, 2013, the Company maywas authorized to issue 10,000,000833,333 shares under the Plan; provided, that no more than 5,000,000

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


416,667 of such shares may be used for grants of restricted stock, restricted stock units, performance units, performance shares and other awards. The Plan was adopted in 2006 as a modification of the Company's 1997 Stock Option Plan (the “Prior Plan”). In addition to providing for additional types of equity-based awards, the Plan increased the total number of shares of common stock that the Company may issue from 7,000,000 under the Prior Plan to 10,000,000 shares under the Plan; provided, that no more than 5,000,000 of such shares may be used for grants of restricted stock, restricted stock units, performance units, performance shares and other awards.
The Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”), which has the authority to set the number, exercise price, term and vesting provisions of the awards granted under the Plan, subject to the terms thereof. Either incentive or non-qualified stock options may be granted to employees of the Company, but only non-qualified stock options may be granted to non-employee directors and advisors. However, in either case, the Plan requires that stock options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Options issued under the plan vest over periods as determined by the Compensation Committee and expire 10 years after the date the option was granted. To date, the only awards made under the Plan (and the Prior Plan) have been non-incentive stock options.
For the year ended December 31, 2013, 2012 and 2011, we recorded compensation expense of $0.5 million, $0.7 million and $1.0 million, respectively within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 3.0 million options. For the year ended December 31, 2010, we recorded compensation expense recovery of less than $0.1 million within selling, general and administrative

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

expense. Two executive officers departed during the second quarter of 2010. All stock options that were unvested were forfeited at the time of their departure as their requisite services periods were not completed. The vesting of options exercisable for the purchase of 1.3 million shares was offset by the expense recovery for stock options that were forfeited due to the requisite service not being rendered. For the year ended December 31, 2009, we recorded compensation expense of $0.2 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.7 million shares. As of December 31, 20112013, there was $1.0$1.4 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of nearly approximately three years.
The fair value of the options and SARs granted during 20112013 was estimated on their respective grant dates using the Black-Scholes option-pricingoption pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 0.92%0.73% to 2.16%1.75%, based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of threefour to five years, based on historical exercise activity; and volatility of 105% to 107%106% for grants made during the year ended December 31, 20112013 based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives hold the majority of the stock options granted in 2013 and are expected to hold the options until they are vested. Forfeitures of 1.1%2% to 3.6%4% have been assumed in the calculation.
The fair value of the options granted during 20102012 was estimated on their respective grant dates using the Black-Scholes option-pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 1.17%0.62% to 1.98%1.03%, based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of five to eight years, based on historical exercise activity; and volatility of 103%101% to 105%114% for grants made during the year ended December 31, 20102012 based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives hold the majority of the stock options and are expected to hold the options until they are vested. Forfeitures of 2.2%2% to 2.5%4% have been assumed in the calculation.
The fair value of the options granted during 20092011 was estimated on their respective grant dates using the Black-Scholes option pricingoption-pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 2.12%0.92% to 3.99%2.16%, based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 5 to 10five years, based on historical exercise activity; and volatility of 106.08%105% to 80.03%107% for grants made during the year ended December 31, 20092011 based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small groupForfeitures of senior executives hold the majority of the stock options and are expected1% to hold the options until they are vested therefore minimal forfeitures were4% have been assumed in 2009.
The following table summarizes activity under the Plan (and the Prior Plan) during the year ended calculation.December 31, 2011:
  
Number of
Options
 
Weighted Average
Exercise Price
Balance at January 1, 2011: 2,565,001
 $2.08
Granted 2,440,500
 1.17
Exercised (30,000) (0.76)
Forfeited (353,501) (1.64)
Expired (450,000) (6.69)
Balance at December 31, 2011: 4,172,000
 $1.10
Exercisable at December 31, 2011 2,131,045
 $1.05


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

The following table summarizes activity under the Plan (and the Prior Plan) during the year ended December 31, 2010:
  
Number of
Options
 
Weighted Average
Exercise Price
Balance at January 1, 2010: 3,331,731
 $2.39
Granted 125,000
 0.50
Exercised (100,000) (0.42)
Forfeited (593,499) (0.73)
Expired (198,231) (11.07)
Balance at December 31, 2010: 2,565,001
 $2.08
Exercisable at December 31, 2010 2,358,334
 $2.22
The following table summarizes activity under the Plan (and the Prior Plan) during the year ended December 31, 2009:
  
Number of
Options
 
Weighted Average
Exercise Price
Balance at January 1, 2009: 3,531,064
 $2.54
Granted 70,000
 0.42
Exercised —
 —
Forfeited (72,833) (1.39)
Expired (196,500) (4.85)
Balance at December 31, 2009: 3,331,731
 $2.39
Exercisable at December 31, 2009 2,518,671
 $2.96
The following table summarizes the stock options that were issued during the year ended December 31, 2011:
  
Number of
Options
 Exercise Price
March 2, 2011 130,000
 $0.74
May 18, 2011 2,205,500
 $1.19
December 2, 2011 105,000
 $1.28
  2,440,500
  
The weighted average grant date fair value per share of options granted during the years ended December 31, 20112013, 20102012 and 20092011 was $0.83, $0.38$3.72, $9.72 and $0.33$9.96 respectively.
Stock Options.
The following table summarizes all stock options outstanding atoption activity under the Plan during the year ended December 31, 20112013:
 
Exercise Price Range 
Number of
Options
Outstanding
 
Remaining
Weighted-Average
Contractual Life
 
Weighted–Average
Exercise Price
 
Number of
Options
Exercisable
$  0.00—$  1.30 3,934,167
 7.5 years $1.03 1,893,212
$  1.31—$  2.60 223,333
 1.6 years $1.89 223,333
$  5.21—$  6.50 7,000
 .3 years $6.16 7,000
$  9.11—$10.00 7,500
 .1 years $9.63 7,500
  4,172,000
     2,131,045
  
Number of
Options
 
Weighted Average
Exercise Price
Balance at January 1, 2013: 362,764
 $12.60
Granted 421,667
 4.56
Forfeited (80,889) (9.48)
Expired (138,514) (12.48)
Balance at December 31, 2013: 565,028
 $6.60
Exercisable at December 31, 2013 153,793
 $12.72

All stock options outstanding were issued to employees, officers or outside directors.
The aggregate intrinsic value of stock options exercisable was $0.7 million at December 31, 2011. The aggregate intrinsic value of stock options outstanding was $1.0 million at December 31, 2011. The aggregate intrinsic value of options exercised at

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
Years Ended December 31, 2011, 20102013, 2012 and 20092011


As of December 31, 20112013, 565,028 outstanding options were expected to vest. The weighted average exercise price of these options was $6.60 and the aggregate intrinsic value was $0.5 million with a remaining weighted average contractual life of 8.7 years.
As of December 31, 2010 was2013, 153,793 options were exercisable with a weighted average exercise price of $12.72 and an aggregate intrinsic value of less than $0.1 million in each year. $10 thousand. The weighted average contractual life of these options was 6.2 years.
No options were exercised in 2009.2013. During 2012 and 2011, 1,667 and 2,500 shares were exercised, respectively, with an intrinsic value of less than $10,000.
The total fair value of shares that vested during 2013, 2012 and 2011 was $0.6 million, $0.6 million and $0.3 million, respectively.
Stock Appreciation Rights (“SARs”).
The following table summarizes SARs activity under the Plan during the year ended December 31, 2013:
  
Number of
Options
 
Weighted Average
Exercise Price
Balance at January 1, 2013: —
 $—
Granted 138,333
 4.32
Balance at December 31, 2013: 138,333
 $4.32
Exercisable at December 31, 2013 —
 $—
All SARs outstanding were issued to officers.
As of December 31, 2013, 138,333 outstanding SARs shares were expected to vest. The weighted average exercise price of these options was $4.32 and the aggregate intrinsic value was $0.4 million with a remaining weighted average contractual life of 4.5 years.
As of December 31, 2013, zero SARs shares were exercisable and no SARs shares were exercised in 2013, 2012 and 2011. At December 31, 2013, a liability of $0.1 million was recorded in accrued expenses.

N.12.    FAIR VALUE

FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.
FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities,liabilities;
Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets,markets; and
Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.
Prior
Debt
Our long term debt is considered a Level 3 liability for which book value approximates fair market value due to Novemberthe variable interest rate it bears.

Common Stock Warrant Liability
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. The Common Stock Warrant Liability represents the fair value of the 0.9 million warrants

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011 the preferred stock warrant liability and preferred stock conversion feature were recorded separately at fair value.


issued in February 2012. We wereare 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. This method is well suited to value 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 $5.52 as of December 31, 2013; the amount of the down-round financing, the timing of the down-round financing, the expected exercise period of 3.11 years from 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 45% based on implied and historical rates over the expected term and the risk-free interest rate of 0.78% based on the 3 year U.S. Treasury yield interpolated from the 3 year and 5 year U.S. Treasury bonds.
Simulated Business Inputs include: the probability of down-round financing, which was estimated to be 45% for simulated equity values below the down-round financing cut-off point.
Simulated Technical Inputs include: our equity value in periods 1-10 follows a geometric Brownian motion and is simulated over 10 independent six-month periods; a down-round financing event was randomly simulated in an iteration based on the 45% discrete probability of a down-round financing for those iterations where our simulated equity value at the expected timing of down-round financing was below the down-round financing cut-off point.

During the year ended December 31, 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
  For the Year Ended
  December 31, 2013
Balance at December 31, 2012 $900
Total gains or losses:  
Recognized in earnings (300)
Balance at December 31, 2013 $600

Preferred Stock Warrant Liability and Conversion Feature
Prior to November 2011, we were required to record our 0.4 million of Series A Preferred Stock warrants and the Series A Preferred Stock's conversion feature at their respective fair values at each reporting date and changes were recorded as an adjustment to earnings. The gains or losses included in earnings arewere reported in other income (expense) in our Statement of Operations.
In November 2011,Due to a change in terms we entered into a transaction with the Third Security Investors, pursuantare no longer required to an Agreement Regarding Preferred Stock (the “Amendment Agreement”), in which the investors agreed to (i) waive their rights to enforce the anti-dilution and redemption features ofrecognize the Series A Preferred Stock warrant and (ii) at the next annual shareholder meeting, vote to amend the Certificate of Designation to remove the anti-dilution and redemption features of the Series A Preferred Stock. In exchange, the Company issued shares of common stock to the investors having an aggregate market value of $0.3 million.
As a result of the Amendment Agreement, the value of the Series A Preferred Stock and Series A Warrants, including the Series A Preferred Stock conversion feature and Series A Warrant liability,as liabilities. They were reclassified into shareholdersstockholders' equity as of the date of the Amendment Agreement.amended agreement.
The Series A WarrantPreferred Stock warrant liability and Series A Preferred Stock conversion feature arewere considered Level 3 financial instruments and were valued using the Black ScholesBlack-Scholes call option pricing formula, which approximates a binomial model for the preferred stockSeries A Preferred Stock conversion feature. This method is among the most common and widely used valuation approaches for call options. The model relates an option's value to five variables: the current price of the underlying asset, the strike price of the option, the time to expiration or exercise of the option, a risk free interest rate, and the volatility of the underlying asset.
The following assumptions were used in the November 8, 2011 valuation of the Series A Preferred Stock conversion feature: the closing share price of our common stock on November 8, 2011 discounted 15% due to the lack of marketability and liquidity, an exercise price of $0.39,$0.39, expected term of 4.00 years, risk-free interest rate of 0.65% based on a linear interpolation of 3 year and 5five year U.S. Treasury rates and volatility of 50%.

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


The following assumptions were used in the November 8, 2011 valuation of the Series A Warrants:Preferred Stock warrants: an exercise price of $2.32,$2.32, expected term of 1.0 year, years, risk-free interest rate of 0.25% based on a 1one year U.S. Treasury and volatility of 50%.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

During the year ended December 31, 2011,, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:
 
Dollars in ThousandsDollars in Thousands
For the year endedFor the year ended
December 31, 2011December 31, 2011
Preferred
Stock
Conversion
Feature
 Preferred
Stock
Warrant
Liability		 Total
Preferred
Stock
Conversion
Feature
 Preferred Stock Warrant Liability Total
Beginning balance at January 1, 2011$1,983
 $2,351
 $4,334
$1,983
 $2,351
 $4,334
Total gains or losses:          
Recognized in earnings5,317
 449
 5,766
5,317
 449
 5,766
Balance as of November 8, 20117,300
 2,800
 10,100
Reclassification to shareholders' equity due to Amendment Agreement$(7,300) $(2,800) $(10,100)
Balance at November 8, 20117,300
 2,800
 10,100
Reclassification to stockholders' equity due to Amendment Agreement(7,300) (2,800) (10,100)
Balance as of December 31, 2011$—
 $—
 $—
$—
 $—
 $—

During 2011, we recorded expense associated with the Series A Preferred Stock and Series A Warrants of $6.1 million, which is due to theThe change in fair value of the preferred stock conversion feature of $5.8 million and the issuance of $0.3 million in common stock to the Third Security Investors.

During the year ended December 31, 2010, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:
 Dollars in Thousands
 For the year ended
 December 31, 2010
 
Preferred
Stock
Conversion
Feature
 Preferred
Stock
Warrant
Liability		 Total
Beginning balance at January 1, 2010$—
 $—
 $—
      
       Issuance1,983
 2,351
 4,334
Balance at December 31, 2010$1,983
 $2,351
 $4,334
There were no purchases, sales, or settlements of Level 3 liabilities in the year ended December 31, 2011 and 2010, respectively. The unrealized gains or losses of Level 3 liabilities areis included in earnings areand is reported in other income (expense) in our Statement of Operations.


