UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-K
  x ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
fiscal year ended December 31, 2008
  o TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
transition period from _____ to ______
  Commission
file number 0001124608
  RESPONSE
GENETICS, INC.
 (Name of
Small Business Issuer in Its Charter)
  Delaware
                
                2835
                
                11-3525548(State
      or Other Jurisdiction of
                  Incorporation
      or Organization)
                
                (Primary
      Standard Industrial
                  Classification
      Code Number)
                
                (I.R.S.
      Employer
                  Identification
      No.)
  1640
Marengo St., 6th Floor
 Los
Angeles, California 90033
 (323)
224-3900
 (Address
and Telephone Number of Principal Executive Offices)
 
 Securities registered under Section
12(b) of the Exchange Act:
 
 Title
      of each class
                          Name
      of each exchange on which registeredCommon
      Stock, par value 0.01 per share
                          Nasdaq
      Capital Market
 Securities
registered under Section 12(g) of the Exchange
Act:  None.
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ̈Nox
  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 ̈Nox
  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 report), and (2) has been subject to such filing requirements for
the past 90 days.  YesxNo ̈
  Indicate
by check mark if the 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 amendments to this Form 10-K. x
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange
Act.
  Large accelerated
      filer   ̈
              
              Accelerated filer
        ̈Non-accelerated
      filer   ̈
              (Do not check if a
      smaller reporting Company)
              Small reporting
      company  x
   
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  ̈No x
  The
aggregate market value of common stock held by non-affiliates of the registrant
was $19,786,292 as of June 30, 2008, the last business day of the registrant’s
most recently completed second fiscal quarter. Such aggregate market value was
computed by reference to the closing price of the common stock of $3.13 per
share as reported on the Nasdaq Capital Market on June 30, 2008. For purposes of
this calculation only, the registrant has defined affiliates as all directors
and executive officers as of June 30, 2008 and any stockholder whose ownership
exceeds 10% of the common stock outstanding as of June 30, 2008.
  The
number of shares of the registrant’s common stock outstanding as of March 31,
2009 was 12,239,276.
  DOCUMENTS
INCORPORATED BY REFERENCE
  The
following documents (or parts thereof) are incorporated by reference into the
following parts of this Form 10-K:  Certain
portions of the Registrant’s definitive Proxy Statement for the 2009 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
 2
  TABLE
OF CONTENTS
  PagePart
      I
                                      
                                      
                                      4Item
      1.
                                      Description
      of Business.
                                      
                                      4Item
      1B.
                                      Unresolved
      Staff Comments.
                                      
                                      22Item
      2.
                                      Properties.
                                      
                                      22Item
      3.
                                      Legal
      Proceedings.
                                      
                                      22Item
      4.
                                      Submission
      of Matters to a Vote of Security Holders.
                                      
                                      22Part
      II
                                      
                                      
                                      22Item
      5.
                                      Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities.
                                      
                                      23Item
      6.
                                      Selected
      Financial Data.
                                      
                                      23Item
      7.
                                      Management’s
      Discussion and Analysis or Financial Condition and Results of
      Operations.
                                      
                                      25Item
      8.
                                      Financial
      Statements and Supplementary Data.
                                      
                                      32Item
      9.
                                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
                                      
                                      32Item
      9A(T).
                                      Controls
      and Procedures.
                                      
                                      32Item
      9B.
                                      Other
      Information
                                      
                                      32Part
      III
                                      
                                      
                                      32Item
      10.
                                      Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a)of
      the Exchange Act.
                                      
                                      33Item
      11.
                                      Executive
      Compensation
                                      
                                      35Item
      12.
                                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                                      
                                      38Item
      13.
                                      Certain
      Relationships and Related Transactions, and Director
      Independence.
                                      
                                      40Item 14.
                                      Principal
      Accountant Fees and Services.
                                      
                                      42Part
      IV
                                      
                                      
                                      44Item
      15.
                                      Exhibits,
      Financial Statement Schedules.
                                      
                                      44
  3
  Item
1.  Business
  Overview
  Response
Genetics, Inc. was formed as a Delaware corporation in September
1999.  We are a life sciences company engaged in the research and
development of innovative clinical diagnostic tests for cancer based on our
proprietary technologies. Our mission is to provide personalized genetic
information that will help guide physicians and patients in choosing the
treatment from which a given patient is most likely to benefit.  We
currently generate revenues primarily from sales of our proprietary analytical
pharmacogenomic testing services of clinical trial specimens to the
pharmaceutical industry.  We launched our first diagnostic tests under
the brand name ResponseDXTM for non small cell lung cancer and colon cancer in
2008.
  Our
patented technologies enable us to reliably and consistently extract the nucleic
acids RNA and DNA from tumor specimens that are stored as formalin-fixed and
paraffin-embedded, or FFPE, specimens and thereby to analyze genetic information
contained in these tissues. This is significant because the majority of patients
diagnosed with cancer have a tumor biopsy sample stored in paraffin, while only
a small percentage of patients’ tumor specimens are frozen. Our technologies
also enable us to use the FFPE patient biopsies for the development of
diagnostic tests. To our knowledge, we are the first company to generate
clinically relevant information regarding the risks of recurrence of cancer or
chemotherapy response using approximately 30,000 genes available from microarray
profiling of FFPE specimens.
 
 Clinical
studies have shown that not all cancer chemotherapy works effectively in every
patient, and that a number of patients receive therapy that has no benefit to
them and may potentially even be harmful.  Our goal is to provide
physicians and cancer patients with a means to make informed, individualized
treatment decisions based on genetic analysis of tumor tissues.
 
 Response
DXTM
 
 The
outcome of cancer chemotherapy is highly variable due to genetic differences
among patients.  Some patients respond well with tumor shrinkage and
increase in life span. Other patients do not obtain benefit from the same
therapy but may still experience toxic side effects as well as delay in
effective treatment and psychological trauma.
 
 At
present most chemotherapy regimens are administered without any pre-selection of
patients on the basis of their particular genetics. However recent development
of very sensitive molecular technologies has enabled researchers to identify and
measure genetic and biochemical factors in patients’ tissues that can predict
the probability of success or failure of many currently used anti-cancer agents.
In order to increase the chances of a better chemotherapy outcome for cancer
patients, RGI is developing genetic tests that will measure predictive factors
for tumor response in tumor tissue samples. We have begun offering tests for
non-small cell lung cancer (NSCLC) and colorectal cancer (CRC) patients’ tumor
tissue through our CLIA registered laboratory and we anticipate offering
additional tests for esophageal, gastric and pancreatic cancer in the
future.
 
 Our
technology
 
 All of
our tests are based on the polymerase chain reaction (PCR), which is a
sensitive, precise and reliable technology that gives numerical values that are
not dependent on subjective interpretation by pathologists, as are
antibody-based tests.  We developed and extensively validated
technology to perform quantitative PCR analysis of gene expressions in
formalin-fixed paraffin embedded (FFPE) tumor tissues. We have used our
technological expertise in many projects for the pharmaceutical industry and for
many collaborative scientific studies.  The benefit of our capability
for patients is that in many cases, no tissue samples other than the
pre-treatment diagnostic biopsy will be required for the biomarker
analysis.
  We
developed ResponseDX in part by using our technology to extract genetic
information from FFPE tumor specimens.  Our technology provides gene
expression information for each patient’s tumor tissue specimen.  Our
mission is to help doctors and patients choose the most effective cancer
treatment options- the first time- based on a patient’s unique genetic code. We
assess non-small cell lung cancer (NSCLC) and/or colorectal cancer (CRC)
patients’ tumor tissue specimens through our ResponseDX: LungTM and ResponseDX:
ColonTM test suites.  The test result can help doctors and patients
decide the best course of treatment for patients.
  Since
February 2008, ResponseDX: Lung and ResponseDX: Colon tests are commercially
available through our laboratory located in Los Angeles, California, which is
certified under the Clinical Laboratory Improvement Amendment of 1988
(CLIA).
  ResponseDX:
LungTM and ResponseDX: ColonTM
  ResponseDX:
LungTM comprises four tests: KRAS Mutation and EGFR Amplification and ResponseDX:
ColonTM comprises three tests: ERCC1, KRAS Mutation and TS. The Response DX test
measures the RNA expression of ERCC1 and RRM1 by RT-PCR from a patient's tumor
tissue. PCR analysis of DNA from the patient's sample is used to determine EGFR
amplification and KRAS mutational status. The ERCC1 test is a test for the
probability of response to platin-based therapies and the analysis of RRM1 tests
for the probability of response to gemcitabine-based therapies. We determine the
ranges of ERCC1 expression and RRM1 expression that classify a patient's tumor
into categories of the low and high probability of responding to platin-based
therapy and gemcitabine-based therapies, respectively. The EFGR Amplitication
test assesses the probability of benefit from EGFR-directed therapy. We
determine if the EGFR gene is amplified, which is associated with better
response to EGFR-based therapy. The KRAS gene mutation test identifies tumors
that have low probability of response to EGFR-directed therapy. This test
utilizes a 7 mutation panel to identify KRAS gene mutations in a sample that are
associated with low response to EGFR-directed therapy.  The TS gene
expression test measures the probability of response to 5-fluorouracil
(5-FU)-based chemotherapy.
  4
  Diagnostic
Tests for Other Cancers
  In
addition to ResponseDx: Lung and ResponseDx: Colon, we are
developing and intend to commercialize tests of other types of
cancer that identify genetic profiles of tumors that are more aggressive
and recur rapidly after surgery. We also are identifying genetic profiles of
tumors that are more or less responsive to a particular chemotherapy. Following
the development of tests to predict the risk of recurrence after surgery, we
intend to develop tests to determine the most active chemotherapy regimen for
the individual patient at risk. Once developed and after obtaining any necessary
regulatory approvals, we intend to leverage our relationships in the healthcare
industry to market, sell or license these tests as a means for physicians to
determine the courses of cancer treatment.
  Expansion
of our pharmacogenomic testing services business
  We have
started the expansion of our pharmacogenomic testing services business into
major markets of the healthcare industry outside of the United States. We have
established a service laboratory in Japan, and are working to establish a
service laboratory in China, through collaboration with some of our current
clients in the pharmaceutical industry. The pharmaceutical industry is in need
of standardized integrated worldwide analysis of clinical trial specimens. It is
important to the pharmaceutical industry and the regulatory agencies that the
same analytical methods are used for each clinical trial sample around the world
so that the data can be easily compared and used for global drug development.
Also, export of clinical trial specimens to the United States is restricted from
some areas of the world, such as China. Our goal is to offer an analysis of
patient specimens and generate consistent data based on integrated common
platforms and technology into the major markets of the healthcare industry
including outside of the United States. To our knowledge, we will be the only
company offering consistent pharmacogenomic analysis to the industry across
geographical regions.
  There are
no assurances that the Company will be able to continue making its current
ResponseDX tests available, or make additional ResponseDX tests available; will
be able to develop and commercialize tests of other types of cancer; or will be
able to expand our pharmacogenomic testing service business.
  Except
for the historical information contained herein, this Annual Report on Form 10-K
contains or may contain, among other things, certain forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve significant risks and uncertainties. Such
statements may include, without limitation, statements with respect to the
Company's plans, objectives, projections, expectations and intentions, such as
the ability of the Company to analyze cancer samples, the potential for using
the results of this research to develop diagnostic tests for cancer, the
usefulness of genetic information to tailor treatment to patients, the ability
of the Company to make its ResponseDX: Lung and ResponseDX: Colon tests
available in a number of institutions, and other statements identified by words
such as "projects," "may," "could," "would," "should," "believes," "expects,"
"anticipates," "estimates," "intends," "plans" or similar
expressions.
  These
statements are based upon the current beliefs and expectations of the Company's
management and are subject to significant risks and uncertainties, including
those detailed in this Annual Report on Form 10-K filed with the Securities and
Exchange Commission. Actual results, including, without limitation, actual sales
results, if any, or the application of funds, may differ from those set forth in
the forward-looking statements. These forward-looking statements involve certain
risks and uncertainties that are subject to change based on various factors
(many of which are beyond the Company's control).
  5
  Scientific
Background
  The
nature of cancer
  Cancer is
basically an uncontrolled growth of cells and expansion of tissues that can
invade and destroy the function of adjoining and even distant organs. In
contrast to infectious diseases which are entirely caused by outside agents such
as viruses and bacteria, cancer is a disease that arises from genetic breakdown
within our own cells. To be sure, this internal cellular malfunction can also be
triggered or promoted by external causes such as chemicals in tobacco smoke or
asbestos exposure or even viruses, but in many cases, cancer also seems to occur
spontaneously because of an inherent instability of the human genome. The
problem with cancer from a treatment point of view is that it is not one disease
but one of almost infinite variety. Due to the vast biochemical complexity of
human cells, there are numerous ways by which loss of control of cell growth can
occur, and this diversity of pathways leads to cancers with varying properties:
growth rate, invasiveness of adjoining tissues, the ability to develop a new
vascular system, metastatic potential, and responsiveness to various therapies.
Cancers arising in different organs (e.g., colon, breast or lung) and tissues
within these organs have distinct biological properties depending on the
triggering event and pathway of tumor development. For example, lung cancers
associated with smoking are different from those that develop in non-smokers and
cancers of the esophagus associated with excessive alcohol and smoking
consumption are different from those associated with chronic gastro-esophageal
acid reflux.
  The
worldwide market for pharmacogenomics
  Human
beings are about 99.9% identical in their genetic makeup, with the remaining
0.1% responsible for their unique individual characteristics. Analyzing these
naturally occurring genetic differences may enable scientists to understand the
variability that contributes to physiological traits, including cancer
susceptibilities and the progression of cancer. The variation in several genes
affects each individual’s risk of cancer development, the level of tumor
aggressiveness, the probability of metastasis, and the probability of survival.
Natural genetic variations also lead to differences in the way that drugs are
absorbed, metabolized and incorporated by the body, and thus affect the relative
efficacy of drugs in different individuals.
  Understanding
genetic variations and discovering the correlations of the genes that are
associated with clinical outcomes constitutes the field of pharmacogenomics and
underlies the concept of personalized medicine. Pharmacogenomics promises to
help researchers produce better predictive and diagnostic molecular tests and
drugs which, in turn, will enable physicians to implement personalized medicine
by selecting treatments and drugs based on individual needs of each patient.
Personalized medicine may offer a number of key benefits, including earlier
interventions, more efficient drug development and more effective
therapies.
  We
believe that the application of pharmacogenomics to cancer treatment represents
a significant opportunity, as new cancer cases are estimated to increase by 50%
and approach 15 million worldwide by the year 2020, according to a new World
Cancer Report by the World Health Organization.  According to this report,
lung cancer accounts for 1.2 million new cases worldwide annually; colorectal
cancer for 940,000; esophageal cancer for 410,000; pancreatic cancer for
216,000. Cancer of unknown primary affects about 5% of all cancer patients. We
focus our research efforts on developing diagnostic tests for each of these
common cancer types. The National Institutes of Health estimates overall costs
for cancer in 2005 at $210 billion, including $74.0 billion for direct medical
costs.
  Benefits
of personalized medicine
  Treatment
of the disease presents a major challenge because of the wide biological
variations among cancers. As such, there is no one standard therapy or approach
for treating the disease that can be recommended to cancer patients. Cancers
originating from various tissues or organ sites require specialized therapies;
but even cancers emanating from the same tissue type may call for different
treatment modalities because of varying degrees of disease
progression.
  To help
choose among treatment options, physicians try to determine the extent to which
the cancer has spread to other parts of the body. Patients are assigned to
different stage categories ranging from I to IV depending on the degree of
invasion of the tumor into the adjacent tissues, the number of lymph nodes with
detectable cancer cells, and the presence of distant metastasis. In addition to
staging, tumors are also graded according to cell type. Cells that are well
differentiated closely resemble mature, specialized cells and indicate a good
prognosis (predicted survival time), whereas cells that are undifferentiated
represent a malignant population associated with poor prognosis.
  Once the
prognosis for a patient is determined by taking into account the stage of the
tumor and the grade of malignancy of the cells, healthcare providers can
determine the appropriate treatment options available to a particular patient. Current
staging and grading methods, which are based largely on subjective
histopathologic examination (i.e., visual inspection by a pathologist) of
tissues or cells, often fall short and fail to adequately predict malignancy
aggressiveness. This suggests that the key to distinguishing the low-risk from
the high-risk patients must lie in understanding the genetic variations between
these groups at the molecular level.
  Until
recently, however, it was very difficult to characterize genetic differences at
the molecular level because the technology did not exist either for rapid
analysis of the genetic sequence or for precise measurement of various mRNA
molecules in biopsy tissues. This situation dramatically changed with the
invention of PCR and gene expression microarrays. Scientists have applied gene
expression profiling to identify markers of high risk of relapse for patients
with various types of cancer. Studies of breast, lung, lymphoma and other
cancers suggest that there are different sets of genes expressed in various
tumor tissues that are associated with specific clinical outcomes. Categorizing
these expressed sets of genes can offer a powerful complementary approach to
clinical or histopathological examination. We believe that this approach will
help researchers produce better predictive and diagnostic molecular tests and
drugs which in turn, will help physicians select treatments and drugs based on
individual needs of each patient.
 
 6
  Personalized
medicine offers a number of key benefits:
  ·Better diagnoses and
earlier interventions. Molecular analysis can help guide treatment
choices by determining precisely which variant of a disease a person has, or
whether he or she is susceptible to drug toxicities. For preventive medicine,
such analysis could improve the ability to identify which individuals are
predisposed to develop a particular condition and guide decisions about
interventions that might prevent it, delay its onset or reduce its
impact.
  ·More efficient drug
development. A better understanding of genetic variations in tumor tissue
could help scientists identify new disease subgroups and their associated
molecular pathways, and design drugs that target them. Molecular analysis could
also assist in the identification of patients better suited for inclusion in, or
exclusion from, late-stage clinical trials — potentially facilitating the
identification and approval of drugs that might otherwise be abandoned because
they appear to be ineffective in the larger patient population.
  ·More effective
therapies. Currently, physicians often have to use trial and error to
find the most effective medication for each patient. As we learn more about
which molecular variations best predict how a patient will react to a treatment,
and develop accurate and cost-effective tests, doctors will have more
information to guide their decisions about which medications are likely to work
best. In addition, testing could help predict the best dosing schedule or
combination of drugs for a particular patient.
  Current
technologies to measure gene expression
  Polymerase Chain Reaction
(PCR). The PCR is a technique that makes it possible to amplify a
specific DNA segment thousands or even millions of times, thereby making it
possible to achieve a quantitative measure of the amount of a particular mRNA
species in a tissue specimen. The PCR method is sensitive, accurate and precise
and is best suited for analysis of a limited number of genes in a large set of
specimens.
  Gene expression microarrays.
Gene expression microarray technology is based on the principle of “capturing”
specific RNA sequences extracted from a patient sample by binding to
complementary sequences placed on a silicon wafer chip. The specific RNA
sequences are labeled with a dye that emits a stronger or weaker signal when
“captured” on the chip depending on whether the gene is expressed at a high or
low level. Since sequences from the majority of the human genome (approximately
30,000 genes) are placed on the chip, information about gene expression from all
of these genes becomes available to the researcher by this technology.
Microarrays are commonly used to simultaneously study large numbers of genes and
their regulation. The power of the microarray lies in its ability to measure the
expression of many thousands of genes simultaneously. The use of gene expression
microarrays from mRNAs has grown rapidly in academia, medicine and the
healthcare industry.
  The
recent microarray- and RT-PCR-based studies showing that gene expression
profiles can predict eventual clinical outcomes (such as long or short survival)
for patients have generated great interest because they demonstrated the
potential of gene expression profiling in cancer prognosis. However, before
predictive gene profiles are adopted for individualized therapy, the findings of
these initial studies will require independent validation using larger sets of
clinical specimens and prospective trials of the markers in a large patient
population will be essential. These large number of specimens are readily
available from patient biopsies embedded in paraffin. Until recently, microarray
analysis of formalin fixed paraffin embedded, or FFPE tumor specimens was not
possible.
  Significance
of our ability to isolate RNA from FFPE specimens compared to fresh-frozen
specimens.
  The value
of the information gained through genetic analysis of tumor specimens suggests
that there will be a growing need for this kind of analysis of ever larger
numbers of tumor specimens. However, this need currently encounters a major
obstacle. RT-PCR technology and especially gene expression microarrays are best
done using a large quantity of nearly full-length RNA recovered from
fresh-frozen clinical specimens; yet fresh-frozen specimens are not generally
available except in a very limited number of cases in which collection of fresh
tissues is a specific part of a clinical trial. The majority of hospitals and
clinics lack the infrastructure to store and archive frozen tissues. Rather,
clinical specimens are usually available as formalin fixed paraffin embedded
specimens, or FFPE. Fixation and paraffin embedding allow staining and
visualization of tumor cells by pathologists, making FFPE more useful to
pathologists than fresh frozen tissue. Also, once embedded in paraffin, the
tissue remains stable indefinitely, thus allowing for easy storage. The end
result is that, unlike fresh-frozen tissues, large tissue banks of archival FFPE
with long-term follow-up are extensively available and easily
accessible.
  7
  Although
most clinical tissue specimens are paraffin-embedded, until recently RNA in FFPE
tissue specimens has not been considered useable for genetic profiling studies
because the isolation of RNA from FFPE with methods that have been published in
the past is unreliable and inconsistent in terms of RNA fragment size. Whereas
RNA isolated from fresh tissues is generally close to full-length, the fixation
process degrades the RNA in the tissue and the more extreme extraction
conditions degrade the RNA further into even shorter fragments. Short fragment
RNA from FFPE has not given consistently good results with currently available
gene expression microarray chips and is also more difficult to use in RT-PCR.
For these reasons, all important diagnostic biomarker studies to date involving
gene expression microarrays and most studies involving RT-PCR have used
fresh-frozen tissue specimens and thus many have been constrained to analyzing a
small number of specimens because of the limited availability of fresh-frozen
biopsy tissue. In contrast, almost all patients diagnosed with cancer have a
paraffin block stored at the hospital from which they were diagnosed. There are
approximately 1.4 million patients diagnosed with cancer per year in the United
States. We can access molecular information from paraffin blocks that have been
stored up to 10 years. Therefore, there are about 14 million specimens in
existence in the United States that we potentially could analyze.
  Our
Technologies
  We have
developed technologies for the extraction of RNA from FFPE tissues which enable
us to reliably recover RNA suitable for a variety of applications, such as gene
expression research, development of diagnostics, and microarray platforms. We
believe our technologies for the first time can provide access to molecular
information from the entire vast body of archival tissue specimens from past
clinical trials for which clinical outcomes and results are documented. In
addition, our technologies permit gene profiling analysis of current clinical
trials, most of which are still using the paraffin embedding technique for
tissue specimen storage.
  RGI-1
  Kathleen
Danenberg, our President, Chief Executive Officer and director, co-developed and
patented (U.S. Patent No. 6,248,535; Danenberg, et al., Method For
Isolation of RNA From Formalin-Fixed Paraffin-Embedded Tissue Specimens), an
extraction method (RGI-1) that allows reliable and consistent isolation of RNA
and DNA from FFPE suitable for use in RT-PCR analysis, while she was employed at
USC. Using RGI-1, successful RT-PCR quantitation of gene expressions is possible
from as little as a single 10-micron section of a paraffin block with over 90%
reliability and excellent reproducibility.  We validated our
methodology, which particularly addressed issues of recovery of RNA, accuracy,
and precision. RGI-1 allows for rapid extraction of RNA with little or no DNA
contamination, which makes it suitable for large-scale analysis. We have used
RGI-1 successfully to quantify gene expressions in over 45,000 FFPE specimens
received by us from various pharmaceutical companies since 2001 as well as in
our own research projects. We and others have published over fifty papers and
articles based on data generated using RGI-1. The data below demonstrates that
gene expressions obtained by us from FFPE specimens using RGI-1 closely match
those isolated from fresh-frozen tissue.
  RNA was
isolated from FFPE tissues by RGI-1 and from matched sets of fresh-frozen
tissues of the same tumor specimens. The expression of several genes was
quantitated by RT-PCR. This experiment shows that if RT-PCR analysis is done
within the guidelines and parameters established by RGI, very similar results
are obtained from FFPE specimens when compared to frozen specimens
data.
  RGI-2
  RNA
isolated by RGI-1 is fragmented by the heating process, but may be analyzed by
the PCR process. The PCR assay works by binding DNA primers, which are specific
sequences of DNA, at various sites on the gene and copying these sequences
through PCR. These sequences can be designed to bind closely together to
accommodate short fragments of RNA. However, the microarray technology works
best through binding of longer RNA sequences. A second technology developed by
us, RGI-2, is designed to maximize the isolation of longer fragments of RNA.
This technology does not replace RGI-1, since it is less rapid and may contain a
small amount of genomic DNA. Using this technology, the average length of RNA
fragments recovered from FFPE is substantially increased. The RNA preparations
obtained with RGI-2 produced similar results on gene expression microarrays as
RNA isolated from fresh-frozen tissues. Therefore, we believe that this new
technology, which we are in the process of patenting, enables profiling of gene
expression by microarray of archival FFPE specimens from clinical
studies.
  The
technologies we have developed for extracting RNA from FFPE provide RNA which is
suitable for both RT-PCR and microarray analyses. These methods of RNA analysis
are characterized by a high degree of reliability and reproducibility, with a
success rate of over 90% if our guidelines are followed.
  · Micro-dissection of
each specimen to separate tumor from non-tumor tissue. Most tumor biopsy specimens are
mixtures of normal and tumor tissue. A specimen may include only a small
percentage of tumor cells. The molecular biology of tumor and normal tissues may
be considerably different and mixing the two may yield false results for gene
expression profiling. To accurately measure gene expression and establish
expression profiles of various pathologic lesions, it is important to analyze
RNA from tumor cells. With the assistance of a pathologist, we can identify the
tumor cells and isolate them, either manually or with laser-capture
micro-dissection. Since we are able to work with FFPE we can more accurately
dissect out the tumor cells from the normal cells than would be possible with
frozen tissue because the resolution in FFPE is better than in frozen
tissue.
  8
  ·Isolation of DNA from the same
specimen used to obtain RNA.Alterations in DNA sequence that are
inherited (polymorphisms) as well as acquired (mutations) are often associated
with disease susceptibilities, treatment response, and survival. DNA
polymorphisms and mutations may change the gene expression pattern of a cell in
specific ways. Characterization of gene expression profiles associated with
various DNA sequence alterations may lead to a better understanding of disease
mechanisms and may suggest new and better treatments. Our technique for
isolating DNA and RNA from the same specimen facilitates such studies because in
many cases the amount of available tissue may not be sufficient for separate
isolation of DNA and RNA. In addition, measuring gene expressions and DNA
sequence alteration in the same cells rather than in different areas of the
tissue specimen is likely to give more valid data.
  We
believe these technologies may be used as a powerful tool to establish
diagnostic gene sets for predicting a patient’s likelihood of survival under a
particular treatment regimen. Such diagnostic tests will provide the opportunity
for choosing the best treatment prior to therapy and thus enable application of
personalized medicine based on each person’s unique genetics.
 
 ResponseDX:
LungTM and ResponseDX: ColonTM
 
 We offer
ResponseDX test suites as clinical laboratory tests, where we analyze tumor
tissue samples in our laboratory and provide physicians with genomic information
specific to the patient’s tumor. Currently, we assess non-small cell lung cancer
(NSCLC) and/or colorectal cancer (CRC) patients’ tumor tissue specimens through
its ResponseDX: LungTM and ResponseDX: ColonTM test suites.  The test
results can help doctors and patients decide the best course of treatment for
patients.
 
 ResponseDX:LungTM  comprises
four tests - ERCC1, RRM1, KRAS Mutation and EGFR Amplification:
 
 ERCC1 gene expression:Cisplatin and carboplatin are widely used in combination with other drugs
to treat non-small cell lung cancer (NSCLC). DNA crosslinks formed by the platin
drugs are repaired by the nucleotide excision repair pathway. A critical gene in
this pathway is excision repair complementing factor 1 (ERCC1).  Low
expression of ERCC1 is a favorable indicator for tumor response to platinum
therapy whereas a high level means that the tumor is likely to be resistant due
to its increased DNA repair capacity. ERCC1 is one of the most validated
predictive markers for tumor response to chemotherapy based on both
retrospective and prospective studies. RGI has determined ranges of ERCC1
expression values that will optimally classify tumors into categories of low and
high probability of response to platinum-based therapy. The ERCC1 test can help
doctors to make informed decisions about whether to recommend platinum versus
non-platinum therapies for NSCLC.  Non-platinum therapies have shown
results comparable to platinum-based therapies but generally have lower
toxicities.
 
 RRM1 gene expression:Gemcitabine is one of the drugs currently used to treat NSCLC, often in
combination with cisplatin. The target of this drug is the enzyme ribonucleotide
reductase subunit 1 (RRM1). Published studies have shown that patients treated
with gemcitabine-based therapy with low RRM1 expression in their tumors have
significantly longer median survival than those with high
levels.  Measuring RRM1 and ERCC1 together may be an especially
effective predictor of the combined gemcitabine/cisplatin therapy in
NSCLC.
 
 EGFR copy number:The
epidermal growth factor receptor (EGFR) is involved in cell growth as well as
cancer development. EGFR is the target molecule for many recently-developed
anti-cancer drugs, including gefitinib and erlotinib, which are used in the
treatment of NSCLC.  When cancer develops, the number of copies of the
EGFR gene in the genome of cancer cells often increases.  Recent
studies have shown that a high copy number of the EGFR gene in lung cancer
patients means increased likelihood of response to gefitinib and
erlotinib.
 
 KRASmutations:Part of the EGFR
signaling pathway includes downstream GTPases encoded by the RAS genes.  The
RAS gene family has an
important role in cancer development. Studies have shown that K-ras gene (KRAS) mutations occur in
about 30% of human lung adenocarcinomas and are often closely associated with
heavy smoking. A mutated KRAS is a very strong
predictor of non-response and no survival benefit from the EGFR inhibitors
gefitinib and erlotinib. Thus, a test for KRAS mutation status may be a
helpful guide to doctors in making recommendations regarding treatment with EGFR
inhibitors, especially to patients with a history of smoking.
 
