Document Description Portions of the Proxy Statement for the Annual Meeting of Shareholders (the “Proxy Statement”) to be held on April Item 5. Item 10. no further user intervention once the Xpert cartridge is loaded into the GeneXpert system; all three phases of PCR: 1) sample preparation, 2) amplification and 3) detection, are performed within the single sealed test cartridge automatically; primarily moderate complexity notably, to our knowledge, the only truly scalable real-time PCR system that operates entirely within a closed system architecture, reducing hands-on time, reducing the likelihood of human error and contamination, and enabling nested PCR capability, a proven process for maximizing real-time PCR full random access whereby different tests for different targets may be run simultaneously in different modules in the same GeneXpert system, which increases potential utilization and throughput of the system and also enables on-demand or “STAT” testing, whereby the user can add a new test to the system at any time without regard to the stage of processing of any other test on the system. In the Non-Clinical market, the GeneXpert modules have been integrated into the BDS purchased by the USPS, utilizing our Bacillus anthracis test. and 2013. Xpert Ebola.In November 2014, we announced a grant award of up to $3.4 million co-financed by the Paul G. Allen Family Foundation and the BMGF to develop Xpert Ebola, a Sunnyvale, California and Stockholm, Sweden. revenue. companies developing and marketing sequence detection systems for diagnostic companies; and companies developing or offering biothreat detection technologies. this Form 10-K. In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements, licenses and other contractual provisions and technical measures to maintain and develop our competitive position with respect to intellectual property. seasonal illnesses such as influenza, respiratory syncytial virus, enteroviruses, and norovirus which are most prevalent in the first and fourth calendar quarters of the year. Name Position David H. Persing, M.D., Ph.D. Dr. Persing first joined us as a director in May 2004, and became our Executive Vice President and Chief Medical and Technology Officer in August 2005. From 1999 to 2005, Dr. Persing was a research executive and Chief Scientific Officer at Corixa Corporation, a Seattle-based biotechnology company, until its acquisition by GlaxoSmithKline. From 1990 to 1999 he was a member of the Clinical and Research Faculty of the Mayo Clinic in Rochester, Minnesota where he conducted research on hepatitis viruses, tick-borne infections and molecular diagnostics. In 1992 he founded and directed the Molecular Microbiology Laboratory at Mayo Clinic. He has authored over 270 peer-reviewed articles and has served as Editor in Chief for four textbooks on Molecular Diagnostics, the most recent of which was published by ASM press in 2011. costs. production of our products. our ability to fulfill orders; the results of clinical trials needed to support any regulatory approvals of our tests; our ability to obtain requisite FDA or other regulatory clearances or approvals for the timing of market entry for various tests for the GeneXpert our ability to convince our potential customers of the advantages and economic value of our systems and tests over competing technologies and products; the breadth of our test menu relative to competitors; changes to policies, procedures or what are considered best practices in clinical diagnostics, including practices for detecting and preventing healthcare-associated infections; the extent and success of our marketing and sales efforts; the effectiveness of our distribution agreements, particularly in expanding our offerings into non-acute care laboratory customers, including moderately complex physician office labs; the pricing of our products; the level of reimbursement for our products by third-party payers; and the publicity concerning our systems and tests. the participants in our HBDC program are located in less developed countries, exposing us to customers in countries that may have less political, social or economic stability and less developed infrastructure and legal systems; the sales cycle in our HBDC program is lengthy and unpredictable, as HBDC program participants are frequently dependent upon governmental agencies and/or non-governmental organizations with additional administrative processes, causing variability and unpredictability in our operating results and timing of cash collection; our HBDC our collaborative partners and other supporters, such as FIND, BMGF, USAID, UNITAID and the World Health Organization, may cease to devote financial resources to or otherwise cease to support our HBDC healthcare through various means and the continuous growth of managed care, together with efforts to reform the healthcare delivery system in the United States and Europe, has increased pressure on healthcare providers and participants in the healthcare industry to reduce costs. Consolidation among healthcare providers and other participants in the healthcare industry has resulted in fewer, more powerful healthcare groups, whose purchasing power gives them cost containment leverage. Additionally, third-party payers are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using our products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products and whether adequate third-party coverage will be available. companies developing and marketing sequence detection systems for diagnostic companies; and companies developing or offering biothreat detection technologies. If we fail to compete effectively, we could lose sales, and our business will be harmed. decreased demand for our products; injury to our reputation; increased product liability insurance costs; costs of related litigation; and substantial monetary awards to plaintiffs. agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the partners; we may not be able to renew existing distributor agreements on acceptable terms; our distributors may not devote sufficient resources to the sale of our products; our distributors may be unsuccessful in marketing our products; our existing relationships with distributors may preclude us from entering into additional future arrangements with other If any of our distribution agreements are terminated or if we elect to distribute decrease or we may be unable to successfully launch our new point-of-care diagnostic platform. For example, the America Invents Act enacted proceedings involving various forms of post-issuance patent review proceedings, such as IPR and covered business method review. These proceedings are conducted before the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office. Each has different eligibility criteria and different types of challenges that can be raised. The IPR process permits any person (except a party who has been litigating the patent for more than a year) to challenge the validity of a patent on the grounds that it was known from the prior art. Recently, entities associated with hedge funds have begun challenging valuable pharmaceutical patents through IPR proceedings. The filing of such proceedings or the issuance of an adverse decision in such proceedings