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Years Ended December 31, 2011, 2010 and 2009


O.13.    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

In thousands except per share dataIn thousands except per share data
March 31 June 30 September 30 December 31March 31 June 30 September 30 December 31
2011       
2013       
Net Sales$7,374
 $7,306
 $6,646
 $6,218
Gross Profit3,681
 3,410
 2,851
 2,554
Net Loss(3,586) (2,867) (5,552) (3,982)
Basic and diluted loss per common share$(0.54) $(0.41) $(0.78) $(0.57)
       
2012       
Net Sales$7,480

$7,667

$8,253

$8,571
$7,206
 $9,093
 $7,889
 $7,292
Gross Profit4,154
 4,555
 4,445

5,283
3,104
 4,562
 3,800
 3,544
Net Income (Loss)(2,778) (5,998) (1,270) 264
(2,696) (563) (2,754) (2,314)
Basic and diluted loss per common share$(0.06) $(0.13) $(0.03) $—
$(0.55) $(0.12) $(0.49) $(0.42)
      

2010       
Net Sales$5,442
 $5,095
 $4,419
 $5,092
Gross Profit2,884
 2,487
 2,017
 2,376
Net Loss(324) (1,146) (898) (767)
Basic and diluted loss per common share$(0.01) $(0.02) $(0.02) $(0.01)


P.14.    OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Our company’s chief operating decision-maker is the Chief Executive Officer, who regularly evaluates our performance based on net sales and gross profit. 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 directionallymaterially correct, actual results could differ from the estimates and assumptions used in preparing this information.
We have threetwo reportable operating segments, Clinical Laboratories, PharmacogenomicLaboratory Services and Diagnostic Tools. During the third quarter of 2011, we changed the manner in which we report segment results internally. Accordingly, segment results of the prior period have been reclassified to reflect these changes. Beginning with the third quarter of 2011 our company's chief operating decision-maker is now reviewing our business as having three segments. The change in segments was driven by our corporate strategy to advance personalized medicine through proprietary molecular technologiesGenetic Assays and world-class clinical and research services.Platforms. These lines of business are complementary with the Pharmacogenomics ServicesBiomarker Identification labs driving innovation and leading to kit production in our Diagnostic ToolsGenetic Assays and Platforms segment and new tests in our Clinical Laboratories.Patient Testing labs.

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


The accounting policies of the segments are the same as the policies discussed in Footnote B2 – Summary of Significant Accounting Policies.
 
Segment information for the years ended December 31, 2013, 2012 and 2011 is as follows:

 Dollars in Thousands
 2013
 Laboratory Services Genetic Assays and Platforms Total
Net Sales$15,391
 $12,153
 $27,544
Gross Profit6,820 5,676
 12,496
Net Loss before Taxes(12,486) (3,555) (16,041)
Income Tax Expense—
 (54) (54)
Net Loss$(12,486) $(3,501) $(15,987)
Depreciation/Amortization$2,467
 $281
 $2,748
Interest Expense(398) (244) (642)
 December 31, 2013
Total Assets$21,711
 $8,567
 $30,278
Goodwill6,918
 —
 6,918

 Dollars in Thousands
 2012
 Laboratory Services Genetic Assays and Platforms Total
Net Sales$19,329
 $12,151
 $31,480
Gross Profit9,316
 5,694
 15,010
Net (Loss) before Taxes(6,874) (1,307) (8,181)
Income Tax Expense—
 146
 146
Net (Loss)$(6,874) $(1,453) $(8,327)
Depreciation/Amortization$1,960
 $318
 $2,278
Interest Expense(851) (37) (888)
 December 31, 2012
Total Assets$29,196
 $9,595
 $38,791
Goodwill6,918
 —
 6,918



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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
Years Ended December 31, 2011, 20102013, 2012 and 2009

Segment information for the years ended December 31, 2011 2010 and 2009 is as follows:


 Dollars in Thousands
 2011
 
Clinical
Laboratories
 
Pharmacogenomic
Services
 Diagnostic
Tools		 Total
Net Sales$16,038
 $2,280
 $13,653
 $31,971
Gross Profit9,478
 1,050
 7,909
 18,437
Net Income (Loss) before Taxes(11,016) (354) 1,633
 (9,737)
Income Tax Expense (Benefit)—
 —
 45
 45
Net Income (Loss)$(11,016) $(354) $1,588
 $(9,782)
Depreciation/Amortization1,568
 242
 235
 2,045
Restructure29
 —
 12
 41
Interest Income (Expense)(959) —
 —
 (959)
 December 31, 2011
Total Assets$22,032
 $1,636
 $9,894
 $33,562
Goodwill6,440
 $—
 $—
 $6,440

 Dollars in Thousands
 2010
 Clinical
Laboratories		 Pharmacogenomic
Services		 Diagnostic
Tools		 Total
Net Sales$3,606
 $1,373
 $15,069
 $20,048
Gross Profit1,481
 (43) 8,326
 9,764
Net Loss before Taxes(1,829) (696) (459) (2,984)
Income Tax Expense (Benefit)—
 —
 150
 150
Net Loss$(1,829) $(696) $(609) $(3,134)
Depreciation/Amortization119
 186
 190
 495
Restructure65
 —
 73
 138
Interest Income (Expense)(1) —
 (3) (4)
 December 31, 2010
Total Assets$22,945
 $1,686
 $7,396
 $32,027
Goodwill6,275
 $—
 $—
 $6,275


Dollars in ThousandsDollars in Thousands
20092011
Clinical
Laboratories		 Pharmacogenomic
Services		 Diagnostic
Tools		 TotalLaboratory Services Genetic Assays and Platforms Total
Net Sales$3,541
 $1,025
 $17,457
 $22,023
$18,318
 $13,653
 $31,971
Gross Profit1,523
 205
 9,877
 11,605
10,528
 7,909
 18,437
Net Loss before Taxes(1,763) (510) 395
 (1,878)(11,370) 1,633
 (9,737)
Income Tax Expense (Benefit)—
 —
 42
 42
Income Tax Expense—
 45
 45
Net Loss$(1,763) $(510) $353
 $(1,920)$(11,370) $1,588
 $(9,782)
Depreciation/Amortization146
 151
 450
 747
$1,810
 $291
 $2,101
Restructure—
 —
 —
 —
29
 12
 41
Interest Income (Expense)4
 —
 11
 15
Interest Expense(958) —
 (958)
December 31, 2009December 31, 2011
Total Assets$6,796
 $661
 $8,547
 $16,004
$23,668
 $9,894
 $33,562
Goodwill6,440
 —
 6,440
 

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Years Ended December 31, 2011, 2010 and 2009

Net sales for the year ended December 31, 2011, 20102013, 2012 and 20092011 by country were as follows:
 
 Dollars in Thousands Dollars in Thousands
 Years ended December 31, Years Ended December 31,
 2011 2010 2009 2013 2012 2011
United States $22,626
 $8,729
 $8,777
 $20,119
 $22,727
 $22,626
Italy 3,152
 3,294
 3,683
 1,530
 2,524
 3,152
Germany 1,218
 907
 750
United Kingdom 778
 1,412
 842
 748
 1,703
 778
Germany 750
 1,366
 1,383
France 758
 1,160
 1,545
 681
 679
 758
Netherlands 97
 56
 1,464
All Other Countries 3,810
 4,031
 4,329
 3,248
 2,940
 3,907
Total $31,971
 $20,048
 $22,023
 $27,544
 $31,480
 $31,971
No other country accounted for more than 5% of total net sales.

More than 95%99% of our long-lived assets are located within the United States. Substantially all of the remaining long-lived assets are located within Europe.

Q.    RELATED PARTY AND SUBSEQUENT EVENTS15.    ACQUISITIONS

ScoliScoreTM
On December 29, 2010, the Company issued 2,586,205 shares of Series A Preferred Stock that were not registered under the Securities Act of 1933 (the “Securities Act”September 21, 2012, we acquired certain intangible assets from Axial Biotech, Inc. ("Axial"). The issuance of such Series A Preferred Stock was related to the financingScoliScoreTM assay. In consideration for the Company's acquisitionpurchase of the intangible assets, from PGxHealth. Please referwe made a cash payment of approximately $3.4 million to Axial and certain of its creditors. In addition, following the Series A Convertible Preferred Stock Purchase Agreement with the Third Security Investors dated December 29, 2010.
On November 8, 2011, the Company entered into an Amendment Agreement with the Third Security Investors, which are the holderstransfer of all of the outstanding shares of the Company's Series A Preferred Stock. Pursuantassets related to the Amendment Agreement,ScoliScoreTM assay and confirmation that the Third Security InvestorsScoliScoreTM assay operates, within our laboratories pursuant to protocol agreed upon by us and Axial, during the Company agreedyears ended December 31, 2012 and 2013 we paid an additional $0.2 million and $0.8 million, respectively, to amend the Certificate of Designation to eliminateAxial and certain features of the Series A Preferred Stock relating to (i) an anti-dilution adjustment to the conversion rate upon which the Series A Preferred Stock is convertible into the Company's common stock and (ii) an optional redemption of the Series A Preferred Stock by the Third Security Investors (the “Certificate Amendment”); subject to the requisite stockholder approval of the Certificate Amendment at the Company's next annual meeting of its stockholders. Pursuant to the Amendment Agreement, the Third Security Investors agreed to vote the Series A Preferred Stock and their common stock in favor of the Certificate Amendment and agreed to waive their rights to the features of the Series A Preferred Stock being eliminated by the Certificate Amendment.  In exchange for the Third Security Investors entering into the Amendment Agreement, the Company agreed to issue to the holders an aggregate of $0.3creditors. The total consideration paid was$4.4 million market value of common stock or 245,903 shares of common stock.
On December 30, 2011, the Company entered into a Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”). This acquisition provides us with the Third Security Investors in the aggregate amount of $3.0 million.  ScoliScoreTM assay technology and intellectual property, and an established revenue and customer base.
The Third Security Investors currently own all the outstanding shares of the Company's Series A Preferred Stock. Under the Note Purchase Agreement, the Company sold tofollowing intangible assets were each of the Third Security Investors a convertible note which matures on March 31, 2012.  The Note Purchase Agreement and notes providevalued separately using valuation approaches most appropriate for conversion of any amount remaining due to the Third Security Investors under the notes into equity securities of the Company of the same class(es) or series and at the same price as the equity securities of the Company sold in the Company's first sale or issuance of its equity securities after December 30, 2011, in the aggregate amount of at least $3.0 million.  The notes and the equity securities into which the notes are convertible have not been registered under the Securities Act and applicable state securities laws, but have been offered and sold in the United States pursuant to applicable exemptions from registration requirements under the Securities Act and applicable state securities laws.
On February 2, 2012, the Company entered into a Securities Purchase Agreement with certain institutional and other accredited investors pursuant to which the Company: (i) sold to the investors an aggregate of 19,000,000 shares of the Company's common stock at a price per share of $1.00 for aggregate gross proceeds of approximately $19.0 million; and (ii) issued to the investors warrants to purchase up to an aggregate of 9,500,000 shares of common stock with an exercise price of $1.25 per share. The warrants may be exercised, in whole or in part, at any time from February 7, 2012 until February 7, 2017 and contain both cash and “cashless exercise” features. The warrants also impose penalties on the Company for failure to deliver the shares ofeach specific asset.

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)STATEMENTS
Years Ended December 31, 2011, 20102013, 2012 and 20092011


Acquired technologyRelief from Royalty Method
TradenamesRelief from Royalty Method
Customer relationshipsMulti-Period Excess Earnings Method
Covenants not to competeWith and Without Method
PatentsRelief from Royalty Method

The Income Approach uses valuation techniques to convert future amounts, cash flows or earnings, to a single, discounted amount. The fair value measure is based on the value that is indicated by market expectations about the present value of those future amounts.

The Relief from Royalty Method assumes that if the Company did not have proprietary ownership of the genetic testing processes on which its revenues depend, it might elect to lease the rights or licenses from another company. The fair value is measured as the estimated discounted cash flows of the royalty payments avoided by ownership.

The Multi Period Excess Earnings Method measures the fair value as the estimated discounted cash flows of the existing customer relationships over a period during which revenues from existing customer relationships are assumed to have been substantially replaced by revenues from future customers.

The With and Without Method measures the fair value of the non-competition agreements as the probability adjusted difference between the estimated discounted cash flows with and without the effect of competition. The model that includes competition includes lost revenues as well as increased expenses required to rebuild the lost revenues.

The acquired intangibles have the following useful lives; acquired technology - 10 years; third party payor relationships - 15 years; assay royalties 7 years; tradenames and trademarks - 7 years.

The assets acquired were $3.9 million in identifiable intangible assets and $0.5 million in goodwill. No liabilities were assumed. The acquired assets are reported as a component of our laboratory services segment.

The goodwill arising from the acquisition has been assigned to our Laboratory Services segment and is expected to be deductible for tax purposes.
16.         RESTRUCTURING CHARGES
In the third quarter of 2010 we made a decision to consolidate our research and development activities in Omaha, Nebraska. We substantially completed the transition at December 31, 2010. We have recognized expenses for restructuring, including but not limited to, severance, facility costs and costs to move equipment from Gaithersburg, Maryland to Omaha, Nebraska. These restructuring charges are attributable to our Clinical Laboratories (now Laboratory services) and Diagnostic Tools (now Genetic Assays and Platforms) segments.
In the fourth quarter of 2010 we had a reduction in workforce of five employees with severance payments of less than $0.1 million which was attributable to our Diagnostic Tools (now Genetic Assays and Platforms) segment.
Restructuring charges include:
  Dollars in Thousands
Costs Incurred in the year ended December 31, 2011 
Cumulative Costs
Incurred at
December 31, 2011
 
Total
Expected  Costs
Severance and related costs $—
 $53
 $53
Facility closure costs 28
 74
 74
Other 13
 52
 52
Restructuring charges $41
 $179
 $179

17.    SUBSEQUENT EVENTS

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011



Amended Certificate of Incorporation and Reverse Stock Split
At a special meeting of stockholders of Transgenomic held on January 14, 2014 (the “Special Meeting”), the stockholders of the Company approved the authorization of the Board to, in its discretion, amend the Company’s Third Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) to effect a reverse split of the Company’s common stock, par value $0.01 at a ratio of between one-for-four to one-for-twenty-five, with such ratio to be determined by the Board. On January 15, 2014, the Board determined to set the reverse stock split ratio at one-for-twelve (the “Reverse Stock Split”) and approved the final form of Certificate of Amendment to the Certificate of Incorporation to effectuate the Reverse Stock Split (the “Certificate of Amendment”). The Certificate of Amendment was filed with the Secretary of State of the State of Delaware on January 24, 2014, and the Reverse Stock Split became effective in accordance with the terms of the Certificate of Amendment at 5:00 p.m. Central Time on January 27, 2014 (the “Effective Time”).
At the Effective Time, every 12 shares of common stock issued and outstanding were automatically combined into one share of issued and outstanding common stock, without any change in the par value per share. No fractional shares were issued as a result of the Reverse Stock Split. Stockholders who otherwise would be entitled to receive a fractional share in connection with the Reverse Stock Split received a cash payment in lieu thereof.
After giving effect to the Reverse Stock Split, the common stock and outstanding preferred stock have the same proportional voting rights and rights to dividends and distributions and are identical in all other respects to the rights of the common stock and preferred stock as of immediately prior to the Effective Time (with the conversion rate of the outstanding Series A Convertible Preferred Stock being proportionately reduced), except for immaterial changes and adjustments resulting from the treatment of fractional shares.
Increase in Shares Available for Issuance Pursuant to 2006 Equity Incentive Plan
At the Special Meeting, the stockholders of the Company approved amendments to the Plan to increase the number of shares of common stock that may be issued under the Plan by 833,333 shares and to provide for a corresponding increase in the limits on the number of incentive stock options and awards other than options or stock appreciation rights that may be granted under the Plan. The amendments to the Plan were conditioned upon the approval by the Company’s stockholders, and the effectiveness, of the Reverse Stock Split. Therefore, at the Effective Time, the total number of shares that the Company may issue under the Plan was increased to 1,666,667 shares; and the total number of such shares that may be used for grants of restricted stock, restricted stock units, performance units, performance shares and other awards was increased to no more than 1,250,000 shares.