 ResponseDX:
ColonTM comprises three tests - ERCC1, KRAS Mutation and TS:
 
 ERCC1 gene expression:In the
case of colorectal cancer (CRC), a widely used combination chemotherapy is
oxaliplatin together with 5-fluorouracil (5-FU)(the FOLFOX
regimen).  For platinum therapies, one of the critical determinants is
the excision repair complementing factor 1 (ERCC1).  In 2001, RGI
participated in a study which showed that ERCC1mRNA
expression levels predicted the clinical outcome ofpatients
with advanced CRC treated with FOLFOX.  Since high expression of ERCC1
may actually increase the response rate to irinotecan therapy, the FOLFIRI
regimen (5-FU plus irinotecan), which has almost identical overall efficacy to
FOLFOX, provides an alternative option for patients with high tumor levels of
ERCC1.  The ERCC1 test can help doctors to make informed decisions
about whether to recommend FOLFOX or FOLFIRI for treatment of CRC.
  9
  KRASmutations:The
EGFR signaling pathway is overexpressed in more than 85% of tumors from patients
with metastatic CRC.  Cetuximab and panitumumab are two EGFR
inhibitors that have shown promising activity as second-line therapy for
metastatic CRC and in first-line use in combination with oxaliplatin and
irinotecan-based therapies.  Mutations in the KRASgenes occur in about 35%
of CRC patients and recent studies have shown that a mutated K-ras gene (KRAS) very strongly predicts
lack of response as well as shorter survival from both cetuximab and panitumumab
therapy.  These results suggest that a test for KRAS mutation status would be
a helpful guide to doctors in making recommendations regarding treatment of CRC
patients with these EGFR inhibitors .
  Thymidylate synthase (TS) gene expression:  Since its introduction 50
years ago, 5-fluorouracil (5-FU) has been a mainstay for chemotherapy of
colorectal cancer (CRC). The intracellular target for 5-FU is the enzyme
thymidylate synthase (TS), which is rate-limiting for DNA synthesis and
thus essential for tumor growth.  Many retrospective clinical studies
have shown that low levels of expression of TS correlate with an
improved response rate and overall survival in CRC patients treated
with 5-FU or its derivatives.  The same relationship between low
TS expression and better clinical outcome is also seen in the 5-FU-based
combination chemotherapy of oxaliplatin and 5-FU (FOLFOX), which is now
widely used in CRC treatment.  However, when 5-FU is used in
combination with irinotecan (FOLFIRI), the therapy is still efficacious at high
TS levels, thus providing an alternative to FOLFOX for CRC patients with high
TS.  The TS test can help doctors to make informed decisions about
whether to recommend FOLFOX or FOLFIRI for treatment of CRC.
  Sales,
Marketing and Client Services for ResponseDX tests
  We offer
our ResponseDX test services nationwide through a specialized sales force
focused on serving the specific needs of customers in the area of
oncology.  Our sales force currently operates out of 8 states and
focuses on community based oncologists, hospitals and physician
offices.  Our sales force is compensated through a combination of
salaries, commissions based upon actual sales performance and bonuses, all at
levels commensurate with each individual’s qualifications, performance and
responsibilities. Our test services are also offered through the clinical
laboratories service company Neogenomics Laboratories, a company focused on
genetic diagnostic tests.
  We have
developed a set of clear and effective marketing materials to support our sales
efforts.  Our materials are targeted to the oncologists and physician
office staff. Our marketing materials provide a summary of our tests along with
practical information regarding how to order our tests.
  We
compete largely on the basis of the quality of our tests, the convenience of
ordering our tests and the innovation of our services.
  Our
Strategy
  Our goal
is to provide cancer patients and their physicians with the means to make
informed, individualized treatment decisions based on genetic analysis of tumor
tissues. Using our two technologies for extraction of RNA from FFPE tissue, we
can analyze specific RNAs rapidly by PCR or the entire genome by using
microarray methods. Elements of our business strategy include:
  Developing
diagnostic tests for assessing the risk of cancer recurrence, prediction of
chemotherapy response and tumor classification in cancer patients based on our
technologies.
  · Develop a lung
cancer recurrence test.To
date, all studies involving microarray analysis could only be done using frozen
tissues. Since frozen tissues from clinical trials are available on a very
limited basis or often not available at all, this has severely limited the
development of diagnostic tests. In contrast, for the reasons discussed above,
nearly all patients diagnosed with cancer have a diagnostic tissue specimen
stored in a paraffinized state. Therefore, there is a vast number of patient
specimens available for the development of a diagnostic test using our
technology.
  We have
developed preliminary gene sets for predicting risk of recurrence in early stage
non-small cell lung cancer after surgery through analysis of 80 patient
specimens by microarray. This “product candidate” must be validated in a larger
set of patient specimens (300-500) in the research setting. Since lung cancer is
among the highest frequency cancers around the world, patient specimens are
available from many sites. We have chosen to prioritize development of a
diagnostic test to predict outcome for this cancer. Generally, Stage 1A and 1B
lung cancer is not treated with chemotherapy even though these patients have a
50% risk of recurrence within five years. The patient is considered in remission
unless and until the tumor recurs. At the time of recurrence chemotherapy is
administered. However, if there were a test for high risk of recurrence, then
the physician could treat the patient right away with chemotherapy rather than
waiting for the recurrence.
  In June
2006, we presented at the ASCO meeting the first study demonstrating the
possibility of a predictive molecular test derived by microarray analysis of
patients’ FFPE tumor biopsies.  Through these preliminary studies in
lung cancer using our technologies for RNA extraction from FFPE, we have
produced gene expression profiles which describe the probability of recurrence
among patients with early stage lung cancer.
 
 Other
expression profiles have been generated predicting the risk of metastases. By
applying our technologies to early stage non-small cell lung cancer, we
have:
 ·
                demonstrated
      the feasibility of creating a preliminary genomic risk prediction model
      using FFPE tissue, and
 ·
                identified
      the differential pathways indicated by the unique gene signatures between
      early stage patients surviving less or greater than two years for both
      adenocarcinomas and squamous cell carcinomas, and demonstrated the
      feasibility of generating differential pathways from FFPE
      specimens.
 
 Our plan
is to use our proprietary technologies to analyze these archived patient
specimens and to correlate the data with clinical outcomes so that we can
develop diagnostic tests to predict likelihood of recurrence to chemotherapy.
The diagnostic tests, when implemented, will involve extracting RNA from tumor
biopsies using our technologies and measuring a series of genes (a gene set)
either by microarray or RT-PCR that have been found to differentiate long and
short-term survivors. Levels of expression of these genes will provide
information regarding whether the patient is at a higher than normal risk of
recurrence. We are currently in the process of refining and validating the
predictive gene set for early stage lung cancer recurrence.
  After
preliminary validation of the predictive gene set, a formal clinical trial will
be designed to prove the ability of the gene set to accurately predict outcome
in additional patients using reagents available from Affymetrix. Since RGI is
able to analyze archived FFPE tissue, the patients included in this trial will
have been treated years ago, but the outcome will be blinded to RGI by the
clinical investigators until the end of the trial. The number of specimens
required in this clinical trial will be determined by the accuracy in which the
preliminary gene set can predict the first 300-500 specimens in the research
study. Based on the current predictability of our gene set, over 90% accuracy,
we estimate that the clinical trial will require 500-1000 early stage lung
cancer patients. Additional trials may then be launched at various sites to
continue to refine the accuracy of our assay.
  10
  We
believe that it will take approximately two years to gather and analyze the
specimens in the research setting and the clinical trial analysis and compliance
with potential regulatory requirements will require approximately two to three
additional years.
  There are
a number of diagnostic test developers available to partner with us during the
clinical trial and test launch process. Roche, with whom we have a strategic
alliance, is one of these providers.
  · Develop a lung
cancer chemotherapy response test.In addition to our Response DX:
LungTM test
and our tests for recurrence for various forms of cancer, we also intend to
develop a test to determine responsiveness to other chemotherapy treatments for
lung cancer.Of the
169,000 newly diagnosed lung cancer patients in the United States, a majority
will receive chemotherapy as an initial treatment. Of those who receive
chemotherapy, greater than 90% are given the combination of
Paclitaxel/Carboplatin as their first chemotherapy. Paclitaxel/Carboplatin is
only effective in about 19% of the patients for whom it is prescribed. We intend
to develop a pharmacogenomic test to determine whether an individual patient
will be included in the 19% of NSCLC patients responding to
Paclitaxel/Carboplatin or whether the patient should consider a different
chemotherapy. Clinical trial specimens are available to us for development of
this test, including from Duke University, however, there can be no assurance
that we will be successful in developing this test, or if developed, that such a
test will be commercially viable.
  ·Develop a pancreatic
cancer recurrence test. Similarly to the test for recurrence in lung
cancer, we are in the research phase of developing a test for recurrence after
surgery for pancreatic cancer. We have analyzed a series of specimens by
microarray from patients with pancreatic cancer who were at “high risk” and “low
risk” of rapid recurrence after surgery. The patients at “high risk” had a
median cancer-free survival of 150 days, where the patients at “low risk” had a
median cancer-free survival of 1225 days. Development of a diagnostic test is
planned to determine the patients at “high risk” of rapid recurrence after
surgery, so that physicians may choose to treat these patients with aggressive
chemotherapy rather than an ineffective surgery at the time of diagnosis. We are
in the early research phase of development of this test and will need to analyze
more specimens before we test our initial gene set by validation. After the
initial validation, a large clinical trial of patients with known outcome to
surgery will be analyzed and the ability of our predictive gene set will be
tested for accuracy. Development of the diagnostic test will be similar to that
for the lung cancer test. We have entered into an agreement with University of
California San Francisco and the University of Utah to obtain additional
pancreatic cancer specimens and have begun to analyze these
specimens.
  ·Develop
a colon cancer
risk of metastasis test. We have analyzed a series of primary tumors in
colon cancer and determined a preliminary gene set predictive of whether the
patient tumor has spread beyond the colon into other sites (metastasized). If a
colon cancer tumor has spread or invaded other organs or lymph nodes, the
treatment may include earlier, more aggressive chemotherapy and not surgery at
the time of diagnosis. It is not always possible for the physician to determine
whether a cancer has spread before surgery has taken place. Therefore, we are
developing a diagnostic test using microarray technology to predict whether the
patient’s tumor is contained in the colon before surgery.  We are in the
research phase of development of this test. We have analyzed sixty patient
specimens with metastatic and non-metastatic colon cancer and have developed a
preliminary gene set predictive of metastatic cancer. We will validate this gene
set in a larger group of specimens and proceed with development of the test in
the same manner as the lung test.
  11
 
 ·Develop an esophageal
cancer risk of recurrence test. We have analyzed a series of esophageal
tumors from patients with long and short survival after esophageal surgery. A
preliminary gene set predictive of “high risk” patients was determined using the
first 46 patients analyzed. An additional set of specimens will be used to
validate this predictive gene set and development of the diagnostic test will be
similar to the lung test.
 
 Develop an ovarian cancer
chemotherapy response test. We intend to develop a test to determine
responsiveness to chemotherapy treatment for ovarian cancer.  We have
analyzed a series of ovarian tumors and plan to further analyze additional
specimens to develop a gene set and development of the diagnostic test will be
similar to the lung test.
 
 ·Develop
a cancers of
unknown primary test. About 5% of patients suffer from cancer without
knowing where the tumor originated. For example, the cancer may have invaded
both the colon and the lungs. Treatments for lung cancer are quite different
from treatments for colon cancer, Therefore, we are planning to develop a
diagnostic test using microarray methods for determination of the origin of the
cancer. We have collected patient specimens from a series of cancers that have
been diagnosed as tumors of unknown origin. These include, gallbladder,
pancreas, gastric, kidney, breast, prostate cancer and others. We intend to
analyze these specimens using microarray methodology and develop a gene set that
will identify the origin of the tumor. We are in the early stages of planning
our research analysis of these specimens. Development of a diagnostic test will
be similar to the lung cancer test.
  We will
validate these tests using clinical specimens available from our network of over
a dozen clinical investigators. As we proceed from the research phase to the
validation phase with respect to these tests, we will need to access additional
specimens from larger institutions. We have identified these institutions and
are in the process of negotiating the appropriate agreements with them. However,
there can be no assurance that we will be able to enter into agreements with
these institutions on terms favorable to us, or at all.
  ·Develop “in-house
tests.”We intend to develop our diagnostic tests as “in-house
tests.” Such in-house tests, which will be performed in our own CLIA-certified
laboratory, are also called “home brew” tests. Current examples of in-house
tests are those for estrogen receptor (ER) and progesterone receptor (PR) which
are given to virtually every breast cancer patient. The results of these tests
determine whether the patient should be prescribed a hormone antagonist such as
Tamoxifen and provide information about the aggressiveness of the tumor. None of
these tests is currently regulated by the FDA.
  After
validation of the results and after obtaining any necessary regulatory approval,
we intend to develop, market and sell these tests or license them to a
diagnostic company, depending on the market potential of the particular test and
the regulatory climate. For instance, we are currently working with clinicians
who are members of the Cancer and Leukemia Group B (CALGB) research group, who
have indicated a commitment to provide us with the requisite number of FFPE of
early stage lung cancer, both for the discovery and validation phase and for the
prospective testing phase. We are in the process of negotiating the appropriate
agreements with them. However, there can be no assurance that we will be able to
enter into agreements with these clinicians on terms favorable to us, or at
all.
  Growth
Through Globalization of Our Service Business.
  We
estimate based on our internal market research and experience to date that the
addressable market opportunity for our testing services business in the area of
analyzing tumor specimens in the course of clinical trials is between $400 and
$500 million worldwide.
  Demand
within the pharmaceutical industry requires us to offer “integrated” service
throughout the world for analysis of their clinical trial specimens. It is
important to the pharmaceutical industry and the regulatory agencies that the
same analytical methods be used for each clinical trial sample around the world
so that the data can be easily compared and used for global drug development.
Also, export of clinical trial specimens to the United States is restricted from
some areas of the world such as China. Finally, the enrollment of patients in
clinical trials sometimes depends on analyzing the sample for a specific
biomarker within five days, which may not provide sufficient time for shipping
specimens to the United States.
  The
pharmaceutical industry is moving a large percentage of their clinical trials to
Asia to access and treat patients that are chemotherapy-naïve (patients who have
not had previous chemotherapies), to carry out less expensive clinical trials
and to generate “on site” chemotherapy response data to be used in conjunction
with drug approval in these areas. The goal of our globalization plan is to
offer a worldwide analysis of patient specimens and generate consistent data
based on integrated common platforms and technology.
  12
  China. We intend to offer our
services in China through an arrangement with an established biotech company,
Shanghai Biochip Company, Ltd. (“SBC”). This collaboration is necessary, since
the Chinese government does not allow shipment of patient specimens outside of
China for processing elsewhere. We believe that placement of a laboratory in
China is important because several of our pharmaceutical clients have stated
that they have clinical trial specimens stored in China that they have not been
able to analyze. Additionally, prospective clinical trials are planned in China
as part of an effort to get drugs approved in China.  In the
partnership, we will provide technology, training and the laboratory manager and
SBC will provide the space, equipment and the rest of the staff.
  ·Japan and Asia (except
China and India). We offer our services in Japan through an arrangement
with Hitachi Chemical Co., Ltd. (“Hitachi”), a leading diagnostics manufacturer
in Japan.  Under this arrangement, Hitachi processes specimens
collected throughout Asia, except China and India, and Australia using our
technology. Pharmaceutical clients have requested analysis of patient specimens
on site in Japan and surrounding countries for prospective clinical trials due
to the need to analyze the patient sample within five days of
surgery.
  ·Europe. We offered our
pharmacogenomic testing at a site in Edinburgh, Scotland, which was associated
with the University of Edinburgh and Edinburgh Royal Infirmary. We established a
subsidiary, Response Genetics, Ltd. in November 2006 through which we managed
the work at this site. As of March 2009, the laboratory in Edinburgh was
consolidated with the laboratory in Los Angeles due to the ability to ship
patient specimens to Los Angeles and to analyze these samples within five days
of surgery, thus no longer necessitating a laboratory on site in Europe. We
intend to offer our services in Europe with the actual analysis of
samples occurring in Los Angeles.
  We
believe that growth in our pharmacogenomic testing services business will be
enhanced by our ability to process specimens in various locations throughout the
world. To our knowledge, we will be the only company offering this type of
service with consistent results at various sites around the world to the
industry.
  Growth
Through Strategic Relationships.
  ·Collaboration with
Roche Molecular Systems, Inc.Once a predictive biomarker has been found
to be associated with response to a particular chemotherapeutic agent, a
pharmaceutical company client may wish to develop a companion in vitro
diagnostic (IVD) kit, to be available for testing the patient population
globally as their drug is approved. Such a test that determines patient
responsiveness to their drug could enhance the probability of approval of the
new agent with the FDA. In order to provide such a test using higher quality
reagents and with global distribution potential, we have formed a collaboration
with Roche. Once we have developed effective research-grade reagents for a
particular biomarker or series of biomarkers, the pharmaceutical company may
contract directly with Roche to generate reagents compliant with FDA standards
for development of IVD tests to replace our research reagents for a particular
biomarker or series of biomarkers. We will use these high quality reagents
comprising the pre-IVD test for positivity of a particular biomarker or series
of biomarkers as a requirement to enroll a patient in prospective clinical
trials. Data from these trials will be submitted to the FDA for approval of an
IVD kit for response simultaneously with the approval of the New Drug
Application. Since we are involved in the discovery of the genes involved for
response to a particular chemotherapy with the pharmaceutical client, we enjoy
royalty free and exclusive rights to analyze the prospective trial specimens for
these biomarkers. These include specimens generated from the large phase II and
phase III trials to be submitted to the FDA, EMEA and other global regulatory
agencies for approval of the drug. The value of this relationship is that we
provide for the pharmaceutical industry testing services that produce
research-grade assays for development of biomarkers and determination of the
appropriate target populations for their therapy, and potentially enhance their
opportunity for clinical trial success in enriched patient populations. In this
way individualized therapy will be available to patients, and the speed to
market of chemotherapy agents targeted to a subset of the population that would
not have met the criteria for approval for the entire population will be
increased.
  Developing
a Pharmacogenomic Test for Generic Drugs.
  ·Generic drug tests.The majority of patients that require chemotherapy are given drugs, such
as Tamoxifen, that are no longer under patent from the pharmaceutical company
that developed the drug. Once a company that seeks to produce and commercialize
a generic version of one of these drugs has obtained approval from the FDA, the
typically lower-priced generic drug may be used in place of the brand name drug.
Tests for generic drugs are not likely to be developed by the pharmaceutical
industry because they no longer have a commercial interest in those drugs,
therefore, they are appropriate targets for the development of associated
in-house tests. We intend to develop a pharmacogenomic test to determine whether
an individual patient will be included in the 19% of NSCLC patients responding
to Paclitaxel/Carboplatin or whether the physician and patient should consider a
different chemotherapy. Paclitaxel and Carboplatin are both sold as generic
drugs. We intend to develop pharmacogenomic tests to determine response to other
generic drugs, if the market potential of the test is similar to that for
Paclitaxel and Carboplatin. However, there can be no assurance that we will be
successful in developing these tests, or if developed, that such a test will be
commercially viable.
  ·Micro RNA
Analysis. Our technology for extraction of nucleic acids from FFPE
tissues delivers micro RNA as well as DNA and total RNA. We are developing a
service to analyze specific micro RNAs from FFPE specimens for the
pharmaceutical industry.
  13
  License
Agreement with the University of Southern California
  In April
2000, as amended in June 2002 and April 2005, we entered into a license
agreement with USC, pursuant to which USC granted us a worldwide, exclusive
license with the right to sublicense, the patents for RGI-1 and related
technology, for use in human and veterinary diagnostic laboratory services, the
sale of clinical diagnostic products, and the sale of research products to the
research community. We are obligated under the agreement to use best efforts to
work toward the commercialization of the licensed technology. In consideration
for this license, we are obligated to pay royalties to USC, as a percentage of
net sales of products or services using the technology, and to meet a certain
minimum in royalty payments. Royalty expense for the years ended December 31,
2008 and 2007 was $79,052, and $152,502, respectively. USC retains the right
under the agreement to use the technology for research and educational
purposes.
  Upon
authorization from us, USC has the obligation to undertake all responsibilities
for the filing, prosecution and maintenance of all patents covered under the
license; however, we have agreed to reimburse USC for all associated costs. If
we elect not to pursue a particular patent, the rights to that patent revert to
USC if USC takes the necessary steps to prosecute and maintain the patent; if
USC does not undertake such actions, the exclusive license rights to the patent
remain with us. We bear full responsibility for enforcement of patent rights
against all claims of infringement by third parties and the right, but not the
obligation to bring action against any alleged infringement of the licensed
patents by third parties, bearing all costs. USC has the right to pursue any
offensive enforcement we chose not to pursue at its own expense and we may agree
with USC to pursue such action jointly, sharing all related costs.
  This
agreement terminates on the first to occur of: (i) the date of the expiration of
the last to expire of the patents issued in any country, or (ii) if no patents
issue, the date on which any decision or determination to reject or deny
the last remaining patent application or claim becomes final. Either party may
terminate this agreement for uncured material breach or default upon written
notice to the other party. We may terminate the agreement for any reason, upon
written notice to USC. USC may terminate the agreement, upon written notice, in
the event that we transfer or assign our rights and obligations under the
agreement to a third party, in any manner contrary to the terms of the agreement
or in derogation of USC’s proprietary rights; and immediately if we fail to
obtain or maintain insurance coverage and for other specified causes. We are
obligated to indemnify USC against all liabilities to third parties, from claims
arising in connection with the agreement and our use, sale or other distribution
of services and products involving the licensed technology. We also are required
to maintain comprehensive general liability insurance, appropriately covering
the full scope and range of activities we pursue with the licensed
technology.
  License
Agreement with Roche Molecular Systems, Inc.
  In
November 2004, we entered into a license agreement with Roche, pursuant to which
we are collaborating with Roche to produce commercially viable assays related to
the validation of genetic markers for pharmaceutical companies. Specifically, we
have licensed the rights to Roche to use the pre-diagnostic assays we develop in
the course of using our RNA-extraction technologies to provide testing services
to pharmaceutical companies, to produce diagnostic kits that then can be sold
commercially to those pharmaceutical companies. Roche is required to pay us
royalties of a certain percentage of net sales of the diagnostic kits sold to
pharmaceutical companies.
  Roche
will own the rights to all improvements or modifications solely made by it to
the assays or to the technologies we use to develop those assays. Roche has
granted us a license to use the optimized assays that form the basis of the
diagnostic kits for research purposes. Each party has the exclusive right to
prosecute, maintain and defend against infringement, its own patents and
applications for patents using counsel of its choice at its
expense.
  The
agreement will continue until the date on which each and every application for
patent and claim of our patent rights has expired, been disclaimed, been
cancelled, abandoned or terminated, or has been held invalid by a court of law.
Either party may terminated the agreement for material breach or for cause, as
defined in the agreement, upon prior written notice to the other party.
Following the two year anniversary of the effective date of the agreement,
either party may terminate the agreement by meeting certain notice obligations
and provided that the term will be extended to the point necessary to meet the
requirements of any third party pharmaceutical company collaboration transaction
then subject to completion.
  Patent
License Agreement with Roche Molecular Systems, Inc.
  In
November 2004, we entered into an agreement with Roche pursuant to which we
obtained a royalty-bearing, non-exclusive, personal, non-transferable license to
use certain licensed technology, including specified nucleic acid amplification
processes, to perform certain polymerase chain reaction-based human in vitro
clinical laboratory services.
  Roche
retains all proprietary rights to the licensed technologies and our
non-exclusive license is limited to the use of the technology as described
above. Under this agreement, neither party is obligated to defend any
proprietary rights against third parties for infringement.
  In
consideration for this license, we are obligated to pay royalties to Roche, as a
certain percentage of revenues we receive from performing services using the
licensed technology. Royalty expense for the years ended December 31, 2008
and 2007 was $292,481
and $219,721, respectively.
  14
  This
agreement terminates on the date of expiration of the last to expire of the
patents included in the licensed technology. Roche may immediately terminate the
agreement upon written notice in the event of any material change in our
ownership or control, or in the event that we breach certain non-assignability
provisions of the agreement. Roche may also terminate the agreement upon prior
written notice in the event of any breach or default by us of a material term
under the agreement. The agreement will automatically terminate upon our entry
into bankruptcy or similar proceedings.
  Services
Agreement with Taiho Pharmaceutical Co., Ltd.
  In July
of 2001, we entered into an agreement with Taiho pursuant to which we will
provide Taiho with molecular-based tumor analyses for use in guiding
chemotherapy treatment for cancer patients using RGI-1, for use in its business
developing and marketing pharmaceutical and diagnostic products for use against
cancer. Pursuant to the agreement, we appointed Taiho as the exclusive purchaser
in Japan of tests and testing services based upon RGI-1 using gene expression
for: (i) any one or the combination of specified molecular markers,
(ii) the therapeutic use of specified compounds, or (iii) the
diagnosis or therapeutic treatment of specified precancerous and cancerous
diseases. We also granted Taiho the right to be a non-exclusive purchaser in
Japan of tests and testing services based upon RGI-1 using gene expression,
other than those for which Taiho has exclusivity, for: (i) any one or
combination of molecular markers, (ii) the therapeutic use of any compound
or biological product against cancer, or (iii) the diagnosis or therapeutic
treatment of precancerous and cancerous diseases.
  We are
obligated to notify Taiho of new molecular markers, therapeutic compounds and
diseases for which RGI-1 may be useful and to offer Taiho the option of
including those within its exclusivity. Taiho must perform all testing services
pursuant to our instructions and we retain the right to process some or all of
the testing services for Taiho internally, or through any other designated and
licensed laboratory; provided that such other laboratory is under an appropriate
obligation of confidentiality with respect to this agreement.
  In
consideration for the testing services provided, Taiho made a fixed amount
advanced payment to us and is obligated to pay regular testing fees, covering
the specific services performed on a monthly basis. Taiho is obligated to
purchase a minimum amount of testing services from us during each calendar
quarter. Revenue recognized under this agreement for the years ended December
31, 2008 and 2007 was $1,844,725, and $2,945,800, respectively. We obtained a
non-exclusive sublicense from the University of Southern California for Taiho
for distribution of the testing services in Japan. We retain all intellectual
property rights to our proprietary testing services and materials, other than
specimens provided by Taiho, and all related patent applications. Provided that,
however, Taiho retains all intellectual property rights to the results of the
testing services performed under the agreement.
  Taiho has
agreed to indemnify us against any damages claims brought by third parties based
on the distribution of the testing services; any claims related to false
advertising or unfair competition; and any regulatory challenges. We have agreed
to indemnify Taiho against claims of intellectual property infringement related
to the testing services. Both parties have agreed to indemnify one another
against any breaches of warranties or failures to perform obligations under the
agreement. We have agreed to maintain comprehensive general liability insurance
for the term of the agreement and for a specified period thereafter. Either
party has the right to terminate the agreement in the event of an uncured
material breach by the other party, upon written notice, or for cause, as
defined under the agreement. Since we do not hold a patent for RGI-1 in Japan,
we have agreed to negotiate to adjust Taiho’s fee obligations in the event that
a third party obtains a patent for similar testing services in Japan and offers
those services at a competitive rate. In the event that we cannot reach an
agreement Taiho has the right to terminate the agreement upon fulfilling certain
notice obligations. In addition, should Taiho terminate the agreement for cause,
Taiho retains the right to have Dr. Peter Danenberg and/or Kathleen Danenberg
provide the testing services in the same manner as we provide them under the
agreement. This agreement with Taiho was renewed for an additional two
years.
  Services
Agreement with SmithKline Beecham Corporation (d.b.a. GlaxoSmithKline) (“GSK”)
and Amended and Restated Service Agreement withGSK
  In
January 2006, we entered into an agreement with GSK, pursuant to which we
provide services in relation to profiling the expression of various genes from a
range of human cancers. Under the agreement, we will provide GSK with testing
services as described in individual protocols and GSK will pay us for such
services based on the pricing schedule established for each particular protocol.
GSK is obligated to make minimum annual payments to us under the agreement and
also was obligated to make a non-refundable upfront payment to us of $2,000,000,
to be credited against work undertaken pursuant to the agreement. The contract
also provides for minimum annual assay testing requirements over a three year
period ending January 2009. The
minimum amount of revenue to be recognized during theinitialterm,
which expiredin
January 2009, will be $6,500,000. Revenue recognized under this agreement
for the year ended December 31, 2007 and December 31, 2008, was $2,818,288
and $1,255,031, respectively. GSK retains the rights to any intellectual
property resulting from our performance of the testing activities contemplated
under the agreement, and we have agreed to cooperate with and assist GSK with
taking any steps necessary for obtaining copyright protection for such
intellectual property. We retain all intellectual property rights to our
proprietary testing and gene production processes and all related
patents.
  15
  Both
parties have agreed to indemnify one another mutually against any liabilities to
third parties arising from a party’s negligence or failure to perform activities
contemplated under the agreement or as a result of any material breaches of the
agreement by a party, or an employee or affiliate of that party. The initial
term of the agreement extended until January 2009. In December 2008 we entered
into an Amended and Restated Master Service Agreement with GSK to extend the
agreement for two years. Subsequently, the parties have the option to extend the
agreement for one-year renewal periods upon their mutual written consent. GSK
has the right to terminate the amended and restated agreement or any particular
study to be performed under the agreement, with or without cause, upon prior
written notice to us. Either party may terminate the agreement upon written
notice, for uncured material breach or for cause, as defined under the
agreement.
  Master
Laboratory Test Services Agreement with GlaxoSmithKline Biologicals (“GSK
Bio”)
  In
December 2006, we entered into an agreement with GSK Bio, the vaccine division
of GlaxoSmithKline, pursuant to which we will provide testing services,
principally in relation to profiling the expression of various genes from a
range of human cancers, primarily through a laboratory we are establishing in
Scotland, in part using funding provided by GSK Bio. We will conduct the testing
services on tissue specimens provided by GSK Bio pursuant to various statements
of work governed by this agreement and GSK Bio will pay us for the testing
services based on pricing schedules outlined in part in the agreement and
further in each of those statements of work. The agreement required that GSK Bio
make an upfront payment of $2,620,000 which we received in December 2006. The
agreement further specifies that GSK Bio will pay annual minimum payments in
2007, 2008 and 2009 and that the upfront payment made in December 2006 will be
credited against the annual minimum payments in 2007 and 2008. The agreement
also provides that any differences between the annual minimum payments made in
2007, 2008 or 2009 and the amounts due to us for testing services performed on
specimens submitted by GSK Bio during the years the three years ended December
31, 2009 be credited towards services performed during the year ending December
31, 2010, the final year of the agreement. The minimum amount of revenue to be
recognized during the term of this contract, which will expire in December 2010,
is approximately $7,300,000. The timing of the recognition of these amounts is
dependent upon when GSK submits the specimens for testing. We did not recognize
any revenue from this agreement in 2006. We recognized $938,701and $3,631,716 of
revenue under this agreement for the year ended December 31, 2007 and 2008,
respectively.
  GSK Bio
retains intellectual property rights to all inventions, improvements and data
resulting from the testing services and bears the full expense of patent
prosecution and enforcement, trademark prosecution and otherwise securing the
intellectual property rights of such inventions, improvements and data. We
retain all intellectual property rights related to our testing services,
proprietary processes and all associated intellectual property and bear the full
responsibility for prosecuting and maintaining our intellectual property rights.
We have agreed to joint ownership by us and GSK Bio of any improvements to our
intellectual property that occur in the course of our providing the testing
services. GSK Bio has the discretion to seek patent protection for the joint
intellectual property at its own expense and if it declines to do so, we have
the right to seek patent protection at our expense. All intellectual property
owned by either party on the date of this agreement remains the exclusive
property of the owning party. We and GSK Bio have agreed to mutually indemnify
one another against all claims arising based on the agreement.
  The
agreement continues until December 31, 2010 or until the completion of the
recruitment phase of a specific trial of GSK Bio, as contemplated by the
agreement. GSK Bio has the right to terminate the agreement at anytime, upon
prior written notice to us. Either party may terminate the agreement for uncured
material breach, if the other party enters into bankruptcy or similar
proceedings, or if the other party is unable to perform its obligations under
the agreement for a period of more than three months due to force majeure. On
February 9, 2009 we implemented a reduction of workforce pursuant to which
we are closing our subsidiary in Edinburgh. See "liquidity and capital
resources" for additional information.
  Service
Provider Agreement with Affymetrix
  We have
obtained from Affymetrix a non-exclusive, non-transferable, non-sublicensable
license to use its GeneChip® microarrays to provide our pharmacogenomic testing
services to our academic, biotech and other industrial clients. Under this
agreement, we work with Affymetrix pursuant to a formal service provider
arrangement. Prominent among the features of this arrangement is that each party
has the right to use the other party’s trademarks and logos in the course of
advertising and marketing their own products and services. However, such right
may be terminated at the option of either party if the other party’s use does
not meet the first party’s usage policy. Except as expressly agreed to,
Affymetrix retains all rights or licenses to any patents or other intellectual
property owned or licensable by it. This agreement also greatly expands our
right to market and sell the results of our pharmacogenomic testing using
Affymetrix’s proprietary probe arrays. We pay Affymetrix based on the number of
their probe arrays we use on a quarterly basis, pursuant to pricing schedules
broken down by the type of client to whom we are providing our services. In
addition, our clients also may purchase probe arrays directly from Affymetrix
and direct that Affymetrix ship those probe arrays to us, for dedicated use in
conducting pharmacogenomic testing services for such clients. During the years
ended December 31, 2007 and December 31, 2008, we paid $379,702 and $155,402,
respectively, to Affymetrix under this agreement.
  We have
agreed to grant Affymetrix a non-exclusive, worldwide, fully sublicensable,
fully paid-up, royalty-free, irrevocable, perpetual license to all product
improvements that result from our use of the probe arrays. We have the right to
request that Affymetrix design and manufacture, under terms of strict
confidentiality, custom probe arrays or custom nucleic acid probe panels for
specific sets of nucleic acid target sequences. We agree to indemnify Affymetrix
for all liabilities to third-parties arising from or relating to such target
sequences or their use.
  16
  This
agreement has a term of one year, with the option for renewal for an additional
one-year term upon mutual agreement of the parties. Affymetrix has the right to
terminate the agreement for cause, upon 30 days written notice, (i) if it
receives two or more substantial client complaints in a one-year period
regarding the services we are providing to our clients, (ii) if it determines
that we have failed to maintain a high level of service, or (iii) if it
determines that we have failed to successfully meet the requirements of any
reasonable technical or scientific audits administered by
Affymetrix.
  Agreement
with Shanghai BioChip
  In March
2007, we entered into a collaboration agreement with Shanghai BioChip Company,
Ltd. (“SBC”) pursuant to which SBC will provide pharmacogenomic testing services
in China using our RGI-1 extraction technology. Under this agreement, we work
with SBC pursuant to a formal statement of work (“SOW”) arrangement. This
agreement greatly expands our ability to provide our services globally,
particularly in China. Specifically, this agreement allows us to collaborate
with some of our current clients in the pharmaceutical industry as we can now
process specimens collected during clinical trials that are based in China.
Additionally, this agreement allows us to offer our services to companies within
China.
  Pursuant
to the agreement, we have granted SBC an exclusive license in China to provide
services in China using our proprietary RGI-1 RNA extraction technology. Subject
to consent from the University of Southern California, we will grant SBC an
exclusive sublicense to patents licensed from the University of Southern
California for distribution of testing services in China. In turn, SBC will
perform RNA extraction from FFPE tissue specimens exclusively for us during the
term of the agreement. SBC must perform all testing services pursuant to our
instructions and we retain the right to generate and report all final results.
All proposed contracts from SBC using our testing services must be explicitly
approved in writing by us. We have also retained the rights to any intellectual
property which result from the performance of this collaboration
agreement.
  Outside
of certain shared costs, as specified in the agreement, we and SBC each are
individually and separately responsible for our own costs. Specifically, we are
responsible for costs related to royalty payments to third parties under
existing licensing agreements, license fees for our intellectual property and
the salary of the General Manager of the facility, costs associated with the
analysis of raw data from test results, costs associated with generating final
reports to customers, costs of responding to customer inquiries regarding the
results of analysis the data and the report of test results, and costs
associated with providing training and assistance with laboratory
setup.
  SBC is
responsible for expenses related to the initial cost of laboratory equipment, as
well as the cost of any additional equipment necessary as a result of increases
in volume of business; maintenance or service fees and expenses for the existing
testing equipment; the cost of reagents; the cost of qualified laboratory space,
including any rent for such space; expenses and salaries associated with
laboratory personnel, including the Vice-General Manager and necessary FTE
personnel to perform collaboration services; the costs of responding to customer
inquiries regarding the performance of the testing, storage of the samples and
other record keeping; and the costs associated with training and commencement of
operations.
  17
  Our
agreement with SBC has an initial term of five years, with an automatic renewal
for an additional three-year term unless either party gives 90 days notice in
advance of the renewal date of its intent not to renew. We may terminate the
agreement on the occurrence of: (i) errors in SBC’s processing of samples that
exceeds levels in our other facilities; (ii) the inability to achieve laboratory
qualifications within 12 months; (iii) the failure to adequately address quality
concerns raised by two or more customers; and (iv) refusal by SBC to agree on a
reasonable request for a SOW. Either party may terminate this agreement for
uncured material breach, insolvency or bankruptcy, or substantial use of the
name of the other party without consent.
  Agreement
with Hitachi Chemical Co., Ltd.
 