could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects. compliance with multiple, conflicting and changing governmental laws and regulations, including United States laws such as the Foreign Corrupt Practices Act and local laws that prohibit bribes and certain payments to governmental officials such as the UK Bribery Act 2010, data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, governmental rebate requirements and export requirements; increased regulatory risk, including additional regulatory requirements different or more stringent than those in the United States; laws and business practices favoring local competitors; foreign exchange and currency risks; exposure to risks associated with sovereign debt uncertainties in Europe and other foreign countries; difficulties in collecting accounts receivable or longer payment cycles; bank guarantee requirements; difficulties staffing and managing foreign operations; reliance on partners with local expertise and resources (for example, our relationship with a partner in India related to delivery, installation and acceptance of certain of our systems in India); business risks, including fluctuations in demand for our products and the cost and effort to conduct international operations and travel abroad to promote international distribution and overall global economic conditions; multiple conflicting tax laws and regulations; political and economic instability and outbreak of military hostilities. Our reliance on international distribution partners may subject us to increased financial and operational risk, as our revenue and costs will be impacted by how successfully such distribution partners sell our products in international markets.xý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 20142015¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 California 77-0441625 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) 904 Caribbean Drive, Sunnyvale, California 94089-1189 (Address of Principal Executive Office) (Zip Code) xý No ¨xýxý No ¨xý No ¨Large Accelerated Filer xý Accelerated Filer ¨ Non-accelerated Filer Smaller Reporting Company ¨ xý2014,2015, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $3.4$4.4 billion based on the closing sale price for the registrant’s common stock on The NASDAQ Global Select Market on that date of $47.94$61.15 per share. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.12, 201518, 2016 there were 71,271,39572,647,648 shares of the registrant’s common stock outstanding. 10-K Part 28, 2015,26, 2016, and to be filed pursuant to Regulation 14A within 120 days after registrant’s fiscal year ended December 31, 20142015 are incorporated by reference into Part III of this Report. III 2014 Page Page Item 1.Business Item 1A.12 Item 1B.28Item 2.Properties28Item 3.Legal Proceedings28Item 4.Mine Safety Disclosures29293233434485 Item 9A.85 Item 9B.8585858585 86 8688 productivity;productivity and the productivity and effectiveness of our distributors; speed and extent of test menu expansion and utilization; improving gross margins; execution of manufacturing operations; our reliance on a single contract manufacturer; our success in increasing product sales under the High Burden Developing Country (“HBDC”) program; the relative mix of commercial and HBDC sales and the relative mix of instrument and test sales; our success in commercial test and commercial system sales andsales; our ability to sell directly to the smaller hospital market and the independent reference laboratory market; the performance and market acceptance of our new products, including our new point-of-care system; manufacturing costs associated with the ramp up of new products; test performance in the field; testing volumes for our products; unforeseen supply, development and manufacturing problems; our ability to manage our inventory levels; our ability to scale up manufacturing; our research and development budget; the potential need for intellectual property licenses for tests and other products and the terms of such licenses; the environment for capital spending by hospitals and other customers for our diagnostic systems; the effectiveness of our sales personnel and our ability to successfully expand and effectively manage increased sales and marketing operations, including expansion of our direct sales force to address the smaller hospital market and the independent reference laboratory market; lengthy sales cycles in certain markets, including the HBDC program and the smaller hospital market program; long sales cycles andmarket; variability in systems placements and reagent pull-through in our HBDC program and the smaller hospital market; the impact of competitive products and pricing; sufficient customer demand; customer confidence in product availability and available customer budgets; the level of testing at clinical customer sites, including for healthcare-associated infections; our ability to consolidate customer demand through volume pricing; our ability to develop new products and complete clinical trials successfully in a timely manner for new products; our ability to obtain regulatory approvals and introducefor new products; uncertainties related to FDA regulatory and international regulatory processes; our ability to respond to changing laws and regulations affecting our industry and changing enforcement practices related thereto; our reliance on distributors in some regions to market, sell and support our products in certain geographic locations; the occurrence of unforeseen expenditures, asset impairments, acquisitions or other transactions; costs of litigation, including settlement costs; our ability to manage geographically-dispersed operations; the scope and timing of actual United States Postal Service (“USPS”) funding of the Biohazard Detection System (“BDS”) in its current configuration; the rate of environmental testing using the BDS conducted by the USPS, which will affect the amount of consumable products sold; underlying market conditions worldwide; the impact of foreign currency exchange; protection of our intellectual property and proprietary information; and the other risks set forth under “Risk Factors” and elsewhere in this report. We neither undertake, nor assume any obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results.ITEM 1.BUSINESSmarket and Non-Clinical markets. Our systems enable rapid,fast, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. Molecular testing historically has involved a number of complicated and time-intensive steps, including sample preparation, DNA amplification and detection. Our easy-to-use systems integrate these steps and analyze complex biological samples in our proprietary test cartridges. We were first to the U.S. market with a Clinical Laboratory Improvement Amendments (“CLIA”) moderate complexity categorization for an amplified molecular test and the majority of our products are moderately complex, expanding our market opportunity beyond high complexity laboratories.rapidfast analysis of a sample.In September 2009, we launched the GeneXpert Infinity-48 system (“Infinity”) for high volume testing. The Infinity uses robotic cartridge handling and a full touch screen driven menu to run up to 1,300 independent molecular tests during any 24-hour period, depending on test selection. In