Amended Loan and Security Agreement
On January 27, 2014, we entered into a third amendment to the Loan Agreement. Pursuant to the third amendment, the Lenders agreed to waive certain events of default under the Loan Agreement, and the parties amended certain provisions of the Loan Agreement, including the minimum liquidity ratio that we must maintain during the term of the Loan Agreement. On March 3, 2014, we entered into a fourth amendment to our Loan Agreement with the Lenders, which 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 amended Loan Agreement, the next principal and interest payment under the Term Loan will be due on April 1, 2015.

Issuance of Series B Preferred Stock
On March 5, 2014, the Company entered into a Series B Convertible Preferred Stock Purchase Agreement (the “Series B Purchase Agreement”) with affiliates of Third Security (the “2014 Third Security Investors”), pursuant to which the Company, in a private placement, sold and issued an aggregate of 1,443,297 shares of the Company’s Series B Convertible 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 $7,000,000. Each share of Series B Preferred Stock issued pursuant to the Series B Purchase Agreement is initially convertible into shares of the Company’s common stock at a rate of 1-for-1, which conversion rate is subject to further adjustment as set forth in the Certificate of Designation of Series B Convertible Preferred Stock.
In connection with the Series B financing, the Company also entered into a Registration Rights Agreement, dated March 5, 2014, with the 2014 Third Security Investors, pursuant to which the Company 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 exercise. The Company currently intends to use the net proceeds from the offering for general corporateany dividend or other distribution with respect thereto.
Third Security, LLC and working capital purposes, primarily to accelerate development of severalits affiliates (collectively, “Third Security”), which holds more than 10% of the company's key initiatives.
As partoutstanding voting stock of the offering, in connection with the conversion of certain convertible promissory notesCompany, participated in the aggregate amountSeries B financing. Additionally, Doit L. Koppler II and Robert M. Patzig, directors of $3.0 million issued by the Company, on December 30, 2011 toare affiliated with Third Security, Investors,LLC.

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TRANSGENOMIC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2013, 2012 and 2011


The 2014 Series B Preferred Stock financing required the Third Security Investors collectively received 3,000,000 sharesrepricing 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 $12.96 per share to purchase up to 1,500,000$11.73 per share and the number of shares of common stockissuable upon the same terms as the investors.
The Registration Rights Agreement requires the Company to file an initial registration statement on Form S-1 with the SEC on or before March 23, 2012. If the initial registration statement is not filed with the SEC on or before March 23, 2012 the Company shall pay to each holder an amount in cash, as liquidated damages, equal to 1.5%exercise of the aggregate purchase price paid by such holder and again on each 30 day anniversary that the deadline is not met. In no event shall the aggregate amount of liquidated damages payablewarrants increased from 1,097,600 to a holder exceed 10% of the purchase price.
The following pro-forma balance sheet does not contemplate the impact of the valuation of the preferred stock warrants.1,212,665.

The following table set forth a summary of the balance sheet as reported and pro-forma as if the private placement financing had occurred on December 31, 2011:


62
 Actual Pro-Forma
 Dollars in Thousands
 December 31, 2011 December 31, 2011
Total Assets$33,562 $51,129
Total Liabilities22,514
 19,514
Total Stockholders' Equity11,048
 31,615
 $33,562
 51,129

Effective June 30, 2010, we entered into a letter agreement with CFO Systems, LLC and Brett L. Frevert. Under the letter agreement CFO Systems will provide financial and consulting services to us at rates of $75 to $150 per hour depending on the level of expertise involved. The services will include providing Chief Financial Officer duties and other financial and accounting expertise on a time share basis. CFO Systems, LLC or the Company may terminate the agreement upon thirty days written notification. In connection with the letter agreement, Mr. Frevert agreed to serve as our Chief Financial Officer. We were charged $405,763 and $126, 459 for the services provided by CFO Systems, LLC during 2011 and 2010, respectively.


Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
None.As previously disclosed in the Company’s Current Report on Form 8-K filed on July 12, 2013, our Audit Committee, on July 8, 2013 appointed Ernst & Young LLP as our principal independent accountant. There were no disagreements or reportable events related to the change in accountants requiring disclosure under Item 304(b) of Regulation S-K.
 
Item 9A.Controls and Procedures.
(a)         Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, management performed, with the participation of our Chief Executive Officer and 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 Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance 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 SEC’s rules and forms, and that such information is accumulated and communicated to management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 20112013, the Company'sour disclosure controls and procedures were effective.
(b)         Management’s Report on Internal Control Over Financial Reporting

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Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that:
 
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

Management has conducted, with the participation of our Chief Executive Officer and our Chief Financial Officer, an assessment, including testing of the effectiveness of our internal control over financial reporting as defined in Rule 13(a)-15(f) under the Exchange Act as of December 31, 20112013. Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, management has concluded that the Company’sour internal control over financial reporting was effective as of December 31, 2011.2013.
McGladrey & Pullen, LLP,This Annual Report does not include an independentattestation report of Transgenomic’s registered public accounting firm has audited the Company's financial statements included in this report on Form 10-K and issued its report on the effectiveness of the Company'sregarding internal control over financial reporting asreporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to Item 308(b) of December 31, 2011,Regulation S-K, which is included herein.permits the Company to provide only management’s report in this Annual Report.

63


(c)         Changes in internal control over financial reporting
There have been no changes in internal control over financial reporting that occurred during the quarter ended December 31, 20112013 that have materially affected, or are reasonably likely to materially affect, the Company'sour internal control over financial reporting.

Item 9B.Other Information.
None.


Part III
 
Item 10.Directors, Executive Officers and Corporate Governance.

Our Board of Directors

Our Board of Directors (“Board”) consists of five directors. The Board of Directorsinformation required by this item is divided into three classes with directors in each class serving for a term of three years. The terms of office of the current Class I, Class II and Class III directors will expire in 2013, 2014 and 2012, respectively. The holders of our Preferred Stock (the "Preferred Stockholders") are entitled, as a separate voting group, to elect two (2) of the five directors (“Preferred Stock Directors”). The common stockholders are entitled, as a separate voting group, to elect the three (3) remaining directors (“Common Stock Directors”). There is one Common Stock Director in each class of directors. There is one Preferred Stock Director in each of Class I and Class II, but not a Preferred Stock Director in Class III.

Robert M. Patzig is the current Preferred Stock Director in the Class I directors and Doit L. Koppler II is the current Preferred Stock Director in the Class II directors.


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Our Class III director, Rodney S. Markin, M.D., Ph.D, is nominated and standing for election at our upcoming 2012 Annual Meeting of Stockholders.

Certain biographical information regarding our directors, including their ages and dates that they were first elected to our Board, is set forth below. In each individual's biography we have highlighted specific experience, qualifications, and skills that led the Board to conclude that each individual should serve as a director of our Board. In addition to these specific attributes, all of our directors have significant expertise in one or more areas of importance to our business and have high-level managerial experience in relatively complex organizations or are accustomed to dealing with complex problems. We believe all of our directors are individuals of high character and integrity, are able to work well with others, and have sufficient time to devoteincorporated by reference to the affairs of our company.
Name Age  Principal Occupation Director Since  Term to Expire
         
CLASS I DIRECTORS
Robert M. Patzig, Preferred Stock Director 43 Senior Managing Director and Chief Investment Officer, Third Security, LLC 2010 2013
         
Craig J. Tuttle, Common Stock Director 59 President and Chief Executive Officer of Transgenomic, Inc. 1997 2013
         
CLASS II DIRECTORS
Doit L. Koppler II, Preferred Stock Director 48 Managing Director and Treasurer, Third Security, LLC 2010 2014
         
Antonius P Schuh, Ph.D, Common Stock Director 48 Chief Executive Officer of Sorrento Therapeutics, Inc. 2009 2014
         
CLASS III DIRECTORS
Rodney S. Markin, M.D., Ph.D, Common Stock Director 55 Chairman of the Board, Transgenomic, President of University of Nebraska Medical Center Physicians 2007 2015




Robert M. Patzig. Mr. Patzig joined Third Security upon the company's inception in 1998. Mr. Patzig's responsibilities include identifying and researching investment opportunities for Third Security and its funds, securities valuation and portfolio management. Mr. Patzig is a Director of the Virginia Biotechnology Association, a non-profit industry advocacy group, and a member of the Virginia Tech English Department Distinguished Alumni. Mr. Patzig has served as Chairman of the Board of Intrexon Corporation and Cyntellect, Inc. and served as a member of the Board of Directors of Synchrony, Inc. Mr. Patzig served as the head of the Investment Committee for Howe and Rusling, Inc., a registered investment advisor, from 2001 until its sale in 2006. Mr. Patzig served as the Chief Executive Officer and Chief Compliance Officer of New River Advisors LLC from June of 2003 until August of 2007. Prior to the formation of Third Security, Mr. Patzig served as Director of Market Research and Analysis at GIV Holdings, Inc. and Director of Research Services at General Injectables & Vaccines, Inc. Mr. Patzig received a B.A. in Philosophy and English from Virginia Tech.The Board select Mr. Patzig as a director because of his substantial biotech industry experience as well as his securities and investment expertise.

Craig J. Tuttle. Mr. Tuttle has served as our President and Chief Executive Officer since 2006. From 2004 to 2005, Mr. Tuttle was President and Chief Operating Officer of Duke Scientific. From 1999 to 2003, Mr. Tuttle served as President and Chief Executive Officer of Applied Biotech, Inc. The Board selected Mr. Tuttle to serve as a director because he is the Company's Chief Executive Officer. He has expansive knowledge and experience in the biotech industry, as well as relationships with chief

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executives and other senior management at biotech companies.

Doit L. Koppler, II. Mr. Koppler joined Third Security in 2001 and manages the finance function of Third Security and is involved with several portfolio companies of Third Security's managed investment funds. Mr. Koppler currently serves as Vice President, Treasurer and a member of the Board of Directors of Vital Diagnostics Holding Corp., a global supplier of products and services for the clinical laboratory in the traditional in vitro diagnostics market with a focus on the physician's office, hospital and small-to-medium sized laboratory segments. Mr. Koppler served as Chairman and Chief Executive Officer of New River Funds, a family of no-load mutual funds, from its inception in 2003 through 2008 and as the Chief Investment Officer of New River Advisers, LLC, the investment adviser to New River Small Cap Fund, predecessor to Southern Sun Small Cap Fund. Mr. Koppler served as a member of the Board of Directors of IntelliMat, Inc. from November 2006 to July 2008. Prior to joining Third Security, Mr. Koppler served as Vice President and Controller of General Injectables & Vaccines, Inc., a $120 million distributor of injectable biologics and vaccines primarily to outpatient physician offices, from 1992-2000. From 1987-1992, he was a Manager in the audit practice of Ernst & Young LLP. Mr. Koppler is a Certified Public Accountant and a Member of the American Institute of Certified Public Accountants. He has also held Series 7 and Series 66 securities registrations. Mr. Koppler received a B.S. in Accounting from Salem International University. The Board selected Mr. Koppler to serve as a director because of his valuable financial expertise, including his public accounting and financial reporting experience.

Antonius P. Schuh, Ph.D. Dr. Schuh co-founded Sorrento Therapeutics, Inc. (NASDAQ: SRNE) in January 2006 and has served as its Chairman since such time and as its Chief Executive Officer since November 2008. From April 2006 to September 2008 Dr. Schuh served as CEO of AviaraDx, Inc. (now bioTheranostics, Inc., a bioMerieux Company). From March 2005 to April 2006 Dr. Schuh was CEO of Arcturus Bioscience, Inc. As of January 23, 2012, Dr. Schuh also serves as a director of TrovaGene, Inc. (PK: TROV), a molecular diagnostics company. In addition, Dr. Schuh was a director of Sequenom, Inc. (NASDAQ: SQNM) from May 2000 to February 2005. The Board selected Dr. Schuh to serve as a director because it believes he possesses valuable biotech experience and extensive executive management experience in the industry which brings a unique and valuable perspective to the Board.
Rodney S. Markin, M.D., Ph.D. Dr. Markin is Professor of Pathology and Microbiology and Surgery, Senior Associate Dean for Clinical Affairs, College of Medicine at the University of Nebraska Medical Center and Chairman and President of UNMC Physicians (the UNMC medical practice). Dr. Markin is also a director of Nebraska Surgical Solutions, Inc. The Board selected Dr. Markin to serve as a director because he has valuable executive experience in the healthcare business. Dr. Markin also has extensive experience serving on other boards. His ability to communicate and encourage discussion makes him an effective Chairman for the Board.

Our Executive Officers

The following provides certain biographical information regarding our executive officers, including their ages and dates that they first joined our Company; provided that information regarding Craig J. Tuttle, our President and Chief Executive Officer, is set forth in the section above entitled “Our Board of Directors.”
Chad Richards.    Mr. Richards, age 42, joined the Company in October 2007 as Senior Vice President, Sales and Marketing and was promoted to Chief Commercial Officer in January 2011. Before joining the Company, Mr. Richards was the National Sales Director for Anatomic Pathology with Quest Diagnostics. During his career with Quest Diagnostics, Mr. Richards held a variety of sales management roles in both their physician and hospital business segments. Before joining Quest Diagnostics, Mr. Richards held different marketing and sales management roles with Roche Diagnostics Ventana Medical Systems Division, one of the world's leading developers and manufacturers of immunohistochemistry and in-situ hybridization instruments and reagent systems. Before embarking on a career in diagnostics, Mr. Richards served in the United States Marine Corps.
Brett Frevert. Mr. Frevert, age 49, was appointed as our Chief Financial Officer by the Board of Directors on June 28, 2010. Mr. Frevert's serves as Chief Financial Officer pursuant to the terms a letter agreement with CFO Systems, LLC (“CFO Systems”) and Brett L. Frevert. Under the letter agreement CFO Systems provides financial and consulting services to us. Since 2004 Mr. Frevert has been Managing Director of CFO Systems, which he founded in 2004. During that time he has served as CFO of several Midwestern companies, including SEC registrants and private companies. Prior to founding CFO Systems, Mr. Frevert was CFO of a regional real estate firm and also served as Interim CFO of First Data Europe. Mr. Frevert began his career with Deloitte & Touche, serving primarily SEC clients in the food and insurance industries.
There is no family relationship between any of the directors or executive officers and any other director or executive officer of the Company.