 On July
26, 2007, we entered into a collaboration agreement with Hitachi Chemical Co.,
Ltd. (“Hitachi”), a leading diagnostics manufacturer in Japan (the “Hitachi
Agreement”). Under the terms of this agreement, Hitachi will begin using our
proprietary and patented techniques to extract genetic information from
formalin-fixed paraffin-embedded (FFPE) tissue samples collected in Southeast
Asia, Australia and New Zealand. As part of this collaboration agreement, we
will provide Hitachi with the technical information and assistance necessary to
perform the testing services. Hitachi also plans to introduce us to potential
new testing services customers in the region to expand the testing of FFPE
clinical samples in Asia. The Southeast Asian countries covered under this
agreement include Japan, North Korea, South Korea, Taiwan, Mongolia, Pakistan,
Bangladesh, Sri Lanka, Nepal, Singapore, Malaysia, Indonesia, Brunei, Thailand,
Myanmar, Laos, Cambodia, Vietnam and the Philippines (the
“Territory”).
 
 Our
agreement with Hitachi has an initial term of three years, expiring on March 31,
2010, with an automatic renewal for one year at the end of the original period
under the same terms and conditions. Pursuant to the agreement, Hitachi will
receive a percentage of the revenue, as provided in the agreement, collected
from our clients in the Territory, for its testing services
performed.
  The
Company has provided to Hitachi required laboratory equipment which Hitachi has
agreed to pay the Company and is included as part of accounts receivable
totaling $248,799.
  Intellectual
Property
  We rely
on a combination of patents, trade secret, copyright and trademark laws, license
agreements, nondisclosure and other contractual provisions and technical
measures to protect our intellectual property rights in our products, services,
technology and processes. We have proprietary rights in four areas.
  First, we
exclusively license from USC the use of the RGI-1 extraction method, which has
been patented in the United States. The RGI-1 extraction method is covered
by four U.S. patents, which are all included in the exclusive license from
USC. We use this patented method when processing specimens, particularly
isolating RNA from FFPE tissue, as part of our contractual obligations with
various clients, including Taiho and Roche. We also have proprietary rights in
additional variations on the RGI-1 extraction technology, for which patent
applications are pending in the United States and in select critical countries.
We also use or intend to use these proprietary methods when meeting our
contractual obligations with various clients and when developing diagnostic
tests for cancer. We intend to protect all of these proprietary technologies,
including our RGI-2 extraction method, by continuing to file patent
applications in the United States and abroad.
  Next, we
have identified and are in the process of identifying tumor response markers,
which provide an indication of an anti-cancer drug’s effectiveness or
ineffectiveness based upon the level of such determinant in a particular tumor.
We intend to protect these proprietary developments to the fullest extent
allowable under current law. We have patented and have patent applications
pending related to certain tumor response markers in the United States and in
select critical countries. For example, we have patented methods of quantifying
expression of response markers from tumor tissue, which provide guidance in
determining appropriate chemotherapeutic regimens for patients that are
candidates for treatment with particular chemotherapies. Currently, we have eleven United States
patents that relate to certain tumor markers. Such markers include thymidylate
synthase (TS), dihydropyrimidine dehydrogenase (DPD), excision repair gene CC1
(ERCC1), glutathione-s transferase pi (GST-π), epidermal growth factor
receptor (EGFR) and HER2/neu gene. We use some of these patented methods
as part of our contractual obligations with various clients. Additionally, we
have licensed the use of our HER2/neu methods to
Roche clients.
  Additionally,
we have proprietary rights in our database, in which we have compiled the
results of our analysis of archived paraffin-embedded tissue specimens, clinical
trials, and recently received patient tissue specimens in establishing response
determinants for anti-cancer drugs, and in which we are continuing to compile
data. We have protected and will continue to protect this database as a trade
secret.
  18
  Finally,
we have proprietary rights and know-how in the factors which allow us to
standardize the quantitative gene expression levels used in our database, and
the computation of such values from the readings provided by the laboratory
equipment used in the analysis of the mRNA extracted from a patient’s tumor,
using our proprietary conversion factors.
  We have
and will continue to pursue the registration of our trademarks in the United
States and internationally. Response Genetics, RGIonline.com, Danenberg Tumor
Profile, Man in Circle Design, and DTP are registered trademarks in the United
States. We have pursued additional marks by filing trademark applications in the
United States and abroad. We currently hold the domain names
www.responsegenetics.com and www.responsedx.com.
  We intend
to broaden the scope of our intellectual property and consider our technologies
and proprietary know-how to be critical to our future success.
  Regulation.
  The
Clinical Laboratory Improvement Amendments of 1988, or CLIA, provide for the
regulation of clinical laboratories by the United States Department of Health
and Human Services (DHHS). This law requires the certification of clinical
laboratories that conduct tests on human subjects and imposes specific
conditions for certification. CLIA is intended to ensure the accuracy,
reliability and timeliness of patient test results performed in clinical
laboratories in the United States by mandating specific standards in the areas
of personnel qualification, administration participation in proficiency testing,
patient test management, quality control, quality assurance and inspections.
CLIA regulations also contain guidelines for the qualification,
responsibilities, training, working conditions and oversight of clinical
laboratory employees. In addition, specific standards are imposed for each type
of test that is performed in a laboratory. The categorization of commercially
marketed in vitro diagnostic tests under CLIA is the responsibility of the FDA.
The FDA will assign commercially marketed test systems into one of three CLIA
regulatory categories based on their potential risk to public health. Tests will
be designated as waived, of moderate complexity or of high complexity. CLIA and
the regulations promulgated thereunder are enforced through quality inspections
of test methods, equipment, instrumentation, materials and supplies on a
periodic basis.
  CLIA regulations are enforced through
biennial surveys and inspections. Moreover, CLIA inspectors may make random
inspections of our laboratory. Since April 21, 2008, we have been CLIA certified
and any loss of CLIA certification, change in CLIA or CLIA regulations or in the
interpretation thereof, could have a material adverse effect on our
business.
  Other Laboratory
Regulations
  CLIA does not preempt more stringent
state clinical laboratory laws. Since March 26, 2007, we have been a licensed
clinical laboratory in California. This license isvalid until March 14, 2010.California laws establish
standards for day-to-day operation of our clinical laboratory, including the
training and skills required of personnel and quality control. Moreover, several
states require that we hold licenses to test specimens from patients residing in
those states. Accordingly, weare also licensed in Florida,
Pennsylvania, Maryland and Rhode Island. We have a license application pending
in New York. Other states in which we chose to operate may have similar
requirements or may adopt similar requirements in the future. Finally, we may be
subject to regulation in foreign jurisdictions if we seek to expand offering our
tests or distribution of our tests internationally.
  If we lose our California license, we
would not be able to sell tests for prospective clinical trials which would
limit our revenues and harm our business. If we were unable to obtain or lost
necessary licenses in other states, we would not be able to test specimens in
those states.
  External
Accreditation
 
 We
participate in the College of American Pathologists’ (CAP) quality surveillance
program and our laboratory is CAP accredited.
 
 The CAP
accreditation program involves on-site inspections of the
laboratory.  CAP is an independent organization of board-certified
pathologists which accredits, on a voluntary basis, laboratories nationwide, and
which has been accredited by CMS to inspect clinical laboratories to determine
adherence to the CLIA standards.
  HIPAA Compliance and Privacy
Protection
  The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) established comprehensive federal protection
for the privacy and security of health information. The HIPAA standards apply to
three types of organizations, or “Covered Entities:” health plans, health care
clearing houses, and health care providers who conduct certain health care
transactions electronically (“Standard Transactions”). Covered Entities must
have in place administrative, physical and technical safeguards to protect
against the misuse of individually identifiable health information.
Additionally, some state laws impose privacy protections more stringent than
HIPAA’s and some states impose privacy obligations specifically applicable to
clinical laboratories.  Additionally, many states have implemented
data breach laws requiring additional security measures for certain types of
personal information and also public notification of the theft, breach or other
loss of personal information. There are also international privacy laws, such as
the European Data Directive and various national laws implementing the Data
Directive, that impose restrictions on the access, use, and disclosure of health
information and other types of identifiable personal information. All of these
laws may impact our business. As of December 31, 2008, we became a Covered
Entity subject to HIPAA privacy and security standards because our testing
services became reimbursable by insurance payors and we began conducting
Standard Transactions. We formed an active program designed to address HIPAA
regulatory compliance.  This program will likely require updating to
comply with amendments to HIPAA contained in the American Recovery and
Reinvestment Act of 2009.  Regardless of our own Covered Entity
status, HIPPA presently applies to many of the facilities and physicians with
whom we do business and controls the ways in which we may obtain tissue
specimens and associated clinical information from those facilities and
physicians. We believe we have taken the steps required for us to comply with
applicable health information privacy and confidentiality statutes and
regulations under both federal and applicable state jurisdictions. However, we
may not be able to maintain compliance in all jurisdictions where we do
business. Our failure to comply with these privacy laws or significant changes
in the laws restricting our ability to obtain tissue specimens and associated
patient information could significantly impact our business and our future
business plans.
  19
  Food
and Drug Administration
  The U.S.
Food and Drug Administration, or the FDA, regulates the sale or distribution, in
interstate commerce, of medical devices, including in vitro diagnostic test
kits. The information that must be submitted to the FDA in order to obtain
clearance or approval to market a new medical device varies depending on how the
medical device is classified by the FDA. Medical devices are classified into one
of three classes on the basis of the controls deemed by the FDA to be necessary
to reasonably ensure their safety and effectiveness. Class I devices are subject
to general controls, including labeling, pre-market notification and adherence
to the FDA’s quality system regulation, which are device-specific good
manufacturing practices. Class II devices are subject to general controls and
special controls, including performance standards and post-market surveillance.
Class III devices are subject to most of the previously identified requirements
as well as to pre-market approval. Most in vitro diagnostic kits are regulated
as Class I or Class II devices. Entities that fail to comply with FDA
requirements can be liable for criminal or civil penalties, such as recalls,
detentions, orders to cease manufacturing and restrictions on labeling and
promotion.
  The FDA
presently requires clearance or approval of diagnostic test kits that are sold
widely to labs, hospitals and doctors, considering them to be medical devices.
However, diagnostic tests that are developed and performed by a CLIA-certified
reference laboratory, known as “home-brew,” “in-house” or “laboratory-developed”
tests, have been generally considered clinical laboratory services. The FDA has
stated that it has the power to regulate laboratory-developed tests such as the
ones that we hope to develop. Nevertheless, it has exercised enforcement
discretion in not regulating most laboratory-developed tests performed by high
complexity CLIA certified laboratories.
  On July
26, 2007, the FDA published a “Draft Guidance” describing the Agency’s current
thinking about potential regulation of  “In Vitro Diagnostic
Multivariate Index Assays (IVDMIA).” An IVDMIA is a type of “in-house”
or “lab-developed” test and is defined as a test system that employs
data, derived in part from one or more in vitro assays, and an algorithm that
usually, but not necessarily, runs on software, to generate a result that
diagnoses a disease of condition or is used in the cure, mitigation, treatment,
or prevention of disease. The Draft Guidance suggests that the FDA may seek to
regulate such tests in the future. IVDMIA tests may include diagnostic tests
using multiple genes to determine whether a patient has a high or low risk of
recurrence or response to a particular chemotherapy.
  The
degree to which in-house tests are regulated by the FDA has also been the focus
of recent Congressional attention, and Congress is considering the introduction
of legislation that would all subject all such tests (not only IVDMIAs) to
premarket review or approval by the FDA.
  The
diagnostic and chemotherapy response tests being developed by Response Genetics
include the use of gene sets involving multiple genes and algorithms to
determine whether a patient falls into a “high” or “low” risk for recurrence of
response to a particular chemotherapy. Response Genetics plans to continue
development of these tests as “in house” tests until the degree to which these
tests are to be regulated by the FDA becomes clearer. We will continue to
monitor both the FDA and Congress and we intend to comply with any new
requirements that may apply.
  Good
Laboratory Practice (GLP)
  We are
subject to various regulatory requirements designed to ensure the quality and
integrity of our non-clinical testing processes. Our standard operating
procedures are written in accordance with applicable regulations and guidelines
for operating in the United States. The industry standards for conducting
preclinical laboratory testing are embodied in Good Laboratory Practice
regulations, or GLP, regulations promulgated by the FDA. In the United States,
non-clinical studies intended for FDA submission must be conducted in accordance
with GLP; foreign governments may require our North American clients to comply
with certain regulatory requirements of other countries (in order to gain
approval within these countries), such as regulations promulgated by the
Japanese Ministry of Health, Labor and Welfare and Ministry of Agriculture,
Forestry and Fisheries, and in Europe, the Organisation for Economic
Co-operation and Development. GLP regulations specify requirements for
facilities, equipment, and professional staff and standardized procedures for
conducting studies, including procedures for recording and reporting data and
for managing study materials and records. In addition, we have established a
required quality assurance program that monitors ongoing compliance with GLP
regulations by auditing test data and reporting and conducting inspections of
testing procedures.
  Our
business is also subject to regulation under state and federal laws regarding
environmental protection and hazardous substances control, such as the Federal
Occupational Safety and Health Act, the Environmental Protection Act, and Toxic
Substances Control Act.  These regulations, among other things,
require work practice controls, protective clothing and equipment, training and
other measures designed to minimize exposure to chemicals and transmission of
pathogens.  We believe that we are in compliance with these and other
applicable laws and that the costs of our ongoing compliance will not have a
material adverse effect on our business.  However, statutes and
regulations applicable to our business may be adopted which impose substantial
costs to assure compliance or otherwise materially adversely affect our
operations.
  20
  Regulation
of Reimbursement and Coverage
 
 Revenues
for clinical laboratory testing services come from a variety of sources and
depend significantly on the availability of third-party reimbursement, including
from Medicare and Medicaid programs, commercial insurers and managed care
organizations. We are a Medicare laboratory services provider and intend to
become a Medicaid laboratory services provider. We also receive reimbursement
from third-party payors for our testing services. However, as is the case with
healthcare services generally, the majority of payors pay
for our testing services at varying levels that may be
significantly lower or otherwise differ from our list prices. Obtaining
reimbursement from third-party payors is both time consuming and
expensive. Payment from third-payors may not be sufficient to allow us
to sell our services on a profitable and competitive basis.
  In 2008,
we derived approximately 3% of our net sales of ResponseDX testing services
directly from the Medicare program. Therefore, compliance with complex
Medicare reimbursement rules is important to our operations. Once
Medicare has determined that it will cover a particular test, or that a test
will be provided as a benefit, payment is generally made under the Clinical
laboratory Fee Schedule with amounts assigned to specific procedure
billing codes. Each Medicare carrier jurisdiction has a fee
schedule that establishes the price for each specific laboratory billing
code. This fee schedule is updated annually. As a Medicare-participating
laboratory based in California, we bill the Medicare program's California
contractors and will have to comply with this contractor's
coverage and payment policies. In recent years, both government and
private sector payers have made efforts to contain or reduce health care costs,
including reimbursement for clinical laboratory services.
 
 Manufacturing
  We
currently intend to rely on contract manufacturers or collaborative partners to
produce materials necessary for our research and development efforts and to
produce our diagnostic tests. We plan to continue to rely on these manufacturers
and collaboration partners to manufacture these materials if any of our
diagnostic tests is approved for marketing by the FDA or any foreign regulatory
authority.  We do not have manufacturing experience.  We may
not be able to identify or enter into satisfactory agreements with collaborative
partners.
  Information
Technology
  We have
implemented an internally developed database system that is used to perform
tracking, evaluation, and reporting of laboratory specimens as they are
analyzed. The database system is maintained using application software
consisting of a multi-tier MS SQL Server application using Thin Crystal reports
for data reporting. Analysis results are imported from TaqMan® PCR instruments.
The application platform consists of a Windows 2000 server on the back end, with
Windows XP Professional workstations as clients operating within the corporate
Local Area Network (“LAN”). We also make use of commercial software applications
that allow biostatistical analysis of data generated from chip array studies.
These systems will be used in the facilities developed overseas by us to ensure
that results from sample processing are consistent from location to
location.
  Pursuant
to a services agreement with Jubilant Biosys Ltd. (“Jubilant”), we have
purchased software that allows us to integrate all of our laboratory database
systems. Additionally, this software enables us to have a unified database
system in all of our locations, particularly those located overseas, and to
provide worldwide bioinformatics services. This unified database system replaced
the previous RGI laboratory database systems.
  We employ
a LAN configured as a switched Ethernet network over the TCP/IP protocol
supporting the responsegenetics.com domain. This LAN hosts the basic business
functions for us including office applications, electronic mail, general
ledger/accounting software, internet connectivity etc. A similar configuration
will be established in our new facilities as needed to support business
efficiency.
  Specimen
storage equipment consists of lockable cabinets that are catalogued for the
storage of paraffin-embedded specimens for our clients. Our database provides
locator information in order to retrieve these archived specimens as needed. In
addition, we maintain freezers to store frozen tissue specimens. These freezers
are monitored via computerized probes on a continuous basis to ensure that
temperatures are maintained at levels necessary to keep these specimens frozen.
Should temperatures in any of the freezers move out of range due to mechanical
failure an emergency alert is sent to us for response. These freezers are also
supported by a freestanding emergency backup generator that will engage in the
event of a general power outage to in order to maintain freezer temperatures at
necessary levels. As we expand globally, similar storage systems will be
developed at our facilities as necessary to safeguard tissue
specimens.
  Competition
  We
provide services in a segment of the healthcare industry that is highly
fragmented and extremely competitive. Any failure to respond to technological
advances and emerging industry standards could impair our ability to attract and
retain clients. This industry is characterized by rapid technological change.
Our actual and potential competitors in the United States and abroad may include
major pharmaceutical, biotechnology, genomic and diagnostic companies such as
Genomic Health, Inc. and Clinical Data, Inc., large clinical laboratories,
universities and other research institutions. Many of our potential competitors
have considerably greater financial, technical, marketing, research and other
resources than we do, which may allow these competitors to discover important
information and technology before we do. It is anticipated that competition will
continue to increase due to such factors as the perceived potential for
commercial applications of biotechnology and the continued availability of
investment capital and government funding for cancer-related research. Our
competitors may succeed in developing diagnostic products that circumvent our
technologies or product candidates. Also, our competitors may succeed in
developing technologies or products that are more effective than those that will
be developed by us or that would render our technology or product candidates
less competitive or obsolete.
  21
  In
addition, we are developing our services and product candidates to impact
certain methods for treating cancer. If those methods change, it is likely that
the demand for our services and product candidates would significantly decline
or cease altogether. The development of new or superior competing technologies
or products, or a change in the methodology of treating cancer, could affect our
competitive position and harm our business. Moreover, these competitors may
offer broader product lines and have greater name recognition than us and may
offer discounts as a competitive tactic.
  Additionally,
several development-stage companies are currently making or developing product
candidates that compete with or will compete with our potential products.
Competitors may succeed in developing, obtaining approval from the FDA or
marketing technologies or products that are more effective or commercially
attractive than our potential products or that render our technologies and
current or potential products obsolete. Competitors may also develop proprietary
positions that may prevent us from commercializing product
candidates.
  Employees
 
 As of
December 31, 2008, we had 47 full-time and part-time employees. We employ 40
full-time and seven part-time employees. Our wholly-owned subsidiary, Response
Genetics, Ltd. employed 10 full time employees;
however,in
connection with the reduction of workforce pursuant to which the Company is
closing its United Kingdom testing facility to consolidate services at its
CLIA-certified laboratory facilities in Los Angeles, we made
all of these employees redundant in
February  2009.  Our employees are not represented by
any collective bargaining organizations and we consider our relations with our
employees to be good.
  Reports
to Security Holders
  We are a
Delaware corporation with our principal executive offices located at 1640
Marengo Street, 6th Floor,
Los Angeles, CA 90033. Our telephone number is (323) 224-3900 and our web site
address iswww.responsegenetics.com
.. We make available free of charge through the Investor Relations section of our
web site our quarterly reports on Form 10-Q, our Annual Report on Form 10-K, and
all amendments to those reports as soon as reasonably practicable after such
material is electronically file with or furnished to the Securities and Exchange
Commission.
  Item
1B. Unresolved Staff Comments.
  None.
  Item
2.  Properties.
  Our
corporate headquarters are located at 1640 Marengo St., Los Angeles, California,
90033. We sub-lease 11,271 square feet of space, adjacent to the University of
Southern California, where research and development and administrative functions
are performed. Our current lease expires on January 31, 2010. We believe that
our facility is sufficient for our U.S. operations in the near term. We also
sub-lease 180 square feet of space at 103 South Carroll Street, Suite 2b,
Frederick, Maryland 21701, where administrative functions are performed. Our
current lease expires on August 31, 2009.
  Our
subsidiary, Response Genetics Ltd., maintains its headquarters at Chancellor’s
Building, Royal Infirmary of Edinburgh, 49 Little France Crescent, Edinburgh
Scotland EH16 5JB. We lease 490 square meters of space (approximately 5,275
square feet of space), where our administrative functions and laboratory
functions are performed. Our current lease expires on March 31, 2009, and
converts to month to month thereafter. We have exercised our option to continue
our lease for an additional month through April 30,
2009.
  Item
3. Legal Proceedings.
  We are
not a party to any legal proceedings.
  Item
4.  Submission of Matters to a Vote of Security Holders.
 
 None.
  22
  Part
II
  Item
5.  Market for Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
  Our
Common Stock is traded on the NASDAQ Capital Market under the symbol "RGDX" and
has been trading since our initial public offering on June 4, 2007. The
following table sets forth the range of high and low sales prices of our Common
Stock, based on the closing price of our Common Stock on a given day, in each
quarter since our Common Stock began trading.
 2008First

                                                                                        Quarter
                                                                                  
                                                                                  
                                                                                  Second

                                                                                        Quarter
                                                                                  
                                                                                  
                                                                                  Third

                                                                                        Quarter
                                                                                  
                                                                                  
                                                                                  Fourth

                                                                                        QuarterStock
      price - High
                                                                                  
                                                                                  $
                                                                                  5.05
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.85
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.40
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.33Stock
      price - Low
                                                                                  
                                                                                  $
                                                                                  3.50
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.11
                                                                                  
                                                                                  
                                                                                  $
                                                                                  2.63
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.18  2007First

                                                                                                                Quarter
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            Second

                                                                                                                Quarter
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            Third

                                                                                                                Quarter
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            Fourth

                                                                                                                QuarterStock
      price - High
                                                                                                            
                                                                                                            
                                                                                                            N/A
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            7.14
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            6.95
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            5.22Stock
      price - Low
                                                                                                            
                                                                                                            
                                                                                                            N/A
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            6.95
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            3.26
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            2.99
  
 Stockholders
 
 As of
March 27, 2009, there were approximately 41 stockholders of record of the
12,239,276 outstanding shares of Common Stock.
 
 Dividends
 
 The
Company has not paid dividends to its stockholders since its inception and does
not plan to pay cash dividends in the foreseeable future. The Company currently
intends to retain earnings, if any, to finance the growth of the
Company.
  
 Recent
sales of Unregistered Securities
  There
were no sales of unregistered equity securities by the Company in the
period covered by this annual report.
  Use of
Proceeds from Registered Securities
  On June 8, 2007 we completed our initial public
offering of 3,000,000 shares of our common stock at $7.00 per share, pursuant to
a registration statement on Form SB-2 (commission file No. 333-139534), which
was declared effective on June 4, 2007. The managing underwriter of our initial
public offering was Maxim Group LLC. Net proceeds from the initial public
offering after deducting underwriting commissions and fees but before expenses
were $18,950,000.
 
 We have
used and expect to continue use the proceeds from our initial public offering
for research and development, business expansion, and working capital and other
general purposes. Pending such use, the net proceeds from the offering have been
invested in interest-bearing money market accounts. None of the net proceeds
from the offering were paid directly or indirectly to any of our directors or
officers (or their associates) or persons owning 10% or more of any class of our
equity securities or to any other affiliate, other than in the form of wages or
salaries, fees and bonuses paid out in the ordinary course of business. We will
retain broad discretion over the use of the net proceeds received from our
initial public offering. The timing and amount of our actual expenditures may
vary significantly depending on a number of factors, including the successful
early clinical development of our lead product candidates, cash flows from
operations and the anticipated growth of our business. We have incurred the
following costs as they relate to our use of proceeds including research and
development costs of $3,373,578, business expansion costs primarily related to
the set up and operation of our European lab of $3,376,654, and $1,543,163 of
cost primarily related to establish and continue investor relations, public
relations, and sales and marketing activities necessary for a public
company.
 
 Purchases
of Equity Securities
  The
Company made no purchases of its equity securities in the period covered by this
annual report.
  23
  Item
6. Selected Financial Data.
  The
following selected consolidated statement of operations data for the years ended
December 31, 2008 and 2007 and the balance sheet data at December 31, 2008 and
2007 have been derived from our audited consolidated financial statements, which
are included elsewhere in this report. Historical results are not necessarily
indicative of the results of operations for future periods. The following data
is qualified in its entirety by and should be read in conjunction with the
rest of the information contained in this section and our
consolidated financial statements and related notes included elsewhere in this
report.
  Consolidated
Statement of Operations Data:
  Year
      ended
                            
                            
                            Year
      endedDecember 31,
                              2008
                            
                            
                            December 31,
                              2007Revenue
                            
                            $
                            7,124,771
                            
                            
                            $
                            7,789,789Operating
      Expenses:Cost
      of revenue
                            
                            $
                            3,594,355
                            
                            
                            $
                            4,045,715General
      and administrative
                            
                            $
                            7,863,313
                            
                            
                            $
                            5,156,711U.K.
      operating expenses
                            
                            $
                            2,477,687
                            
                            
                            $
                            1,630,179U.K. impairment
      of property and equipment
                            
                            
                            893,826
                            
                            
                            
                            -Research
      and development
                            
                            $
                            2,155,749
                            
                            
                            $
                            2,455,044Operating
      (loss)
                            
                            $
                            (9,860,160
                            )
                            
                            $
                            (5,497,860
                            )Net
      (loss)
                            
                            $
                            (9,485,538
                            )
                            
                            $
                            (5,052,907
                            )Net
      (loss) per common share:Basic
                            
                            $
                            (0.93
                            )
                            
                            $
                            (0.78
                            )Diluted
                            
                            $
                            (0.93
                            )
                            
                            $
                            (0.78
                            )Weighted
      average common shares outstanding:Basic
                            
                            
                            10,239,276
                            
                            
                            
                            6,987,092Diluted
                            
                            
                            10,239,276
                            
                            
                            
                            6,987,092
  Consolidated
Balance Sheet data:
  December
      31,
                              2008
                            
                            
                            December
      31,
                              2007Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                            
                            $
                            9,545,000
                            
                            
                            $
                            17,024,209Total
      assets
                            
                            $
                            13,548,053
                            
                            
                            $
                            24,414,033Total
      stockholders’ equity
                            
                            $
                            6,870,871
                            
                            
                            $
                            15,105,775
  24
  Item 7. Management’s Discussion and
Analysis of Financial Condition and results of Operations.
  Special Note Regarding Forward
Looking Statements
  Certain
statements in this report constitute “forward-looking statements.” These
forward-looking statements involve known or unknown risks, uncertainties and
other factors that may cause the actual results, performance, or achievements of
Response Genetics, Inc. to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. Specifically, the actions of competitors and customers and our
ability to execute our business plan, and our ability to increase revenues is
dependent upon our ability to continue to expand our current business and to
expand into new markets, general economic conditions, and other factors. You can
identify forward-looking statements by terminology such as “may,” “will,”
“should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continues,” or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We undertake no
obligations to publicly update or review any forward-looking statements, whether
as a result of new information, future developments or otherwise.
  The
following discussion of our financial condition and results of operation should
be read in conjunction with our audited financial statements and related notes
to the financial statements included elsewhere in this Annual Report on Form
10-K as of December 31, 2008 and 2007 and our
audited financial statements for the year ended December 31, 2006 included in
our Annual Report on Form 10-KSB previously filed with the SEC.
This discussion contains forward-looking statements that relate to future events
or our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward looking statements.
  Overview
 
 Response
Genetics, Inc. (the “Company”) was incorporated in the state of Delaware on
September 23, 1999 as Bio Type, Inc. for the purpose of providing unique
molecular profiling services of tumor tissue that has been formalin-fixed and
embedded in paraffin wax. In August 2000, we changed our name to Response
Genetics, Inc.   In November 2006, we established Response Genetics Ltd.,
a wholly owned subsidiary in Edinburgh, Scotland. On
February 9, 2009 we implemented a reduction of workforce pursuant to which
we are closing our subsidiary in Edinburgh. See "liquidity and capital
resources" for additional information.
  Clinical
studies have shown that not all cancer chemotherapy works effectively in every
patient, and that a number of patients receive therapy that has no benefit to
them and may potentially even be harmful. Our goal is to provide cancer patients
and their physicians with a means to make informed, individualized treatment
decisions based on genetic analysis of tumor tissues. Our pharmacogenomic
analysis of clinical trial specimens for the pharmaceutical industry may provide
data that will lead to a better understanding of the molecular basis for
response to specific drugs and, therefore lead to individualized treatment. We
are focusing our efforts in the following areas:
 
 •
              Commercialization
      of our ResponseDX TM tests;•
              Developing
      additional diagnostic tests for assessing the risk of cancer recurrence,
      prediction of chemotherapy response and tumor classification in cancer
      patients; and•
              Expanding
      our pharmacogenomic testing services business into and creating a
      standardized and integrated testing platform in the major markets of the
      healthcare industry, including outside of the United
    States.
 