July 2011, we introduced the GeneXpert Infinity-80 (“Infinity-80”), our highest throughput system, comprised of up to 80 modules, enabling more than 2,000 tests to be run during a 24-hour period, yet occupying the same footprint as the GeneXpert Infinity-48. In July 2012, we introduced the GeneXpert Infinity-48s, comprised of up to 48 modules in a footprint that is almost two feet less in width than the original Infinity-48 and still enables up to 1,300 tests to be run during a 24-hour period.rapidfast results, in most cases approximately one hour, and the ability to do testing in any workflow environment: full random access; on-demand; or traditional batch testing.fastshort time-to-result molecular diagnostic tests, at any time, even if the system is simultaneously performing other tests, either in a batch or on-demand mode; 2) the system’s ease-of-use, which enables it to be operated without the need for highly-trained laboratory technologists; and 3) the scalability of the instrument, currently from one to 80 modules, enabling it to serve high volume testing requirements as well as lower volume requirements for smaller institutions or for testing at the point of patient care. Our GeneXpert system can provide rapidfast results with frequently superior test sensitivity and specificity over comparable systems on the market today that are integrated but have open architectures. Our GeneXpert system operates with an entirely closed cartridge, reducing the likelihood of human error and contamination. As a result, the system is particularly well suited to perform “nested” PCR, a detection method that can provide an enhanced level of sensitivity and specificity, but that has historically been discouraged because of the high risk of cross-contamination during processing in an open lab environment. This method performs an additional amplification of the target sequence after the first PCR amplification.women’s health, virology, oncology and genetics. Our reagents and tests are marketed along with our systems on a worldwide basis.•Provide a fully-integrated molecular testing solution to the Clinical market. We are focusing our investments on selling our systems and tests to the Clinical market and we believe our GeneXpert system will continue to significantly expand our presence in the Clinical market due to its ability to deliver accurate and rapid results, ease of use, flexibility and scalability. Features of the GeneXpert system and Xpert tests include:Clinical Laboratory Improvement Amendments (“CLIA”)CLIA categorized, amplified molecular tests, which means the GeneXpert system can be operated without the need for highly-trained laboratory technologists;sensitivity;sensitivity and•Continue to develop and market new tests. We plan to capitalize on our strengths in nucleic acid chemistry and molecular biology to continue to develop new tests for our systems and offer our customers the broadest menu of Xpert tests designed to address many of the highest volume molecular test opportunities. Our strategy is to offer a portfolio of Xpert tests spanning healthcare-associated infections, critical infectious disease, sexual health, women’s health, virology, oncology and genetics. For example, Xpert CT/NG and Xpert MTB/RIF were made commercially available in the United States in 2013 and Xpert Norovirus and Xpert Flu/RSV XC were made commercially available in the United States in 2014. Xpert HPV, Xpert Carba-R, Xpert Norovirus, Xpert Flu/RSV XC, and Xpert Trichomonas were all made commercially available in all markets that recognize CE Marks during 2014 and Xpert HIV-1 Viral Load achieved CE Mark in December 2014.•Obtain additional target rights. We expect to continue to expand our collaborations with academic institutions and commercial organizations to develop and obtain target rights to various infectious disease and oncology targets. In addition, we expect to focus key business development activities on identifying infectious disease and oncology targets held by academic institutions or commercial organizations for potential license or acquisition.•Extend geographic reach.Our European sales and marketing operations are headquartered in France. As of December 31, 2014, we had direct sales forces in Australia, the Benelux region, France, Germany, Hong Kong, Italy, South Africa and the United Kingdom, and we have offices in Brazil, China, Dubai, India, Japan and Singapore. We expect to continue to expand our international commercial operations capability on both a direct and distributor basis in 2015 and future years.•Extend High Burden Developing Countries sales programs. We are developing and expect to continue to expand our presence in HBDCs following the World Health Organization’s endorsement of the Xpert MTB/RIF test in late 2010 to deliver GeneXpert systems and Xpert tests to HBDCs at a discount to our standard commercial prices. We believe that participation in the HBDC program considerably broadens the geographic reach of our products and increases recognition of the Cepheid brand and product portfolio. market and Non-Clinical markets. Our main system is the GeneXpert system, including the Infinity systems, which incorporates sample preparation, nucleic acid extraction and purification, DNA amplification, and detection into a small, self-contained cartridge, enabling rapidfast molecular testing 24 hours a day, 7 days a week, offering medically relevant results when and where they are needed most. We also offer our first generation system, the SmartCycler, which integrates DNA amplification and detection for rapidfast batch or random access analysis in “real-time.” health, women’s health, virology, oncology and genetics. These tests include U.S. Food and Drug Administration (“FDA”) cleared products, such as IVD medical devices, CE Marked products (“CE IVD”) and Research Use Only (“RUO”) tests. As of December 31, 2014,2015, our Xpert menu includes the following FDA and CE IVD approved tests:Xpert BCR-ABL Monitor (CE IVD only)Xpert Carba-R (CE-IVD Only)Xpert C. difficileXpert C. difficile/epi (FDA only)Xpert CT/NGXpert EV for EnterovirusXpert FluXpert Flu/RSV XCXpert Factor II and Factor V LeidenXpert GBS for Group B StreptococcusXpert GBS for Lim broth (FDA only)Xpert HIV-1 Viral Load (CE-IVD Only)Xpert HPV (CE-IVD Only)Xpert NorovirusXpert Nasal CompleteXpert MRSAXpert MRSA/SA-BC for Blood CultureXpert MRSA/SA-SSTI for Skin and Soft TissueXpert MTB/RIFXpert Trichomonas (CE-IVD Only)Xpert vanA for vancomycin resistant enterococci (FDA only)Xpert vanA/vanB (CE IVD only)fourthree main areas: 1) assay development efforts to design, optimize and produce specific tests that leverage the systems and chemistry we have developed and extend our product offering to customers; 2) chemistry research to develop innovative and proprietary methods to design and synthesize oligonucleotide primers, probes and dyes to optimize the speed, performance and ease-of-use of our assays;assays and 3) engineering efforts to extend the capabilities of our systems and to develop new low and high throughput systems and 4) target discovery research to identify novel micro RNA targets to be used in the development of future assays.systems. Total research and development expense was $115.8 million, $96.9 million $80.2 million