Business Ethics Policy

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Our Board of Directors has adopted a code of ethical conduct that applies to our principal executive officer, principal financial officer and senior financial officers. This code of ethical conduct is embodied within our Business Ethics Policy, which applies to all persons associated with the Company, including our directors, officers, and employees (including our principal executive officer, principal financial officer, principal accounting officer and controller). The Business Ethics Policy is available in the investor relations section of our website at www.transgenomic.com. We will disclose amendments to, or waivers of, certain provisions of our Business Ethics Policy relating to our chief executive officer, chief financial officer, chief accounting officer, controller or persons performing similar functions on our website promptly following the adoption of any such amendment or waiver.

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Corporate Governance

Board Leadership Structure

Our Board has determined that having an independent director serve as the Chairman of the Board is in the best interests of our stockholders. Our Chairman of the Board is Rodney S. Markin, Ph.D. Our President and CEO, Mr. Tuttle, is the only member of our Board who is not an independent director. We believe that this leadership structure enhances the accountability of our President and CEO to the Board and strengthens the Board's independence from management. While both leaders are actively engaged on significant matters affecting the Company, such as long-term strategy, we believe splitting these leadership positions enables Mr. Tuttle to focus his efforts on running our business and managing the Company while permitting Dr. Markin to focus more on the governance of the Company, including oversight of our Board.

Director Attendance at Meetings.

Our Board conducts its business through meetings of the Board, both in person and telephonic, and actions taken by written consent in lieu of meetings. During the year ended December 31, 2011, the Board of Directors held six meetings and acted by written consent in lieu of a meeting three times. All directors attended at least 75% of the meetings of the Boardsections titled “Board of Directors and of the committees of the Board of Directors on which they served during 2011.

Our Board strongly encourages all directors to attend our annual meetings of stockholders unless it is not reasonably practicable for a director to do so. All of the directors serving as of May 18, 2011 attended our 2011 Annual Meeting of Stockholders.
Committees”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Business Ethics Policy”, “Corporate Governance - Committees of our Board of Directors
Our Board has establishedDirectors”, “Corporate Governance - Audit Committee” and delegated certain responsibilities“Corporate Governance - Compensation Committee” in our definitive proxy statement to its standing Audit Committee and a Compensation Committee. We do not have a standing nominating committee.
Audit Committee.

We have a separately designated Audit Committee establishedbe filed with the SEC in accordanceconnection with Section 3(a)(58)(A)the annual meeting of stockholders to be held in 2014 (the “2014 Proxy Statement”). The information required by this item related to the executive officers can be found in the section captioned “Executive Officers of the Exchange Act. The Audit Committee's primary duties and responsibilities include monitoring the integrityRegistrant” under Part I, “Item 1. Business” of our financial statements, monitoring the independence and performance of our external auditors, and monitoring our compliance with applicable legal and regulatory requirements. The functions of the Audit Committee also include reviewing periodically with independent auditors the performance of the services for which they are engaged, including reviewing the scope of the annual audit and its results, reviewing with management and the auditors the adequacy of our internal accounting controls, reviewing with management and the auditors the financial results prior to the filing of quarterly and annual reports, reviewing fees charged by our independent auditors and reviewing any transactions between the Company and related parties. Our independent auditors report directly and are accountable solely to the Audit Committee. The Audit Committee has the sole authority to hire and fire the independent auditorsthis Annual Report on Form 10-K, and is responsible for the oversight of the performance of their duties, including ensuring the independence of the independent auditors. The Audit Committee also approves in advance the retention of, and all fees to be paid to, the independent auditors. The rendering of any auditing services and all non-auditing servicesincorporated herein by the independent auditors is subject to the approval in advance of the Audit Committee.

The Audit Committee operates under a written charter which is available on our website at www.transgenomic.com. The Audit Committee is required to be composed of directors who are independent of the Company under the rules of the SEC and the NASDAQ listing standards.reference.    

The current members of the Audit Committee are directors Dr. Markin and Dr. Schuh each of whom has been determined by the Board of Directors to be independent under the rules adopted by the SEC and NASDAQ listing standards. The Board of Directors has determined that Dr. Markin qualifies as an “audit committee financial expert” under the rules adopted by the SEC and the Sarbanes Oxley Act of 2002. The Audit Committee met four times during 2011.

Compensation Committee.   

The Compensation Committee reviews and approves our compensation policy, changes in salary levels and bonus payments to our executive officers and other management and determines the timing and terms of equity awards under our equity incentive plans. The Compensation Committee operates under a written charter which is available on our website at www.transgenomic.com.


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The Compensation Committee currently consists of directors Dr. Schuh, Dr. Markin and Mr. Patzig each of whom has been determined by the Board of Directors to be independent under the NASDAQ listing standards. The Compensation Committee met four times during 2011.
Oversight of Risk Management.
      Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including economic risks, financial risks, legal and regulatory risks, and others, such as the impact of competition. Management is responsible for the day-to-day management of the risks that we face, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our Board is responsible for satisfying itself that the risk management processes designed and implemented by management are adequate and functioning as designed. Our Board assesses major risks facing the Company and options for their mitigation in order to promote its stockholders' interests in the long-term health and the overall success of the Company and its financial strength. A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The involvement of our full Board in the risk oversight process allows our Board to assess management's appetite for risk and also determine what constitutes an appropriate level of risk for the Company. Our Board regularly includes agenda items at its meetings relating to its risk oversight role and meets with various members of management on a range of topics, including corporate governance and regulatory obligations, operations and significant transactions, risk management, insurance, pending and threatened litigation and significant commercial disputes.
While our Board is ultimately responsible for risk oversight, various committees of the Board oversee risk management in their respective areas and regularly report on their activities to our entire Board. In particular, the Audit Committee has the primary responsibility for the oversight of financial risks facing the Company. The Audit Committee's charter provides that it will discuss our major financial risk exposures and the steps we have taken to monitor and control such exposures. The Board has also delegated primary responsibility of the oversight of all executive compensation and the Company's employee benefit programs to the Compensation Committee. The Compensation Committee strives to create incentives that encourage a level of risk-taking behavior consistent with the Company's business strategy.

We believe the division of risk management responsibilities described above is an effective approach for addressing the risks facing the Company and that our Board leadership structure provides appropriate checks and balances against undue risk taking.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act and the rules of the SEC require our directors, certain officers and beneficial owners of more than 10% of our outstanding common stock to file reports of their ownership and changes in ownership of our common stock with the SEC. We believe all Section 16 reports were filed in a timely manner during 2011, except that one Form 4 to report option grants made on May 18, 2011 was not filed timely by Mr. Tuttle, Mr. Richards and Mr. Frevert each.

Item 11.Executive Compensation.

COMPENSATION DISCUSSION AND ANALYSIS
Our compensation philosophyThe information required by this item is designed to support our key objective of creating value for our stockholdersincorporated by growing our revenues, growing our earnings, increasing our total market capitalization and growing our share price.

This Compensation Discussion and Analysis explains our compensation objectives, policies and practices with respect to Craig Tuttle, President and Chief Executive Officer; Brett Frevert, Chief Financial Officer, and Chad Richards, Chief Commercial Officer, whom are collectively referred to as the "named executive officers" or, in this “Compensation Discussion and Analysis” section, our executives.

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Objectives of Our Executive Compensation Programs
Our compensation programs for our named executive officers are designed to achieve the following objectives:

•    attract and retain high performing and experienced executives;

•    motivate and reward executives whose knowledge, skills and performance are critical to our success; 

align the interests of our executives and stockholders by motivating executives to increase stockholder value and rewarding executives when stockholder value increases;

•    foster a shared commitment among executives by coordinating their goals; 

motivate our executives to manage our business to meet our short and long-term objectives, and reward them for meeting these objectives.
Role of our Compensation Committee
We have a Compensation Committee that has the primary purpose of providing oversight of all executive compensation and the Company's employee benefit programs. The Compensation Committee's responsibilities include, but are not limitedreference to the direct responsibility for the following:
Review and approve corporate goals and objectives relevant to CEO and other executive officers' compensation, evaluate performance in light of these goals and objectives, and determine and approve the compensation level for the CEO and other executive officers based on this evaluation.

Make recommendations to the Board of Directors with respect to incentive-compensation plans and equity-based plans.
Adoption of stock option and other long-term incentive plans and approval of individual grants and awards.
Adoption of executive annual incentive plans and approval of total incentive payments and individual awards to the President, CEO and other executive officers.
Adoption of benefit plans, including profit sharing and supplemental retirements plans.  
Adoption of executive perquisite programs.
Annual evaluation and appraisal of President and CEO performance.
Approval of all employment agreements for President, CEO and other executives.  
Annual review of non-employee Director compensation programs and recommendation of changes to the Board of Directors when appropriate.
Our Chief Executive Officer makes recommendations to our Compensation Committee regarding the compensation of all executive officers, excluding his own, but our Compensation Committee is ultimately responsible for approving this compensation.


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Role of Our CEO and Executive Management
Our CEO annually evaluates the performance of each executive and, based on that review, may recommend changes in the executive's compensation to the Compensation Committee. This review includes a performance appraisal that takes into consideration various factors, including, without limitation, the following:
•the ability of the executive to drive results for the Company;
•the executive's understanding of the Company's business and his/her organizational savvy;
•the ability of the executive to make complex decisions and his/her strategic abilities;
•the executive's ability to manage work process;
•the communication skills of the executive; and
•the executive's ability to manage diversity and ethics.

The CEO's review also includes a determination of each executive's leadership attributes along with other key accomplishments during the review period. Our Company is an evolving company, and executives' roles and scope of work, and the size and geographical diversity of the groups they manage are subject to change. As an executive's role changes, our CEO may recommend changes to the executive's compensation to the Compensation Committee.

The CEO's compensation recommendations may include changes in base salary and incentive bonus, additional equity grants or modifications to standard vesting schedules that are deemed to be in the best interest of the Company.
Peer Group Information and Benchmarking

In connection with compensation decisions in 2011, our Compensation Committee, with the assistance of the Chief Executive Officer and other Company employees, reviewed market compensation data paid by companies in the biopharmaceutical industry as reported by Top 5 Data Services, Inc. (the “2011 Competitive Analysis”). The 2011 Competitive Analysis contained data from 342 publicly traded companies within the biopharmaceutical industry covering the details of compensation for 1,249 top executives. Our Chief Executive Officer, in consultation with the Chairman of the Compensation Committee, reviewed all of the data contained in the 2011 Competitive Analysis and then selected companies with annual revenue of between $25 million and $149.9 million and between 100 and 500 employees to be used as peer group companies for purposes of benchmarking.
The Compensation Committee and management used the peer group compensation data selected from the 2011 Competitive Analysis primarily to ensure that the total direct compensation for our executives and senior management is within a reasonable range of comparative pay of our peer group companies. While this market data provides a useful starting point for compensation decisions, our Compensation Committee also takes into account factors such as level of individual responsibility, prior experience and performance in arriving at final compensation decisions.
Generally, neither management nor the Compensation Committee utilizes the services of independent compensation consultants in connection with the establishment of executive compensation other than to obtain independent third-party benchmarking surveys similar to the 2011 Competitive Analysis discussed above.


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Elements of 2011 Executive Compensation

Our executive compensation program is comprised of the following principal elements, each of which is described in more detail below:

Element of CompensationPurposePay-for-Performance Considerations
Cash and Short-Term Variable Compensation:
Base CompensationProvides competitive, fixed compensation to attract and retain exceptional executive talentAdjustments to base salary consider the individual's overall performance, contribution to the business and internal and external comparisons
Cash BonusEncourages and rewards achievement of strong financial, operational and strategic performance by the CompanyThe amount of any discretionary bonus received by an executive officer, if any, depends on the degree we achieve strong annual financial, operational or strategic performance and the extent to which the executive officer contributes to the achievement
Long-Term Compensation:
Stock OptionsEncourages executive officers to focus on the long-term performance of the Company, links an executive officer's incentives to our stockholders' interests in increasing our stockholder value, encourages significant ownership of our common stock and promotes long-term retention of our executives officersThe potential appreciation in our stock price above the exercise price for stock options motivates our executives to build stockholder value as the executive officer only realizes value from the stock option if the stock price appreciates
Other Elements:
Health, Retirement and Other BenefitsProvides broad-based market competitive employee benefits program such as participation in benefit plans generally available to our employees, including, employee stock purchase plan, 401(k) retirement plan, life, health and dental insurance and short-term and long-term disability plansNot applicable

Base Compensation
We pay our Chief Executive Officer and Chief Commercial Officer a base salary, which we review and determine annually. We believe that a competitive base salary is a necessary element of any compensation program that is designed to attract and retain talented and experienced executives. We also believe that attractive base salaries can motivate and reward executives for their overall performance. Although base salaries are established in part based on the individual experience, skills and expected contributions during the coming year as well as each executive's performance during the prior year, we do not view base salaries as primarily serving our objective of paying for performance. Our Chief Financial Officer does not receive a base salary directly from the Company. We pay our Chief Financial Officer in accordance with a letter agreement with CFO Systems, LLC, under which CFO Systems provides financial leadership and consulting services to us. See "Agreements with Our Named Executive Officers - CFO Systems Letter Agreement."
It is our goal to maintain a base compensation structure among our executives that, in our judgment, appropriately reflects their respective roles and responsibilities. Our executives' base compensation reflects the initial amounts that we negotiated with each of our executives at the time of his or her initial employment or promotion and our subsequent adjustments to these amounts, to reflect market increases, our growth, the individual executives' performance and increased experience, any changes in the individual executives' roles and responsibilities and other factors. Generally, the base compensation of our executives is based on our understanding of compensation for comparable positions at similarly situated companies at the time, the individual experience and skills of, and expected contribution from each executive, the roles and responsibilities of the executive, the base compensation of our existing executives and other factors.