 Our
patented technologies enable us to reliably and consistently extract the nucleic
acids RNA and DNA from tumor specimens that are stored as formalin-fixed and
paraffin-embedded, or FFPE, specimens and thereby to analyze genetic information
contained in these tissues. This is significant because the majority of patients
diagnosed with cancer have a tumor biopsy sample stored in paraffin, while only
a small percentage of patients’ tumor specimens are frozen. Our technologies
also enable us to use the FFPE patient biopsies for the development of
diagnostic tests. To our knowledge, we were the first company to generate
clinically relevant information regarding the risks of recurrence of cancer or
chemotherapy response using approximately 30,000 genes available from microarray
profiling of FFPE specimens.
  ResponseDXTM
  The
outcome of cancer chemotherapy is highly variable due to genetic differences
among patients. Some patients respond well with tumor shrinkage and increase in
life span. Other patients do not obtain benefit from the same therapy but may
still experience toxic side effects as well as delay in effective treatment and
psychological trauma.
  At
present most chemotherapy regimens are administered without any pre-selection of
patients on the basis of their particular genetics. However recent development
of very sensitive molecular technologies has enabled researchers to identify and
measure genetic and biochemical factors in patients’ tissues that can predict
the probability of success or failure of many currently used anti-cancer agents.
In order to increase the chances of a better chemotherapy outcome for cancer
patients, we are developing genetic tests that will measure predictive factors
for tumor response in tumor tissue samples. We have begun offering tests for
non-small cell lung cancer (NSCLC) (ResponseDX: Lung Ô ) and colorectal
cancer (CRC) (ResponseDX: Colon Ô ) patients’ tumor
tissue through our laboratory located in Los Angeles, California, which
is certified under the Clinical Laboratory Improvement Amendments of 1988
(CLIA), and we anticipate offering additional tests for esophageal, ovarian,
gastric and pancreatic cancer in the future. These tests are proprietary based
tests which serve to help oncologists make optional therapeutic decisions for
cancer patients. The results from our tests can help oncologists choose among
chemotherapy regimens to treat their cancer patients. On September 29, 2008, we
announced an exclusive agreement with NeoGenomics Laboratories (OTCBB: NGNM)
whereby NeoGenomics will offer our proprietary ResponseDx: Colon and ResponseDx:
Lung tests nationwide. Under the terms of the agreement NeoGenomics will be the
national exclusive clinical reference laboratory authorized to offer our
proprietary tests through NeoGenomics national sales force and our newly formed
sales team. Currently, our newly formed sales team was expanded to 10 sales
people located in the West Coast, Midwest, and East Coast areas of the United
States.
  25
 
 Diagnostic
Tests for Other Cancers
  In
addition to ResponseDX: Lung and ResponseDX: Colon, we are
developing and intend to commercialize tests for other types of
cancer that identify genetic profiles of tumors that are more aggressive
and recur rapidly after surgery. We also are identifying genetic profiles of
tumors that are more or less responsive to a particular chemotherapy. Following
the development of tests to predict the risk of recurrence after surgery, we
intend to develop tests to determine the most active chemotherapy regimen for
the individual patient at risk. Once developed and after obtaining any necessary
regulatory approvals, we intend to leverage our relationships in the healthcare
industry to market, sell or license these tests as a means for physicians to
determine the courses of cancer treatment.
  Expansion
of our pharmacogenomic testing services business
  We have
started the expansion of our pharmacogenomic testing services business into
major markets of the healthcare industry outside of the United States. We have a
service laboratory in Japan, and are working to potentially establish a service
laboratory in China, through collaboration with some of our current clients in
the pharmaceutical industry. The pharmaceutical industry is in need of
standardized integrated worldwide analysis of clinical trial specimens. It is
important to the pharmaceutical industry and the regulatory agencies that the
same analytical methods are used for each clinical trial sample around the world
so that the data can be easily compared and used for global drug development.
Also, export of clinical trial specimens to the United States is restricted from
some areas of the world, such as China. Our goal is to offer an analysis of
patient specimens and generate consistent data based on integrated common
platforms and technology into the major markets of the healthcare industry
including outside of the United States.
  There are
no assurances that we will be able to continue making our current ResponseDX
tests available, or make additional ResponseDX tests available; will be able to
develop and commercialize tests of other types of cancer; or will be able to
expand our pharmacogenomic testing service business.
 
 We
anticipate that, over the next 12 months, a substantial portion of our capital
resources and efforts will be focused on research and development to bring to
market a series of diagnostic tests for cancer patients, to establish
laboratories overseas in collaboration with certain of our current
pharmaceutical clients, sales and marketing activities related to our ResponseDX
diagnostic tests, and for other general corporate purposes.
 
 Research
and development expenses represented 18.5% and 12.7% of our total operating
expenses for the years ended December 31, 2007 and December 31, 2008,
respectively. Major components of the $2,155,749 in research and development
expenses for the year ended December 31, 2008 included supplies and reagents for
our research activities, personnel costs, occupancy costs, equipment warranties
and service, patent fees, stock-based compensation and sample procurement
costs.
  26
   Critical
Accounting Policies and Significant Judgments and Estimates
  This
discussion and analysis of our financial condition and results of operations is
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities and expenses and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as revenues and expenses during the reporting periods. We
evaluate our estimates and judgments on an ongoing basis. We base our estimates
on historical experience and on various other factors we believe are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results could therefore differ
materially from those estimates under different assumptions or conditions. We
believe the following critical accounting policies reflect our more significant
estimates and assumptions used in the preparation of our financial
statements.
 
 Revenue
Recognition
  Revenues
are derived from services provided to pharmaceutical companies and from revenues
generated from our ResponseDX tests. Revenue is recognized in accordance with
SEC Staff Accounting Bulletin No. 104, Revenue Recognition, which requires that
four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence that an arrangement exists; (2) delivery has occurred and title and the
risks and rewards of ownership have been transferred to the client or services
have been rendered; (3) the price is fixed or determinable; and (4)
collectability is reasonably assured.
  Revenues
from pharmaceutical company contracts are recorded on an accrual basis as the
contractual obligations are completed and as a set of assays is processed
through our laboratory under a specified contractual protocol. Certain contracts
have minimum assay requirements that, if not met, result in payments that are
due upon the completion of the designated period. In these cases, revenues are
recognized when the end of the specified contract period is
reached.
  On
occasion, we may enter into a contract that requires the client to provide an
advance payment for specimens that will be processed at a later date. In these
cases, we record this advance as deferred revenue and recognize the revenue as
the specimens are processed or at the end of the contract period, as
appropriate.
 
 We
recognize a portion of product revenue from our ResponseDX tests invoiced to
Medicare on an accrual basis and to third-party payors, including private
payors on a cash basis. We have received our Medicare provider number which
allows us to invoice and collect from Medicare. Our invoicing to Medicare is
primarily based on amounts allowed by Medicare for the service provided as
defined by Common Procedural Terminology (CPT) codes. We recognize revenue from
third party and private payors currently on a cash basis until a collection
history can be determined. Until we are reasonably assured about a pattern of
collections we will continue to record revenues from third party payors of
ResponseDx on a cash basis. We continue to process samples for ResponseDx
testing services. Currently we are processing more samples for ResponseDx
testing services than revenue is being recorded. This is primarily due to timing
and recognition of revenue from third party payors until a collection history
can be established.
 
 We are
subject to potentially significant variations in the timing of revenue
recognized from period to period due to a variety of factors including: (1) the
timing of when specimens are submitted to us for testing; and (2) the specific
terms, such as minimum assay requirements in any given period, advance payment
requirements, and terms of agreements, as set forth in each contract we have
with significant clients.
 
 License
Fees
  We have
licensed technology for the extraction of RNA and DNA from FFPE tumor specimens
from USC in exchange for royalty fees on revenue generated by use of this
technology. These royalties are calculated as a fixed percentage of revenue that
we generate from use of the technology licensed from USC. Total license fees due
under the royalty agreement to USC were $152,502 and $79,052 for the years ended
December 31, 2007 and December 31, 2008, respectively. We also maintain a
non-exclusive license to use Roche’s polymerase chain reaction (PCR), homogenous
PCR, and reverse transcription PCR processes. We pay Roche a fixed percentage
royalty fee for revenue that we generate through use of certain applications of
this technology. Royalties accrued under this agreement totaled $219,721 and
$292,481 for the years ended December 31, 2007 and December 31, 2008,
respectively. We are subject to potentially significant variations in royalties
recorded in any period. While the amount paid is based on a fixed percentage
from revenues of specific tests pursuant to terms set forth in the
agreements with USC and Roche, the amount due is calculated based on the revenue
we recognize using the respective licensed technology. As discussed above, this
revenue can vary from period to period as it is dependent on the timing of the
specimens submitted by our clients for testing.
  27
  
 Accounts
Receivable
  We
invoice our pharmaceutical clients as specimens are processed and any other
contractual obligations are met. Our contracts with pharmaceutical clients
typically require payment within 45 days of the date of invoice. We maintain
allowances for doubtful accounts for estimated losses resulting from the
inability of our clients to make required payments. We specifically analyze
accounts receivable and historical bad debts, client credit, current economic
trends and changes in client payment trends when evaluating the adequacy of the
allowance for doubtful accounts. Account balances are charged-off against the
allowance when it is probable the receivable will not be recovered. To date, our
clients have primarily been large pharmaceutical companies. As a result, bad
debts to date have been minimal.
  We
generally bill Medicare and third-party payors for ResponseDX upon delivery of a
report to the physician. As such, we take assignment of benefits and the risk of
collection with Medicare and third-party payors. As we continue to generate
revenues from ResponseDX, we will monitor the collection history from third
party payors. Until we are reasonably assured about a pattern of collections, we
will continue to record revenues from third party payors of ResponseDX on a cash
basis.
 
 Income
Taxes
  We
estimate our tax liability through calculations we perform for the determination
of our current tax liability, together with assessing temporary differences
resulting from the different treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
recorded in our balance sheets. Our management then assesses the likelihood that
deferred tax assets will be recovered in future periods through future operating
results. To the extent that we cannot conclude that it is more likely than not
that the benefit of such assets will be realized, we establish a valuation
allowance to adjust the net carrying value of such assets. The carrying value of
our net deferred tax assets assumes that we will be able to generate sufficient
future taxable income, based on management’s estimates and assumptions. These
estimates and assumptions take into consideration future taxable income and
ongoing feasible tax strategies in determining recoverability of such assets.
Our valuation allowance is subject to significant change based on management’s
estimates of future profitability and the ultimate realization of the deferred
tax assets.
  Results
of Operations
  Years
Ended December 31, 2008 and December 31, 2007
  Revenues.
  Revenues were $7,124,771 for the year ended December 31, 2008, as
compared to $7,789,789 for the comparable period in 2007, a decrease of
$665,018, or 8.5%. This decrease was generated primarily due to a
delay in receipt of samples to be tested from our pharmaceutical clients which
we expect to receive in 2009 and 2010 anda reduction in revenue from the
fluorescent in situ hybridization, immunohistochemistry (or IHC) and
bioinformatics services provided  by us to our pharmaceutical company
clients and a
slowdown in the pharmaceutical services business due to the current economic
environment.Combined revenue from fluorescent in situ hybridization, IHC
and bioinformatics services provided by us decreased $1,679,707 for the year
ended December 31, 2008 compared to  the year ended December 31,
2007.  This decrease was partially offset by $236,363 in revenue
associated with our new Response DX assays which were not available in the year
ended December 31, 2007.  Additionally, revenues from GSK Bio
increased $2,693,015 in 2008 as compared to 2007. This increase was offset by
decreases from our clients Taiho and GSK amounting to $1,336,000 and $1,563,257,
respectively, in 2008 compared to 2007. For the year ended December 31, 2008,
two of our clients, GSK and Taiho, accounted for approximately 94% of our
revenue, as compared to approximately 85% of our revenue for the year ended
December 31, 2007.
  Cost of Revenues.
  Cost of revenues for the year ended December 31, 2008 were
$3,594,355 as compared to $4,045,715 for the year ended December 31, 2007, a
decrease of $451,360 or 11.1%. This decrease is primarily related to a decrease
in expenses associated with floursecent in situ hybridization processing
and  bioinformatics expenses of $615,440, and a $117,569 reduction in
expenses associated with issuance of stock options to employees and
consultants.  These decreases were partially offset by increases in
reagents and lab supplies of $293,508 to support our pharmaceutical clients and
our new ResponseDX assay.
  Research and Development
Expenses.   Research and development expenses were $2,155,749
for the year ended December 31, 2008, as compared to $2,455,044 for the same
period in 2007, a decrease of $299,295 or 12.2%. This decrease resulted
primarily from a decrease in share-based compensation related to stock options
issued to employees and consultants of $134,523, a decrease in laboratory
supplies and reagents of $104,508, and a decrease associated with an academic
research collaboration of $45,360. We expect research and development expenses
to increase as we continue work to develop additional aspects of our technology
and to study diagnostic indicators for various forms of cancer.
  28
   General and Administrative
Expenses.   General and administrative expenses totaled
$7,863,314 for the year ended December 31, 2008, as compared to $5,156,711 for
the comparable period in 2007, an increase of $2,706,603 or 52.5%. This increase
resulted primarily from an increase of  $963,928 in personnel
expenses  primarily related to our sales and marketing activities for
our new ResponseDX assay, an increase in our advertising and business consulting
expenses of $640,890 primarily related to our sales and marketing activities for
our new ResponseDX assay, an increase of $176,300 in board of director
fees compared to $11,500 in 2007, an increase of $151,801 of stock based
compensation related to issuance of stock options to some of our key employees,
costs related to expenses in Japan of $273,374 which did not exist in 2007, an
increase in royalties of $239,802,and an increase of $161,868 in insurance
related expenses primarily related to directors and officers insurance. We
expect general and administrative expenses to increase as a result of the need
to hire additional administrative personnel and due to higher legal, accounting,
compliance and related expenses associated with being a public
company.
  U.K. Operating Costs and
U.K. Impairment of Property and Equipment.In
December, 2008, we made the decision to increase the operational efficiency of
the Company by consolidating our UK operations with our US
operations.  Based on this decision we began implementation of a
reduction of workforce pursuant to which we will close our UK testing facility
and consolidate testing services in our laboratory facilities located in Los
Angeles.  As a result of the implementation of the reduction of
workforce management
performed a recoverability test of the long-lived assets located at the United
Kingdom testing facility. Based on the recoverability analysis performed, the
Company recorded a non-cash charge for the impairment of long-lived assets of
$0.9 million as of December 31, 2008 to write down the carrying value of the
long-lived assets to their estimated fair value of $0. The fair value was
estimated based upon offers received from third parties to purchase the
long-lived assets.The operating costs related to our UK lab, which
were previously included in  general and administrative expenses, were
approximately $2.5 million for 2008 compared to $1.6 million in
2007.
 Interest Income.
  Interest income was $374,659 for the year ended December 31, 2008,
compared with $517,645 for the same period in 2007. This $142,986 decrease was
due to lower average cash balances and lower rates of return during the period
ending December 31, 2008.
  Interest Expense.
  Interest expense was $3,875 for the year ended December 31, 2008 and
$28,669 for the same period in the preceding year. In the year ending December
31, 2007 this expense consisted primarily of a fixed amount on notes
payable from our stockholders. The notes payable and accrued interest related to
these notes payable was converted into shares of our common stock upon the
closing of our initial public offering.
  Income
Taxes
  As of
December 31, 2008 and 2007, a full valuation allowance has been recorded for the
deferred tax assets since we do not believe the recoverability of the deferred
income tax assets in the near future is more likely then not.
  Liquidity
and Capital Resources
  We
incurred net losses of $5,052,907 and $9,485,538during the year ended December 31, 2007 and the year ended
December 31, 2008, respectively. Since our inception in September 1999, we have
incurred cumulative losses and as of December 31, 2008, we had an accumulated
deficit of $29,805,729. We expect that our research and development, and general
and administrative expenses will continue to increase and, as a result, we will
need to generate significant revenues to achieve profitability.
  We expect
to use our capital to fund research and development and to make capital
expenditures to keep pace with the expansion of our research and development
programs and to scale up our commercial operations. The amount and timing of
actual expenditures may vary significantly depending upon a number of factors,
such as the progress of our product development, regulatory requirements,
commercialization efforts, and the amount of cash used by operations. We expect
that we will continue to generate revenue through our pharmacogenomic testing
services business provided to pharmaceutical companies, but these revenues are
not guaranteed and are not expected to substantially offset the costs associated
with our expansion efforts.
  We lease
office and laboratory space for our location in Los Angeles under noncancelable
operating leases that expire through March 2010. Additionally, in 2007, the
Company entered into an agreement to lease office and laboratory space for our
operations in Scotland. This is an operating lease which expires in March, 2009.
As
a result of the reduction in workforce implemented by the Company on February 9,
2009, the Company has extended its lease in Scotland for one additional month in
order to facilitate the winding down of our UK operations. For additional
information see Note 17 for additional information. Rent expense for
our facilities was $617,441 and $587,669 for the years ended December 31, 2008
and 2007, respectively.Future minimum lease payments aggregate to approximately $463,333 over
the next two years through the expiration of the leases
in 2010.
 
 Following
is a summary of recent events and the expected impact of these events may or
have had on our liquidity and future realization of revenues.
  ·
              On
      December 26, 2008, we amended and restated our master service agreement
      with GlaxoSmith Kline, Ltd. ("GSK"), a leading pharmaceutical manufacturer
      (the "GSK Agreement"). Pursuant to the amendment, the term of the GSK
      Agreement has been extended for a two-year period, with the option for the
      parties to extend the GSK Agreement for additional one-year periods, upon
      their mutual written agreement. In addition, we will become a preferred
      provider to GSK and its affiliates of genetic testing services on a
      fee-for-service basis and, in anticipation of the services to be provided,
      GSK agreed to make a non-refundable upfront payment of approximately
      $1,300,000 which was received on January 5, 2009. This payment may be
      credited against future work undertaken in the period beginning on January
      1, 2009 and ending on December 31,
2010.
  29
   ·
              On
      February 9, 2009, we implemented a reduction of workforce ("Reduction of
      Workforce") pursuant to which we are closing our United Kingdom testing
      facility to consolidate services at our CLIA-certified laboratory
      facilities in Los Angeles. Pursuant to the Reduction of Workforce, we have
      eliminated all of our employees in the United Kingdom, a total of 9
      positions. The lease for our United Kingdom testing facility is
      due to terminate on March 31, 2009. We have arranged to extend the lease,
      pursuant to its terms, for an additional month, in order to facilitate the
      winding down of our operations in the United Kingdom. The Reduction of
      Workforce will be substantially complete on March 31, 2009. We undertook
      the Reduction of Workforce as part of a strategic plan to increase
      operational efficiency in conjunction with our consolidation
      of our services at its Los Angeles facilities and it will not affect
      its genetic testing services or current partnership
      agreements.
  In
connection with the Reduction of Workforce, the Company expects to incur
expenses associated with one-time termination benefits of approximately $197,000.The
Company had not satisfied all the criteria necessary in order to
include those one-time termination benefits in its December 31, 2008 financial
statements. Those costs will be included in the Company’s 2009 financial
statements.Additionally, management
performed a recoverability test of the long-lived assets located at the United
Kingdom testing facility in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Based on the recoverability analysis performed, the Company
recorded a non-cash charge for the impairment of long-lived assets of $0.9
million as of December 31, 2008 to write down the carrying value of the
long-lived assets to their estimated fair value of $0. The fair value was
estimated based upon offers received from third parties to purchase the
long-lived assets.
  ·
              On
      February 27, 2009, we entered into a Purchase Agreement (the "Purchase
      Agreement") with certain affiliates of Special Situations Funds (the
      "Purchasers") for the private placement of 2,000,000 newly-issued shares
      of the Company's common stock (the "Shares") at a per share price of $1.00
      (the "Private Placement"). The closing of the sale of the Shares occurred
      on Monday, March 2, 2009.
  In
connection with the Private Placement, we also entered into a Registration
Rights Agreement, dated February 27, 2009, with the Purchasers (the
"Registration Rights Agreement") pursuant to which we have agreed to
file, within 90 days of the closing of the Private Placement, a registration
statement with the Securities and Exchange Commission ("SEC") to register the
Shares for resale, which registration statement is required to become effective
within 150 days following the closing. If the Registration Statement is not
filed or declared effective within the timeframes set forth above, then we will
be obligated to pay liquidated damages to the Purchasers in an amount equal to
1.5% of the aggregate amount invested by the Purchasers for each 30-day period,
or pro rata for any portion thereof, following the date by which the
Registration Statement should have been filed or declared effective. In
addition, liquidated damages will also accrue in the event that, subject to
certain exceptions, we do not maintain the effectiveness of the registration
statement until the earlier of the sale of all of the Shares or the Shares
become eligible for sale under Rule 144 without regard to any volume
limitations.
  Comparison
of Years Ended December 31, 2008 and 2007
  As of
December 31, 2008, we had $9,545,000 in cash and cash equivalents, working
capital of $7,742,874 and an accumulated deficit of $29,805,729.
  Cash
flows provided by operating activities
  During
the year ended December 31, 2008, the Company generated negative cash flows from
operations of $6,790,588 compared to  negative cash flows of
$3,485,900 operations in the year ended December 31, 2007. The reasons for
the change in cash flows of $3,304,688 was due mainly to the increase in net
loss of $4,432,631, and in combination of a decrease in receivables, a
decrease in prepaid expenses, increases in accounts payable
and accrued expenses, a decrease in accrued payroll, bonus and related
liabilities, and a decrease in deferred revenue.
  The decrease in accounts receivable, of $2,087,269,
related mainly to one receivable for deferred revenue related to an
amendment entered into in the fourth quarter of 2007 to the contract with GSK
Bio. This amendment changed the Company receiving monthly payments to a single
advance payment amounting to $2.4 million prior to December 31, 2007, which was
not received until January, 2008.
  The
decrease in deferred revenue of 3,045,916 related to a decrease in advance
billings to our customers, along with recognition of deferred revenue
totaling $4,611,016. The decrease in deferred revenue was offset with an
increase of approximately $1.3 million due to our amended and restated master
service agreement with GSK completed on December 26, 2008.
  The
decrease in prepaid expenses of
$162,791 was primarily due to reductions in prepaid maintenance contracts
partially offset by an increase in prepaid
insurance.
  The
increase in accounts payable and accrued expenses primarily resulted from
increased sales and marketing and business development activities related to the
launch of Response DX.
  The change in accrued payroll, bonus and related
liabilities is due to the decrease in bonuses granted and accrued as of December
31, 2008 of $0 versus accrued bonuses of $422,666 as of December 31,
2007.
  30
   Cash
flows used in investing activities
  Net cash
used in investing activities was $577,328 for the year ended December 31, 2008
and $1,980,435 for the year ended December 31, 2007. This
decrease in the use of cash of 1,403,107 was attributable to reduced need for
capital equipment in our laboratories.
  Cash
flows used in financing activities
  There
were no cash flows from financing activities for the year ended December
31, 2008. For the year ended December 31, 2007 net cash provided by
financing activities was $17,593,512 as a result of our initial public
offering.
  Off-Balance
Sheet Arrangements
  We do not
have any off-balance sheet arrangements.
  Recent
Accounting Pronouncements
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value
Measurements,” and defines fair value, establishes a framework for measuring
fair value under U.S. GAAP, and expands disclosures about fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal years. The adoption of SFAS 157 did not have a material impact on the
Company's financial statements.
 
 In February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities - an amendment of FASB
Statement No. 115 ,” which permits entities to measure many financial
instruments and certain other items at fair value, and establishes the
presentation and disclosure requirements to facilitate comparisons between
entities choosing different measurement attributes for similar types of assets.
SFAS 159 is effective for fiscal years ending after November 15, 2007. The
adoption of SFAS 159 did not have a material impact on the Company's
financial statements.
  In
December 2007, FASB issued SFAS No. 141(R), “Business Combinations”, an
amendment of SFAS No. 141, which improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
SFAS 141(R) applies for all business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. We do not expect the adoption of SFAS 141(R) to have
a material impact on the Company’s financial statements.
  In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting
Research Bulletin No. 51,” which amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008. We do not expect the adoption of SFAS
160 to have a material impact on the Company’s financial
statements.
  In March
2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133,” which establishes
the disclosure requirements for derivative instruments and for hedging
activities. This Statement amends and expands the disclosure requirements of
Statement 133 with the intent to provide users of financial statements with an
enhanced understanding of derivative instruments and hedging activities. SFAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early adoption encouraged. We do
not expect the adoption of SFAS 161 to have a material impact on the Company’s
financial statements.
 
 In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy
of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (the GAAP hierarchy). SFAS 162 will become
effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting Principles.”
We do not expect the adoption of SFAS 162 to have a material effect on our
consolidated results of operations and financial
condition.
  In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161. This FSP applies to credit derivatives within the scope
of Statement 133, hybrid instruments that have embedded credit derivatives, and
guarantees within the scope of Interpretation 45. This FSP is effective for
reporting periods (annual or interim) ending after November 15, 2008. We do not
expect this FSP to have a material impact on our consolidated financial position
and results of operations.
   31
  Item
8.  Financial Statements and Supplementary Data.
 
 Our
consolidated financial statements and related notes are included in this annual
report beginning on page F-1.
 
 Item
9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
 
 None.
 
 Item
9(A)(T).  Controls and Procedures.
 
 Evaluation
of Disclosure Controls and Procedures
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Under the supervision, and
with the participation of our management, including the Principal Executive
Officer and Principal Financial Officer, we have evaluated the effectiveness of
our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and
15d-15 as of the end of the period covered by this report. Based on that
evaluation, our Principal Executive Officer and Principal Financial Officer have
concluded that these disclosure controls and procedures were effective such that
the information required to be filed in this report is recorded, processed,
summarized and reported within the required time periods specified in the SEC
rules and forms and that
such information is accumulated and communicated to our management, including
our Principal Executive Officer
and Principal Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
  It should
be noted that any system of controls and procedures, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. As a result, there can be no assurance
that a control system will succeed in preventing all possible instances of error
and fraud. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and the conclusions of our
Principal Executive Officer and the Principal Financial Officer are made at the
“reasonable assurance” level.
 
 Management’s
Annual Report on Internal Control over Financial Reporting
  Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act. Our internal control system was designed to provide
reasonable assurance to our management and board of directors regarding the
preparation and fair presentation of published financial
statements.
  All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can only
provide reasonable assurance with respect to financial statement preparation and
presentation.
  Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, it used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control—Integrated Framework. Based on its assessment, management
believes that, as of December 31, 2008, our internal control over financial
reporting was effective based on those criteria.
  This Annual Report on Form 10-K does
not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our independent registered
public accounting firm pursuant to temporary rules of the SEC that permit us to
provide only management’s report in this Annual Report on Form 10-K.
 
 Changes
in Internal Control over Financial Reporting
 
 There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
 
 Item
9B.  Other Information.
 
 None.
  32
  Part
III
  Item
10.  Directors, Executive Officers, Promoters, Control Persons and
Corporate Governance; Compliance With Section 16(a) of the Exchange
Act.
  Our
executive officers and directors and their respective ages and positions as of
December 31, 2008 are as follows:
  Directors
      and Executive Officers
                        
                        Age
                        
                        PositionTom
      R. DeMeester, M.D.
                        
                        70
                        
                        Chairman
      of the BoardKathleen
      Danenberg
                        
                        61
                        
                        Director,
      Chief Executive Officer and PresidentDavid
      M. Smith
                        
                        42
                        
                        Vice
      Chairman of the BoardMichael
      Serruya
                        
                        44
                        
                        DirectorHubertus
      Spierings
                        
                        64
                        
                        DirectorGary
      D. Nusbaum
                        
                        42
                        
                        DirectorJohn
      C. Ferrara
                        
                        57
                        
                        DirectorKirk
      K. Calhoun
                        
                        64
                        
                        DirectorDavid
      R. Gandara, M.D.
                        
                        61
                        
                        DirectorThomas
      Stankovich
                        
                        48
                        
                        Vice
      President, Chief Financial Officer and SecretaryJames
      Clark
                        
                        40
                        
                        Vice
      President and Chief Operating OfficerDenise
      McNairn
                        
                        41
                        
                        Vice
      President and General
Counsel
  The
following is a brief summary of the background of each of our executive officers
and directors. There are no family relationships among any of the executive
officers or directors.
  Tom R. DeMeester,
M.D. joined us in March 2000 as Chairman of our board of directors.
Dr. DeMeester has been the Chairman of the Department of Surgery and
Professor of General and Cardiothoracic Surgery at the USC School of Medicine
since 1990. From 1984 to 1990, Dr. DeMeester served as Chairman and
Professor of the Department of Surgery at Creighton University School of
Medicine. Dr. DeMeester received his M.D. from the University of Michigan
School of Medicine and a B.A. from Calvin College.
  Kathleen
Danenberg has been our Chief Executive Officer and President since 2002.
Prior to that, she served as our Vice President and Chief Scientific Officer
from December 2000 to December 2002. Ms. Danenberg has served as one of our
board members since March 2000. Ms. Danenberg began her career in molecular
research and developed broad expertise in a variety of areas and applications.
While at USC, Ms. Danenberg invented a breakthrough patented method to
extract RNA from formalin-fixed paraffin embedded tissue specimens which became
the basis for the establishment of Response Genetics, Inc. Prior to her work at
USC, Ms. Danenberg worked with the renowned enzyme kineticist Dr. W.W.
Cleland at the University of Wisconsin to elucidate the mechanism of action of
the enzyme hexokinase. Ms. Danenberg has over 100 scientific publications to her
credit.
  David M. Smithis a founder and has served as Vice Chairman and a Director of our board
of directors since December 1999. From 1998 until 2005, Mr. Smith was an
Executive Vice President and Director, and later, Chief Operating Officer of
CoolBrands International Inc. (TSE:COB.A), and from 1993 until 2006, he was a
Director, and later the Chairman and Chief Executive Officer, of Calip Dairies,
a privately held consumer products company. Mr. Smith was also the Chairman and
Chief Executive Officer of Hempstead Capital Corporation, a private holding
company, until it was acquired in 2006. Mr. Smith is currently the founder and
Managing Partner of Smith Global Ventures, a privately held venture firm. Mr.
Smith received a B.A. degree and graduated with honors from Boston
University.
  Michael Serruyahas served on our board of directors since March 2000. Since February
2000, Mr. Serruya has been Chairman of Yogen Fruz World Wide Incorporated, and
from 1995 to February 2000 he was President, Chief Executive Officer and
Chairman of Yogen Fruz, a consumer products company. Mr. Serruya was also a
member of the Ontario Jobs and Investment Board, an Ontario government
organization. Mr. Serruya is currently the President and Chief Executive Officer
of CoolBrands International Inc. (TSE:COB.A). Mr. Serruya attended Ryerson
Polytechnical Institute.
  Hubertus
Spierings has served on our board of directors since June 4, 2007 and has
served as a member of our audit committee, nominating and governance committee,
and compensation committee. From 1992 until 2002, Mr. Spierings served as a
non-executive chairman of the board of Cargill International S.A., a subsidiary
of a privately held agricultural management company, and from 1999 until 2002,
he served as executive vice president of Cargill, Inc, a privately held
agricultural management company. From 2004 until early 2009, Mr. Spierings
served as a director on the board of directors of the International Management
Institute-Kyiv, a private Ukranian professional school. Mr. Spierings earned a
degree in economics from Nyenrode N.O.I.B. (an international business college in
the Netherlands).
  33
 
 Gary
D.Nusbaumhas served on our board
of directors on August 24, 2007.  Mr. Nusbaum has served as a member
of our audit committee, nominating and governance committee, and compensation
committee. From 1989-2002, Mr. Nusbaum was at the Private Equity firm
Warburg Pincus, where he was a Managing Director, and from 2002 until 2005, Mr.
Nusbaum was a Managing Director at Aetos Capital, an asset management
firm.  At Aetos Capital, Mr. Nusbaum was the firm’s Chief Financial
Officer, and also headed its private equity business. In 2006, Mr. Nusbaum
joined Palladium Equity Partners, LLC, as a Managing Director.  Mr.
Nusbaum received his Bachelor of Science in Economics, summa cum laude, and Master
of Business Administration degrees from The Wharton School of the University of
Pennsylvania.  He has been a board member of several public and
private companies.
 