and $71.7$80.2 million for the years ended December 31, 2015, 2014 and 2013, and 2012, respectively.Sales for products withinspecific markets are conductedproducts through both a direct salessalesforce and indirect distribution channels worldwide. Clinical market sales in the United States, United Kingdom, Australia, France, the Benelux region, Germany, Hong-Kong,Hong Kong, Italy, and South Africa, and the United Kingdom are handled primarily through our direct sales force, while sales in all other markets are handled primarily through distributors. In October 2014, we re-acquired certain product distribution rights and customer relationships from a former distributor that served hospitals with fewer than 150 beds in the United States. We continue to expand our direct sales capability,capabilities, including in the international markets. Some of our customers in the United States are members of Group Purchasing Organizations (“GPOs”) and purchase products under GPO contracts. Sales to end customers who are part of GPOs represented 36%30%, 41%36%, and 43%41% of total sales for the years ended December 31, 2015, 2014 2013 and 2012,2013, respectively. There were no direct customers that accounted for 10% or more of the total sales for the years ended December 31, 2015, 2014 2013 or 2012. In October 2002, we entered intoWe are party to a collaboration agreement with Life Technologies Corporation previously known as Applied Biosystems Group (“LIFE”), to develop reagents for use in the USPS BDS program, which was developed by the consortium led by Northrop Grumman Corporation. Under the agreement, reagents are manufactured by LIFE for packaging by us into our GeneXpert test cartridges and sold by us for use in the BDS. This agreement calls for the computed gross margin on sales In 2003, We are part of a consortium led by Northrop Grumman-led consortium that included us and other subcontractors developedGrumman to develop the BDS for the USPS. This consortium was awarded a production contract, and installations were completed at the end of 2005. In August 2007,We have entered into multiple contracts with Northrop Grumman entered into a five-year master purchase agreement with us for the purchase of up to $200 million in anthrax test cartridges and associated materials used in BDS. The agreement, and subsequent purchase orders, covered the period through September 30, 2011. In the fourth quarter of 2011, Northrop Grumman entered into another five-year master purchase agreement with us for the purchase of up to $112 million of anthrax test cartridges and associated materials used in BDS. The agreementBDS, which began in 2007 and subsequent purchase orders cover the periodwill last through September 30, 2016. In the fourth quarter of 2012, we entered into an agreement directly with the USPS to sell the anthrax test cartridges and associated materials used in BDS directly to USPS through the period ending September 30, 2016. We are currently in negotiations to extend the agreement.In May 2006, we entered into We are party to an agreement with FINDFoundation for Innovative New Diagnostics ("FIND") to develop a simple, rapidfast test that can detect mycobactriummycobacterium tuberculosis and associated rifampin resistance from human sputum samples. Under the agreement, we were responsible for the development of a 6-color GeneXpert instrument to accomplish such a test and the development of an enhanced manufacturing line for the manufacture of test cartridges used in the test. FIND reimbursed us at agreed upon amounts. The term of the development portion of the agreement was 30 months, which was subsequently extended an additional five months. In July2009, the agreement was extended for another year for further specified enhancements. Theoriginal supply term of the agreement is for 12 years, unless terminated by either party in accordance with relevant provisions of the agreement. In January 2011,July 2009, the supply term of the agreement was extended for another year for further specified enhancements. In January 2011, the supply term of the agreement was extended for another year, now set to expire in 2020, and a new agreement was signed for the development of our Xpert HIVHIV-1 Viral Load test. In December 2014, the Xpert HIV-1 Viral Load achieved CE-IVD status under the European Directive onIn Vitro Diagnostic Medical Devices which was the final milestone of the agreement. Under the Xpert HIV agreement, FIND funded $5.1 million in development costs during the term of the two-year contract. In October 2014, we announced a collaboration to develop Xpert MTB/RIF Ultra with FIND and Rutgers New Jersey Medical School to develop a next-generation test for Mycobacterium tuberculosis (TB) with increased sensitivity to aid in detection of patients with smear-negative TB, which is often associated with HIV co-infection. Xpert MTB/RIF Ultra will run on our existing 6-color GeneXpert Systems. FIND agreed to fund up to $3.0 million in development costs throughout the two-year contract. In December 2015, we announced an extension of our collaboration with FIND to bring point-of-care tuberculosis diagnosis to all levels of the health system in low and middle-income countries. The work under the collaboration will focus on evaluating and implementing our new GeneXpert Omni system, which we expect to launch in 2016, and Xpert MTB/RIF Ultra test, in addition to assessing the system's cloud-based connectivity.iswas to decrease the price per test of Xpert MTB/RIF for HBDC customers to $9.98. Under the agreements, BMGF funded $3.5 million, USAID/PEPFAR funded $3.5 million and UNITAID funded $3.2 million.Xpert Carba-R.In June 2014, we announced a collaboration with AstraZeneca plc, Cubist Pharmaceuticals, Inc., GlaxoSmithKline plc and others to develop Xpert Carba-R, a rapid diagnostic test that can target multi-drug resistant pathogens and support the appropriate use of antibiotics.MTB/RIF Ultra.In October 2014, we announced a collaboration to develop Xpert MTB/RIF Ultra with FIND and Rutgers New Jersey Medical School to develop a next-generation test for Mycobacterium tuberculosis (TB) with increased sensitivity to aid in detection of patients with smear-negative TB, which is often associated with HIV co-infection. Xpert MTB/RIF Ultra will run on our existing 6-color GeneXpert Systems. FIND agreed to fund up to $3.0 million in development costs throughout the two-year contract.rapidfast Ebola test that couldto be run on our installed baseGeneXpert Systems.SystemsOmni and the CLIA-waived Xpert Flu+RSV assay that is available today.developing countries.MANUFACTURINGmarket and Non-Clinical markets worldwide. In our manufacturing facilities, we assemble our systems and produce reagents and tests for use on our GeneXpert and SmartCycler systems. We assemble our disposable reaction tubes and cartridges on custom, automated assembly lines that are designed with expandable capacity. We depend on suppliers for various components used in the manufacture of the GeneXpert and SmartCycler systems, and our disposable reaction tubes and cartridges, some of which are our sole source for such components.oftotaled $30.7 million and $31.7 million as of December 31, 2015 and 2014, respectively. Our backlog is comprised of firm