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2011 Cash Incentive Bonus
During 2011, the Compensation Committee relied on a discretionary bonus program for its executives which left the decision of whether an executive, including a named executive officer, received a bonus to the discretion of the Compensation Committee. In exercising this discretion, the Compensation Committee had the authority to set desired goals and targets for the executive officer or consider other performance goals, current economic conditions and exceptional and/or inadequate performances by each executive officer when evaluating whether and to what extent to award bonuses. The discretionary bonus awards earned by our named executive officers in 2011 areinformation set forth in the “Summary Compensation Table” belowsections titled “2013 Executive Compensation” and “Director Compensation” in the section below entitled "Analysis of Named Executive Officer Compensation."
2012 Bonus Plan
In 2012, the Compensation Committee established an incentive bonus plan (the “2012 Bonus Plan”) which provides variable incentive compensation to our executives, including our named executive officers, and senior management. The 2012 Bonus Plan provides bonus opportunities tied to specific corporate-level and individual goals for payments ranging from 0% of the applicable bonus opportunity, if the threshold performance levels are not attained, to 225% of the applicable bonus opportunity, if all performance is above the levels established to qualify for maximum payouts. Performance attainment levels of the targeted performance objectives range from 5% to 60% and correspond to payment levels ranging from 0% to 225% of the target bonus opportunity.
The 2012 Bonus Plan provides that payments senior management, excluding our named executive officers, will be paid as cash bonuses. However, with respect to our named executive officers, the plan provides that our named executive officers will be paid as follows:
Target Attainment PercentageForm of Payment
100%Cash
Above 100%
50% Cash
50% Restricted Stock
The Compensation Committee believes that providing for payment of a portion of the incentive compensation earned by our named executive officers supports links the executives' incentives to our stockholders' interests in increasing stockholder value and provides executive officers with incentives to stay. We also believe that the payment of on-target performance, and a portion of above-target performance as a cash incentive supports our pay for performance philosophy and encourages an executive officer's contribution to, and rewards an executive officer for, Company-wide performance and the attainment of specific operational and financial goals that are controlled by or can be directly impacted by the executive officer.
Individualized bonus plans are established for each participant, including our named executive officers, with performance metrics and related targets that include a mix of company-level financial metrics and business unit or individual metrics tailored to include the important factors under the executive's control. The company-level metrics consist of net revenue, MEBITDA and a p/s multiple.The individual performance metrics are specific operational and financial goals that are controlled by or can be directly impacted by the individual and include for instance, objectives related implementation of investment relations, product initiatives and other corporate strategies, organizational development, targeted product revenues as well as other objectives tailored to the individual The objective of the 2012 Bonus Plan is to encourage executives to contribute toward the attainment of the Company's consolidated financial and performance goals for fiscal year 2012. See “Analysis of Named Executive Officer Compensation” below for the on-target bonus opportunities awarded to our named executive officers under the 2012 Bonus Plan.
Long-Term Equity Incentive Compensation
We grant long-term equity incentive awards in the form of stock options to executives as part of our total compensation package. We place a significant emphasis on performance-based incentive compensation. These awards generally represent a significant portion of total executive compensation. We use long-term equity incentive awards in order to align the interests of our executives and our stockholders by providing our executives with strong incentives to increase stockholder value and a significant reward for doing so. Our decisions regarding the amount and type of long-term equity incentive compensation and relative weighting of these awards among total executive compensation have also been based on our understanding of market practices and take into account additional factors such as level of individual responsibility, experience and performance.

 Stock option awards provide our executive officers with the right to purchase shares of our common stock at a fixed exercise price typically for a period of up to ten years, subject to continued employment with our Company. Stock options are earned based on continued service to us and generally vest over three years, with one-third vesting on each anniversary of the date grant.

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All our stock options awards are granted pursuant to our 2006 Equity Incentive Plan (the “2006 Incentive Plan”) and the exercise price of each stock option granted under our 2006 Incentive Plan is based on the fair market value of our common stock on the grant date. Under the term of the 2006 Incentive Plan, when the Company is not listed on a national stock exchange but traded on an over-the-counter market, fair market value is defined as the average of the bid and ask price of our common stock on the trading date immediately preceding the grant date. See “Equity Incentive Plan and Other Compensation Plans - 2006 Equity Incentive Plan” for additional information on the 2006 Incentive Plan.
Broad-Based Benefits Programs
All full-time employees in the United States, including our named executive officers, may participate in our health and welfare benefit programs, including medical coverage, dental coverage, disability insurance, life insurance and our 401(k) plan. We offer similar plans in foreign countries.

Equity Incentive Plan and Other Compensation Plans
2006 Equity Incentive Plan.
The Company's 2006 Incentive Plan allows the Company to make awards of various types of equity-based compensation, including stock options, dividend equivalent rights (“DERs”), stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other awards, to employees and directors of the Company. The 2006 Incentive Plan provides that the total number of shares of common stock that the Company may issue is 10,000,000 shares under the 2006 Incentive Plan; provided, that no more than 5,000,000 of such shares may be used for grants of restricted stock, restricted stock units, performance units, performance shares and other awards. As of March 7, 2012, there were 4,157,333 outstanding options granted under the 2006 Incentive Plan, of which 2,251,378 may be exercised at this time.

The 2006 Incentive Plan is administered by the Compensation Committee of the Board of Directors which has the authority to set the number, exercise price, term and vesting provisions of the awards granted under the 2006 Incentive Plan, subject to the terms thereof. Either incentive or non-qualified stock options may be granted to employees of the Company, but only non-qualified stock options may be granted to non-employee directors and advisors. However, in either case, the 2006 Incentive Plan requires that stock options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Options issued under the 2006 Incentive Plan vest over periods as determined by the Compensation Committee and expire ten years after the date the option was granted. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period).
Employee Savings Plan.
The Company maintains an employee savings plan that is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code. This plan allows for voluntary contributions up to statutory maximums by eligible employees. Historically, we matched a specific proportion of these contributions, subject to limitations imposed by law. We may make additional contributions to the savings plan on behalf of our employees if our Board of Directors decides to do so. For the year ended December 31, 2009 we discontinued matching 401(k) contributions for the third and fourth quarters due to our expense reduction initiatives. We reinstated matching 401(k) contributions for the first three quarters of 2010; however, effective October 1, 2010, we again discontinued matching 401(k) contributions. Our named executive officers are eligible to participate in the 401(k) retirement plan. We did not make any matching contributions to any employees, including our named executive officers, during 2011.

Analysis of Named Executive Officer Compensation

In connection with establishment of 2011 compensation for our named executive officers, our Chief Executive Officer and the Compensation Committee reviewed the market compensation data contained in the 2011 Competitive Analysis. Our Chief Executive Officer, in consultation with the Chairman of our Compensation Committee, identified the comparable positions for each of our named executive officers in the 2011 Competitive Analysis based on their positions and responsibilities. Our Chief Executive Officer then made compensation recommendations for our executives, excluding his own, and senior management. Although our Chief Executive Officer makes executive compensation recommendations to the Compensation Committee, the Compensation Committee is ultimately responsible for approving all executive compensation.

The Compensation Committee considered the Chief Executive Officer recommendations and also reviewed the 2011 Competitive Analysis to ensure that the compensation programs for our key senior managers, including our named executive

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officers, are consistent with our compensation philosophy and remain within broadly competitive norms.

In addition to reviewing competitive market data, the Compensation Committee also believes that individual compensation should reflect an executive officer's position and value to our organization considering individual contribution to business results, knowledge and skills, and market value and that individual compensation should also take into consideration long-term potential of the executive officer to contribute to our financial position and retention concerns, if any, for individual executives.
In determining our Chief Executive Officer's compensation, in addition to a review of the 2011 Competitive Analysis, the Compensation Committee specifically considers the Board of Director's evaluation of the his performance.
After reviewing the 2011 Competitive Analysis and considering the recommendations made by our Chief Executive Officer, the Compensation Committee determined the terms and amount of compensation to pay to each of our executive officers.
Set forth below is a summary of the decisions related to 2011 executive compensation for each of our named executive officers made during 2011 as well as additional information regarding decisions made related to the 2012 executive compensation for our named executive officers.
Craig J. Tuttle, President and Chief Executive Officer
The Compensation Committee reviews our Chief Executive Officer's compensation and the terms of his employment agreement on an annual basis in connection with the review of all other executive officers' compensation. See “Agreements with Our Named Executive Officers - CEO Employment Agreement” for additional information on the Mr. Tuttle's employment agreement. Based on a review of the 2011 Competitive Analysis, Mr. Tuttle received a grant of 500,000 stock option awards but he did not receive an increase to his base salary; therefore, his base salary of $325,000 remained the same. The Compensation Committee also awarded a discretionary cash bonus to Mr. Tuttle in the amount of $10,000 in recognition of his performance during 2011, including, without limitation, his integration of the FAMILION product line into the Company's operations and his effective management of costs.
In 2012, based on a review of the performance of Mr. Tuttle during 2011 and the first quarter of 2012 which included the cost effective management and the successful completion of a private placement offering, the Compensation Committee increased Mr. Tuttle's base salary from $325,000 to $350,000, a 7.7% increase, effective March 1, 2012 which reflects the first increase in Mr. Tuttle's base salary since 2008. Under the 2012 Bonus Plan, Mr. Tuttle's annual on-target bonus opportunity is $175,000.
Brett L. Frevert, Chief Financial Officer
Mr. Frevert serves as Chief Financial Officer pursuant to the terms a letter agreement with CFO Systems and therefore, Mr. Frevert does not receive a base salary; rather, payments for Mr. Frevert's services are paid directly to CFO Systems. See “Agreements with Our Named Executive Officers - CFO Systems Letter Agreement” for additional information on the terms of this letter agreement. During 2011, we paid CFO Systems $242,250 Mr. Frevert's services. Based on a review of the 2011 Competitive Analysis, Mr. Frevert received a grant of 250,000 stock option awards. The Compensation Committee also awarded a discretionary cash bonus to Mr. Frevert in the amount of $5,000 in recognition of his performance during 2011, including, without limitation, his support of the integration of the FAMILION business into the Company's operations, the successful audit of the FAMILION line of business and his cost effective management of the senior financial officers and our financial resources.
Under the 2012 Bonus Plan, Mr. Frevert's annual on-target bonus opportunity is $125,000.
Chad M. Richards, Chief Commercial Officer
Based on a review of the 2011 Competitive Analysis, the Compensation Committee increased Mr. Richards' base salary from $188,708 to $199,167, a 5.5% increase and he received a grant of 250,000 stock options. During 2011, Mr. Richards also participated in the Company's 2011 sales incentive plan which was available for all Company sales personnel. This plan provided Mr. Richards with an opportunity to receive incentive compensation based on total net sales as reported in the Company's quarterly financial statements. Mr. Richards' annual on-target incentive opportunity under this plan was $100,000. Because the Company did not achieve the net sales performance target, Mr. Richards did not receive any compensation under this plan. The Compensation Committee also awarded a discretionary cash bonus to Mr. Richards in the amount of $6,000 in recognition of his performance during 2011, including, without limitation, his effective integration of the FAMILION product line into the Company's operations.
During 2012, Mr. Richards will not participate in the Company's sales incentive plan, but he will participate in the 2012 Bonus Plan. Under the 2012 Bonus Plan, Mr. Richards' annual on-target bonus opportunity is $125,000.


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Tax and Accounting Implications
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code, as amended (the “Code”) limits the deductibility of compensation in excess of $1 million paid to our named executive officers, unless the compensation qualifies as “performance-based compensation.” Among other things, in order to be deemed performance-based compensation, the compensation must be based on the achievement of pre-established, objective performance criteria and must be pursuant to a plan that has been approved by our stockholders. It is intended that all performance-based compensation paid in 2011 to our named executive officers under the plans and programs described above will qualify for deductibility, either because the compensation is below the threshold for non-deductibility provided in Section 162(m) of the Code, or because the payment of amounts in excess of $1 million qualify as performance-based compensation under the provisions of Section 162(m) of the Code.

We believe that it is important to continue to be able to take all available company tax deductions with respect to the compensation paid to our named executive officers. Therefore, we believe we have taken all actions that may be necessary under Section 162(m) of the Code to continue to qualify for all available tax deductions related to executive compensation. However, we also believe that preserving flexibility in awarding compensation is in our best interest and that of our stockholders, and we may determine, in light of all applicable circumstances, to award compensation in a manner that will not preserve the deductibility of such compensation under Section 162(m) of the Code.
Accounting for Share-Based Compensation

We account for share-based compensation awards, including our stock options, in accordance with the requirements of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation - Stock Compensation (formerly FASB Statement 123R, “Share-Based Payment”). Before we grant stock-based compensation awards, we consider the accounting impact of the award as structured and under various other scenarios in order to analyze the expected impact of the award.

Agreements with Our Named Executive Officers
CEO Employment Agreement
The Company has entered into an employment agreement dated July 12, 2008 with Craig J. Tuttle, our President and Chief Executive Officer. The employment agreement provides that the term of the agreement will be one year, but shall be automatically extended for additional one year terms unless either the Company or Mr. Tuttle provides written notice to the other of an intention not to extend no later than sixty (60) days prior to the end of the then current term. The employment agreement automatically renewed for an additional year ending on July 12, 2012.

The employment agreement provides that Mr. Tuttle will be entitled to receive severance payments from the Company if his employment is terminated involuntarily except if such termination is based on “just cause”, as that term is defined in the employment agreement. The severance payment payable in such circumstances is equal to his annual base salary at the time of termination and will be paid to him over a twelve-month period. The employment agreement provides that the severance payment provisions will be honored if the Company is acquired by, or merged into, another company and his position is eliminated as a result of such acquisition or merger. This severance payment is designed to provide him with an amount of cash sufficient to provide for living expenses and other needs which would normally be paid from his monthly base salary payments in situations where the executive officer's employment was not terminated voluntarily or for just cause. In addition, the payments are designed so as to not exceed the maximum amount which may be paid without imposition of the excise tax imposed by Section 4999 of the Internal Revenue Code or resulting in a loss of the Company's income tax deduction for any portion of these payments under Section 280G of the Internal Revenue Code if such payments are made after, or in contemplation of, a change of control transaction.
CFO Systems Letter Agreement
Effective June 30, 2010, we entered into a letter agreement with CFO Systems and Brett L. Frevert. Under the letter agreement CFO Systems will provide financial and consulting services to us at rates of $75 to $150 per hour depending on the level of expertise involved. The services will include providing Chief Financial Officer duties and other financial and accounting expertise on a time share basis. The letter agreement provides that either CFO Systems or the Company may terminate the agreement upon thirty (30) days written notification. In connection with the letter agreement, Mr. Frevert agreed to serve as our Chief Financial Officer. We were charged $405,763 and $126,459 for the services provided by CFO Systems during 2011 and 2010, respectively. The 2011 fees included $242,250 for Mr. Frevert's services and $150,327 for other professionals services, primarily related to support the audit of the FAMILION business and the integration of it into our ongoing business.