 John C.
Ferrara has served on our board of directors since April 4, 2008. Mr.
Ferrara is currently Chief Financial Officer of EDGAR® Online®, Inc. (NASDAQ:
EDGR). Prior to joining EDGAR® Online®, Inc., Mr. Ferrara served as Interim CFO
to GAMCO Investors, Inc., President of The LGL Group, Inc. and has held chief
financial officer positions at Space Holding Corporation, Golden Books Family
Entertainment and Renaissance Communications Corporation. Since 1999, Mr.
Ferrara has served on the Boards of Directors of several public companies,
including GAMCO Investors and Lynch Interactive. Mr. Ferrara holds a B.S. in
Accounting from the University of Maryland as well as an M.B.A. in Finance from
Columbia University.
 
 David R. Gandara,
M.D. has served on our board of directors since April 30, 2008. Since
1994, Dr. Gandara has been a professor of medicine at the University of
California, Davis School of Medicine. He also is Associate Director of Clinical
Research and has been Director of Thoracic Oncology at the University of
California, Davis Cancer Center since 1994. He is a diplomat of the American
Board of Internal Medicine specializing in Medical Oncology. He also serves on
the board of directors for the International Association for the Study of Lung
Cancer (IASLC) and is a prior board member and secretary-treasurer of the
American Society for Clinical Oncology (ASCO). He also is chair of the
NCI-directed Lung Correlative Science Committee. Dr. Gandara received his M.D.
from the University of Texas Medical Branch and holds a B.A. from the University
of Texas.
 
 Kirk K.
Calhoun has served as a member of our board of directors since May 16,
2008. Mr. Calhoun joined Ernst & Young, LLP, a public accounting firm, in
1965 and served as a partner of the firm from 1975 until his retirement in 2002.
Mr. Calhoun is a Certified Public Accountant. He is currently on the board of
directors of Abraxis Bioscience, Inc. and was on the board of directors
of Replidyne, Inc. until its acquistion by Cardiovascular Systems, Inc. in
February 2009. Mr. Calhoun received a B.S. in Accounting from the
University of Southern California.
  Thomas
Stankovich joined us as our Vice President, Chief Financial Officer and
Secretary in November 2006. Mr. Stankovich has gained financial and
business experience over the past 20 years working in both domestic and
international operations with publicly-traded companies in the pharmaceutical
and biotechnology industries. Mr. Stankovich most recently was Executive
Vice President and Chief Financial officer at Cobalis Corp. (Nasdaq: CLSC) from
December 2005 until he joined us. Subsequent to Mr. Stankovich's departure from
Cobalis in December, 2006, Cobalis declared Chapter 11 Bankruptcy in October,
2007. Prior to his position at Cobalis Corp., he worked at MP Biomedicals, LLC
where he served as Senior Vice President and Chief Financial Officer from July
2003 to December 2005. From January 2003 through July 2003 Mr. Stankovich worked
as a financial consultant. He served as Senior Vice President and Chief
Financial Officer for Ribapharm, Inc. (NYSE: RNA) from December 2001 to January
2003 (now part of Valeant Pharmaceuticals International) (NYSE: VRX) where he
helped complete an initial public offering in April 2002. Since 1986,
Mr. Stankovich has served in various executive financial management
positions for ICN Pharmaceuticals, Inc. (NYSE: ICN) (now renamed Valeant
Pharmaceuticals International) including Vice President, Chief Financial Officer
for ICN International A.G., and Vice President and Controller for ICN Europe.
Mr. Stankovich holds Bachelor of Science degrees in both accounting and
finance from California State University, Northridge.
  James
Clark joined us as our Vice President and Chief Operating Officer in
October 2006. From June 1, 2003 to August 31, 2006, Dr. Clark served as
head of the Cancer Molecular Biology, Technology group at  GlaxoSmithKline
— Biologicals (NYSE: GSK). From 1995 to 2003, Dr. Clark served as a Senior
Research Fellow within the Department of Medicine, University of Glasgow, where
he began his career developing molecular techniques and applications for the
study of the immune response to breast cancer. Dr. Clark received his B.S.c from
Heriot-Watt University, Edinburgh, Scotland and his Ph.D. from the Department of
Biochemistry, University of Glasgow, Scotland.
  Denise McNairnjoined us as our Vice President and General Counsel in February 2007.
Prior to joining us, from 2001 to 2007, Ms. McNairn was an attorney at Kenyon
& Kenyon LLP. Prior to working for Kenyon & Kenyon, Ms. McNairn worked
as a Technology Transfer Specialist at the National Cancer Institute Technology
Transfer Branch, where she began her career in drafting and negotiating
transactional agreements. Ms. McNairn received her B.S. from Virginia
Polytechnic Institute and State University, an M.S. from Johns Hopkins
University and her J.D. from the University of Maryland School of
Law.
  There is
no pending litigation or proceeding involving any of our directors, officers,
employees or agents in which indemnification will be required or permitted. We
are not aware of any threatened litigation or proceeding that may result in a
claim for such indemnification.
  Compliance
with Section 16(a) of the Exchange Act
  34
  Our
records reflect that all reports which were required to be filed pursuant to
Section 16(a) of the Exchange Act were filed on a timely basis during the fiscal
year ended December 31, 2008.
  Code
of Ethics
  We have
adopted a Code of Ethics that applies to all of our employees and directors,
including our principal executive officer and our principal financial
officer.  The Code of Ethics is filed as Exhibit 14 to our
Registration Statement on Form SB-2 (File No. 333-139534) and is also available
on our website at www.responsegenetics.com.
  Audit
Committee and Audit Committee Financial Expert
 
 Our Board
has appointed an audit committee and has adopted a written audit committee
charter.  The audit committee is composed of three members and, among
other things, is authorized to assist the Board in monitoring the integrity
of the financial statements of the Company and financial reporting procedures
and the Company’s compliance with legal and regulatory requirements. Our audit
committee consists of John C. Ferrara, Gary D. Nusbaum and Kirk K. Calhoun. Our
Board has determined that each such director is independent in accordance with
the applicable requirements of the SEC and the NASDAQ Stock Market Inc. Our board
has determined Mr. Ferrara qualifies as our audit committee expert within
the meaning of SEC regulations and the NASDAQ Stock Market Inc.
rules.
 
 Nominating
and Governance Committee
  There
have been no material changes to the procedures by which Company shareholders
may submit recommendations for nomination to the Company’s Board of
Directors.
  Item 11.  Executive
Compensation.
  The
following summary compensation table sets forth summary information as to
compensation earned during the year ended December 31, 2008 and 2007 by our
Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and
General Counsel, who we collectively refer to as our “Named Executive officers”
elsewhere.
  Summary
Compensation Table
  Name and Principal Position
                                
                                Year
                                
                                Salary ($)
                                
                                
                                Bonus.($)
                                
                                
                                Stock
                                  Options ($)
                                  A
                                
                                
                                All Other
                                  Compensation (B)
                                
                                
                                Total
                                  ($)Kathleen
      Danenberg, President and CEO
                                
                                2008
                                
                                $
                                371,000
                                
                                
                                $
                                0
                                
                                
                                $
                                417,676
                                
                                
                                $
                                18,027
                                (B)
                                
                                $
                                806,7032007
                                
                                $
                                350,000
                                
                                
                                $
                                175,000
                                
                                
                                $
                                689,836
                                
                                
                                $
                                114,673
                                
                                
                                $
                                1,329,509Thomas
      Stankovich, Vice President, Chief Financial Officer and
      Secretary
                                
                                2008
                                
                                $
                                233,200
                                
                                
                                $
                                0
                                
                                
                                $
                                111,188
                                
                                
                                $
                                0
                                
                                
                                $
                                344,3882007
                                
                                $
                                220,000
                                
                                
                                $
                                80,000
                                
                                
                                $
                                44,387
                                
                                
                                $
                                0
                                
                                
                                $
                                344,387James
      Clark, Vice President, Chief Operating Officer
                                
                                2008
                                
                                
                                251,856
                                (C)
                                
                                
                                0
                                
                                
                                $
                                110,048
                                
                                
                                
                                0
                                
                                
                                $
                                361,9042007
                                
                                $
                                237,600
                                
                                
                                $
                                80,000
                                
                                
                                $
                                44,314
                                
                                
                                $
                                0
                                
                                
                                $
                                361,914Denise
      McNairn, Vice President, General Counsel
                                
                                2008
                                
                                $
                                238,500
                                
                                
                                
                                0
                                
                                
                                $
                                111,575
                                
                                
                                
                                0
                                
                                
                                $
                                350,0752007
                                
                                $
                                225,000
                                
                                
                                $
                                80,000
                                
                                
                                $
                                44,576
                                
                                
                                $
                                0
                                
                                
                                $
                                349,576
 
 (A)
              Represents
      the compensation expense related to outstanding stock options we
      recognized for the year ended December 31, 2008 under Statement of
      Financial Accounting Standards 123R to our named executive officers.
      Assumptions used in the calculation of these amounts are included in Note
      11 to our financial statements for the year ended December 31,
      2008.
  35
  (B)
              “All
      Other Compensation” for the year ended December 31, 2008 includes amounts
      paid to Ms. Danenberg pursuant to the monthly car and personal expense
      allowances provided for under the terms of her Employment
      Agreement.
  (C)
              Mr.
      Clark’s salary was paid in pounds sterling and was then converted to US
      dollars at an average exchange rate of $1.86 per Pound
      Sterling.
 
 All
bonuses for 2007 were awarded on February 12, 2008 and paid on February 19,
2008.
  Employment
Agreements and Change in Control Arrangements
  The
Danenberg Employment Agreement
  We
entered into an employment agreement with Ms. Danenberg on December 11, 2000.
This previous agreement was superceded by a new employment agreement, which we
entered into as of October 26, 2006, as amended on December 14, 2006 and on May
29, 2007, for the position of President and Chief Executive Officer. The
agreement has an initial term of three years, with automatic one-year renewal
terms thereafter. Ms. Danenberg is to receive an initial base salary of
$350,000 per year, subject to annual adjustments at the discretion of the Board.
Ms. Danenberg also is eligible to earn a minimum of 40% of her base salary
as an annual bonus based upon our meeting certain performance targets and her
meeting personal objectives as determined by our board of directors. Ms.
Danenberg was not awarded a bonus pursuant to this provision of her current
employment agreement in 2008.
  Pursuant
to the terms of the employment agreement, we granted Ms. Danenberg
non-qualified stock option under the 2006 Stock Plan, in an amount equal to 3%
of the number of shares of our common stock outstanding on October 26, 2006 on a
fully diluted basis  or 212,577 options at an exercise price equal to the
initial public offering price of our common stock. One third of these options
vested immediately upon the issuance of the options and the remainder vested in
two equal installments on the first and second anniversary of the date of
Ms. Danenberg’s employment agreement (October 26, 2006). The options
will vest immediately upon a change in control.  Ms. Danenberg is
eligible for future option grants as approved by our board of directors,
including those options granted in 2008 as referenced below. We will provide
Ms. Danenberg with a monthly allowance of $1,000 to cover miscellaneous
business expenses and a $1,000 monthly automobile allowance. We agreed to cover
up to $5,000 of Ms. Danenberg’s legal fees incurred in the negotiation of her
employment agreement and up to $1,000 of Ms. Danenberg’s legal fees incurred in
the negotiation of the amendment to her employment agreement.
  In the
event that Ms. Danenberg’s employment is terminated without cause or for
good reason, as defined under the agreement, we are obligated to pay her
severance equivalent to the greater of (a) one full year of base pay and
benefits; or (b) the base pay and benefits for the remaining term of the
employment agreement. In addition, within forty-five days of her termination, we
are obligated to pay her the pro rata portion of the bonus earned as of her
termination date. In addition the portion of Ms. Danenberg’s options that
are vested as of the date of her termination shall be exercisable for one year
from the date of her termination. In the event the employment agreement is
terminated because of Ms. Danenberg’s death, or because of a disability as
defined in the employment agreement, Ms. Danenberg or her estate will be
entitled to receive her base pay and pro rata bonus earned as of the date of
death or disability, and we will provide benefits coverage for a period of 12
months following the date of such death or disability to Ms. Danenberg or
her heirs as the case may be.
  In the
event a change in control occurs during Ms. Danenberg’s employment, she has
agreed not to resign her employment voluntarily for a period of six months
following the effective date of the change in control. If she is terminated
within such six-month period without cause or she resigns for good reason, in
addition to any other benefits to which she is entitled and provided she
executes a release of claims, Ms. Danenberg will be entitled to a lump sum
payment equivalent to a month of base pay at her then current annual rate for
each month during such six-month period for which she has yet to complete
service to us at the time of such termination, within forty-five days following
such termination. The employment agreement also places certain confidentiality,
assignment of inventions and non-solicitation obligations on
Ms. Danenberg.
  The
Stankovich Employment Agreement
  We have
entered into an Employment Agreement with Thomas Stankovich, dated as of October
25, 2006, as amended on May 29, 2007 for the position of Vice President and
Chief Financial Officer. He commenced employment on November 27, 2006. The
agreement has an initial term of three years with automatic one-year renewal
terms thereafter. The agreement provides for Mr. Stankovich to receive an
initial base salary of $220,000 per year. Mr. Stankovich also is eligible
to earn an annual bonus based upon our meeting certain performance targets and
his meeting personal objectives as agreed upon with the CEO and approved by our
board of directors.  Mr. Stankovich was not awarded a bonus pursuant
to this provision of his current employment agreement in 2008.
  Pursuant
to the terms of the employment agreement, we granted Mr. Stankovich a
non-qualified stock option under the 2006 Stock Plan, in an amount equal to 1%
of the number of shares of our common stock outstanding on November 27, 2006, on
a fully diluted basis, or 70,976 options, at an exercise price equal to the
initial public offering price of our common stock. The shares vest in equal
annual amounts over a four-year period, beginning on the first anniversary of
the initial grant date. The options will vest immediately upon a change in
control.  Mr. Stankovich is eligible for additional option grants
as approved by our board of directors, including those options granted in 2008
as referenced below.
  36
  In the
event that a change in control occurs within the first year of
Mr. Stankovich’s employment, and regardless of whether he is terminated, we
are obligated to give him a cash payment equal to six months salary at his base
salary rate at the time of change in control, as defined in the employment
agreement. In the event that a change in control occurs within the second or
third years of his employment, regardless of whether he is terminated, we are
obligated to give him a cash payment equal to nine months salary at his base
salary rate at the time of the change in control. In the event that
Mr. Stankovich’s employment is terminated without cause or he resigns for
good reason as defined under the agreement, during the first year of his
employment, we are obligated to pay him severance equal to six months salary at
his base salary rate at the time of termination. In the event that
Mr. Stankovich’s employment is terminated without cause or he resigns for
good reason within the second or third years of his employment, we are obligated
to pay him severance equal to nine months salary at his base salary rate at the
time of termination. In the event of Mr. Stankovich’s termination without
cause, the portion of the his options that are vested as of the date of his
termination shall be exercisable for one year from the date of his termination.
The employment agreement also places certain confidentiality, assignment of
inventions and non-solicitation obligations on Mr. Stankovich.
  The
Clark Employment Agreement
  We have
entered into an Employment Agreement with James Clark, dated as of October 26,
2006, for the position of Vice President and Chief Operating Officer. The
agreement provides for Dr. Clark to receive an initial base salary of
£120,000 (approximately $230,000) per year. Dr. Clark also is eligible to
earn an annual bonus based upon our meeting certain performance targets and his
meeting personal objectives as agreed upon with the CEO and approved by our
board of directors. Dr. Clark was not awarded a bonus pursuant to this provision
of his current employment agreement in 2008.  Dr. Clark is
eligible to participate in our employee benefit plans and we are required to
reimburse him for reasonable business-travel expenses. We also are required to
reimburse Dr. Clark for up to $10,000 for expenses related to his
relocation of his home and office to Scotland but, should Dr. Clark give
notice that he is terminating his employment within the initial term, he is
required to reimburse us for the pro-rated amount of the relocation
expenses.
  Should
either Dr. Clark or we give the other notice of the intention to terminate
Dr. Clark’s employment, we may elect to terminate his employment
immediately and we will be obligated, upon so electing, to pay to Dr. Clark
a sum equal to his base salary exclusive of any contractual bonus or benefit in
kind for the unexpired portion of the contractual notice entitlement. This
obligation ceases if Dr. Clark commences alternate employment within the
entitled notice period.
  Pursuant
to the employment agreement, we granted Dr. Clark a non-qualified stock
option under the 2006 Stock Plan, in an amount equal to 1% of the number of
shares of our common stock outstanding on November 1, 2006 on a fully diluted
basis or 70,859 options, at an exercise price equal to the initial public
offering price of our common stock. The shares vest in equal annual amounts over
a four-year period, beginning on the first anniversary of the initial grant
date. The options will vest immediately upon a change in
control.  Dr. Clark is eligible for additional option grants as
approved by our board of directors, including those options granted in 2008 as
referenced below.
  In the
event of Dr. Clark’s termination without cause or for good reason, the
portion of his options that are vested as of the date of his termination shall
be exercisable for one year from the date of his termination. The employment
agreement with Dr. Clark contains confidentiality, non-competition and
non-solicitation provisions.
  On
February 9, 2009, in connection with the reduction of workforce pursuant to
which the Company is closing its United Kingdom testing facility to consolidate
services at its CLIA-certified laboratory facilities in Los Angeles, the Company
terminated Dr. Clark.  Dr. Clark will receive certain severance
benefits pursuant to the terms of his employment agreement, as well as certain
additional minimal severance payments required under United Kingdom employment
laws.
   The
McNairn Employment Agreement
  We have
entered into an Employment Agreement with Denise McNairn, dated as of February
20, 2007, as amended on May 29, 2007 for the position of Vice President and
General Counsel. The agreement has an initial term of three years with automatic
one-year renewal terms thereafter. The agreement provides for Ms. McNairn to
receive an initial base salary of $225,000 per year. Ms. McNairn also is
eligible to earn an annual bonus of up to 35% of her base salary based upon our
meeting certain performance targets and her meeting personal objectives as
agreed upon with the CEO and approved by our board of directors. Ms. McNairn was
not awarded a bonus pursuant to this provision of her current employment
agreement in 2008.  Ms. McNairn is eligible to participate in our
employee benefit plans.
  Pursuant
to the employment agreement, we granted Ms. McNairn a non-qualified stock option
under the 2006 Stock Plan, in an amount equal to 1% of the number of shares of
our common stock outstanding on February 20, 2007 on a fully diluted basis, or
71,278 options, at an exercise price equal to the initial public offering price
of our common stock. The shares vest in equal annual amounts over a four-year
period, beginning on the first anniversary of the initial grant date. The
options will vest immediately upon a change in control.  Ms. McNairn
is eligible for additional option grants as approved by our board of directors,
including those options granted in 2008 as referenced below.
  37
  In the
event that a change in control occurs within the first year of Ms. McNairn’s
employment, and regardless of whether she is terminated, we are obligated to
make cash payments to her equal to six months salary at her base salary rate at
the time of change in control, as defined in the employment agreement. In the
event that a change in control occurs within the second or third years of her
employment, regardless of whether she is terminated, we are obligated to make
cash payments equal to nine months salary at her base salary rate at the time of
the change in control. In the event that Ms. McNairn’s employment is terminated
without cause or she resigns for good reason, as defined under the agreement,
during the first year of her employment we are obligated to pay her severance
equal to six months salary at her base salary rate at the time of termination.
In the event that Ms. McNairn’s employment is terminated without cause or she
resigns for good reason within the second or third years of her employment, we
are obligated to pay her severance equal to nine months salary at her base
salary rate at the time of termination. In the event of Ms. McNairn’s
termination without cause, the portion of her options that are vested as of the
date of her termination shall be exercisable for one year from the date of her
termination. The employment agreement also places certain confidentiality,
assignment of inventions and non-solicitation obligations on Ms.
McNairn.
  Outstanding
Equity Awards at 2008 Fiscal Year-End
  Name
      and Principal Position
                          Grant
      Date
                          Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
                          Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
                          Options
      Exercise Price ($)
                          Option
                            Expiration
      DateKathleen
      Danenberg
                            President
      and CEO
                          6/17/08
                          —
                          11,500
                          $3.15
                          6/17/18Kathleen
      Danenberg
                            President
      and CEO
                          9/17/08
                          18,750
                          56,250
                          $3.05
                          9/17/18Thomas
      Stankovich,
                            Chief
      Financial Officer
                          9/17/08
                          7,500
                          22,500
                          $3.05
                          9/17/18James
      Clark,
                            Chief
      Operating Officer
                          9/17/08
                          7,500
                          22,500
                          $3.05
                          9/17/18Denise
      McNairn,
                            General
      Counsel
                          9/17/08
                          7,500
                          22,500
                          $3.05
                          9/17/18
  We
granted Ms. Danenberg non-qualified stock option under the 2006 Stock Plan, in
the amount of 86,500 options at an exercise price equal to the fair market value
of our common stock on the date of grant. One quarter of Ms. Danenberg’s options
vested immediately upon the issuance of the options and the remainder shall vest
in four equal installments over a four year period on the anniversaries of the
grant date.
 
 We
granted Mr. Stankovich a non-qualified stock option under the 2006 Stock Plan,
in the amount of 30,000 options at an exercise price equal to the fair market
value of our common stock on the date of grant. A quarter of the shares vested
on the date of grant and the remaining shares vest in equal annual amounts over
a four-year period, beginning on the first anniversary of the initial grant
date. .
  We granted Mr. Clark a non-qualified
stock option under the 2006 Stock Plan, in the amount of 30,000 options at an
exercise price equal to the fair market value of our common stock on the date of
grant.  A quarter of the shares vested on the date of grant and the
remaining shares vest in equal annual amounts over a four-year period, beginning
on the first anniversary of the initial grant date.
  We
granted Ms. McNairn a non-qualified stock option under the 2006 Stock Plan, in
the amount of 30,000 options at an exercise price equal to the fair market value
of our common stock on the date of grant. A quarter of the shares vested on the
date of grant and the remaining  shares vest in equal annual amounts
over a four-year period, beginning on the first anniversary of the initial grant
date.
  Compensation of Directors
  This
table shows the compensation paid to our current non-employee directors for
2008
 
 Fees
      earned $ (a)
                        
                        
                        Option
      awards $ (b)
                        
                        
                        TotalHubertus
      Spierings
                        
                        
                        24,000
                        
                        
                        
                        18,577
                        
                        
                        
                        42,577Gary
      D. Nusbaum
                        
                        
                        24,000
                        
                        
                        
                        12,790
                        
                        
                        
                        36,790John
      C. Ferrara
                        
                        
                        24,500
                        
                        
                        
                        5,577
                        
                        
                        
                        30,277Kirk
      K. Calhoun
                        
                        
                        15,000
                        
                        
                        
                        4,028
                        
                        
                        
                        19,028David
      R. Gandara, M.D.
                        
                        
                        13,300
                        
                        
                        
                        4,306
                        
                        
                        
                        17,606David
      M. Smith
                        
                        
                        20,500
                        
                        
                        
                        3,932
                        
                        
                        
                        24,432Michael
      Serruya
                        
                        
                        20,500
                        
                        
                        
                        3,932
                        
                        
                        
                        24,432Tom
      DeMeester, M.D.
                        
                        
                        20,500
                        
                        
                        
                        3,932
                        
                        
                        
                        24,432
 
 (a)
  A full description of all fees paid to our directors is provided below.
The cash portion of fees paid represent: 100% of the annual retainer and 100% of
the committee meeting fees described below.
 
 (b) Represents
the compensation expense related to outstanding stock options we recognized for
the year ended December 31, 2008 under Statement of Financial Accounting
Standards 123R. Assumptions
used in the calculation of these amounts are included in Note 11 to our
financial statements for the year ended December 31,
2008.
  On
February 12, 2008, the Compensation Committee of the Board of Directors revised
and adopted a director compensation policy. Under the terms of this policy, all
new directors, upon commencement of their service on the board and all current
directors, beginning with fiscal year 2008 will receive the
following:
 An annual
retainer of $20,000 to be paid quarterly in arrears on the last day of the
quarter.
 An option
to purchase 11,500 shares of our common stock at an exercise price equal to the
fair market value of our common stock on the date of grant, vesting quarterly
over a four-year period, and an option to purchase 11,500 shares of common
stock, vesting quarterly over a period, each year thereafter. Continued vesting
of the options is subject to continued service on the board of
directors.
 All
members of the audit committee, the compensation committee and the nominating
and governance committee of the board of directors also will receive a payment
of $500 for each meeting of the respective committee attended, either in person
or telephonically.
  The
Chairman of each of the committees of the board of directors will receive a
payment of $750 for each meeting of the committee meetings attended, either in
person or telephonically.
 Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
 
 The
following table sets forth as of March 27, 2009 certain information regarding
the beneficial ownership of our common stock by:
  38
  · each
stockholder known by us to own beneficially more than five percent of our common
stock;
  · each of
the executive officers named in the summary compensation table;
  · each of
our directors; and
  · all of
our current directors and executive officers as a group.
  Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the securities.
  The
number of shares of common stock and the percentage of common stock beneficially
owned based on a total of 12,239,276
shares of common stock outstanding on March
27, 2009 and includes shares of common stock issuable within 60 days
ofMarch
27,
2009.
  Except as
indicated in the footnotes to this table, we believe that the stockholders named
in this table have sole voting and investment power with respect to all shares
of common stock shown to be beneficially owned by them, based on information
provided to us by such stockholders. Unless otherwise indicated, the address for
each director and executive officer listed is c/o Response Genetics, Inc., 1640
Marengo St., 6th Floor, Los Angeles, CA 90033.
  Beneficial
      owner
                                                
                                                Number
                                                  of
      shares
                                                  beneficially
                                                  owned
                                                
                                                
                                                Percentage
      of shares
                                                  beneficially
      ownedDirectors
      and Executive OfficersDavid
      Smith
                                                
                                                
                                                1,386,229
                                                
                                                
                                                
                                                11
                                                %Michael
      Serruya
                                                
                                                
                                                3,939
                                                
                                                
                                                
                                                0
                                                %Kathleen
      Danenberg
                                                
                                                
                                                657,435
                                                (1)
                                                
                                                
                                                5
                                                %Tom
      DeMeester
                                                
                                                
                                                372,845
                                                
                                                
                                                
                                                3
                                                %Hubertus
      Spierings
                                                
                                                
                                                2,875
                                                (2)
                                                
                                                
                                                0
                                                %Gary
      D. Nusbaum
                                                
                                                
                                                2,875
                                                (2)
                                                
                                                
                                                0
                                                %John
      C. Ferrara
                                                
                                                
                                                2,875
                                                (2)
                                                
                                                
                                                0
                                                %Kirk
      K. Calhoun
                                                
                                                
                                                2,875
                                                (2)
                                                
                                                
                                                0
                                                %David
      R. Gandara, M.D.
                                                
                                                
                                                2,875
                                                (2)
                                                
                                                
                                                0
                                                %Thomas
      Stankovich
                                                
                                                
                                                25,244
                                                (2)
                                                
                                                
                                                0
                                                %James
      Clark
                                                
                                                
                                                25,215
                                                (2)
                                                
                                                
                                                0
                                                %Denise
      McNairn
                                                
                                                
                                                25,320
                                                (2)
                                                
                                                
                                                0
                                                %All
      current executive officers and directors
                                                
                                                
                                                2,510,602
                                                
                                                
                                                
                                                21
                                                %5%
      or more stockholdersKathleen
      Danenberg
                                                
                                                
                                                657,435
                                                (1)
                                                
                                                
                                                5
                                                %Clara
      Serruya
                                                
                                                
                                                1,728,656
                                                (3)
                                                
                                                
                                                14
                                                %Samuel
      Serruya
                                                
                                                
                                                1,728,656
                                                (4)
                                                
                                                
                                                14
                                                %AWM
      Investment Co., Inc
                                                
                                                
                                                3,196,170
                                                (5)
                                                
                                                
                                                26
                                                %WSV
      Management, LLC
                                                
                                                
                                                910,493
                                                (6)
                                                
                                                
                                                7
                                                %
 ____________________
 (1)
Includes of 426,108 shares of common stock jointly owned by Ms. Danenberg
and her husband, Peter Danenberg. Includes 231,327 shares of common stock
issuable upon the exercise of options within 60 days of December 31,
2008.
  (3)
Includes 864,328 shares of common stock owned by her husband, Samuel Serruya, as
to which Mrs. Serruya disclaims beneficial ownership.
 (4)
Includes 864,328 shares of common stock owned by his wife, Clara Serruya, as to
which Mrs. Serruya disclaims beneficial ownership.
 (5) According
to a Form 4 filed by Austin W. Marxe and David M. Greenhouse on March 19, 2009,
Mr. Marxe and Mr. Greenhouse have shared power to vote and dispose of or direct
the disposition of 3,196,170 common shares. MGP Advisors Limited (“MGP”) is the
general partner of the Special Situations Fund III QP, L.P.
(“QP”).  AWM Investment Company, Inc. (“AWM”) is the general partner
of MGP, the general partner of and investment adviser to the Special Situations
Cayman Fund, L.P. (“Cayman”) and the investment adviser to QP and the Special
Situations Life Sciences Fund, L.P. (“LS”).  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, which
include respectively 929,835 common shares held by QP, 1,147,915 common shares
held by Cayman, and 1,118,420 common shares held by LS.  The principal
address for AWM Investment Co. is 527 Madison Ave. #2600, New York, NY
10022.
 (6)
According to a Schedule 13G filed by WSV Management, LLC, WSV Management, LLC,
WS Ventures Management. L.P., Reid S. Walker, G. Stacy Walker, and Patrick P.
Walker have shared power to vote and dispose of or direct the disposition of
910,493 common shares. The principal address for WSV Management, LLC is 300
Crescent Court # 1100, Dallas, TX 75201.
  39
  
 Securities
Authorized For Issuance Under Equity Compensation Plans
 
 Plan
      Category
                  Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                    (a)
                  Weighted-average
      exercise price of outstanding options, warrants and rights
                    (b)
                  Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                    (c)Equity
      compensation plans approved by security holders
                  1,686,490
                  $6.24
                  779,510Equity
      compensation plans not approved by security holders
                  —
                  —
                  —Total
                  1,686,490
                  $6.24
                  779,510
  Item 13.  Certain
Relationships and Related Transactions, and Director Independence.
 
 The
following is a description of transactions that were entered into with our
executive officers, directors or 5% stockholders during the prior
fiscal year. We believe that all of the transactions described below were
made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All future related party transactions will be
approved by our audit committee or a majority of our independent directors who
do not have an interest in the transactions and who will have access, at our
expense, to our or independent legal counsel.
  Royalty
Payment to the University of Southern California
  While
employed at USC, Kathleen Danenberg, our President, Chief Executive Officer and
a director, developed and patented (RGI-1). USC retains ownership of this patent
but has exclusively licensed this technology to us. In consideration for this
license, we are obligated to pay as royalties to USC a percentage of the net
sales of products or services using the technology, and to meet a certain
minimum in royalty payments. Pursuant to USC policy, the inventors of technology
owned by the University and then licensed for commercialization are paid a
portion of royalties received by the University from the licensed technology.
USC therefore pays a portion of royalties received from us to Ms. Danenberg
in recognition of her invention. Amounts paid to Ms. Danenberg by USC
amounted to $34,658 and $29,993 respectively, for the years ended December 31,
2007 and 2008, respectively.
 