orders, all of which are expected to be converted into sales in 2015.2016. Some of our customers may cancel or reschedule orders without substantial penalty. Our aggregate backlog of $42.9 million as of December 31, 2013 was comprised of firm orders which were expected to be converted into sales in 2014. We do not believe that aggregate backlog as of any particular date is necessarily indicative of future results.industrial research products; pharmaceutical companies;companies developing drug discovery technologies; and(sequence detection systems) to the commercial market. Roche, Abbott Laboratories (“Abbott”), Becton Dickinson and Company, (“BD”), Qiagen N.V., Hologic Inc., Luminex Corporation, Meridian Bioscience, Inc., bioMerieux SA, and Quidel Corporation sellsequence nucleic acid detection systems, some with separate robotic batch DNA purification systems, and sell reagents to the Clinical market. Other companies, such as Nanosphere Inc., Alere Inc. (which announced an agreement to be acquired by Abbott in February 2016), and GenMark Diagnostics, Inc., offer molecular tests. Additionally, we anticipate that in the future, additional competitors will emerge that offer a broad range of competing products.The life sciences industry is characterized by rapid and continuous technological innovation. We may need to develop new technologies for our products to remain competitive. One or more of our current or future competitors could render our present or future products technologically obsolete or uneconomical by reducing the prices of their competing products or could develop proprietary positions that prevent us from successfully commercializing our products. In addition, the introduction or announcement of new products by us or others could result in a delay of or decrease in sales of existing products, as we await regulatory approvals and as customers evaluate these new products. We may also encounter other problems in the process of delivering new products to the marketplace such as problems related to design, development or manufacturing of such products, and as a result we may be unsuccessful in selling such products. Our future success depends on our ability to compete effectively against current technologies, as well as to respond effectively to technological advances by developing and marketing products that are competitive in the continually changing technological landscape.In order to compete effectively, we need to demonstrate the advantages of our products over alternative well-established technologies and products. We also need to demonstrate the potential economic value of our products relative to these technologies and products.organizations than we have.organizations. Moreover, these competitors may offer broader product lines and tactical discounts and have greater name recognition. If we fail to compete effectively against these and other competitors, we could lose sales, and our business will be harmed.genetic and DNA analysismolecular diagnostic systems include the speed, integrated functionality and portability of the equipment,test accuracy, ease of use, the qualitytotal cost ownership, price, breadth of the test results, price, market acceptance of the technology, regulatory approvals, particularly in the Clinical market, possession of the necessary intellectual property licenses for specific markets, collaborationsmenu, and distributor relationships for specific markets and tests, and the selection of tests available for the system.reliability. We believe our products better integrate the various processes associated with DNA and RNA analysis than other currently available equipment, and that the speed, portability, flexibility, reliability and ease of use of our products are competitive.inof other countries. In particular, FDA regulations govern activities such as product development, product testing, product labeling, product storage, premarket clearance or approval, manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution. Some ofFor more information about government regulation, see "Risk Factors - The regulatory processes applicable to our products depending on their intended use, will require premarket approval (“PMA”) or 510(k) clearanceand operations are expensive, time-consuming and uncertain, and may prevent us from the FDA prior to marketing in the United States. The 510(k) clearance process usually takes approximately 90 days from submission but can take longer. Productsobtaining required approvals for the non-waived physician office laboratory market will require an additional submission known as a CLIA waiver from FDA. The CLIA waiver approval process usually takes approximately 180 days.For the Non-Clinical market,commercialization of some of our products may not need FDA or other regulatory approval; however, allproducts" in Item 1A of our products are being produced under ISO 13485 and Quality System Regulations.We have patents covering technologies of our own and have licensed technologies from others. Our pending patent applications may lack priority over applications submitted by third parties or may not result in the issuance of patents. Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented.Nevertheless, these measures may not be adequateFor more information about our ability to safeguard the technology underlyingmaintain and develop our products. Forexample, employees, consultants and others who participate in the development of our products may breach their agreementscompetitive position with us regarding ourrespect to intellectual property, andsee "Risk Factors - If we may not have adequate remedies for the breach. We also may not be ablefail to effectivelymaintain and protect our intellectual property rights, in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the United States. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independentlycould use our technology to develop similar or alternative technologies orcompeting products that are equal or superior toand our technology. Our competitors may also develop similar products without infringing on anybusiness will suffer" in Item 1A of our intellectual property rights or design around our proprietary technologies. Furthermore, any efforts to enforce our proprietary rights could result in disputes and legal proceedings that could be costly and divert attention from our business. this Form 10-K. also be subject to third-party claims that we require additional licenses for our products, and such claims couldwould interfere with our business. From time to time, third parties have contacted us regarding their intellectual property, whether to license intellectual property, or in some instances, alleging potential infringement. If our products infringe the intellectual property rights of others, we could face costly litigation, which could cause us to pay substantial damages and limit our ability to sell some or all of our products. Even if our products were determined not to infringe the intellectual property rights of others, we could incur substantial costs in defending any such claims. Please refer to Part I, Item 3 “Legal Proceedings” for a discussion of current litigation surrounding intellectual property rights. In September 2006, we entered into a sublicense agreement with