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Compensation Risk Analysis

We have reviewed our material compensation policies and practices for all employees and have concluded that these policies and practices are not reasonably likely to have a material adverse effect on the Company. While risk-taking is a necessary part of growing a business, our compensation philosophy, as discussed above is focused on aligning compensation with the long-term interests of our stockholders as opposed to rewarding short-term management decisions that could pose long-term risks.


REPORT OF THE COMPENSATION COMMITTEE
We, the Compensation Committee of the Board of Directors of the Company, have reviewed and discussed the Compensation Discussion and Analysis set forth above with the management of the Company, and, based on such review and discussion, have recommended to the Board of Directors inclusion of the Compensation Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 and its2014 Proxy Statement for the 2012 Annual Meeting of Stockholders.

MEMBERS OF THE COMPENSATION COMMITTEE:
Antonius P. Schuh, Ph.D.
Rodney .S. Markin, MD, Ph,D.
Robert M. Patzig



Compensation Committee Interlocks And Insider ParticipationStatement.

No member of the Compensation Committee was at any time during 2011, or at any other time, an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board or its Compensation Committee.


2011 EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth compensation awarded to, paid to, or earned by our "named executive officers" for services rendered during fiscal years 2011, 2010 and 2009.
Name and Principal Position Year Salary ($) Bonus ($) 
Option Awards(1) $
 All Other Compensation ($) Total ($)
Craig J. Tuttle (2) 
 2011 $325,000
 $10,000
 $457,950
 $12,102
 $805,052
President and 2010 325,000
 —
 —
 18,377
(3) 
343,377
Chief Executive Officer 2009 325,000
 —
 —
 17,559
(3) 
342,559
             
Brett L. Frevert (4)
 2011 —
 5,000
 228,975
 242,250
(4) 
476,225
Chief Financial Officer 2010 —
 —
 —
 96,225
(4) 
96,225
             
Chad M. Richards(5)
 2011 199,167
 6,000
 228,975
 9,338
(6) 
443,480
Chief Commercial Officer 2010 188,708
 —
 —
 13,476
(6) 
202,184
  2009 182,250
 —
 —
 11,340
(6) 
193,590

(1) The amounts in this column reflect the aggregate grant date fair value of the stock option awards granted during the respective fiscal year as computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation--Stock Compensation ("FASB ASC Topic 718"), excluding the effect of estimated forfeitures. The amounts shown do not correspond to the actual value that will be recognized by the named executive officer. The assumptions used in the calculation of these amounts are included in footnote B. to the Company's audited financial statements for the fiscal year ended December

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31, 2011 included in this Annual Report. See the "2011 Grants of Plan-Based Awards" table for information on stock options granted in 2011.
(2) See “Agreements with Our Named Executive Officers--CEO Employment Agreement” for a description of Mr. Tuttle's employment agreement with the Company.

(3) Amounts paid to Mr. Tuttle in 2011 consisted of an automobile allowance as provided in his employment agreement, group life insurance and long term disability insurance. Amounts paid to Mr. Tuttle in 2010 and 2009 consisted of an automobile allowance as provided in his Employment Agreement, a 401(k) matching contribution, group life insurance and long term disability insurance.

(4) Mr. Frevert began serving as our Chief Financial Officer effective June 30, 2010 when we entered into a letter agreement with CFO Systems relating to his service. All compensation received by Mr. Frevert represents amounts paid to CFO Systems for Mr. Frevert's services as our Chief Financial Officer. See “Agreements with Our Named Executive Officers - Letter Agreement with CFO Systems” for a description of the arrangement with CFO Systems.

(5) Mr. Richards joined the Company as Senior Vice President, Sales and Marketing on October 8, 2007 and was promoted to Chief Commercial Officer in January 2011.

(6) Amounts paid to Mr. Richards in 2011 consisted of group life insurance and long term disability insurance Amounts paid to Mr. Richards in 2010 and 2009 consisted of a 401(k) matching contribution, group life insurance and long term disability insurance.


2011 Grants of Plan-Based Awards

The following table sets forth certain information with respect to grants of plan-based awards in fiscal year 2011 to our named executives. The option awards granted to our named executive officers in fiscal year 2011 were granted under our 2006 Incentive Plan. The option awards during 201l have time-based vesting, with one-third vesting occurring evenly during each of the first three years from the date of grant. Each option award has a term of ten years.
Name Grant Date All Other Option Awards: Number of Securities Underlying Options (#) 
Exercise or Price of Option Awards ($/sh) (1)
 
Grant Date Fair Value of Option Awards ($)(2)
Craig J. Tuttle 5/18/2011 500,000
 $1.19
 $457,950
Brett L. Frevert 5/18/2011 250,000
 $1.19
 228,975
Chad M. Richards 5/18/2011 250,000
 $1.19
 228,975

(1)The exercise price of stock options awarded represents the fair market value of our common stock on the date of grant as defined in our 2006 Incentive Plan.

(2) The amounts in this column reflect the aggregate grant date fair value of the stock option awards granted during the respective fiscal year as computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The amounts shown do not correspond to the actual value that will be recognized by the named executive officer. The assumptions used in the calculation of these amounts are included in footnote B. to the Company's audited financial statements for the fiscal year ended December 31, 2011 included in this Annual Report.

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Outstanding Equity Awards at Fiscal 2011 Year-End

The following table provides certain information concerning outstanding option awards held by our named executive officers as of December 31, 2011.
    Option Awards
 NameOption Award / Grant Date Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Option Expiration Date
 
 Craig J. Tuttle9/1/2006 200,000
 —
 $0.69
 8/31/2016
 Craig J. Tuttle1/17/2007 200,000
 —
 0.75
 1/16/2017
 Craig J. Tuttle7/12/2007 200,000
 —
 0.66
 7/11/2017
 Craig J. Tuttle5/18/2011 —
 500,000
 1.19
 5/17/2021
 Brett L. Frevert5/18/2011 —
 250,000
 1.19
 5/17/2021
 Chad M. Richards10/8/2007 200,000
   0.69
 10/7/2017
 Chad M. Richards5/18/2011 —
 250,000
 1.19
 5/17/2021


Fiscal Year 2011 Option Exercises and Stock Vested
No stock options were exercised by any of our named executive officers during fiscal year 2011.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

Except for the employment agreement with Mr. Tuttle and the letter agreement with CFO Systems and Mr. Frevert described above, none of our named executive officers have employment or severance agreements with the Company and their employment may be terminated at any time; provided; however, the services of Mr. Frevert are governed by a letter agreement between the Company, CFO Systems and Mr. Frevert which requires thirty days written notice prior to termination.

2006 Equity Incentive Plan

Stock Options.  The 2006 Incentive Plan provides that if an optionee, including a named executive officer, voluntarily terminates employment with the Company, all unvested stock options will terminate and the optionee will have three months from the date of termination to exercise any vested stock options granted under the 2006 Incentive Plan. However, the 2006 Incentive Plan also provides that if the optionee's employment terminates due to death, disability or retirement, all stock options will immediately vest upon the optionee's death or disability and the optionee (or his or her estate or personal representative) will have twelve months from the date of death, disability or retirement to exercise the stock options; provide, such optionee had continuously served as an employee, director or advisor for at least three years, or such shorter period as the Compensation Committee may prescribe. The plan also provides that all stock options will immediately vest upon the occurrence of a change-in-control of the Company.

Potential Post Termination Benefits Table

The tables below quantify certain compensation that would have become payable to our named executive officers in the event such executive officer's employment had terminated on December 31, 2011 under various circumstances. The estimates set forth in the table below are based on our named executive officers' compensation and service levels as of such date and, if applicable, the closing stock price of our common stock on that date which was $1.29. These benefits are in addition to benefits generally available to salaried employees such as distributions under our 401(k) Plan, disability benefits and accrued vacation pay.

Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed to our named executive officers may be different. Factors that could affect these amounts

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include the timing of any such event, our stock price and the executive's age.

Name Benefit Cause 
Without Cause(1)
 Voluntary Termination 
Change in Control(2)
 
Death(2)
 
Disability(2)
 
Retirement(2)
Craig. J. Tuttle Cash $—
 $350,000
 $—
 $350,000
 $—
 $—
 $—
  Stock options —
 354,000
 —
 404,000
 404,000
 404,000
 404,000
  Benefits —
 —
 —
 —
 —
 —
 —
  Total $—
 $704,000
 $—
 $754,000
 $404,000
 $404,000
 $404,000
              
  
Brett L. Frevert Cash $—
 $—
 $—
 $—
 $—
 $—
 $—
  Stock options —
 —
 —
 25,000
 25,000
 25,000
 25,000
  Benefits —
 —
 —
 —
 —
 —
 —
  Total $—
 $—
 $—
 $25,000
 $25,000
 $25,000
 $25,000
                 
Chad M. Richards Cash $—
 $—
 $—
 $—
 $—
 $—
 $—
  Stock options —
 120,000
 —
 145,000
 145,000
 145,000
 145,000
  Benefits —
 —
 —
 —
 —
 —
 —
  Total $—
 $120,000
 $—
 $145,000
 $145,000
 $145,000
 $145,000

(1) The amount reflected for stock options is equal to the number of stock options exercisable as of December 31, 2011 multiplied by the difference between the stock price as of that date ($1.29) and the stock option exercise price. The value represents the net proceeds the named executive would have earned as of that date assuming exercise of the stock options.

(2) The amount reflected for stock options is equal to the total number of stock options outstanding as of December 31, 2011 multiplied by the difference between the stock price as of that date ($1.29) and the stock option exercise price. The value represents the net proceeds the named executive would have earned as of that date assuming exercise of the stock options.

DIRECTOR COMPENSATION

It is our Board's general policy that compensation for independent directors should be a mix of cash and equity-based compensation. As part of a director's total compensation, and to create a direct linkage with corporate performance and stockholder interests, our Board believes that a meaningful portion of a director's compensation should be provided in, or otherwise based on, the value of appreciation in our common stock.

Our Board of Directors has the authority to approve all compensation payable to our directors, although our Compensation Committee is responsible for making recommendations to our Board regarding this compensation. Additionally, our Chief Executive Officer may also make recommendations or assist our Compensation Committee in making recommendations regarding director compensation. Our Board of Directors and Compensation Committee annually review our director compensation. In connection with director compensation decisions in 2011, our Board and the Compensation Committee reviewed market director compensation data paid by companies in the life sciences industry as reported by Top 5 Data Services, Inc. (the “2011 Director Competitive Analysis”). The 2011 Director Competitive Analysis contained data for 217 publicly traded medical device (“MD) companies and 331 biopharmaceutical companies, with 65 companies assigned to both sectors based on their mix of products. Based on its review of the 2011 Director Competitive Analysis, the Board made changes to our director compensation program which are further discussed below.
Cash Compensation
Directors who are also employees of the Company are not separately compensated for serving on the Board of Directors

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other than reimbursement for out-of-pocket expenses related to attendance at Board and committee meetings. Independent directors are paid an annual retainer of $20,000 and they receive reimbursement for out-of-pocket expenses related to attendance at Board and committee meetings. Independent directors serving on any committee of the Board of Directors are paid an additional annual retainer of $2,500 unless they are also a chairman of a committee. The chairman of the Audit Committee receives an additional annual retainer of $8,000 and the chairman of any other committee receives an additional annual retainer of $4,000. All directors' fees paid annually or quarterly were prorated for partial periods. In addition, any independent director who attends more than four meetings per quarter, which includes committee meetings, receives $500 for each meeting attended over the four.
Equity-Based Compensation
Our practice during 2010 was to grant each new independent director an option to purchase 15,000 shares of common stock under our 2006 Incentive Plan at the next Compensation Committee meeting following a director's initial appointment to the Board. The options granted to an independent director upon initial appointment to the Board vested at the rate of 33 1/3% per year of service on the Board.

Beginning in 2011, our practice changed to grant each new independent director an option to purchase 40,000 shares of common stock under our 2006 Incentive Plan at the next Compensation Committee meeting following a director's initial appointment to the Board, which option vests after one (1) year.

Our practice during 2010 was to grant annually to each continuing independent director an option to purchase 5,000 shares of common stock, which option vested after three (3) years.
Our practice changed in 2011 to grant annually to each continuing independent director an option to purchase 25,000 shares of common stock, which option vests after one (1) year. Additional annual grants of options will be made each year by the Compensation Committee in its sole discretion. All options granted to independent directors have exercise prices that represented the fair market value of our stock on the grant date.

On March 2, 2011 (the grant date), our independent directors were each granted a non-qualified option to purchase 25,000 shares of our common stock with an exercise price equal to $0.74.

Director Summary Compensation Table

The following table provides information regarding the Company's compensation for non-employee directors during the year ended December 31, 2011. Directors who are employees of the Company do not receive compensation for serving on the Board of Directors or its committees.
Name Fees Earned or Paid in Cash ($) 
Option Awards $ (1)
 Total ($)
       
Doit Koppler $21,000 $23,309 $44,309
Robert Patzig 18,750 23,309
 42,059
Rodney Markin, M.D., Ph.D. 25,375 14,568
 39,943
Antonius Schuh, Ph.D 23,625 14,568
 38,193

(1) The amounts reflected in this column reflect the grant date fair value of each option award granted during 2011, as determined in accordance with FASB ASC Topic 718.The amounts shown do not correspond to the actual value that will be realized by the independent director. The assumptions used in the calculation of these amounts are included in footnote B. to the Company's audited financial statements for the fiscal year ended December 31, 2011, included in this Annual Report. The grant date fair value of the options granted to our independent directors on March 2, 2011 was $0.58 per option. The aggregate grant date fair value for all options granted to our independent directors on March 2, 2011 was $75,754.