 Director
Independence
 
 Our board
of directors has determined that the following directors are independent in
accordance with the applicable requirements of the SEC and the NASDAQ Stock
Market Inc.:
 
 Hubertus
Spierings
 Gary D.
Nusbaum
 John C.
Ferrara
 Kirk K.
Calhoun
 David R.
Gandara, M.D.
  In the
course of our board of directors’ determination regarding the independence of
Gary Nusbaum in particular, the board of directors considered that a member of
his immediate family is partner and chairman of a law firm which served as the
Company’s legal counsel on certain matters during the last fiscal year, and it
is anticipated the Company will continue the relationship with the firm in this
fiscal year.  Our board
of directors ultimately determined that Mr. Nusbaum can be classified as an
independent director based on the relative insignificance of the Company’s
annual legal fees paid to the law firm as a percentage of such firm’s total
annual revenue.
 40
  Committees
of the Board of Directors
  In order
to fulfill its responsibilities, our board of directors has delegated certain
authority to its committees.  There are three standing
committees.  During 2008, our Board held five regular
meetings.  Each of our directors attended at least 75% of the
aggregate of the number of meetings of the Board of Directors held during the
period for which he has been a director and of meetings held by the committees
on which he served.  We have utilized the phase-in provisions afforded
to us by NASDAQ Marketplace Rule 4350(a)(5) and are in compliance with the
director and board committee independence requirements contained
therein.
  A
brief description of each of the Board committees and their functions is
described below.  Additional information about the committees can be
found in the committee charters, which are available on the Investor Relations
section of our website at www.responsegenetics.com.  Printed copies of
these charters or the Code may be obtained without charge by writing to the
Corporate Secretary.
  Audit
Committee
 Our audit
committee is composed of three members and is authorized to:
  ·
                                                                                                                                                                      assist
      the Board in monitoring the integrity of the financial statements of the
      Company and financial reporting procedures and the Company’s compliance
      with legal and regulatory requirements;·
                                                                                                                                                                      approve
      and retain the independent auditors to conduct the annual audit of our
      books and records and inform the Board of any significant accounting
      matters, including accounting policies;·
                                                                                                                                                                      review
      management’s accounting for the Company’s financial results and reviews
      the timeliness and adequacy of the reporting of those results and related
      judgments;·
                                                                                                                                                                      review
      the proposed scope and results of the audit;·
                                                                                                                                                                      review
      and pre-approve the independent auditor’s audit and non-audit services
      rendered;·
                                                                                                                                                                      approve
      the audit fees to be paid;·
                                                                                                                                                                      review
      accounting and financial controls with the independent auditors and our
      financial and accounting staff;·
                                                                                                                                                                      review
      and approve transactions between us and our directors, officers and
      affiliates;·
                                                                                                                                                                      recognize
      and prevent prohibited non-audit services;·
                                                                                                                                                                      oversee
      internal audit functions and make inquiry into the audits of the Company’s
      books made internally and by outside independent registered public
      accounting firm;·
                                                                                                                                                                      review
      the performance of the Audit Committee;·
                                                                                                                                                                      establish
      procedures for the receipt, retention and treatment of complaints relating
      to accounting, internal accounting controls, and for the confidential,
      anonymous submission by employees of concerns regarding accounting or
      auditing matters;·
                                                                                                                                                                      review
      and report to the Board on the Company’s management of its financial
      resources;
and
  ·
              prepare
      the report of the audit committee that SEC rules require to be included in
      our annual meeting proxy statement.
  Each of
Mr. Ferrara, Mr. Nusbaum and Mr. Calhoun serve as a member of our audit
committee. Our board
of directors has determined that John C. Ferrara qualifies as an “audit
committee financial expert” as defined by applicable SEC rules. Our audit
committee met seven times during 2008.
  We
engaged SingerLewak LLP as our independent registered public accountants on
June 9, 2006. Prior to this, we had not engaged an independent registered
public accounting firm.
  Compensation
Committee
  Our
compensation committee is composed of three members and is authorized
to:
  ·review and recommend the compensation arrangements for management,
including the compensation for our president and chief executive
officer;
  ·establish and review general compensation policies with the objective to
attract and retain superior talent, to reward individual performance and to
achieve our financial goals;
  ·administer our stock incentive plans; and
  41
  ·prepare the report of the compensation committee that SEC rules require
to be included in our annual meeting proxy statement.
  Each of
Mr. Spierings, Mr. Calhoun and Dr.Gandara serve as a member of our compensation
committee. Our compensation committee met three times during 2008.
  Governance
and Nominating Committee
 Our
nominating and governance committee is composed of three members and is
authorized to:
  ·
                      seek
      and identify individuals qualified to become Board members, and reviews
      and recommends possible candidates for Board membership, taking into
      account such criteria as independence, skills, diversity, occupation and
      experience in the context of the needs of the Board;·
                      review
      the structure of the Board, its committees and overall
    size;·
                      recommend
      for Board approval assignments of Board members to committees and
      selection of Board committee
chairs;
  ·
                                                                        oversee
      the implementation of the Code of Business Conduct and Ethics and monitors
      compliance with the Code;·
                                                                        determine
      a schedule for regular executive sessions of the Board in which
      non-management directors meet without management
      participation;·
                                                                        develop
      and recommend to the Board corporate governance principles applicable to
      our company;·
                                                                        oversee
      the process of succession planning for management;·
                                                                        review
      and maintain oversight of matters relating to the independence of Board
      and committee members;·
                                                                        review
      the performance of the nominating and governance committee;
      and·
                                                                        oversee
      the annual performance evaluation of the board of directors and
      management.
  Each of
Mr. Spierings, Mr. Nusbaum and Mr. Ferrara serve as a member of our
nominating and governance committee. Our nominating and governance committee met
three times during 2008.
  Item
14.  Principal Accountant Fees and Services.
  Information
required by Item 14 will be set forth in our Definitive Proxy Statement for our
2009 Annual Meeting of Shareholders, which is expected to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission within 120 days after
the close of the Company’s fiscal year end.  Such information is
incorporated herein by reference.
  42
 
 FINANCIAL
STATEMENTS
  INDEX
  PageReport
      of Independent Registered Public Accounting Firm
                    
                    
                    F-2Consolidated
      Balance Sheets as of December 31, 2007 and 2008
                    
                    
                    F-3Consolidated
      Statements of Operations for the Years Ended December 31, 2007 and
      2008
                    
                    
                    F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007 and
      2008
                    
                    
                    F-5Consolidated
      Statements of Stockholders’ (Deficit) Equity and Comprehensive Loss for
      the Years Ended December 31, 2007 and 2008
                    
                    
                    F-6Notes
      to Consolidated Financial Statements
                    
                    
                    F-7
      - F-29
   43
  Report
of Independent Registered Public Accounting Firm
 
 To the
Board of Directors and Stockholders
 Response
Genetics, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Response Genetics, Inc.
and subsidiaries (the “ Company”) as of December 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders' (deficit) equity
and comprehensive loss and cash flows for the years then ended.  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 audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2007, and the results of their operations and their cash flows for
the years then ended, in conformity with U.S. generally accepted accounting
principles.
 
 We were
not engaged to examine management's assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2008,
included in the accompanying Managements Annual Report on Internal Control over
Financial Reporting and, accordingly, we do not express an opinion
thereon.
 
 
 /s/
SingerLewak LLP
 
 Los
Angeles, California
 March 31,
2009
   F-2
    RESPONSE GENETICS,
INC.
  CONSOLIDATED
BALANCE SHEETS
 
 As of December
    31,2007
                                            
                                            
                                            2008ASSETSCurrent
      assetsCash
      and cash equivalents
                                            
                                            $
                                            17,024,209
                                            
                                            
                                            $
                                            9,545,000Accounts
      receivable, net
                                            
                                            
                                            4,206,765
                                            
                                            
                                            
                                            2,119,496Prepaid
      expenses and other current assets
                                            
                                            
                                            562,403
                                            
                                            
                                            
                                            399,612Total
      current assets
                                            
                                            
                                            21,793,377
                                            
                                            
                                            
                                            12,064,108Property
      and equipment, net
                                            
                                            
                                            2,593,303
                                            
                                            
                                            
                                            1,414,842Other
      assets
                                            
                                            
                                            27,353
                                            
                                            
                                            
                                            69,103Total
      assets
                                            
                                            $
                                            24,414,033
                                            
                                            
                                            $
                                            13,548,053LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                                            
                                            $
                                            234,705
                                            
                                            
                                            $
                                            545,971Accrued
      expenses
                                            
                                            
                                            305,517
                                            
                                            
                                            
                                            513,868Accrued
      royalties
                                            
                                            
                                            264,551
                                            
                                            
                                            
                                            526,712Accrued
      payroll, bonus and related liabilities
                                            
                                            
                                            521,123
                                            
                                            
                                            
                                            154,185Deferred
      revenue
                                            
                                            
                                            4,706,045
                                            
                                            
                                            
                                            2,580,498Total
      current liabilities
                                            
                                            
                                            6,031,941
                                            
                                            
                                            
                                            4,321,234Deferred
      revenue, net of current portion
                                            
                                            
                                            3,276,317
                                            
                                            
                                            
                                            2,355,948Total
      liabilities
                                            
                                            
                                            9,308,258
                                            
                                            
                                            
                                            6,677,182Commitments
      and contingenciesStockholders’
      equityCommon
      stock, $0.01 par value; 50,000,000 shares authorized; 10,239,276 shares
      issued and outstanding at December 31, 2007 and December 31,
      2008
                                            
                                            
                                            102,393
                                            
                                            
                                            
                                            102,393Additional
      paid-in capital
                                            
                                            
                                            35,356,569
                                            
                                            
                                            
                                            36,805,932Accumulated
      deficit
                                            
                                            
                                            (20,320,191
                                            )
                                            
                                            
                                            (29,805,729
                                            )Accumulated
      other comprehensive loss
                                            
                                            
                                            (32,996
                                            )
                                            
                                            
                                            (231,725
                                            )Total
      stockholders’ equity
                                            
                                            
                                            15,105,775
                                            
                                            
                                            
                                            6,870,871Total
      liabilities and stockholders’ equity
                                            
                                            $
                                            24,414,033
                                            
                                            
                                            $
                                            13,548,053
  The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
   RESPONSE
GENETICS, INC.
  CONSOLIDATED
STATEMENTS OF OPERATIONS
  Year
      Ended
                                                              December
      31,2007
                                                            
                                                            
                                                            2008Revenue,
      net
                                                            
                                                            $
                                                            7,789,789
                                                            
                                                            
                                                            $
                                                            7,124,771Operating
      expenses:Cost
      of revenue
                                                            
                                                            
                                                            4,045,715
                                                            
                                                            
                                                            
                                                            3,594,355General
      and administrative
                                                            
                                                            
                                                            5,156,711
                                                            
                                                            
                                                            
                                                            7,863,314UK
      operating expenses
                                                            
                                                            
                                                            1,630,179
                                                            
                                                            
                                                            
                                                            2,477,687UK
      impairment of property and equipment
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            893,826Research
      and development
                                                            
                                                            
                                                            2,455,044
                                                            
                                                            
                                                            
                                                            2,155,749Total
      operating expenses
                                                            
                                                            
                                                            13,287,649
                                                            
                                                            
                                                            
                                                            16,984,931Operating
      loss
                                                            
                                                            
                                                            (5,497,860
                                                            )
                                                            
                                                            
                                                            (9,860,160
                                                            )Other
      income (expense):Interest
      expense
                                                            
                                                            
                                                            (28,669
                                                            )
                                                            
                                                            
                                                            (3,875
                                                            )Interest
      income
                                                            
                                                            
                                                            517,645
                                                            
                                                            
                                                            
                                                            374,659Other
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            (8,911
                                                            )Loss
      from operations before provision (benefit) for income
      taxes
                                                            
                                                            
                                                            (5,008,884
                                                            )
                                                            
                                                            
                                                            (9,498,287
                                                            )Provision
      (benefit) for income taxes
                                                            
                                                            
                                                            44,023
                                                            
                                                            
                                                            
                                                            (12,749
                                                            )Net
      loss
                                                            
                                                            
                                                            (5,052,907
                                                            )
                                                            
                                                            
                                                            (9,485,538
                                                            )Preferred
      stock dividends
                                                            
                                                            
                                                            (412,625
                                                            )
                                                            
                                                            
                                                            —Net
      loss attributable to common stockholders
                                                            
                                                            $
                                                            (5,465,532
                                                            )
                                                            
                                                            $
                                                            (9,485,538
                                                            )Net
      loss per share — basic
                                                            
                                                            $
                                                            (0.78
                                                            )
                                                            
                                                            $
                                                            (0.93
                                                            )Net
      loss per share — diluted
                                                            
                                                            $
                                                            (0.78
                                                            )
                                                            
                                                            $
                                                            (0.93
                                                            )Weighted-average
      shares — basic
                                                            
                                                            
                                                            6,987,092
                                                            
                                                            
                                                            
                                                            10,239,276Weighted-average
      shares — diluted
                                                            
                                                            
                                                            6,987,092
                                                            
                                                            
                                                            
                                                            10,239,276
  The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4


RESPONSE
GENETICS, INC.
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Year
      Ended
                                                                                      December
      31,2007
                                                                                    
                                                                                    
                                                                                    2008Cash
      flows from operating activities:Net
      loss
                                                                                    
                                                                                    $
                                                                                    (5,052,907
                                                                                    )
                                                                                    
                                                                                    $
                                                                                    (9,485,538
                                                                                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                                                    
                                                                                    
                                                                                    572,095
                                                                                    
                                                                                    
                                                                                    
                                                                                    784,721UK
      impairment of property and equipment
                                                                                    
                                                                                    
                                                                                    —
                                                                                    
                                                                                    
                                                                                    
                                                                                    893,826Share-based
      compensation
                                                                                    
                                                                                    
                                                                                    1,549,655
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,449,363Loss
      on sale of property and equipment
                                                                                    
                                                                                    
                                                                                    —
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,911Changes
      in operating assets and liabilities:Accounts
      receivable
                                                                                    
                                                                                    
                                                                                    (534,353
                                                                                    )
                                                                                    
                                                                                    
                                                                                    791,261Prepaid
      expenses and other current assets
                                                                                    
                                                                                    
                                                                                    (339,149
                                                                                    )
                                                                                    
                                                                                    
                                                                                    132,593Other
      assets
                                                                                    
                                                                                    
                                                                                    (8,251
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (41,750
                                                                                    )Accounts
      payable
                                                                                    
                                                                                    
                                                                                    (169,303
                                                                                    )
                                                                                    
                                                                                    
                                                                                    317,416Accrued
      expenses
                                                                                    
                                                                                    
                                                                                    (241,602
                                                                                    )
                                                                                    
                                                                                    
                                                                                    213,989Accrued
      royalties
                                                                                    
                                                                                    
                                                                                    140,699
                                                                                    
                                                                                    
                                                                                    
                                                                                    262,161Accrued
      payroll and related liabilities
                                                                                    
                                                                                    
                                                                                    (74,153
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (366,392
                                                                                    )Accrued
      interest on notes payable to stockholders
                                                                                    
                                                                                    
                                                                                    21,394
                                                                                    
                                                                                    
                                                                                    
                                                                                    —Deferred
      revenue
                                                                                    
                                                                                    
                                                                                    649,880
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1,751,148
                                                                                    )Net
      cash used in operating activities
                                                                                    
                                                                                    
                                                                                    (3,485,995
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (6,790,587
                                                                                    )Cash
      flows from investing activities:Purchase
      of property and equipment
                                                                                    
                                                                                    
                                                                                    (1,980,435
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (577,328
                                                                                    )Net
      cash used in investing activities
                                                                                    
                                                                                    
                                                                                    (1,980,435
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (577,328
                                                                                    )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                                                                                    
                                                                                    
                                                                                    21,000,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    —Transaction
      costs relating to issuance of common stock
                                                                                    
                                                                                    
                                                                                    (3,406,488
                                                                                    )
                                                                                    
                                                                                    
                                                                                    —Net
      cash provided by financing activities
                                                                                    
                                                                                    
                                                                                    17,593,512
                                                                                    
                                                                                    
                                                                                    
                                                                                    —Effect
      of foreign exchange rates on cash and cash equivalents
                                                                                    
                                                                                    
                                                                                    (32,996
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (111,293
                                                                                    )Net
      increase (decrease) in cash and cash equivalents
                                                                                    
                                                                                    
                                                                                    12,094,086
                                                                                    
                                                                                    
                                                                                    
                                                                                    (7,479,209
                                                                                    )Cash
      and cash equivalents:Beginning
      of period
                                                                                    
                                                                                    
                                                                                    4,930,123
                                                                                    
                                                                                    
                                                                                    
                                                                                    17,024,209End
      of period
                                                                                    
                                                                                    $
                                                                                    17,024,209
                                                                                    
                                                                                    
                                                                                    $
                                                                                    9,545,000Cash
      paid during the period for:Income
      taxes
                                                                                    
                                                                                    $
                                                                                    16,754
                                                                                    
                                                                                    
                                                                                    $
                                                                                    39,485Interest
                                                                                    
                                                                                    $
                                                                                    —
                                                                                    
                                                                                    
                                                                                    $
                                                                                    3,027Supplemental
      non-cash operating activitiesAccounts
      receivable, net incurred for deferred revenue
                                                                                    
                                                                                    $
                                                                                    2,384,157
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,294,768
 Supplemental
non-cash financing activities
 The
following non-cash transactions occurred in connection with the Company's June
8, 2007 initial public offering:
 ·
              Notes
      payable of $716,854 and $350,430 of accrued interest were converted to an
      aggregate of 152,489 shares of common stock·
              $6,510,204
      of accrued but unpaid dividends on Series B Preferred Stock automatically
      converted into 1,760,467 shares of common stock·
              $613,984
      of transaction costs recorded in prepaid expenses at December 31, 2006
      were reclassified as a reduction in the proceeds of the initial public
      offering·
              The
      Company issued 100,000 warrants to purchase 100,000 shares of its common
      stock, for proceeds of $100, to the   underwriters. The
      $329,000 fair value of the warrants was recorded as a reduction in the
      proceeds of the initial public
offering
  The accompanying notes are an
integral part of these consolidated financial statements.
  F-5
   RESPONSE GENETICS,
INC.
  Consolidated
Statement of Stockholders’ (Deficit) Equity and Comprehensive Loss
  Series
      B Convertible
                                              Preferred
      Stock
                                            
                                            
                                            Series
      A Convertible
                                              Preferred
      Stock
                                            
                                            
                                            Common
      StockNumber
      of
                                              Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Number
                                              of
      Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Number
      of
                                              Shares
                                            
                                            
                                            Amount
                                            
                                            
                                            Additional
                                              Paid-in
                                              Capital
                                            
                                            
                                            Deferred
                                              Compensation
                                            
                                            
                                            Accumulated
                                              Deficit
                                            
                                            
                                            Accumulated
                                              Other
                                              Comprehensive
                                              Loss
                                            
                                            
                                            Total
                                              Stockholders'
                                              (Deficit)
      EquityBalance
      at December 31, 2006
                                            
                                            
                                            1,038,048
                                            
                                            
                                            $
                                            10,380
                                            
                                            
                                            
                                            500,000
                                            
                                            
                                            $
                                            5,000
                                            
                                            
                                            
                                            2,726,320
                                            
                                            
                                            $
                                            27,263
                                            
                                            
                                            $
                                            9,722,273
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            (15,267,284
                                            )
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            (5,502,368
                                            )Accrued
      dividends on Series B Convertible Preferred Stock
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (412,625
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (412,625
                                            )Conversion
      of Series A and Series B Preferred Stock, as further discussed in Note
      10
                                            
                                            
                                            (1,038,048
                                            )
                                            
                                            
                                            (10,380
                                            )
                                            
                                            
                                            (500,000
                                            )
                                            
                                            
                                            (5,000
                                            )
                                            
                                            
                                            4,360,467
                                            
                                            
                                            
                                            43,605
                                            
                                            
                                            
                                            6,481,979
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            6,510,204Conversion
      of Notes Payable to Stockholders, as further discussed in Note
      10
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            152,489
                                            
                                            
                                            
                                            1,525
                                            
                                            
                                            
                                            1,065,759
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,067,284Issuance
      of common stock in connection with initial public offering, net of
      $4,020,472 of transaction costs, including warrants to purchase 100,000
      shares of common stock, as further discussed in Note 10
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            3,000,000
                                            
                                            
                                            
                                            30,000
                                            
                                            
                                            
                                            16,949,528
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            16,979,528Adjustment
      to stock-based compensation expense for options subject to variable
      accounting
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (82,606
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (82,606
                                            )Share-based
      compensation expense related to issuance of employee stock
      options
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,632,261
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,632,261Unrealized
      loss on foreign currency translation
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (32,996
                                            )
                                            
                                            
                                            (32,996
                                            )Net
      loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (5,052,907
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (5,052,907
                                            )Total
      Comprehensive loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (5,085,903
                                            )Balances
      at December 31, 2007
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            
                                            10,239,276
                                            
                                            
                                            $
                                            102,393
                                            
                                            
                                            $
                                            35,356,569
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            (20,320,191
                                            )
                                            
                                            $
                                            (32,996
                                            )
                                            
                                            $
                                            15,105,775Share-based
      compensation expense related to issuance of employee stock
      options
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,449,363
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,449,363Unrealized
      loss on foreign currency translation
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (198,729
                                            )
                                            
                                            
                                            (198,729
                                            )Net
      loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (9,485,538
                                            )
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (9,485,538
                                            )Total
      Comprehensive loss
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (9,684,267
                                            )Balances
      at December 31, 2008
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            
                                            10,239,276
                                            
                                            
                                            $
                                            102,393
                                            
                                            
                                            $
                                            36,805,932
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            (29,805,729
                                            )
                                            
                                            $
                                            (231,725
                                            )
                                            
                                            $
                                            6,870,871
  F-6
 
 RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  1.
Organization, Operations and Basis of Accounting
  Response Genetics, Inc. (the
“Company”) was incorporated in the state of Delaware on September 23, 1999 as
Bio Type, Inc. for the purpose of providing unique molecular profiling services
of tumor tissue that has been formalin-fixed and embedded in paraffin wax. In
August 2000, the Company changed its name to Response Genetics,
Inc.  In November 2006, the Company established Response Genetics
Ltd., a wholly owned subsidiary in Edinburgh, Scotland.On
February 9, 2009 we implemented a reduction of workforce (“reduction of
workforce”) pursuant to which we are closing our subsidiary in Edinburgh. See
Note 17 "Subsequent Events."
 
 The
Company is a life science company engaged in the research, development,
marketing and sale of pharmacogenomic tests for use in the treatment of cancer.
Pharmacogenomics is the science of how an individual’s genetic makeup relates to
drug response. Tests based on pharmacogenomics facilitate the prediction of a
response to drug therapy or survival following surgery based on an individual’s
genetic makeup. In order to generate pharmacogenomic information from patient
specimens for these tests, the Company developed and patented enabling methods
for maximizing the extraction and analysis of nucleic acids and, therefore,
accessing the genetic information available from each patient sample. The
Company’s platforms include analysis of single biomarkers using the polymerase
chain reaction method as well as global gene interrogation using microarray
methods from paraffin or frozen tissue specimens. The Company primarily derives
its revenue by providing pharmacogenomic testing services to pharmaceutical
companies in the United States, Asia and Europe.
 
 The
Company’s goal is to provide cancer patients and their physicians with a means
to make informed, individualized treatment decisions based on genetic analysis
of tumor tissues. The Company’s pharmacogenomic analysis of clinical trial
specimens for the pharmaceutical industry may provide data that will lead to a
better understanding of the molecular basis for response to specific drugs and,
therefore lead to individualized treatment.
  2.
Summary of Significant Accounting Policies
  Basis
of Consolidation
  The
consolidated financial statements include the accounts of Response Genetics,
Inc. and its wholly owned subsidiary, Response Genetics, Ltd., a Scottish
corporation, which was incorporated in November 2006. All significant
intercompany transactions and balances have been eliminated in
consolidation.
  Cash
and Cash Equivalents
  The
Company considers all highly liquid investments with a maturity at date of
purchase of three months or less to be cash equivalents. The carrying value of
cash equivalents approximates fair value due to the short-term nature and
liquidity of these instruments. The Company’s cash equivalents are comprised of
cash on hand, deposits in banks and money market investments.
  Accounts
Receivable
  Clinical Accounts
Receivable
  The
Company invoices its clients as specimens are processed and any other
contractual obligations are met. The Company’s contracts with clients typically
require payment within 45 days of the date of invoice. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its clients to make required payments. The Company specifically
analyzes accounts receivable and historical bad debts, client credit, current
economic trends and changes in client payment trends when evaluating the
adequacy of the allowance for doubtful accounts. Account balances are
charged-off against the allowance when it is probable the receivable will not be
recovered. To date, the Company’s clients have primarily been large
pharmaceutical companies. As a result, bad debts to date have been minimal.
There were no allowances for doubtful accounts recorded at December 31, 2007 and
2008.
 
 F-7
 
 RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  2.
Summary of Significant Accounting Policies  - (continued)
 
 Accounts
Receivable – (continued)
 
 Patient Accounts
Receivable
  Patient
accounts receivable is recorded at established billing rates less an estimated
billing adjustment, based on reporting models utilizing historical cash
collection percentages and updated for current effective reimbursement factors
from third party payers and patients. Management performs ongoing evaluations of
account receivable balances based on management’s evaluation of historical
experience and current industry trends. Management believes that its accounts
receivable at December 31, 2008 is correctly recorded and  no allowance for
doubtful accounts is currently needed. Although the Company expects to collect
amounts due, actual collections may differ from estimated amounts.
  Patient
accounts receivable as of December 31, 2008 consisted of the
following:
  Year
      Ended
                              December
      31, 2008Gross
      Medicare receivable
                            
                            $
                            326,539Gross
      private patients and insurance
                            
                            
                            506,028Gross
      patients accounts receivable
                            
                            
                            832,567Less
      contractual allowances
                            
                            
                            (673,100
                            )Net
      patient accounts receivable
                            
                            $
                            159,467
   Supply
Inventories
  The
Company purchases reagents, analyte specific reagents, and other supplies to
conduct various laboratory tests on an as needed basis with turnover typically
within 30 days of purchase. The Company’s primary product is data generated from
its pharmacogenomic testing services. Hence, the Company does not record either
product or supply inventories as part of its financial statements as these are
considered immaterial to the Company’s financial position and results of
operations.
  Property
and Equipment
  Property
and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the double
declining balance method over the estimated useful lives of the assets. The
Company has determined the estimated useful lives of its property and equipment,
as follows:
  Laboratory
      equipment
                  
                  5
      to 7 yearsFurniture
      and Equipment
                  
                  5
      to 7 yearsLeasehold
      Improvements
                  
                  Shorter
      of the useful life or the lease term (5 to 7
  years)
 Maintenance
and repairs are charged to expense as incurred. The cost and accumulated
depreciation of assets sold or otherwise disposed of are removed from the
related accounts and the resulting gain or loss is reflected in the statements
of operations. The
Company plans to amortize those software development costs once they are placed
in service during 2009 according to SOP 98-1 accounting for the costs of
computer software developed or obtained for internal use.
 
 F-8
   RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  2.
Summary of Significant Accounting Policies  - (continued)
  Revenue
Recognition
  Revenues
are derived from pharmacogenomic testing services provided to pharmaceutical
companies and are recognized on a contract specific basis pursuant to the terms
of the related agreements. Revenue is recognized in accordance with SEC Staff
Accounting Bulletin No. 104, Revenue Recognition, which
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred and
title and the risks and rewards of ownership have been transferred to the client
or services have been rendered; (3) the price is fixed or determinable; and (4)
collectibility is reasonably assured.
  Revenues
are recorded on an accrual basis as the contractual obligations are completed
and as a set of assays is processed through the Company’s laboratory under a
specified contractual protocol. Certain contracts have minimum assay
requirements that, if not met, result in payments that are due upon the
completion of the designated period. In these cases, revenues are recognized
when the end of the specified contract period is reached.
  On
occasion, the Company may enter into a contract that requires the client to
provide an advance payment for specimens that will be processed at a later date.
In these cases, the Company records this advance as deferred revenue and
recognizes the revenue as the specimens are processed or at the end of the
contract period, as appropriate.
 
 We
recognize a portion of product revenue from our ResponseDX tests invoiced to
Medicare on an accrual basis and to third-party payors, including private payors
on a cash basis. We have received our Medicare provider number which allows us
to invoice and collect from Medicare. Our invoicing to Medicare is primarily
based on amounts allowed by Medicare for the service provided as defined by
Common Procedural Terminology (CPT) codes. We recognize revenue from third party
and private payors currently on a cash basis until a collection history can be
determined. Until we are reasonably assured about a pattern of collections we
will continue to record revenues from third party payors of ResponseDx on a cash
basis.
 
  Cost
of Revenue
  Cost of
revenue represents the cost of materials, direct labor, costs associated with
processing tissue specimens including pathological review, staining,
microdissection, paraffin extraction, reverse transcription polymerase chain
reaction, or (“RT-PCR”) and quality control analyses, license fees and delivery
charges necessary to render an individualized test result. Costs associated with
performing tests are recorded as the tests are processed.
  Patent
License Fees
  The
Company has licensed technology for the extraction of mRNA from formalin-fixed,
paraffin-embedded tumor specimens from the University of Southern California
(“USC”). Under the terms of the license agreement, the Company is required to
pay royalties to USC based on the revenue generated by use of this technology.
The Company maintains a non-exclusive license to use the polymerase chain
reaction (“PCR”), homogenous PCR, and reverse transcription PCR processes of
Roche Molecular Systems, Inc. (“Roche”). The Company pays Roche Molecular
Systems a royalty fee based on revenue that the Company generates through use of
this technology. The Company accrues for such royalties at the time revenue is
recognized. Such royalties are included in cost of revenue in the accompanying
statements of operations.
  Research
and Development
  The
Company expenses costs associated with research and development activities as
incurred. Research and development costs are allocated on a pro rata basis using
the number of research-only specimens that are processed by the Company versus
specimens that are processed and paid for by various third parties via contract.
Research and development costs include employee costs (salaries, payroll taxes,
benefits, and travel), equipment depreciation and warranties and maintenance,
laboratory supplies, primers and probes, reagents, patent costs and occupancy
costs.
  F-9
  RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  2.
Summary of Significant Accounting Policies  - (continued)
  Income
Taxes
  Deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
  The
Company adopted the Financial Accounting Standards Board's Interpretation No.
48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109" ("FIN 48") effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements
and requires the impact of a tax position to be recognized in the financial
statements if that position is more likely than not of being sustained by the
taxing authority. At the date of adoption, and as of December 31, 2007 and 2008,
the Company does not have a liability for unrecognized tax
benefits.
  