Abbott, pursuant to which Abbott granted us a non-exclusive, world-wide, non-transferable right to Abbott’s exclusive license to certain patents from the Baylor College of Medicine. Under the sublicense agreement, we will be able to make, use, distribute and sell products incorporating the patented technology generally characterized as multiple genomic DNA amplification. In September 2006, we also entered into a license agreement with Abbott, pursuant to which Abbott granted us a non-exclusive, world-wide, non-transferable right to a certain Abbott patent. Under the license agreement, we will be able to make, use, distribute and sell products incorporating the patented technology generally characterized as detection of cervical chlamydia trachomatis infection.will beare able to use the licensed rights to develop and sell products for use with our GeneXpert and SmartCycler systems. an exclusive license agreements with Oregon Health and Science University ("OHSU") related to breast and prostate cancer detection. We also entered into exclusive license agreements with Johns Hopkins University ("JHU") related to breast and pancreatic cancer detection in July 2015. Under thethese license agreements, we will be able to make, use, distribute and sell products incorporating their patented technology from both OHSU and JHU for use with our GeneXpert system.was paid in cash in 2014, and $3.0 million was retained subject to certain final price adjustments. This retained amount was recordedpaid in “Accrued and other liabilities” in the Balance Sheet at December 31,fiscal 2014 and was paid in January, 2015.2015, respectively. In 2013, we acquired local distributors’ businesses and assets in foreign markets for total consideration of $3.7 million, net of cash received.2014,2015, we had approximately 1,4001,700 full-time equivalent employees worldwide. At December 31, 2014,2015, none of our U.S. employees were represented by a labor union. Many of our employees in Sweden are represented by labor unions and employed under a collective bargaining agreement. We consider our employee relations to be good.Worldwideincluding U.S. sales, do not reflect any significant degree of seasonality; however, sales of our Xpert Flu, Xpert Flu/RSV XC and Xpert EV for Enterovirus products have demonstratedmay be subject to seasonal fluctuations consistent withdriven primarily by the onsettiming and declineseverity of respective illnesses.26, 2015:25, 2016: Age John L. Bishop 7071 Chairman and Chief Executive Officer Warren Kocmond 56 President and Chief Operating Officer Daniel E. Madden 48 Executive Vice President, Chief Financial Officer Michael Fitzgerald 5556 Executive Vice President, Global Human Resources Kerry J. Flom,Scott A. Campbell, Ph.D. 6346 ExecutiveCorporate Vice President and Chief Regulatory OfficerWarren Kocmond55Executive Vice President, Chief Operating OfficerDaniel E. Madden47Vice President, Corporate Controller and Acting Chief Financial OfficerDavid H. Persing, M.D., Ph.D. 5960 Executive Vice President, Chief Medical and Technology Officer, and Director Peter Farrell 5051 Executive Vice President of Worldwide Commercial Operations Joseph H. SmithWilliam E. Murray 7062 Executive Vice President, Corporate DevelopmentGeneral Counsel and General CounselChief Privacy Officerand a master’s degree in Industrial Relations and Personnel Management from the University of London’s London School of Economics and Political Science. He is currentlyScience, and a participantmaster's degree in management at McGill University in Montreal, Canada as part of the International Masters in Practicing Management Program. He is a current participant in the postgraduate diploma in applied social studies program under the auspicesat Trinity College, Dublin.Montreal, Canada.Kerry J. Flom, Ph.D. Dr. Flom was promotedincreasing responsibility prior to Executive Vice President,his appointment as our Chief Regulatory Officer in January 2013,August 2015 and was our SeniorCorporate Vice President Clinical Affairs & Regulatory Submissions from January 2010 until December 2012, after having joined us in May 2004 as Vice President, Clinical Affairs & Regulatory Submissions.September 2015. Prior to joining us, Dr. FlomCampbell was Senior Director of Clinical Affairs, and Regulatory Submissionearlier, Director of Marketing for Abbott Molecular DiagnosticsNucleic Acids at Nanosphere from 2006-2010. From 2003-2006, Dr. Campbell was the Executive Director of Marketing at Third Wave Technologies (now a part of Hologic, Inc.), and from 2001 to 2004. Prior to Abbott,2003, Dr. Flom directed the clinical affairs departmentsCampbell held various technical support, marketing, and strategic product development roles at Vysis, Inc., Baxter Health Corporation – Cardiovascular Group (presently Edwards Lifesciences), and Oncor, Inc. Before joining Oncor, Dr. Flom held clinical and R&D positions at Boehringer Mannheim Corporation (presently Roche Diagnostics), Behring Diagnostics, and Corning Corporation.Warren Kocmond. Mr. Kocmond joined us as Executive Vice President, Global Operations in May (now a part of 2013 and was promoted to Executive Vice President and Chief Operating Officer in October 2014. Prior to joining us, Mr. Kocmond served as Vice President of Global Operations at Lam Research Corporation, a wafer fabrication equipment and services supplier, from February 2012 until April 2013, where he was responsible for globally dispersed operations including a multi-billion dollar supply chain. From August 2009 until October 2011, Mr. Kocmond served as Executive Vice President of Global Operations and Quality at Verigy, Ltd., now a wholly owned subsidiary of Advantest Corp., a provider of semiconductor automatic test equipment. Mr. Kocmond served as the Chief Operating Officer of Electroglas, Inc., a supplier of semiconductor manufacturing equipment and software, from May 2008 until February 2009 when he was promoted to Chief Executive Officer and served in that role until July 2009. Prior to that, from May 2007 until May 2008, Mr. Kocmond served as the Senior Vice President of Global Operations for Affymetrix, Inc., a manufacturer of DNA microarrays.Abbott Molecular).Daniel E. Madden. Mr. Madden joined us as Vice President and Corporate Controller in June 2014 and assumed the role of Acting Chief Financial Officer on February 3, 2015 for an interim period, in connection with the resignation of our Chief Financial Officer. Prior to joining us, from November 2012 through January 2014, Mr. Madden served as Vice President Finance and Corporate Controller of Symmetricom, Inc., a timekeeping technology developer, manufacturer and supplier, which was acquired by Microsemi Corporation in November 2013. From March 2008 through November 2012, Mr. Madden served as Vice President, Finance and Investor Relations of Symmetricom, Inc. From September 2005 through March 2008, Mr. Madden served as Vice President and Corporate Controller of Sonic Solutions, a computer software company. Mr. Madden began his career with Ernst & Young and is a Certified Public Accountant.Joseph H. Smith.William E. Murray. Mr. Smith joined us in June 2003 as Vice President, General Counsel, served as our Senior Vice President of Business Development and General Counsel from April 2004 