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The following table sets forth each independent director's aggregate number of option awards outstanding as of December 31, 2011:

Name Vested Stock Option Awards Unvested Stock Option Awards Aggregate Stock Option Awards
Doit Koppler, II —
 40,000
 40,000
Robert Patzig —
 40,000
 40,000
Rodney Markin, M.D., Ph.D 20,000
 35,000
 55,000
Antonius Schuh, Ph.D 10,000
 35,000
 45,000

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following equity compensation plan information summarizes plans and securities approved and not approvedrequired by security holders as of December 31, 2011.
  (a)  (b) (c)
PLAN CATEGORY 
Number of
securities to be
issued upon
exercise of
outstanding options,
warrants and rights
  
Weighted-average
exercise price of
outstanding
options, warrants
and rights
 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) )
Equity compensation plans approved by security holders (1)
 4,172,000
  $1.10
  4,944,231
 
Equity compensation plans not approved by security holders —
  —
   —
Total 4,172,000
  $1.10
  4,944,231
 
(1)Consists of our 2006 Equity Compensation Plan
Beneficialthis item is incorporated by reference to the information set forth in the sections titled “Beneficial Ownership of Common Stock

As of March 7, 2012, there were 71,625,725 issued and outstanding shares of our common stock. Each share of common stock is entitled to one vote on each matter to be voted on by the holders of our common stock at the 2012 Annual Meeting of Stockholders. Common stockholders do not have the right to cumulate votes in the election of directors.
The following table provides information known to us with respect to beneficial ownership of our common stock by our directors and all nominees for director, by those of our executive officers who are named in the Summary Compensation Table, by all of our current executive officers and directors as a group, and by each person we believe beneficially owns more than 5% of our outstanding common stock as of March 7, 2012. Except as indicated in the footnotes to this table, to our knowledge the persons named in the table below have sole voting and investment power with respect to all of common stock of the Company beneficially owned and such shares are owned directly by such person. The number of shares beneficially owned by each person or group as of March 7, 2012 includes shares of common stock that such person or group had the right to acquire on or within 60 days after March 7, 2012, including, but not limited to, upon the exercise of options or warrants to purchase common stock or the conversion of securities into common stock. Beneficial ownership information of persons other than our current executive officers and directors is based on available information including, but not limited to, Schedules 13D, 13F or 13G filed with the SEC or information supplied by these persons.


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Name and Address of Beneficial Owner(1)
 Number of Shares Beneficially Owned  Percent of Class
      
Directors and Executive Officers     
Craig J. Tuttle, President and Chief Executive Officer, Director 600,000
(2) 
 *
Brett L. Frevert, Chief Financial Officer —
(3) 
 *
Chad M. Richards, Chief Commercial Officer 243,800
(4) 
 *
Doit L. Koppler II, Director 107,500
(5) 
 *
Rodney S. Markin, M.D., Ph.D, Director 45,000
(6) 
 *
Robert M. Patzig, Director 92,500
(7) 
 *
Antonius P. Schuh, Ph.D, Director 35,000
(8) 
 *
All directors and executive officers as a group (7 persons) 1,123,800
(9) 
 1.5%
      
Other Stockholders     
LeRoy C. Kopp 14,156,661
(10) 
 19.8%
AMH Equity, LLC and Leviticus Partners, L.P. 4,621,181
(11) 
 6.5%
Kevin Douglas 4,000,000
(12) 
 5.6%
Austin W. Marxe and David M. Greenhouse 5,250,000
(13) 
 7.2%
Randal J. Kirk 20,263,131
(14) 
 22.1%
*Represents less than 1% of the outstanding common stock of the Company.

(1) The address for all of our directors and executive officers is the address of the Company's principal executive offices located at 12325 Emmet Street, Omaha, Nebraska 68164.

(2) Includes 600,000 shares issuable upon the exercise of options that are exercisable or will become exercisable within 60 days after March 7, 2012.

(3) Includes 0 shares issuable upon the exercise of options that are exercisable or will become exercisable within 60 days after March 7, 2012.

(4) Includes 43,800 shares owned by Mr. Richards and includes 200,000 shares issuable upon the exercise of options that are exercisable or will become exercisable within 60 days after March 7, 2012.

(5) Includes 50,000 shares owned by Mr. Koppler and includes 57,500 shares issuable upon the exercise of options and warrants that are exercisable or will become exercisable within 60 days after March 7, 2012.

(6) Includes 45,000 shares issuable upon the exercise of options that are exercisable or will become exercisable within 60 days after March 7, 2012.

(7) Includes 40,000 shares owned by Mr. Patzig and includes 52,500 shares issuable upon the exercise of options and warrants that are exercisable or will become exercisable within 60 days after March 7, 2012.

(8) Includes 35,000 shares issuable upon the exercise of options that are exercisable or will become exercisable within 60 days after March 7, 2012.

(9) Includes shares which may be acquired by executive officers and directors as a group within 60 days after March 7, 2012 through the exercise of stock options or warrants.

(10) Consists of shares owned directly by Mr. Kopp, shares held in individual retirement accounts established for Mr. Kopp and

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his spouse; shares held in the Kopp Family Foundation of which he is a director; and shares held in discretionary client accounts managed by Kopp Investment Advisors, LLC of which he is the Chief Executive Officer. The business address of each of these beneficial owners is 7701 France Avenue South, Suite 500, Edina, Minnesota 55435.

(11) Consists of shares held by AMH Equity, LLC which is the general partner of Leviticus Partners, L.P. The business address of this beneficial owner is 60 East 42nd Street, Suite 901, New York, New York 10165.

(12) Mr. Douglas has dispositive power over all of the shares owned by the Douglas affiliates. The Douglas affiliates include shares owned directly by James E. Douglas,III as well as shares held in the following trusts: K&M Douglas Trust, Douglas Family Trust and the Douglas Irrevocable Descendants Trust . The business address of this beneficial owner is 125 East Sir Francis Drake Boulevard, Suite 400, Larkspur, California, 94939.

(13) Includes 3,500,000 shares owned and 1,750,000 shares issuable upon the exercise of warrants that are exercisable or will become exercisable within 60 days after March 7, 2012. MGP is the general partner of the Special Situations Fund III, QP, L.P. AWM Investment Company, Inc. (“AWM”) is the general partner of MGP and the investment adviser to the Special Situations Fund III, QP, L.P.Stock”, Special Situations Private Equity Fund, L.P. and Special Situations Life Sciences Fund, L.P.  Austin W. Marxe and David M. Greenhouse are the principal owners of MGP and AWM.  Through their control of MGP and AWM, Messrs. Marxe and Greenhouse share voting and investment control over the portfolio securities of each of the funds listed above. The business address of these beneficial owner is 527 Madison Avenue, Suite 2600, New York, New York 10022.

(14) Includes 3,245,903 shares owned and consists of (i) warrants to purchase 1,500,000 shares of common stock; (ii) shares of Series A Convertible Preferred Stock (the “Preferred Stock”) convertible into 10,344,820 shares of common stock; and (iii) warrants to purchase shares of the Preferred Stock which are convertible into 5,172,408 shares of common stock. These shares and warrants are held 40% by Third Security Senior Staff 2008 LLC, 40% by Third Security Staff 2010 LLC and 20% by Third Security Incentive 2010 LLC, which companies are affiliated with the beneficial owner. Mr. Randal J. Kirk could be deemed to have indirect beneficial ownership of these shares. The business address of these beneficial owners is 1881 Grove Avenue, Radford, Virginia 24141.
Beneficial“Beneficial Ownership of Preferred Stock

As of March 7, 2012, there were 2,586,205 issuedStock” and outstanding shares of our Preferred Stock. Each share of Preferred Stock is entitled to one vote on each matter to be voted on by the Preferred Stockholders at the Annual Meeting.
The following table provides information known to us with respect to beneficial ownership of the Preferred Stock by each person we believe beneficially owns more than 5% of our outstanding Preferred Stock as of March 7, 2012. The number of shares of Preferred Stock beneficially owned by each person or group as of March 7, 2012 includes shares of Preferred Stock that such person or group had the right to acquire on or within 60 days after March 7, 2012, including, but not limited to, upon the exercise of warrants to purchase Preferred Stock. Except as indicated“Equity Compensation Plan Information” in the footnotes to this table, to our knowledge the persons named in the table below have sole voting and investment power with respect to all of the Preferred Stock beneficially owned and such shares are owned directly by such person. Beneficial ownership information of such persons is based on available information including, but not limited to, Schedules 13D, 13F or 13G filed with the SEC or information supplied by these persons.


Name and Address of Beneficial Owner Number of Shares Beneficially Owned  Percent of Class
Randal J. Kirk 3,879,307
(1) 
 100%


(1) Includes warrants to purchase 1,293,102 shares of the Preferred Stock. These shares of the Preferred Stock and warrants are held 40% by Third Security Senior Staff 2008 LLC, 40% by Third Security Staff 2010 LLC and 20% by Third Security Incentive 2010 LLC, which companies are affiliated with the beneficial owner. Mr. Randal J. Kirk could be deemed to have indirect beneficial ownership of these shares. The business address of these beneficial owners is 1881 Grove Avenue, Radford, Virginia 24141.2014 Proxy Statement.

Item 13.Certain Relationships and Related Transactions, and Director Independence.

ReviewThe information required by this item is incorporated by reference to the information set forth in the sections titled “Review and Approval of Related Person Transactions

We recognize that related person transactions can present potential or actual conflicts of interestTransactions” and create the appearance

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that our decisions are based on considerations which may not be in our best interests or the best interests of our stockholders. Accordingly, as a general matter, we prefer to avoid related person transactions. Nevertheless, we recognize that there are situations where related person transactions may be in, or may not be inconsistent with, our best interests. Pursuant to the Audit Committee Charter, the Audit Committee must review in advance and approve or reject all material transactions between the Company and a related party. The Audit Committee reviews and considers each transaction in light of the specific facts and circumstances presented. Related persons include our directors or executive officers and their respective immediate family members and 5% beneficial owners of our common stock. Our Board of Directors will also review related party transactions in accordance with applicable law and the provisions of our Third Amended and Restated Certificate of Incorporation.

In addition, our Business Ethics Policy establishes a policy on potential conflicts of interest. Under our Business Ethics Policy our directors and employees, including our executive officers, must promptly report any transaction, relationship or circumstance that creates or could be reasonably expected to create a conflict of interest. Members of our senior management, including our executive officers, and our Board of Directors may not engage in any activity giving rise to an actual or potential conflict of interest without the prior approval of the Audit Committee. Any waiver of this policy relating to our executive officers or directors may only be made by the Board of Directors and will be promptly disclosed to our stockholders as required by law or applicable exchange rules.

Third Security Convertible Promissory Notes and Conversion

On December 30, 2011, we entered into a Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with Third Security Senior Staff 2008 LLC, a Virginia limited liability company, Third Security Staff 2010 LLC, a Virginia limited liability company, and Third Security Incentive 2010 LLC, a Virginia limited liability company (collectively, the “Third Security Entities”),“Director Independence” in the aggregate amount of $3,000,000. The Third Security Entities are currently the holders of 100% of our Preferred Stock and collectively represent a more than 10% beneficial ownership interest in our common stock.

Under the Note Purchase Agreement, the Company sold to each of the Third Security Entities a convertible note which with a March 31, 2012 maturity date (collectively, the “Convertible Notes”). The Note Purchase Agreement and Convertible Notes provided for conversion of any amount remaining due to the Third Security Entities under the Convertible Notes into equity securities of the Company of the same class(es) or series and at the same price as the equity securities of the Company sold in the Company's first sale or issuance of its equity securities after December 30, 2011, in the aggregate amount of at least $3,000,000.

A majority of the disinterested directors approved the Company's entrance into the Note Purchase Agreement and issuance of the Convertible Notes to the Third Security Entities.
On February 2, 2012, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional and other accredited investors (the “Investors”) pursuant to which the Company: (i) sold to the Investors an aggregate of 19,000,000 shares of the Company's Common Stock at a price per share of $1.00 (the “Common Shares”) for aggregate gross proceeds of approximately $19,000,000; and (ii) issued to the Investors warrants (the “Warrants”) to purchase up to an aggregate of 9,500,000 shares of Common Stock with an exercise price of $1.25 per share (collectively, the “Offering”). The Warrants may be exercised, in whole or in part, at any time from February 7, 2012 until February 7, 2017 and contain both cash and “cashless exercise” features.
As part of the Offering, in connection with the conversion of the Convertible Notes, the Third Security Entities received an aggregate of 3,000,000 Common Shares (the “Third Security Common Shares”) and Warrants to purchase up to 1,500,000 shares of Common Stock (the “Third Security Warrants”) upon the same terms as the Investors. As part of the Offering, our Preferred Stock Directors, Doit L. Koppler, II and Robert M. Patzig, purchased shares Common Shares and Warrants on the same terms as the other Investors.

In connection with the Offering, we also entered into a registration rights agreement with the Investors and the Third Security Entities (the “Registration Rights Agreement”). The Registration Rights Agreement requires that the Company file a registration statement with the SEC within forty-five (45) days of the closing date of the Offering for the resale by the Investors and the Third Security Entities of all of the Common Shares, the shares of Common Stock issuable upon exercise of the Warrants, the Third Security Common Shares, the shares of Common Stock issuable upon exercise of the Third Security Warrants and all shares of Common Stock issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect thereto.

A majority of the disinterested directors approved the Company's entrance into the Note Purchase Agreement, the issuance of the Convertible Notes to the Third Security Entities and the terms of the Offering.


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Director Independence

The Company is governed by our Board of Directors. Currently, each member of our Board, other than our President and Chief Executive Officer, Craig J. Tuttle, is an independent director and all standing committees of the Board are composed entirely of independent directors, in each case under NASDAQ's independence definition. For a director to be considered independent, the Board must determine that the director has no relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Members of the Audit Committee also must satisfy a separate SEC independence requirement, which provides that they may not accept directly or indirectly any consulting, advisory or other compensatory fee from the Company or any of its subsidiaries other than their directors' compensation. In addition, under SEC rules, an Audit Committee member who is an affiliate of the issuer (other than through service as a director) cannot be deemed to be independent. The four independent members of the Board of Directors are Rodney S. Markin, M.D., Ph.D, Doit L. Koppler, II, Robert M. Patzig and Antonius P. Schuh, Ph.D.

2014 Proxy Statement.

Item 14.Principal Accountant Fees and Services.