 Stock-Based
Compensation
  The
Company accounts for stock-based compensation under the guidance of
 Statement of Financial Accounting Standards No. 123(R), “Share-Based
Payments,” (“SFAS 123(R)”) which requires the measurement and recognition of
compensation expense for all share-based payment awards based on estimated fair
values.
  Under the
modified prospective method of SFAS No. 123(R), compensation expense is
recognized for all stock-based payments granted prior to, but not yet vested as
of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123 and compensation
expense for all stock based payments granted after January 1, 2006, based
on the grant date fair value estimated in accordance with the provisions of SFAS
No. 123(R). The Company’s financial results for the prior periods have not
been restated.  Stock-based compensation expense recognized under SFAS
123(R) was $1,549,655 and $1,449,363 for the years ended December 31, 2007 and
2008, respectively. The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of Emerging Issues Task Force
No. 96-18, Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services (“EITF 96-18”). Under EITF
96-18, stock option awards issued to non-employees are accounted for at fair
value using the Black-Scholes option-pricing model.
  Management
Estimates
  The
preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Management has identified revenue, the fair value
of its preferred and common stock and the assessment of the realizability of
deferred income tax assets as areas where significant estimates and assumptions
have been made in preparing the financial statements.
  Long-lived
Assets
  Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company evaluates potential impairment by comparing the carrying amount of the
asset with the estimated undiscounted future cash flows associated with the use
of the asset and its eventual disposition. Should the review indicate that the
asset is not recoverable, the Company’s carrying value of the asset would be
reduced to its estimated fair value, which is measured by future discounted cash
flows.
  F-10
  RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  2.
Summary of Significant Accounting Policies  - (continued)
  Foreign
Currency Translation
  The
financial position and results of operations of the Company’s foreign operations
are determined using local currency as the functional currency. Assets and
liabilities of these operations are translated at the exchange rate in effect at
each period-end. Statement of operations amounts are translated at the average
rate of exchange prevailing during the period. Translation adjustments arising
from the use of differing exchange rates from period to period are included in
accumulated other comprehensive loss in stockholders’ equity.
  Comprehensive
Income (Loss)
  Comprehensive
income (loss) encompasses the change in equity from transactions and other
events and circumstances from non-owner sources and the Company’s net income
(loss).  Accumulated other comprehensive loss is comprised of foreign
currency translation adjustments for the years ended December 31, 2007 and
2008.
  Fair
Value of Financial Instruments
  The
carrying amounts of the Company’s financial instruments, which include cash,
cash equivalents, accounts receivable, accounts payable, and accrued expenses,
approximate fair value due to the short term nature of these financial
instruments.
  Reclassifications
 
 Prior
year amounts in the consolidated financial statements have been reclassified to
conform with the current year presentation. Reclassified amounts had no impact
on the company’s net losses.
 
 F-11
 
 RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  2.
Summary of Significant Accounting Policies  - (continued)
  Concentration
of Credit Risk and Clients and Limited Suppliers
  Cash and
cash equivalents consist of financial instruments that potentially subject the
Company to concentrations of credit risk to the extent recorded on the balance
sheets. The Company maintains cash in United States financial institutions in
excess of Federal Deposit Insurance Corporation limitations. In addition, the
Company has invested its excess cash in money market instruments which are not
insured under the Federal Deposit Insurance Corporation. The Company has not
incurred any losses on these cash balances as of December 31, 2008. At December
31, 2008, the Company had cash on deposit that was in excess of the federally
insured limit of $250,000. At December 31, 2008, approximately $243,000 of
cash was held outside of the United States.
  Clients
that account for greater than 10 percent of revenue are provided
below.
  Year Ended December
      31,2007
                            
                            
                            2008Revenue
                            
                            
                            Percent
      of
                              Total
                              Revenue
                            
                            
                            Revenue
                            
                            
                            Percent
      of
                              Total
                              RevenueTaiho
      Pharmaceutical
                            
                            $
                            2,945,800
                            
                            
                            
                            38
                            %
                            
                            $
                            1,844,725
                            
                            
                            
                            26
                            %GlaxoSmithKline
                            
                            $
                            2,818,288
                            
                            
                            
                            36
                            %
                            
                            $
                            1,255,031
                            
                            
                            
                            18
                            %GlaxoSmithKline
      Biologicals
                            
                            $
                            938,701
                            
                            
                            
                            12
                            %
                            
                            $
                            3,631,716
                            
                            
                            
                            51
                            %
 
 Clients
that account for greater than 10 percent of accounts receivable are provided
below.
  As of December
    312007
                          
                          
                          2008Receivable
                            Balance
                          
                          
                          Percent
      of
                            Total
                            Receivables
                          
                          
                          Receivable
                            Balance
                          
                          
                          Percent
      of
                            Total
                            ReceivablesTaiho
      Pharmaceutical
                          
                          $
                          396,100
                          
                          
                          
                          9
                          %
                          
                          $
                          388,275
                          
                          
                          
                          18
                          %GlaxoSmithKline
                          
                          $
                          567,139
                          
                          
                          
                          14
                          %
                          
                          $
                          1,294,768
                          
                          
                          
                          61
                          %GlaxoSmithKline
      Biologicals
                          
                          $
                          3,059,597
                          
                          
                          
                          73
                          %
                          
                          $
                          -
                          
                          
                          
                          -
                          %
  Many of
the supplies and reagents used in the Company’s testing process are procured by
a limited number of suppliers. Any supply interruption or an increase in demand
beyond the suppliers’ capabilities could have an adverse impact on the Company’s
business. Management believes it can identify alternative sources, if necessary,
but it is possible such sources may not be identified in sufficient time to
avoid an adverse impact on its business. Refer also to Notes 7 and 8 for further
discussion regarding these supply agreements.
  F-12
  RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  2.
Summary of Significant Accounting Policies  - (continued)
  Recent
Accounting Pronouncements
  In  September
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements,” and
defines fair value, establishes a framework for measuring fair value under U.S.
GAAP, and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The adoption
of SFAS 157 did not have a material impact on the Company's financial
statements.
 
 In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities - an amendment of FASB
Statement No. 115,” which permits entities to measure many financial instruments
and certain other items at fair value, and establishes the presentation and
disclosure requirements to facilitate comparisons between entities choosing
different measurement attributes for similar types of assets. SFAS 159 is
effective for fiscal years ending after November 15, 2007. The adoption of SFAS
159 did not have a material impact on the Company's financial
statements.
 
 In
December 2007, FASB issued SFAS No. 141(R), “Business Combinations”, an
amendment of SFAS No. 141, which improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
SFAS 141(R) applies for all business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. We do not expect adoption of SFAS 141(R) to have a
material impact on the Company’s financial statements.
 
 In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51,” which amends ARB 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008. We do not expect adoption of SFAS 160 to have a material
impact on the Company’s financial statements.
 
 In March
2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133,” which establishes
the disclosure requirements for derivative instruments and for hedging
activities. This Statement amends and expands the disclosure requirements of
Statement 133 with the intent to provide users of financial statements with an
enhanced understanding of derivative instruments and hedging activities. SFAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early adoption encouraged. We do
not expect adoption of SFAS 161 to have a material impact on the Company’s
financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” We do not expect the adoption of SFAS 162 to have a material effect
on our consolidated results of operations and financial condition.
 
 In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161. This FSP applies to credit derivatives within the scope
of Statement 133, hybrid instruments that have embedded credit derivatives, and
guarantees within the scope of Interpretation 45. This FSP is effective for
reporting periods (annual or interim) ending after November 15, 2008. We do not
expect this FSP to have a material impact on our consolidated financial position
and results of operations.
  F-13
    RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 3.
Property and Equipment
  Property
and equipment consists of the following:
  December
      31,2007
                                          
                                          
                                          2008Laboratory
      equipment
                                          
                                          $
                                          3,657,668
                                          
                                          
                                          $
                                          2,328,888Furniture
      and equipment
                                          
                                          
                                          483,749
                                          
                                          
                                          
                                          113,643Leasehold
      improvements
                                          
                                          
                                          141,135
                                          
                                          
                                          
                                          364,902Software
      Development
                                          
                                          
                                          317,524
                                          
                                          
                                          
                                          403,325Total
                                          
                                          
                                          4,600,076
                                          
                                          
                                          
                                          3,210,758Less:
      Accumulated depreciation and
      amortization
                                          
                                          
                                          (2,006,773
                                          )
                                          
                                          
                                          (1,795,916
                                          )Total
      property and equipment, net
                                          
                                          $
                                          2,593,303
                                          
                                          
                                          $
                                          1,414,842
  Depreciation
expense for the years ended December 31, 2007 and 2008 was $572,095 and
$784,721, respectively.
  During
2007 and 2008, the Company has accumulated costs related to database software
development. The Company has not yet placed this database into service and
accordingly has not depreciated these software development costs. The Company
intends to place those software development costs into service during
2009.
  As a
result of the reduction of workforce management implemented on February 9, 2009,
management performed a recoverability test of the long-lived assets located at
the United Kingdom testing facility in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. Based on the recoverability analysis performed, the
Company recorded a non-cash charge for the impairment of long-lived assets of
$0.9 million as of December 31, 2008 to write down the carrying value of the
long-lived assets to their estimated fair value of $0. The fair value was
estimated based upon offers received from third parties to purchase the
long-lived assets.
  4.
Prepaid Expenses and Other Current Assets
  Prepaid
expenses and other current assets consists of the following:
 December   31,2007
                                
                                
                                2008Prepaid
      insurance
                                
                                $
                                128,766
                                
                                
                                $
                                146,084Prepaid
      maintenance contracts
                                
                                
                                237,277
                                
                                
                                
                                98,513Other
                                
                                
                                196,360
                                
                                
                                
                                155,015$
                                562,403
                                
                                
                                $
                                399,612
  5.
Notes Payable to Stockholders
  On March
28, 2000, the Company issued notes payable in an aggregate principal amount of
$716,854 to holders of the Company’s Series A Junior Convertible Preferred
Stock. These notes payable accrued interest on the unpaid principal balances at
the rate of 6.8% per annum, and under the original terms were payable on
December 31, 2006. As of December 31, 2006, no principal or interest payments
had been made. Total aggregate principal and accrued interest amounted to
$1,045,890 at December 31, 2006.
  On
October 24, 2006, the Board of Directors of the Company approved an amendment to
the terms of the notes payable to stockholders such that all outstanding notes
payable to stockholders, plus accrued interest, would be automatically converted
into shares of the Company’s common stock at a per share price equal to the
initial public offering price. The Company completed its initial public offering
on June 8, 2007 and the aggregate principal amount of notes payable of $716,854
and $350,430 of accrued interest were converted to an aggregate of 152,489
shares of the Company’s common stock based on a conversion price of $7.00, the
initial public offering price.
  F-14
   RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  6.
Loss Per Share
  The
Company calculates net loss per share in accordance with SFAS No. 128, Earnings Per Share (“SFAS No.
128”). Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss attributable to common stockholders for the
period by the weighted average number of shares of common stock outstanding for
the period. Diluted net loss per share attributable to common stockholders is
computed by dividing the net loss attributable to common stockholders by the
weighted average number of shares of common stock and dilutive common stock
equivalents then outstanding. Common stock equivalents consist of shares of
common stock issuable upon the conversion of convertible preferred stock and
upon the exercise of stock options and warrants.
  The
following table sets forth the computation for basic and diluted loss per
share:
 
 Year
      Ended December 31,2007
                                              
                                              
                                              2008Numerator:Net
      loss
                                              
                                              $
                                              (5,052,907
                                              )
                                              
                                              $
                                              (9,485,538
                                              )Series
      B convertible preferred stock dividends
                                              
                                              
                                              (412,625
                                              )
                                              
                                              
                                              —Numerator
      for basic earnings per share - income (loss) available to
                                                common
      stockholders
                                              
                                              
                                              (5,465,532
                                              )
                                              
                                              
                                              (9,485,538
                                              )Effect
      of dilutive securities:Series
      B convertible preferred stock dividends
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Numerator
      for diluted earnings per share — income (loss) available
                                                to
      common stockholders
                                              
                                              $
                                              (5,465,532
                                              )
                                              
                                              $
                                              (9,485,538
                                              )Denominator:Denominator
      for basic earnings per share — weighted-average
                                                shares
                                              
                                              
                                              6,987,092
                                              
                                              
                                              
                                              10,239,276Effect
      of dilutive securities:Series
      A Junior Convertible preferred stock
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Series
      B Convertible preferred stock
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Stock
      options
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Warrants
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Dilutive
      potential common shares
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Denominator
      for diluted earnings per share — adjusted weighted-
                                                average
      shares and assumed conversions
                                              
                                              
                                              6,987,092
                                              
                                              
                                              
                                              10,239,276Basic
      Loss per share
                                              
                                              $
                                              (0.78
                                              )
                                              
                                              $
                                              (0.93
                                              )Diluted
      Loss per share
                                              
                                              $
                                              (0.78
                                              )
                                              
                                              $
                                              (0.93
                                              )
  Outstanding
stock options and warrants to purchase 1,260,190 shares and 1,686,490 shares for
the years ended December 31, 2007, and 2008, respectively, were excluded from
the calculation of diluted loss per share as their effect would have been
antidilutive. The assumed conversion of the Series A Junior Convertible
Preferred Stock and the Series B Convertible Preferred Stock were excluded from
the calculation of diluted loss per share for the year ended December 31, 2007
as their effect would have been antidilutive.
 
 F-15
   RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  7.
Commitments and Contingencies
  Operating
Leases
  The
Company leases office and laboratory space under a noncancelable operating lease
that expires on January 31, 2010. The lease contains two two-year options
to extend the term of the lease and contains annual scheduled rate increases
tied to the Consumer Price Index for the Los Angeles/Long Beach California
metropolitan area. In March 2007, the Company entered into a noncancelable
operating lease, which expires in March 2009, for office and laboratory space in
Scotland. As a
result of the reduction in workforce implemented by the Company on February 9,
2009, the Company has extended its lease in Scotland for one additional month.
For additional information see Note 17 Subsequent Events.The Company
also leases space at 103 South Carroll Street, Suite 2b, Fredrick, Maryland
21701, for administrative purposes. This lease expires on August 31,
2009.  Rent expense was $587,669 and $617,441for the years ended December 31, 2007 and 2008,
respectively.
  Future
minimum lease payments by year and in the aggregate, under the Company’s
noncancelable operating leases, consist of the following at December 31,
2008:
  Year
      Ending December 31,2009
                                
                                $
                                433,2422010
                                
                                
                                30,091Total
                                
                                $
                                463,333
  Employment
Agreements
  The
Company has employment contracts with several individuals, which provide for
annual base salaries and potential bonuses. These contracts contain certain
change of control, termination and severance clauses that require the Company to
make payments to certain of these employees if certain events occur as defined
in their respective contracts. Below are summaries of these
agreements.
  The
Danenberg Employment Agreement
  We
entered into an employment agreement with Ms. Danenberg on December 11, 2000.
This previous agreement was superceded by a new employment agreement, which we
entered into as of October 26, 2006, as amended on December 14, 2006 and on May
29, 2007, for the position of President and Chief Executive Officer. The
agreement has an initial term of three years, with automatic one-year renewal
terms thereafter. Ms. Danenberg is to receive an initial base salary of
$350,000 per year, subject to annual adjustments at the discretion of the Board.
Ms. Danenberg also is eligible to earn a minimum of 40% of her base salary
as an annual bonus based upon our meeting certain performance targets and her
meeting personal objectives as determined by our board of
directors.
  We
granted Ms. Danenberg non-qualified stock option under the 2006 Stock Plan,
in an amount equal to 3% of the number of shares of our common stock outstanding
on October 26, 2006 on a fully diluted basis  or 212,577 options at an
exercise price equal to $7.00, which was the initial public offering price
of our common stock (the "IPO Price"). One third of these options vested
immediately upon the issuance of the options and the remainder vested in
two equal installments on the first and second anniversary of the date of
Ms. Danenberg’s employment agreement (October 26, 2006). The options
will vest immediately upon a change in control. Ms. Danenberg will be
eligible for future option grants as approved by our board of directors. We will
provide Ms. Danenberg with a monthly allowance of $1,000 to cover
miscellaneous business expenses and a $1,000 monthly automobile allowance. We
agreed to cover up to $5,000 of Ms. Danenberg’s legal fees incurred in the
negotiation of her employment agreement and up to $1,000 of Ms. Danenberg’s
legal fees incurred in the negotiation of the amendment to her employment
agreement.
  In the
event that Ms. Danenberg’s employment is terminated without cause or for
good reason, as defined under the agreement, we are obligated to pay her
severance equivalent to the greater of (a) one full year of base pay and
benefits; or (b) the base pay and benefits for the remaining term of the
employment agreement. In addition, within forty-five days of her termination, we
are obligated to pay her the pro rata portion of the bonus earned as of her
termination date. In addition the portion of Ms. Danenberg’s options that
are vested as of the date of her termination shall be exercisable for one year
from the date of her termination. In the event the employment agreement is
terminated because of Ms. Danenberg’s death, or because of a disability as
defined in the employment agreement, Ms. Danenberg or her estate will be
entitled to receive her base pay and pro rata bonus earned as of the date of
death or disability, and we will provide benefits coverage for a period of 12
months following the date of such death or disability to Ms. Danenberg or
her heirs as the case may be.
  F-16
  RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  7.
Commitments and Contingencies – (continued)
 
 The
Danenberg Employment Agreement – (continued)
 
 In the
event a change in control occurs during Ms. Danenberg’s employment, she has
agreed not to resign her employment voluntarily for a period of six months
following the effective date of the change in control. If she is terminated
within such six-month period without cause or she resigns for good reason, in
addition to any other benefits to which she is entitled and provided she
executes a release of claims, Ms. Danenberg will be entitled to a lump sum
payment equivalent to a month of base pay at her then current annual rate for
each month during such six-month period for which she has yet to complete
service to us at the time of such termination, within forty-five days following
such termination. The employment agreement also places certain confidentiality,
assignment of inventions and non-solicitation obligations on
Ms. Danenberg.
  The
Stankovich Employment Agreement
  We have
entered into an Employment Agreement with Thomas Stankovich, dated as of October
25, 2006, as amended on May 29, 2007 for the position of Vice President and
Chief Financial Officer. He commenced employment on November 27, 2006. The
agreement has an initial term of three years with automatic one-year renewal
terms thereafter. The agreement provides for Mr. Stankovich to receive an
initial base salary of $220,000 per year. Mr. Stankovich also is eligible
to earn an annual bonus based upon our meeting certain performance targets and
his meeting personal objectives as agreed upon with the CEO and approved by our
board of directors.
  We
granted Mr. Stankovich a non-qualified stock option under the 2006 Stock
Plan, in an amount equal to 1% of the number of shares of our common stock
outstanding on November 27, 2006, on a fully diluted basis, or 70,976 options,
at an exercise price equal to the IPO Price. The shares vest in equal annual
amounts over a four-year period, beginning on the first anniversary of the
initial grant date. The options will vest immediately upon a change in control.
Mr. Stankovich will be eligible for additional option grants as approved by
our board of directors. In the event that a change in control occurs within the
first year of Mr. Stankovich’s employment, and regardless of whether he is
terminated, we are obligated to give him a cash payment equal to six months
salary at his base salary rate at the time of change in control, as defined in
the employment agreement. In the event that a change in control occurs within
the second or third years of his employment, regardless of whether he is
terminated, we are obligated to give him a cash payment equal to nine months
salary at his base salary rate at the time of the change in control. In the
event that Mr. Stankovich’s employment is terminated without cause or he
resigns for good reason as defined under the agreement, during the first year of
his employment, we are obligated to pay him severance equal to six months salary
at his base salary rate at the time of termination. In the event that
Mr. Stankovich’s employment is terminated without cause or he resigns for
good reason within the second or third years of his employment, we are obligated
to pay him severance equal to nine months salary at his base salary rate at the
time of termination. In the event of Mr. Stankovich’s termination without
cause, the portion of the his options that are vested as of the date of his
termination shall be exercisable for one year from the date of his termination.
The employment agreement also places certain confidentiality, assignment of
inventions and non-solicitation obligations on Mr. Stankovich.
  The
Clark Employment Agreement
  We have
entered into an Employment Agreement with James Clark, dated as of October 26,
2006, for the position of Vice President and Chief Operating Officer. The
agreement provides for Dr. Clark to receive an initial base salary of
£120,000 (approximately $230,000) per year. Dr. Clark also is eligible to
earn an annual bonus based upon our meeting certain performance targets and his
meeting personal objectives as agreed upon with the CEO and approved by our
board of directors. Dr. Clark is eligible to participate in our employee
benefit plans and we are required to reimburse him for reasonable
business-travel expenses.
  Should
either Dr. Clark or we give the other notice of the intention to terminate
Dr. Clark’s employment, we may elect to terminate his employment
immediately and we will be obligated, upon so electing, to pay to Dr. Clark
a sum equal to his base salary exclusive of any contractual bonus or benefit in
kind for the unexpired portion of the contractual notice entitlement. This
obligation ceases if Dr. Clark commences alternate employment within the
entitled notice period.
  We
granted Dr. Clark a non-qualified stock option under the 2006 Stock
Plan, in an amount equal to 1% of the number of shares of our common stock
outstanding on November 1, 2006 on a fully diluted basis or 70,859 options, at
an exercise price equal to the IPO Price. The shares vest in equal annual
amounts over a four-year period, beginning on the first anniversary of the
initial grant date. The options will vest immediately upon a change in control.
Dr. Clark will be eligible for additional option grants as approved by our
board of directors. In the event of Dr. Clark’s termination without cause
or for good reason, the portion of his options that are vested as of the date of
his termination shall be exercisable for one year from the date of his
termination. The employment agreement with Dr. Clark contains
confidentiality, non-competition and non-solicitation provisions. On
February 9, 2009, in connection with the Reduction of Workforce, the Company
terminated James Clark, its Chief Operating Officer. Mr. Clark will receive
severance benefits pursuant to the terms of his employment agreement, as well as
certain additional minimal severance payments required under United Kingdom
employment laws.
  F-17
 
 RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 7.
Commitments and Contingencies – (continued)
 
 The
McNairn Employment Agreement
  We have
entered into an Employment Agreement with Denise McNairn, dated as of February
20, 2007, as amended on May 29, 2007 for the position of Vice President and
General Counsel. The agreement has an initial term of three years with automatic
one-year renewal terms thereafter. The agreement provides for Ms. McNairn to
receive an initial base salary of $225,000 per year. Ms. McNairn also is
eligible to earn an annual bonus of up to 35% of her base salary based upon our
meeting certain performance targets and her meeting personal objectives as
agreed upon with the CEO and approved by our board of directors. Ms. McNairn is
eligible to participate in our employee benefit plans.
  We
granted Ms. McNairn a non-qualified stock option under the 2006 Stock Plan, in
an amount equal to 1% of the number of shares of our common stock outstanding on
February 20, 2007 on a fully diluted basis, or 71,278 options, at an exercise
price equal to the IPO Price. The shares vest in equal annual amounts over a
four-year period, beginning on the first anniversary of the initial grant date.
The options will vest immediately upon a change in control. Ms. McNairn will be
eligible for additional option grants as approved by our board of
directors.
  In the
event that a change in control occurs within the first year of Ms. McNairn’s
employment, and regardless of whether she is terminated, we are obligated to
make cash payments to her equal to six months salary at her base salary rate at
the time of change in control, as defined in the employment agreement. In the
event that a change in control occurs within the second or third years of her
employment, regardless of whether she is terminated, we are obligated to make
cash payments equal to nine months salary at her base salary rate at the time of
the change in control. In the event that Ms. McNairn’s employment is terminated
without cause or she resigns for good reason, as defined under the agreement,
during the first year of her employment we are obligated to pay her severance
equal to six months salary at her base salary rate at the time of termination.
In the event that Ms. McNairn’s employment is terminated without cause or she
resigns for good reason within the second or third years of her employment, we
are obligated to pay her severance equal to nine months salary at her base
salary rate at the time of termination. In the event of Ms. McNairn’s
termination without cause, the portion of her options that are vested as of the
date of her termination shall be exercisable for one year from the date of her
termination. The employment agreement also places certain confidentiality,
assignment of inventions and non-solicitation obligations on Ms.
McNairn.
  Agreements
with Suppliers
  The
Company purchases certain supplies from Applied Biosystems, Affymetrix Inc., and
DxS Diagnostic Innovations. Purchases from these companies accounted for
approximately 86% and 81% of the Company’s reagent purchases for the years ended
December 31, 2007 and 2008, respectively.
  Under the
supply agreement with Affymetrix, the Company is required to pay an annual
subscription fee and has access at predetermined prices to various probes,
arrays, software and reagents necessary to support the Company’s
work.
  F-18
 
 RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 8.
License and Collaborative Agreements
  License
Agreement with the University of Southern California (“USC”)
  In April
2000, as amended in June 2002 and April 2005, the Company entered into a license
agreement with USC. Under this agreement, USC granted the Company a worldwide,
exclusive license with the right to sublicense, the patents for RGI-1 and
related technology, for use in human and veterinary diagnostic laboratory
services, the sale of clinical diagnostic products, and the sale of research
products to the research community. USC retains the right under the agreement to
use the technology for research and educational purposes.
  In
consideration for this license, the Company agreed to pay to USC royalties based
on a percentage of the revenues generated by the use of RGI-1 and related
technology. Royalty expense relating to this agreement amounted to $152,502 and
$79,052 for the years ended December 31, 2007 and 2008,
respectively.
 
 License
Agreement with Roche Molecular Systems (“Roche”)
  In July
2001, the Company entered into a diagnostic services agreement with Roche to
provide the Company with access to Roche’s patented PCR technology. In November
2004, this agreement was replaced by a non-exclusive license to use Roche’s PCR,
homogenous PCR, and reverse transcription PCR processes. In consideration for
these rights, the Company is obligated to pay royalties to Roche, based on a
percentage of net sales of products or services that make use of the PCR
technology. Royalty expense relating to this agreement amounted to $219,721 and
$292,481 for the years ended December 31, 2007 and 2008,
respectively.
  In
November 2004, the Company entered into an agreement with Roche, pursuant to
which the Company is collaborating with Roche to produce commercially viable
assays used in the validation of genetic markers for pharmaceutical companies.
Specifically, the Company has licensed the rights to Roche to use the
pre-diagnostic assays the Company develops in the course of using its
RNA-extraction technologies to provide testing services to pharmaceutical
companies and to produce diagnostic kits that then can be sold commercially to
those pharmaceutical companies. Roche is required to pay the Company royalties
of a certain percentage of net sales of such diagnostic kits sold to
pharmaceutical companies. Through December 31, 2008, Roche has not been required
to pay any royalties to the Company pursuant to this agreement.
  Services
Agreement with Taiho Pharmaceutical Co., Ltd. (“Taiho”)
  In July
of 2001, the Company entered into an agreement with Taiho pursuant to which it
will provide Taiho with molecular-based tumor analyses for use in guiding
chemotherapy treatment for cancer patients using the RGI-1 and for use in its
business developing and marketing pharmaceutical and diagnostic products for use
against cancer. Pursuant to the agreement, the Company appointed Taiho as the
exclusive purchaser in Japan of tests and testing services based upon the RGI-1
using gene expression for (i) any one or the combination of specified molecular
markers, (ii) the therapeutic use of specified compounds, or (iii) the diagnosis
or therapeutic treatment of specified precancerous and cancerous diseases. The
Company also granted Taiho the right to be a non-exclusive purchaser in Japan of
tests and testing services based upon the RGI-1 using gene expression, other
than those for which Taiho has exclusivity, for, (i) any one or combination of
molecular markers, (ii) the therapeutic use of any compound or biological
product against cancer, or (iii) the diagnosis or therapeutic treatment of
precancerous and cancerous diseases.
  In
consideration for the testing services provided, Taiho paid an upfront payment
at the commencement of the agreement and is obligated to pay regular testing
fees, covering the specific services performed on a monthly basis.
  Taiho is
obligated to purchase a minimum amount of testing services from the Company each
calendar quarter. Revenue recognized under this agreement was $2,945,800 and
$1,844,725 for the years ended December 31, 2007 and 2008,
respectively.
  F-19
  RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  8.
License and Collaborative Agreements  - (continued)
  Services
Agreement with SmithKline Beecham Corporation (d.b.a. GlaxoSmithKline or
“GSK”)
  In
January 2006, the Company entered into an agreement with GSK pursuant to which
the Company provides services in connection with profiling the expression of
various genes from a range of human cancers. Under the agreement, the Company
will provide GSK with testing services as described in individual protocols and
GSK will pay the Company for such services based on the pricing schedule
established for each particular protocol. GSK is obligated to make minimum
annual payments to the Company under the agreement and also was obligated to
make a non-refundable upfront payment to the Company, to be credited against
work undertaken pursuant to the agreement. In January 2006, the Company received
an upfront payment of $2,000,000. The contract also provides for minimum annual
assay testing requirements over a three year period ending January 2009. The
minimum amount of revenue to be recognized during the term, which will expire in
January 2009, will be $6,500,000. The timing of the recognition of these amounts
is dependent upon when GSK submits the specimens for testing. The Company
recognized $2,818,288 and $1,255,031of revenue during the years ended
December 31, 2007 and 2008, respectively.
 
  In
December 2008, we amended and restated our master service agreement with
GlaxoSmith Kline, Ltd. ("GSK"), a leading pharmaceutical manufacturer (the "GSK
Agreement"). Pursuant to the amendment, the term of the GSK Agreement has been
extended for a two-year period, with the option for the parties to extend the
GSK Agreement for additional one-year periods, upon their mutual written
agreement. In addition, we will become a preferred provider to GSK and its
affiliates of genetic testing services on a fee-for-service basis and, in
anticipation of the services to be provided, GSK agreed to make a non-refundable
upfront payment of approximately $1,300,000 which was received on January 5,
2009. This payment may be credited against future work undertaken in the period
beginning on January 1, 2009 and ending on December 31, 2010.
  Master
Laboratory Test Services Agreement with GlaxoSmithKline Biologicals (“GSK
Bio”)
  In
December 2006, the Company entered into an agreement with GSK Bio pursuant to
which it will provide testing services, principally in relation to profiling the
expression of various genes from a range of human cancers. The Company will
conduct the testing services on tissue specimens provided by GSK Bio. The
agreement required that GSK Bio make an upfront payment of $2,620,000, which was
received by the Company in December 2006. The agreement further specifies that
GSK Bio will pay annual minimum payments in 2007, 2008 and 2009 and that the
upfront payment made in December 2006 will be credited against the annual
minimum payments in 2007 and 2008. The agreement also provides that any
differences between the annual minimum payments made in 2007, 2008 or 2009 and
the amounts due to the Company for testing services performed on specimens
submitted by GSK Bio during the three years ending December 31, 2009 be credited
towards services performed during the year ending December 31, 2010, the final
year of the agreement. The minimum amount of revenue to be recognized during the
term of this contract, which will expire in December 2010, is approximately
$7,300,000. In December 2007 the Company amended its agreement
with GSK Bio whereby GSK Bio would make the remaining minimum payments under the
agreement in one lump sum. This payment was received in January 2008. The timing
of the recognition of these amounts is dependent upon when GSK submits the
specimens for testing. The Company recognized $938,701 and $3,631,716 of revenue
under this agreement during the years ended December 31, 2007 and
2008, respectively. On February 9, 2009 we implemented a reduction of workforce
(“reduction of workforce”) pursuant to which we are closing our subsidiary in
Edinburgh. See Note 17 "Subsequent Events."
  Collaboration
Agreement with Shanghai BioChip Company, Ltd. (“SBC”)
  On March
5, 2007, the Company entered into a collaboration agreement with SBC pursuant to
which SBC will provide exclusive pharmacogenomic testing services to the
Company’s clients in China.
  Pursuant
to the agreement, the Company has granted SBC an exclusive license in China to
provide services in China using the Company’s proprietary RNA extraction
technologies. Subject to consent from USC, the Company will grant SBC an
exclusive sublicense to patents licensed from USC for distribution of testing
services in China. In turn, SBC will perform RNA extraction from FFPE tissue
specimens exclusively for the Company during the term of the
agreement.
  This
agreement has an initial term of five years, with an automatic renewal for an
additional three-year term unless either party gives 90 days notice in advance
of the renewal date of its intent not to renew. Pursuant to the agreement, SBC
will receive a percentage of the gross margin, as defined in the agreement,
collected from the Company’s clients in China as compensation for its testing
services performed. For the years ended December 31, 2007 and 2008, no testing
services have performed.
  F-20
  RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  8.
License and Collaborative Agreements  - (continued)
  Commission
Agreement with Hitachi Chemical Co., Ltd.
  On July
26, 2007, the Company entered into a collaboration agreement with Hitachi
Chemical Co., Ltd. (“Hitachi”), a leading diagnostics manufacturer in Japan (the
“Hitachi Agreement”). Under the terms of this agreement, Hitachi will begin
using the Company's proprietary and patented techniques to extract genetic
information from formalin-fixed paraffin-embedded (“FFPE”) tissue samples
collected in Southeast Asia, Australia and New Zealand. As part of this
collaboration agreement, the Company will provide Hitachi with the technical
information and assistance necessary to perform the testing services. Hitachi
also plans to introduce the Company to potential new testing services customers
in the region to expand the testing of FFPE clinical samples in Asia. The
Southeast Asian countries covered under this agreement include Japan, North
Korea, South Korea, Taiwan, Mongolia, Pakistan, Bangladesh, Sri Lanka, Nepal,
Singapore, Malaysia, Indonesia, Brunei, Thailand, Myanmar, Laos, Cambodia,
Vietnam and the Philippines (the “Territory”).
  This
Agreement has an initial term expiring on March 31, 2010, with an automatic
renewal for one year at the end of the original period under the same terms and
conditions. Pursuant to the agreement, Hitachi will receive a percentage of the
revenue, as provided in the agreement, collected from the Company's clients in
the Territory, for its testing services performed which totaled $273,374 for
2008.
  Hitachi
is responsible for expenses related to the cost of laboratory equipment and
modification to the laboratory facilities, as well as the cost of reagents.
The
Company has provided to Hitachi required laboratory equipment which Hitachi has
agreed to pay the Company and is included as part of accounts receivable
totaling $248,799.
  Collaboration
Agreement with University of California, San Francisco (“UCSF”)
  On July
20, 2007, the Company entered into a research study collaboration agreement with
the University of California, San Francisco (“UCSF”) to develop diagnostic tests
for pancreatic cancer. Under the terms of this agreement, the Company will fund
research performed by and collaborate with UCSF concerning molecular marker
profiling and the evaluation of diagnostic assays and test kits. The research
program will be carried out through July 20, 2009. As consideration for UCSF’s
services, the Company will pay UCSF an amount equal to its expenditures subject
to a maximum amount of approximately $147,000. An initial payment of
approximately $73,000 was paid upon execution of the collaboration agreement
with the balance to be paid upon receipt of all samples and clinical
data.
  9.
Stockholders’ Equity (Deficit)
  Common
Stock
  On June
8, 2007, the Company completed an initial public offering of 3,000,000 shares of
common stock at $7.00 per share. Total net proceeds from the initial public
offering was approximately $17.2 million.
    Preferred
Stock
  The
Company was authorized to issue 2,000,000 shares of Preferred Stock with a par
value of $0.01 per share. Of the 2,000,000 shares, the Company has designated
500,000 shares as Series A Junior Convertible Preferred Stock and 1,111,000
shares as Series B Convertible Preferred Stock.
  On
December 14, 2006, the Board of Directors of the Company approved and in January
2007, the stockholders approved to amend and restate the Company’s
Certificate of Incorporation increasing the authorized Preferred Stock to
5,000,000 shares.
  F-21
 
 RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 9.
Stockholders’ Equity (Deficit) – (continued)
 
 Series
A Junior Convertible Preferred Stock
  In March
2000, the Company issued 500,000 shares of Series A Junior Convertible Preferred
Stock (“Series A Junior Preferred Stock”) with a par value of $0.01 per share
for $5 per share (gross proceeds of $2,500,000). The Series A Junior Preferred
Stock ranked senior to the Company’s common stock and junior to any other
preferred stock with respect to dividend and liquidation rights. Each
outstanding share of Series A Junior Preferred stock could be converted into 5.2
shares of common stock provided the holder waived any unpaid dividends relating
to those shares upon conversion. No dividends were declared on the Series A
Junior Preferred Stock through June 8, 2007, at which time all outstanding
shares of Series A Junior Preferred Stock automatically converted into 2,600,000
shares of common stock, as further discussed below upon closing of the initial
public offering of the Company’s common stock on June 8, 2007.
 