The following table shows information about fees paid, were billed or were expected to be billedrequired by McGladrey & Pullen LLP, our independent auditor, during the fiscal years ended December 31, 2011 and 2010.
  2011 2010
Audit fees $321,005
 $205,315
Audit-related fees 25,999
 127,200
Tax fees 30,190
 34,055
All other fees —
 —
Total fees $377,194
 $366,572
Audit Fees.    McGladrey & Pullen LLP billed us for professional services rendered for the audit of our annual financial statements for those fiscal years and to review our interim financial statements included in Quarterly Reports on Form 10-Q filedthis item is incorporated by us with the SEC during that year.
Audit-Related Fees.    McGladrey & Pullen LLP billed us for audit-related services. Audit-related services generally include fees for the audits of our employee benefit plans and fees incurred in connection with services associated with SEC registration statements, periodic reports and other documents filed with the SEC. In 2010 we incurred fees relatedreference to the audits, review and consultation for our acquisition ofinformation set forth in the FAMILION family of genetic tests.
Tax Fees.    McGladrey & Pullen LLP billed us for tax services. Tax services consist primarily of planning, advice and compliance, or return preparation, for U.S. federal, state and local, as well as international jurisdictions.
All Other Fees.    McGladrey & Pullen LLP did not render any services other thansection titled “Independent Registered Public Accounting Firm” in the services described above in 2011 or 2010.2014 Proxy Statement.

Pre-Approval of Audit and Non-Audit Services

64

Under the Audit Committee Charter, the Audit Committee is required to pre-approve all audit and non-audit services to be provided to us by our independent auditor and its member firms. All services provided by our independent auditor in 2011 were pre-approved by the Audit Committee.

Part IV

Item 15.Exhibits, Financial Statement Schedules.
 
(a)The following documents are filed as part of this report:
1Financial Statements. The following financial statements of the Registrant are included in response to Item 8 of this report:

81

Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets of the Registrant and Subsidiary as of December 31, 20112013 and 2010.2012.
Consolidated Statements of Operations of the Registrant and Subsidiary for the years ended December 31, 2011, 20102013, 2012 and 2009.2011.
Consolidated Statements of Comprehensive Loss of the Registrant and Subsidiary for the years ended December 31, 2013, 2012 and 2011.
Consolidated Statements of Stockholders’ Equity of the Registrant and Subsidiary for the years ended December 31, 2011. 20102013, 2012 and 2009.2011.
Consolidated Statements of Cash Flows of the Registrant and Subsidiary for the years ended December 31, 2011, 20102013, 2012 and 2009.2011.
Notes to Consolidated Financial Statements of the Registrant and Subsidiary.
 
2Financial Statement Schedules.
All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements.
3Exhibits. The following exhibits wereare filed as required by Item 15(a)(3) of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:
†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 Registrant's Report on Form 10-Q filed on November 14, 2005.
3.2       Amended and Restated Bylaws of the Registrant (filed herewith).
4.1         Form of Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
4.2Certificate of Designation of Series A Convertible Preferred Stock dated as of December 28, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant's Report on Form 8-K filed on January 4, 2011).
*10.1       2006 Equity Incentive Plan of the Registrant (incorporated by reference to Exhibit 4(b) to Registration on Form S-8 (Registration No. 333-139999) filed on January 16, 2007.
*10.2     1999 UK Approved Stock Option Sub Plan of the Registrant (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
*10.3       Employment Agreement between the Company and Craig J. Tuttle dated July 12, 2006 (incorporated by reference to Exhibit 10.1 to Registrant's Report on Form 8-K filed on July 12, 2006.
*10.4       Amendment No. 1 to the Employment Agreement between the Company and Craig J. Tuttle, effective July 12, 2006 (incorporated by reference to Exhibit 10.1 to Registrant's Report on Form 10-Q filed on November 14, 2006.
10.5       License Agreement, dated September 1, 1994, between Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997 (incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
10.6      License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University (incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
10.7      License Agreement, dated December 1, 1989, between Cruachem Holdings Limited (a wholly owned subsidiary of the Registrant) and Millipore Corporation (incorporated by reference to Exhibit 10.13 to Registrant's Annual Report on Form 10-K filed on March 25, 2002).
10.8       Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Limited (a wholly owned subsidiary of the Registrant) and Applied Biosystems, Inc. (incorporated by reference to Exhibit 10.14

82

to Registrant's Annual Report on Form 10-K filed on March 25, 2002).
10.9     Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q filed on August 14, 2002).
10.10     License Amendment Agreement, dated June 2, 2003, by and between Geron Corporation and the Registrant (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q filed on August 12, 2003).
10.11     Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments (incorporated by reference to Exhibit 10.16 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
10.12     Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003).
10.13    Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003).
10.14     Securities Purchase Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004).
10.15     Amendment to Securities Purchase Agreement and Related Document by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004).
10.16     Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004).
10.17     Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004).
10.18     Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004).
10.19     Form of Securities Purchase Agreement by and between the Registrant and various counter-parties dated September 22, 2005 (incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed on November 14, 2005).
10.20     Common Stock Purchase Warrant by and between the Registrant and Oppenheimer & Co., Inc. dated October 27, 2005 (incorporated by reference to Exhibit 10.34 to the Registrants Annual Report on Form 10-K filed on March 31, 2006).
10.21     Letter Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated October 31, 2005 (incorporated by reference to Exhibit 10.36 to the Registrants Annual Report on Form 10-K filed on March 31, 2006).
* 10.22   Employment Agreement Extension between the Company and Craig Tuttle dated July 12, 2008 (incorporated by reference to Registrant's Report on Form 8-K filed on July 16, 2008).
10.23 License Agreement between the Company and the Dana-Farber Cancer Institute dated October 8, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on November 5, 2009).

83

10.24     License Agreement between the Company and Power3 Medical Products, Inc. dated January 23, 2009 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed on November 5, 2009).

+10.25Asset Purchase Agreement, dated November 29, 2010, by and among PGxHealth, LLC, Clinical Data, Inc. and Transgenomic, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on January 4, 2011)May 29, 2012).

+10.26
3.3
Certificate of Amendment to Asset Purchase Agreement, dated December 29, 2010, byof Third Amended and among PGxHealth, LLC, Clinical Data, Inc. and Transgenomic, Inc.Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 2.23.1 to the Registrant'sRegistrant’s Current Report on Form 8-K filed on January 4, 2011)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).

10.27     Series A Convertible Preferred Stock Purchase Agreement with Third Security dated December 29, 2010 (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on January 4, 2011).
65


10.284.2
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 on December 29, 2010 (incorporated by reference to Exhibit 4.2 to the Registrant'sRegistrant’s Current Report on Form 8-K filed on January 4, 2011).

10.294.3
Registration Rights Agreement, dated December 29, 2010, by and among Transgenomic, Inc.,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'sRegistrant’s Current Report on Form 8-K filed on January 4, 2011).

10.304.4Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc. in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.4 to the Registrant's Current Report on Form 8-K filed on January 4, 2011).

10.31Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc. in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.5 to the Registrant's Current Report on Form 8-K filed on January 4, 2011).

10.32Sublease Agreement, dated December 29, 2010, by and between Transgenomic, Inc. and Clinical Data, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on January 4, 2011).

10.33Noncompetition and Nonsolicitation Agreement, dated December 29, 2010, by and among PGxHealth, LLC, Clinical Data, Inc. and Transgenomic, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 4, 2011).

10.34Security Agreement, dated December 29, 2010, by and between PGxHealth, LLC and Transgenomic, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on January 4, 2011).
10.35First Amendment to Registration Rights Agreement dated November 8, 2011 (incorporated by reference to Exhibit 4.2 to the Registrant'sRegistrant’s Current Report on Form 8-K filed on November 14, 2011).
10.364.5Agreement Regarding Preferred Stock dated November 8, 2011 (incorporated
Form of Warrant issued by reference to Exhibit 10.1the Registrant to the Registrant's Current Report on Form 8-K filed on November 14, 2011).

10.37Convertible Promissory Note Purchase Agreement by and among the Company; Third Security Senior Staff 2008 LLC; Third Security Staff 2010 LLC; and Third Security Incentive 2010 LLC dated December 30, 2011 (incorporated by referenced to Exhibit 10.1 to the Registrant's Current ReportEntities on Form 8-K filed on January 6, 2012).

10.38Convertible Promissory Note by and between Transgenomic, Inc. and Third Security Senior Staff 2008

84

LLC dated December 30, 2011(incorporated by referenced to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 6, 2012).

10.39Convertible Promissory Note by and between Transgenomic, Inc. and Third Security Staff 2010 LLC dated December 30, 2011 (incorporated by referenced to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on January 6, 2012).

10.40Convertible Promissory Note by and between Transgenomic, Inc. and Third Security Incentive 2010 LLC dated December 30, 2011(incorporated by referenced to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on January 6, 2012).
10.41Securities Purchase Agreement entered into by and among the Company and the Investors dated February 2,7, 2012 (incorporated by reference to Exhibit 10.110.2 to the Registrant'sRegistrant’s Current Report on Form 8-K filed on February 7, 2012).
10.424.6
Form of Warrant issued by the Company to the Third Securities Entities on February 7, 2012(incorporated by referenced to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on February 7, 2012).
10.43Form of Warrant issued by the CompanyRegistrant to the Investors on February 7, 2012 (incorporated by reference to Exhibit 10.3 to the Registrant'sRegistrant’s Current Report on Form 8-K filed on February 7, 2012).
10.444.7
Form of Registration Rights Agreement entered into by and among the Company,Registrant, the Third SecuritiesSecurity Entities and the Investors dated February 2, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant'sRegistrant’s Current Report on Form 8-K filed on February 7, 2012).

21     Subsidiaries of the Registrant.
23     Consent of Independent Registered Public Accounting Firm.
24     Powers of Attorney.
31     Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**     32     Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document ***
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).
   
101.SCH4.9
 XBRL Taxonomy Extension Schema Document ***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).
   
101.CAL4.10
 XBRL Taxonomy Extension Calculation Linkbase Document ***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).
   
101.DEF*10.1
 XBRL Taxonomy Extension Definition Linkbase Document ***The Registrant’s 2006 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 28, 2014).
   
101.LAB*10.2
 XBRL Taxonomy Extension Label Linkbase Document ***1999 UK Approved Stock Option Sub Plan of the Registrant (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
   
101.PRE10.3
 XBRL Taxonomy Extension Presentation Linkbase Document ***License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
10.4
License Agreement, dated December 1, 1989, between Cruachem Holdings Limited (a wholly owned subsidiary of the Registrant) and Millipore Corporation (incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed on March 25, 2002).
10.5
Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Limited (a wholly owned subsidiary of the Registrant) and Applied Biosystems, Inc. (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed on March 25, 2002).
10.6
Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2002).
10.7
License Amendment Agreement, dated June 2, 2003, by and between Geron Corporation and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 12, 2003).
10.8
Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000).
10.9
License Agreement between the Registrant and the Dana-Farber Cancer Institute dated October 8, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 5, 2009).
   

66


*10.10
Employment Agreement between the Registrant and Mark P. Colonnese (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 17, 2012).
   
10.11
Securities Purchase Agreement, entered into by and among the Registrant and the Investors, dated January 24, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A filed on January 31, 2013).
10.12
Forbearance Agreement, dated February 7, 2013, by and between the Registrant and Dogwood Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 8, 2013).
10.13
Loan and Security Agreement among the Registrant, Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated March 13, 2013 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K filed on March 14, 2013).
10.14
First Amendment to Loan and Security Agreement among the Registrant, Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated August 2, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 6, 2013).
*10.15
Employment Agreement between the Registrant and Paul Kinnon, effective September 30, 2013 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 30, 2013).
*10.16
Form of Incentive Stock Option Agreement between the Registrant and Paul Kinnon, effective September 30, 2013 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2014).
*10.17
Form of Stock Appreciation Rights Agreement between the Registrant and Paul Kinnon, effective September 30, 2013 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2014).
*10.18
Form of Stock Appreciation Rights Agreement between the Registrant and Mark Colonnese, effective September 30, 2013 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2014).
*10.19
Form of Stock Appreciation Rights Agreement under the 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on September 30, 2013).
10.20
Second Amendment to Loan and Security Agreement among the Registrant, Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, effective October 31, 2013 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2014).
10.21
Limited Waiver and Third Amendment to Loan and Security Agreement among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated January 27, 2014.
10.22
Fourth Amendment to Loan and Security Agreement among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, as administrative agent and a lender, and the other lenders party thereto, dated March 3, 2014 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014).
10.23
Series B Convertible Preferred Stock Purchase Agreement, dated as of March 5, 2014, by and among Transgenomic, Inc. and Third Security Senior Staff 2008 LLC, Third Security Staff 2014 LLC and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2014).
‡10.24
Collaboration Agreement, dated as of October 9, 2013, by and between the Registrant and PDI, Inc.
21
Subsidiaries of the Registrant.
23.1
Consent of Independent Registered Public Accounting Firm - Ernst & Young LLP
23.2
Consent of Independent Registered Public Accounting Firm - McGladrey LLP
24
Powers of Attorney (included on signature page hereto).
31
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  

67


**32
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
*
Denotes exhibit that constitutes a management contract, or compensatory plan or arrangement.
**This certification is
These certifications are not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certificationcertifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the CompanyRegistrant specifically incorporates it by reference.
***XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by

85

reference into any registration statement, prospectus or other document.
+
Confidential treatment has been requestedgranted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.
‡
The Registrant has requested confidential treatment with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.



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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 14th27th day of March 2012.2014.
 
   
TRANSGENOMIC, INC.
  
By: /s/ CRAIG J. TUTTLEPAUL KINNON
  
Craig J. Tuttle,Paul Kinnon,
President and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicatedand on this 14th day of March 2012.the dates indicated.
 
   
  
Signature TitleDate
  
/s/ CRAIG J. TUTTLEPAUL KINNON
Craig J. TuttlePaul Kinnon
 Director, President and Chief Executive Officer (Principal Executive Officer)March 27, 2014
  
/s/ BRETT L. FREVERTMARK P. COLONNESE
Brett L. FrevertMark P. Colonnese
 Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)March 27, 2014
  
/s/ RODNEY S. MARKIN*MARKIN
Rodney S. Markin
 DirectorMarch 27, 2014
  
/s/ ANTONIUS P. SCHUH*SCHUH
Antonius P. Schuh
 DirectorMarch 27, 2014
  
/s/ ROBERT M. PATZIG*PATZIG
Robert M. Patzig
 DirectorMarch 27, 2014
  
/s/ DOIT L. KOPPLER II*II
Doit L. Koppler II
 DirectorMarch 27, 2014
  
*By Craig J. Tuttle, as attorney-in-fact
/s/ MICHAEL A. LUTHER
Michael A. Luther
DirectorMarch 27, 2014
  
  
/s/ CRAIG J. TUTTLE
Craig J. Tuttle
Attorney-in-fact for the individuals as indicated.
  



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