 Series
B Convertible Preferred Stock
  In March
2000, the Company issued 1,038,048 shares of Series B Convertible Preferred
stock (“Series B Preferred Stock”) with a par value of $0.01 per share at $9.00
per share (gross proceeds of $9,342,432). Each outstanding share of Series B
Preferred stock could be converted into one share of common stock. The Series B
Preferred stock ranked senior to the common stock and any other issue of
preferred stock which did not expressly provide that it ranked senior to the
Series B preferred stock as to dividends, liquidation preferences or otherwise.
Each outstanding share of Series B Preferred stock was entitled to receive
cumulative dividends which accrued upon issuance and were payable at $.90 per
annum. The Company had the option to pay the dividend in the form of common
stock.
  On
October 24, 2006, the Board of Directors of the Company approved and on
June 1, 2007, the stockholders approved to amend and restate the
Certificate of Incorporation to amend the rights and preferences of the Series B
Preferred Stock providing that the Series B Preferred Stock, including accrued
but unpaid dividends, would automatically convert into common stock upon the
closing of the initial public offering. Each share of Series B Preferred Stock
was to convert into 0.8 shares of common stock. The total accrued but unpaid
dividends at the date of conversion were to convert into common stock based on
the fair value of the stock on the date of conversion. All outstanding shares of
Series B Preferred Stock including $6,510,204 of accrued but unpaid dividends
automatically converted into 1,760,467 shares of common stock upon the closing
of the initial public offering of the Company’s common stock on June 8, 2007, as
further discussed below.
 
 Reverse
Stock Split
  On May 1,
2007, the Company’s Board of Directors approved an amendment to the Company’s
Certificate of Incorporation to effect a 0.8-for-1 reverse stock split of the
Company’s common stock. A majority of shareholders approved the stock split on
May 31, 2007, and on June 4, 2007 the amendment to the Certificate of
Incorporation was filed, which effected the stock split. All references to
shares in the consolidated financial statements and the accompanying notes,
including but not limited to the number of shares and per share amounts, unless
otherwise noted, have been adjusted to reflect the reverse stock split on a
retroactive basis. Previously awarded options to purchase shares of the
Company’s common stock have been retroactively adjusted to reflect the stock
split. Further, the stock split resulted in an adjustment to the conversion
ratio of the Series B Convertible Preferred Stock and Series A Junior
Convertible Preferred Stock.
 
 Initial
Public Offering
  On June
8, 2007, the Company completed an initial public offering of 3,000,000 shares of
common stock at $7.00 per share. Total net proceeds from the initial public
offering was approximately $17.2 million. Upon completion of the initial public
offering, the following occurred:
 
 •
              All
      of the outstanding Series B Convertible Preferred Stock and Series A
      Junior Convertible Preferred Stock, including accrued but unpaid
      dividends, automatically converted into 4,360,467 shares of common stocks
      based on the initial public offering price of
  $7.00.
 
 •
              All
      of the outstanding notes payable to stockholders, including accrued but
      unpaid interest, automatically converted into 152,489 shares of common
      stock based on the initial public offering price of
  $7.00.
  F-22
 
 RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  10.
Stock Option Plan
  In March
2000, the Company adopted a Stock Option Plan (the “2000 Plan”) as approved by
its board of directors. Under the 2000 Plan, the Company may grant options to
acquire up to 1,600,000 shares of common stock. In connection with the adoption
of the 2006 Employee, Director and Consultant Stock Plan, as further discussed
below, the Company will grant no additional options under its 2000 Plan under
which options to purchase 190,000 shares remained outstanding as of December 31,
2008. Although no more options may be granted under the 2000 Plan, the terms of
the 2000 Plan continue to apply to all outstanding options. The Company also
granted options to purchase 16,000 shares of common stock to two consultants
which were granted under separate agreements outside of the 2000
Plan.
  On
October 26, 2006, the Board of Directors of the Company approved, and on May 1,
2007, reapproved, the adoption of the 2006 Employee, Director and Consultant
Stock Plan (the “2006 Stock Plan”). The stockholders approved the 2006 Stock
Plan on June 1, 2007. Under this plan, the Company may grant up to a maximum of
2,160,000 options to purchase the Company’s common stock. As of December 31,
2008, there were 779,510 options available to grant under the 2006 Stock
Plan.
  Employee
options vest according to the terms of the specific grant and expire 10 years
from the date of grant. Non-employee option grants to date vest typically over a
2 to 3 year period. The Company had 1,586,490 options outstanding at a weighted
average exercise price of $6.24 at December 31, 2008. There were 893,179
nonvested stock options with a weighted average grant date fair value of $5.25
outstanding at December 31, 2008.
  The
Company estimated share-based compensation expense for the year ended December
31, 2008 using the Black-Scholes model with the following weighted average
assumptions:
  2007
                          
                          
                          
                          2008Risk
      free interest rate
                          
                          5.03
                          %
                          
                          
                          3.54
      - 5.03
                          %Expected
      dividend yield
                          
                          —
                          
                          
                          
                          —Expected
      volatility
                          
                          77.4
                          %
                          
                          
                          77.4
                          %Expected
      life (in years)
                          
                          7
                          
                          
                          
                          7Forfeiture
      rate
                          
                          15
                          %
                          
                          
                          5.0
                          %
   F-23
   RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  10.
Stock Option Plan  - (continued)
  The
following table summarizes the stock option activity for the year ended December
31, 2008:
  Number
      of Shares
                            
                            
                            Weighted
      Average
                              Exercise
      PriceOutstanding,
      December 31, 2007
                            
                            
                            1,160,190
                            
                            
                            $
                            7.62Granted
                            
                            
                            532,800
                            
                            
                            $
                            3.28Exercised
                            
                            
                            —
                            
                            
                            $
                            —Forfeited
                            
                            
                            (106,500
                            )
                            
                            $
                            6.35Outstanding,
      December 31, 2008
                            
                            
                            1,586,490
                            
                            
                            $
                            6.24
  The
following table provides information for options that were outstanding and
exercisable as of December 31, 2008:
  Options
      Outstanding
                                                                  
                                                                  
                                                                  Options
      ExercisableExercise
      Prices
                                                                  
                                                                  
                                                                  Number
                                                                  
                                                                  
                                                                  Weighted
      Average
                                                                    Remaining
      Life in
                                                                    Years
                                                                  
                                                                  
                                                                  Weighted
      Average
                                                                    Exercise
      Price
                                                                  
                                                                  
                                                                  Number
                                                                  
                                                                  
                                                                  Weighted
                                                                    Average
                                                                    Exercise
      Price$
                                                                  11.25
                                                                  
                                                                  
                                                                  
                                                                  184,000
                                                                  
                                                                  
                                                                  
                                                                  1.97
                                                                  
                                                                  
                                                                  $
                                                                  11.25
                                                                  
                                                                  
                                                                  
                                                                  184,000
                                                                  
                                                                  
                                                                  $
                                                                  11.25$
                                                                  7.00
                                                                  
                                                                  
                                                                  
                                                                  864,190
                                                                  
                                                                  
                                                                  
                                                                  8.28
                                                                  
                                                                  
                                                                  $
                                                                  7.00
                                                                  
                                                                  
                                                                  
                                                                  397,778
                                                                  
                                                                  
                                                                  $
                                                                  7.00$
                                                                  3.05-$4.99
                                                                  
                                                                  
                                                                  
                                                                  538,300
                                                                  
                                                                  
                                                                  
                                                                  9.57
                                                                  
                                                                  
                                                                  $
                                                                  3.32
                                                                  
                                                                  
                                                                  
                                                                  111,533
                                                                  
                                                                  
                                                                  $
                                                                  3.221,586,490
                                                                  
                                                                  
                                                                  
                                                                  7.98
                                                                  
                                                                  
                                                                  $
                                                                  6.24
                                                                  
                                                                  
                                                                  
                                                                  693,311
                                                                  
                                                                  
                                                                  $
                                                                  7.52
  The
weighted average exercise prices, remaining contractual lives and aggregate
intrinsic value for options granted, exercisable and expected to vest as of
December 31, 2008 were as follows:
  Number
      of
                          Shares
                        
                        
                        Weighted
                          Average
      Exercise
                          Price
                        
                        
                        Weighted
                          Average
                          Remaining
                          Contractual
      Life
                          (Years)
                        
                        
                        Aggregate
                          Intrinsic
      ValueOutstanding
                        
                        
                        1,586,490
                        
                        
                        $
                        6.24
                        
                        
                        
                        7.98
                        
                        
                        $
                        —Expected
      to vest
                        
                        
                        848,520
                        
                        
                        $
                        5.25
                        
                        
                        
                        8.98
                        
                        
                        $
                        —Exercisable
                        
                        
                        693,311
                        
                        
                        $
                        7.52
                        
                        
                        
                        6.70
                        
                        
                        $
                        —
  Aggregate
intrinsic value excludes those options that are “not-in-the-money” as of
December 31, 2008. Awards that are expected to vest take into consideration
estimated forfeitures for awards not yet vested.
  Information
about stock-based compensation included in the results of operations for the
years ended December 31, 2007 and 2008 is as follows:
  Year
      Ended December 31,2007
                            
                            
                            2008Cost
      of revenue
                            
                            $
                            414,692
                            
                            
                            $
                            297,123General
      and administrative
                            
                            
                            898,666
                            
                            
                            
                            1,050,466Research
      and development
                            
                            
                            236,297
                            
                            
                            
                            101,774Totals
                            
                            $
                            1,549,655
                            
                            
                            $
                            1,449,363
  F-24
  RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  11.
Common Stock Warrants
  The
Company issues warrants to purchase common shares of the Company either as
compensation for services, or as additional incentive for investors who may
purchase common stock. The value of warrants issued for compensation is
accounted for as a non-cash expense to the Company at the fair value of the
warrants issued. The value of warrants issued in conjunction with financing
events is recorded as a reduction in paid in capital for common stock issuances.
The Company values the warrants at fair value as calculated by using the
Black-Scholes option-pricing model.
  In June,
2007, in conjunction with the initial public offering, the Company issued
100,000 warrants to purchase 100,000 shares of its common stock, for proceeds of
$100, to the underwriters as part of the initial public offering (see Note 10).
The fair value of the common stock warrants, in the amount of $329,000, was
recorded as a reduction in the proceeds of the initial public
offering.
  The
Company valued the warrants using the Black-Scholes pricing model. The following
assumptions were used to determine the fair value of those
warrants:
  Expected
      volatility
                    
                    
                    77.4
                    %Expected
      dividends
                    
                    
                    0.0
                    %Expected
      term
                    
                    5.0
      yearsRisk-free
      rate
                    
                    
                    5.03
                    %
  There
were no warrants granted during the year ended December 31,
2008.
  The
following table summarizes all common stock warrant activity during the nine
months ended December 31, 2008:
  Number
      of
                                        Shares
                                      
                                      
                                      Weighted
                                        Average
      PriceOutstanding,
      December 31, 2007
                                      
                                      
                                      100,000
                                      
                                      
                                      $
                                      7.70Granted
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Exercised
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Cancelled
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Outstanding,
      December 31, 2008
                                      
                                      
                                      100,000
                                      
                                      
                                      $
                                      7.70Exercisable,
      December 31, 2008
                                      
                                      
                                      100,000
                                      
                                      
                                      $
                                      7.70
  The
following table summarizes information about the warrants outstanding at
December 31, 2008:
  Exercise
      Price
                                                    
                                                    
                                                    Warrants
                                                      Outstanding
                                                    
                                                    Remaining Contractual
                                                      Life (years)$
                                                    7.70
                                                    
                                                    
                                                    
                                                    100,000
                                                    
                                                    5.00100,000
  The
Company accounts for its warrants in accordance with Emerging Issues Task Force
Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Company’s Own Stock” (“EITF 00-19”) which requires
warrants to be classified as permanent equity, temporary equity or as assets or
liabilities. In general, warrants that either require net-cash settlement or are
presumed to require net-cash settlement are recorded as assets and liabilities
at fair value and warrants that require settlement in shares are recorded as
equity instruments. The Company’s warrants require settlement in shares and are
accounted for as permanent equity.
  F-25
 
 RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  12.
Income Taxes
  The
components of the income tax provision for the years ended December 31, 2007 and
2008 were as follows:
  2007
                              
                              
                              2008CurrentFederal
                              
                              $
                              14,000
                              
                              
                              $
                              (14,000
                              )Foreign
                              
                              
                              —
                              
                              
                              
                              —State
                              
                              
                              30,023
                              
                              
                              
                              1,25144,023
                              
                              
                              
                              (12,749
                              )DeferredFederal
                              
                              
                              —
                              
                              
                              
                              —Foreign
                              
                              
                              —
                              
                              
                              
                              —State
                              
                              
                              —
                              
                              
                              
                              ——
                              
                              
                              
                              —Provision
      for income taxes
                              
                              $
                              44,023
                              
                              
                              $
                              (12,749
                              )
  For
financial statement purposes, loss before income taxes for the years ended
December 31, 2007 and 2008 includes the following components:
 
 2007
                          
                          2008Domestic
                          
                          $
                          (3,514,709
                          )
                          
                          $
                          (6,152,507
                          )Foreign
                          
                          
                          (1,494,175
                          )
                          
                          
                          (3,345,780
                          )$
                          (5,008,884
                          )
                          
                          $
                          (9,682,348
                          )
  A
reconciliation of the expected income tax provision computed using the federal
statutory income tax rate of 34% to the Company’s effective income tax rate is
as follows:
  2007
                          
                          
                          2008Income
      tax expense (benefit) based on federal statutory rate
                          
                          $
                          (1,703,000
                          )
                          
                          $
                          (3,229,000
                          )State
      income taxes, net of federal income tax
                          
                          
                          (227,000
                          )
                          
                          
                          (300,000
                          )Change
      in deferred tax valuation allowance
                          
                          
                          1,919,000
                          
                          
                          
                          3,350,000Foreign
      income taxed at varying rates
                          
                          
                          60,000
                          
                          
                          
                          134,000Other,
      net
                          
                          
                          (4,977
                          )
                          
                          
                          32,251Provision
      for income taxes
                          
                          $
                          44,023
                          
                          
                          $
                          (12,749
                          )
  The tax
effects of temporary differences that give rise to significant portions of the
Company’s deferred tax assets and deferred tax liabilities at December 31, 2007
and 2008 are presented below:
  2007
                                  
                                  
                                  2008Deferred
      tax assets:Domestic
      net operating loss carryforwards
                                  
                                  $
                                  1,711,000
                                  
                                  
                                  $
                                  3,741,000Foreign
      net operating loss carryforwards
                                  
                                  
                                  448,000
                                  
                                  
                                  
                                  1,184,000Deferred
      revenue
                                  
                                  
                                  2,134,000
                                  
                                  
                                  
                                  1,951,000Federal
      and state tax credit
                                  
                                  
                                  224,000
                                  
                                  
                                  
                                  206,000Deferred
      stock compensation
                                  
                                  
                                  892,000
                                  
                                  
                                  
                                  1,461,000Capitalized
      costs
                                  
                                  
                                  1,241,000
                                  
                                  
                                  
                                  1,235,000Other,
      net
                                  
                                  
                                  15,000
                                  
                                  
                                  
                                  362,000Total
      gross deferred tax assets
                                  
                                  
                                  6,665,000
                                  
                                  
                                  
                                  10,140,000Less
      valuation allowance on deferred tax assets
                                  
                                  
                                  (6,584,000
                                  )
                                  
                                  
                                  (10,013,000
                                  )Net
      deferred tax assets
                                  
                                  
                                  81,000
                                  
                                  
                                  
                                  127,000Deferred
      tax liabilities:Plant
      and equipment, principally accelerated depreciation
                                  
                                  
                                  (81,000
                                  )
                                  
                                  
                                  (127,000
                                  )Total
      deferred tax liabilities
                                  
                                  
                                  (81,000
                                  )
                                  
                                  
                                  (127,000
                                  )Net
      deferred taxes
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
 F-26
 
 RESPONSE GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 12.
Income Taxes – ( continued)
 
 Deferred
income taxes result from temporary differences between income tax and financial
reporting computed at the effective income tax rate. The Company has established
a valuation allowance against its net deferred tax asset due to the uncertainty
surrounding the realization of such asset. Management periodically evaluates the
recoverability of the deferred tax assets. At such time it is determined that it
is more likely than not that deferred tax assets are realizable, the valuation
allowance will be reduced.
  The
Company adopted the Financial Accounting Standards Board’s Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109” (“FIN 48”) effective January 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements
and requires the impact of a tax position to be recognized in the financial
statements if that position is more likely than not of being sustained by the
taxing authority. At the date of adoption, and as of December 31, 2007 and 2008,
the Company does not have a liability for unrecognized tax
benefits.
  We file
U.S. federal, U.S. state, and foreign tax returns. Our major tax jurisdictions
are U.S. federal and the State of California and are subject to tax examinations
for the years 1999 through 2008.
  As of
December 31, 2008, the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $9.9 million and $6.6 million,
respectively. If not utilized, the federal net operating loss and tax credit
carryforwards will expire beginning in 2020. If not utilized, the state net
operating loss carryforward will expire beginning in 2012.
  As of
December 31, 2008, the Compnay had U.K. net operating loss carryforwards
totaling approximately $3.9 million that may be carried forward indefinitely. A
full valuation allowance has been provided against this asset.
  F-27
  RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 13.
Defined Contribution Plan
  The
Company maintains a defined contribution plan covering substantially all of its
employees meeting minimum age and service requirements. Participation in the
plan is optional.  The Company provides a maximum of 3% matching
contribution based on employee contributions up to 6%. The
Company’s matching contribution amount for 2008 was $41,185.
 
 14.
Related Party Transactions
  While
employed at USC, Kathleen Danenberg, president, chief executive officer and
director, developed and patented (United States Patent 6,248,535; Danenberg , et al., Method
For Isolation of RNA From Formalin-Fixed Paraffin-Embedded Tissue Specimens) an
extraction method that allowed reliable and consistent isolation of RNA from
FFPE suitable for RT-PCR. USC retains ownership of this patent but has
exclusively licensed this technology to the Company. In consideration for this
license, the Company is obligated to pay royalties to USC, as a percentage of
net sales of products or services using the technology, and to meet a certain
minimum in royalty payments. Pursuant to USC policy, the inventors of technology
owned by the University and then liensed for commercialization are paid a
portion of royalties received by the University from the licensed technology.
USC therefore pays a portion of royalties received from the Company to Ms.
Danenberg in recognition of her invention. Amounts paid to Ms. Danenberg
amounted to $34,658 and $29,993 for the years ended December 31, 2007 and 2008,
respectively.
  15.
Segment Information
  The
Company operates in a single reporting segment, with operating facilities in the
United States and the United Kingdom.
  The
following enterprise wide disclosure was prepared on a basis consistent with the
preparation of the financial statements. The following tables contain certain
financial information by geographic area:
  Year
      Ended December 31,Revenue:
                                
                                2007
                                
                                
                                2008United
      States
                                
                                $
                                3,905,288
                                
                                
                                $
                                1,631,619Europe
                                
                                
                                938,701
                                
                                
                                
                                3,648,427Japan
                                
                                
                                2,945,800
                                
                                
                                
                                1,844,725$
                                7,789,789
                                
                                
                                $
                                7,124,771
  December 31,Long-lived
      assets:
                                2007
                                
                                2008United
      States
                                
                                $
                                3,125,371
                                
                                
                                $
                                3,210,758United
      Kingdom
                                
                                
                                1,474,705
                                
                                
                                
                                0$
                                4,600,076
                                
                                
                                $
                                3,210,758
  
 F-28
  
 RESPONSE
GENETICS, INC.
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 16. Net
Patient Service Revenue
 
 Net
patient service revenue for the year ended December 31, 2008 were comprised of
the following:
 
 Year
      EndedDecember
      31, 2008Gross
      patient service revenue
                          
                          $
                          909,463Contractual
      allowances
                          
                          
                          (673,100
                          )Net
      patient service revenue
                          
                          $
                          236,363
  There
were no net patient service revenues recorded in 2007.
  Cost-Containment
Measures
  Both
government and private pay sources have instituted cost-containment measures
designed to limit payments made to providers of health care services, and there
can be no assurance that future measures designed to limit payments made to
providers will not adversely affect the Company.
  Regulatory
Matters
  Laws and
regulations governing Medicare programs are complex and subject to
interpretation. Compliance with such laws and regulations can be subject to
future governmental review and interpretation, as well as significant regulatory
action including fines, penalties and exclusions from certain governmental
programs. The Company believes that it is in compliance with all applicable laws
and regulations and is not aware of any pending or threatened investigations
involving allegations of potential wrongdoing.
 
 A portion
of the Company’s revenues are derived from Medicare for which reimbursement
rates are subject to regulatory changes and government funding restrictions.
Although the Company is not aware of any significant future rate changes,
significant changes to the reimbursement rates could have a material effect on
the Company’s operations.
 
 17. Subsequent
events
  U.K.
Operations
  On
February 9, 2009, management implemented a reduction of workforce
(“Reduction of Workforce”) pursuant to which the Company is closing its United
Kingdom testing facility to consolidate services at its CLIA-certified
laboratory facilities in Los Angeles.  In connection with the
Reduction of Workforce, the Company expects to incur expenses associated with
one-time termination benefits of approximately $197,000.The
Company had not satisfied all the criteria necessary in order to
include those one-time termination benefits in its December 31, 2008 financial
statements. Those costs will be included in the Company’s 2009 financial
statements.Additionally, management
performed a recoverability test of the long-lived assets located at the United
Kingdom testing facility in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Based on the recoverability analysis performed, the Company
recorded a non-cash charge for the impairment of long-lived assets of $0.9
million as of December 31, 2008 to write down the carrying value of the
long-lived assets to their estimated fair value of $0. The fair value was
estimated based upon offers received from third parties to purchase the
long-lived assets.Our lease for its United Kingdom testing facility
is due to terminate on March 31, 2009. We have arranged to extend the lease,
pursuant to its terms, for an additional month, in order to facilitate the
winding down of our operations in the United Kingdom. The Reduction of
Workforce will be substantially complete on March 31, 2009. We undertook the
Reduction of Workforce as part of a strategic plan to increase operational
efficiency in conjunction with the consolidation of our services
at our Los Angeles facilities and it will not affect our genetic
testing services or current partnership agreements.
  Private Placement
  On
February 27, 2009, the Company entered into a Purchase Agreement with certain
affiliates of Special Situations Funds for the private placement of 2,000,000
newly-issued shares of the Company's common stock at a per share price of $1.00.
The closing of the sale of the Shares occurred on March 2, 2009.  The
aggregate offering price of the Shares is approximately $2 million.
  In
connection with the Private Placement, we also entered into a Registration
Rights Agreement, dated February 27, 2009, with the Purchasers (the
"Registration Rights Agreement") pursuant to which it has agreed to file, within
90 days of the closing of the Private Placement, a registration statement with
the Securities and Exchange Commission ("SEC") to register the Shares for
resale, which registration statement is required to become effective within 150
days following the closing. If the Registration Statement is not filed or
declared effective within the timeframes set forth above, then we will be
obligated to pay liquidated damages to the Purchasers in an amount equal to 1.5%
of the aggregate amount invested by the Purchasers for each 30-day period, or
pro rata for any portion thereof, following the date by which the Registration
Statement should have been filed or declared effective. In addition, liquidated
damages will also accrue in the event that, subject to certain exceptions, we do
not maintain the effectiveness of the registration statement until the earlier
of the sale of all of the Shares or the Shares become eligible for sale under
Rule 144 without regard to any volume limitations.
 
 F-29
  Part
IV.
 
 Item
15.  Exhibit, Financial Statement Schedules.
 (a) The
following documents are filed as a part of this Annual Report on Form
10-K:
  (1) Financial Statements. The
financial statements filed as part of this report are listed on the Index to the
Financial Statements.
  (2) Financial Statement
Schedules. Schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
  (3) Exhibits.Reference is made
to the Exhibit Index below. The exhibits are included, or incorporated by
reference, in the Annual Report on Form 10-K and are numbered in accordance with
Item 601 of Regulation S-K.
 3.1*
              Amended
      and Restated Certificate of Incorporation, as amended.3.2*
              Restated
      Bylaws of the Company.4.1*
              Warrant
      to purchase common stock issued to Maxim Group LLC and its
      designees.4.2*
              Form
      of Common Stock Certificate.10.1†
              Amended and Restated Master Agreement
      for the supply of Laboratory Test Services by and between SmithKline
      Beccham Corporation (a.b.a GlaxoSmithKline) and the Company dated as of
      December 22, 2008.10.2*†
              Master
      Agreement for the Supply of Laboratory Services by and between
      GlaxoSmithKline Biologicals and the Company, dated as of December 1,
      2006.10.3*†
              Services
      Agreement by and between Taiho Pharmaceutical Co., Ltd. And the Company,
      dated as of July 30, 2000.10.4*†
              License
      Agreement by and between Roche Molecular Systems, Inc. and the Company,
      dated as of November 23, 2004.10.5*†
              Patent
      License Agreement by and between Roche Molecular Systems Inc. and the
      Company, dated as of November 16, 2004.10.6*†
              Service
      Provider Agreement by and between Affymetrix, Inc. and the Company, dated
      as of September 29, 2006.10.7*†
              Option
      and License Agreement by and between the University of Southern California
      and the Company, as amended, dated as of April 19,
2000.10.8*†
              Agreement
      by and between Applied Biosystems and the Company, dated December 29,
      2005.10.9*#
              Employment
      Agreement by and between James Clark and the Company, dated as of
      October 26, 2006.10.10*#
              Employment
      Agreement by and between Thomas Stankovich and the Company, dated as
      of
                October
      25, 2006, as amended on May 29, 2007.10.11*#
              Employment
      Agreement by and between Kathleen Danenberg and the Company, dated as of
      October 26, 2006, as amended on December 14, 2006, and on
      May 29, 2007.10.12*#
              Employment
      Agreement by and between Denise McNairn and the Company, dated as of
      February 20, 2007, as amended on May 29,
2007.10.13*#
              Response
      Genetics, Inc. 2006 Employee, Director and Consultant Stock
      Plan.10.14*
              Office
      Lease by and between Health Research Association and the Company, dated
      effective as of January 25, 2005.10.15*†
              Collaboration
      Agreement by and between the Company and Shanghai Biochip Company, Ltd.,
      dated as of March 5, 200710.16*
              Lease
      Agreement by and between the Company and the University Court of the
      University of Edinburgh, dated as of March 15,
  2007.10.17*#
              Executive
      Officer Form of Incentive Stock Option Agreement.10.18*#
              Executive
      Officer Form of Non-Qualified Stock Option Agreement.10.19@†
              Commission
      Agreement by and between Hitachi Chemical Co., LTD. and the Company, dated
      as of July 26, 2007.14*
              Code
      of Ethics.21*
              Subsidiaries
      of the Small Business Issuer.23.1
              Consent
      of SingerLewak LLP.31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley
      Act of 2002.31.2
              Certification of Chief Financial Officer pursuant
      to Section 302 of the Sarbanes-Oxley Act of
      2002.32
              Certification of Chief Executive Officer and Chief
      Financial Officer pursuant to Section
  906
 
 *
Incorporated by reference to the Company’s Registration Statement on Form
SB-2  (File No. 333-139534).
 @
Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB for
the quarter ended September 30, 2007.
  #
Identifies a management contract or compensatory plan or agreement in which an
executive officer or director of the Company participates.
 †
Confidential treatment requested as to certain portions, which portions have
been filed separately with the Securities and Exchange Commission.
  44
  SIGNATURES
  Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  RESPONSE
GENETICS, INC.
 
 Date:
      March 31, 2009
                          /s/
      Kathleen Danenberg
 
 Kathleen
      Danenberg
                    President
      and Chief Executive
                    Officer
  Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
  Signatures
                                                                  
                                                                  Title
                                                                  
                                                                  DateBy:
                                                                  /s/
      Kathleen Danenberg
                                                                  
                                                                  President
      and Chief Executive Officer (principal executive officer) and
      Director
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      Thomas Stankovich
                                                                  
                                                                  Vice
      President and Chief Financial Officer (principal financial and accounting
      officer)
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      Tom DeMeester, M.D.
                                                                  
                                                                  Chairman
      of the Board
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      Hubertus Spierings
                                                                  
                                                                  Director
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      Gary D. Nusbaum
                                                                  
                                                                  Director
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      John C. Ferrara
                                                                  
                                                                  Director
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      Michael Serruya
                                                                  
                                                                  Director
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      David M. Smith
                                                                  
                                                                  Director
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      Kirk K. Calhoun
                                                                  
                                                                  Director
                                                                  
                                                                  March
      31, 2009By:
                                                                  /s/
      David R. Gandara, M.D.
                                                                  
                                                                  Director
                                                                  
                                                                  March
      31,
2009
  
 45