until December 2012 andMurray was promoted to Executive Vice President, Corporate Development and General Counsel and Chief Privacy Officer in January, 2013.2016. He has been Secretary since March 2004. From 1989 to 2002, Mr. Smith wasjoined us in 2010 as Vice President, of Intellectual Property at Applied Biosystems (now Life Technologies Corporation)IP - Oncology, responsible for Cepheid's cancer diagnostics business development. He assumed responsibility for worldwide commercial legal support in October 2011 and its predecessors, a biotechnology research equipment company, and fromwas appointed Chief Privacy Officer in October 2013. From 2002 to 20032010, Mr. Murray was its SeniorDivision Counsel, Abbott Laboratories, responsible at various times for non-litigation patent matters for Abbott Diagnostics, Abbott Molecular and Abbott Point of Care. Prior to Abbott, Mr. Murray served as Vice President, for Business Development. PriorGeneral Counsel and Secretary of Vysis, Inc. from 1994 to Applied Biosystems,2001. Mr. Smith was a partnerMurray began his legal career with Amoco Corporation in the law firm of Wiseman, Jones, and Smith; and prior to that he was a member of the Technical Legal Department of Hewlett-Packard.1983.ITEM 1A.RISK FACTORSand 2013, we reportedexperienced a net loss of $50.1$48.5 million and $18.0$50.1 million, respectively. As of December 31, 2014,2015, we had an accumulated deficit of approximately $293.7$342.2 million. We do not expect to be profitable for fiscal 20152016 and our ability to be profitable in the future will likely depend on our ability to continue to increase our revenues,revenue, which is subject to a number of factors including our ability to continue to successfully penetrate the Clinical market, our ability to successfully market the GeneXpert system and develop and market additional GeneXpert tests, our ability to sell directly tosuccessfully expand our United States sales organization and international commercial operations and the smaller hospital (hospitals with less than 150 beds)success of our sales organization in selling our systems and independent referencetests, the success of GeneXpert Omni, our new point-of-care diagnostic platform, the success of our distributor relationships, particularly in expanding our offerings into non-acute care laboratory markets,customers, including moderately complex physician office labs, our ability to secure regulatory approval of additional GeneXpert tests, our ability to gain FDA regulatory and international regulatory clearance for our new products, our ability to continue to grow sales of GeneXpert tests, our ability to compete effectively against current and future competitors, the increasing number of competitors in our market that could reduce the average selling price of our products, the development of our HBDC sales program, the amount of products sold through the HBDC program and the extent of global funding for such program, our ability to penetrate new geographic markets, global economic and political conditions and our ability to increase manufacturing throughput. Our ability to be profitable also depends on our expense levels and product gross margin, which are also influenced by a number of factors, including: the mix of revenuesrevenue from Clinical reagent sales and GeneXpert system sales as opposed to GeneXpert Infinity system sales and sales under our HBDC program, both of which have lower gross margins; the resources we devote to developing and supporting our products; increases in manufacturing costs associated with our operations;operations, including those associated with ramp-up of new products; increases in costs related to our distributor relationships; our ability to improve manufacturing efficiencies,efficiencies; our ability to manage our inventory levels; third-party freight costs; the resources we devote to our research and development of, and compliance with regulatory processes for, potential products; license fees or royalties we may be required to pay; the potential need to acquire licenses to new technology or to use our technology in new markets, which could require us to pay unanticipated license fees and royalties in connection with these licenses; the impact of foreign currency exchange rates; and the prices at which we are able to sell our GeneXpert systems and tests. Our manufacturing expansion efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenuesrevenue to offset higher expensesexpenses. These expenses or a reduction in the prices at which we are able to sell our products, among other things, may cause our net income and working capital to decrease. For example, our gross margin for the third quarter of 2015 was lower than expected due primarily to a higher proportion of lower-margin HBDC business and less commercial business as well as higher than expected manufacturing expenses associated with the ramp-up to volume of our newest virology tests. If we fail to grow our revenue, manage our expenses and improve our gross margin, we may never achieve profitability again. If we fail to do so, the market price of our common stock will likely decline.collection processes related to our ongoing implementationthe impact of an enterprise resource planning system.foreign currency exchange rates. Additionally, we have experienced, and expect to continue to experience, meaningful variability in connection with our commercial system placements and system placements and reagent pull-through in our HBDC program. This variability may cause our revenuesrevenue and operating results to fluctuate significantly from quarter to quarter. Additionally, because of the limited visibility into the actual timing of future system placements, our operating results are difficult to forecast from quarter to quarter. Additionally, we expect moderate fluctuations from quarter to quarter in gross margin depending on product, geography and channel mix, including the relative mix of instrument and test sales, as well as the revenue contribution from our HBDC program, which has a lower gross margin than our other products.commercial sales. If revenue declines in a quarter, whether due to a delay in recognizing expected revenue, adverse economic conditions and unexpected costs or otherwise, our results of operations will be harmed because many of our expenses are relatively fixed. In particular, research and development, sales and marketing and general and administrative expenses are not significantly affected by variations in revenue. However, if we have an unexpected increase in costs and expenses in a quarter, our quarterly operating results will be affected. For example, for the year ended December 31, 2013, we incurred certain costs and inventory reserve provisions related to our manufacturing scale up and restructuring activities. Additionally, in July 2014, we began to self-insure for a portion of employee health insurance coverage and we estimate the liabilities associated with the risks retained by us, in part, by considering actuarial assumptions which, by their nature, are subject to a high degree of variability. If the number or severity of claims for which we are self-insured increases, or if we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessments, our operating results may be affected. Additionally, we had higher than expected operating expenses and lower than expected gross margin for the third quarter of 2015, which were primarily driven by a higher proportion of lower-margin HBDC business and less commercial business and higher than expected manufacturing costs associated with the ramp-up to volume of our newest virology tests. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly.revenuesrevenue could be diminished, and our gross margin may be negatively impacted.revenuesrevenue and other operating results will depend in large part on our ability to manufacture and assemble our products in sufficient quantities and in a timely manner. In the past, we have experienced lower than expected revenue due to intermittent interruptions in our supply chain, which also negatively impacted the efficiency of our manufacturing operations and our resulting gross margin. In addition, we may incur unexpected expenses in connection with the manufacturing scale-up of new products, which could negatively impact our gross margin. For example, in the third quarter of 2015, higher than expected manufacturing costs associated with new test ramp-up contributed to lower than expected gross margin.revenuesrevenue and adversely affect our operating results in a particular quarter, and could also adversely affect our relationships with our customers, and could erode customer confidence in our product availability. Manufacturing problems can and do arise, as evidenced by our higher than expected manufacturing costs associated with new test ramp-up in the third quarter of 2015, and as demand for our products increases, any such problems could have an increasingly significant impact on our operating results. In the past, we have experienced problems and delays in production that have impacted our product yield and the efficiency of our manufacturing operations and caused delays in our ability to ship finished products, and we, or our contract manufacturer, may experience such delays in the future. We may not be able to react quickly enough to ship products and recognize anticipated revenuesrevenue for a given period if we experience significant delays in the manufacturing process. In addition, we must maintain sufficient production capacity and inventory in order to minimize such delays, which carriescarry fixed costs that we may not be able to offset if orders slow, which would adversely affect our operating margins. If we are unable to manufacture our products consistently, in sufficient quantities, and on a timely basis, our revenues from product sales, gross margins and our other operating results will be materially and adversely affected.ifa contract manufacturer for the manufacture and assembly of our systems, and our reliance on such suppliers failand contract manufacturer exposes us to deliver key product components in a timely manner, our manufacturing ability would be impairedincreased risks associated with quality control, production delays and our product sales could suffer.that supplyfor some of the components used in the manufacture of our systems and our disposable reaction tubes and cartridges. We also depend on a contract manufacturer for the manufacture and assembly of our systems and we recently expanded our existing relationship with this contract manufacturer, which was previously responsible for the manufacture of a substantial portion of our systems, to cover the manufacture and final assembly of all of our systems. During the fourth quarter, we completed our transition to having a contract manufacturer wholly responsible for the manufacture and final assembly of the entire line of GeneXpert systems. Strategic purchases of components are necessary for our business. Ifbusiness, but our reliance on a limited number of suppliers and a single contract manufacturer could expose us to reduced control over product quality and product availability, which could lead to product reliability issues and/or lower revenue and product shortages as a result of manufacturing capacity issues at our contract suppliers or manufacturer, or failure to adequately forecast demand for our components or systems. In addition, we need alternative sources for key component parts for any reason, these component parts may notcannot be immediately availablecertain that our suppliers or contract manufacturer will continue to us.be willing and able to meet our requirements according to existing terms or at all. If alternative suppliers or contract manufacturers are not immediately available, we will have to identify and qualify alternative suppliers or contract manufacturers and we could experience production of these components may be delayed.delays and additional costs. We may not be able to find an adequate alternative suppliersuppliers or contract manufacturers in a reasonable time period or on commercially acceptable terms, if at all. Shipments of affected products have been limited or delayed as a result of such problems in the past, and similar problems could occur in the future. For example, in the past, we have experienced intermittent interruptions in the supply of Xpert cartridge parts, which negatively impacted our product sales. In addition, some companies continue to experience financial difficulties, partially resulting from continued economic uncertainty. We cannot be assured that our suppliers or contract manufacturer will not be adversely affected by this uncertainty or that they will be able to continue to provide us with the components we need. Our inabilityneed or to manufacture and assemble our systems. If we are unable to obtain ourthe key source supplies for the manufacture of our products or we experience interruptions in the manufacture and assembly of our systems, product shipments may require us to delay shipments of products,be delayed, which could harm customer relationships and our distributor relationships or force us to curtail operations or temporarily cease operations.revenuesrevenue in a given period, and may cause revenuesrevenue and operating results to vary significantly from period to period. For example, sales of our products often involve purchasing decisions by large public and private institutions andwhere any purchases can require many levels of pre-approval. Additionally, because we only recently began selling directly to independent reference laboratories, the sales cycle to independent reference laboratories may be unpredictable for a period of time. In addition, certain Non-Clinical sales may depend on these institutions receiving research grants from various federal agencies, which grants vary considerably from year to year, in both amount and timing, due to the political process.approval. Additionally, participants in our HBDC program may be dependent on funding from governmental agencies and/or non-governmental organizations and, accordingly,organizations; as a result, such customers’ purchase decisions may not be within their direct control and may be subject to lengthy administrative processes, the result of which is thatprocesses. Accordingly, the sales cycle in our HBDC program is lengthy and unpredictable. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions on the schedule anticipated.willmay prevent us from achieving profitability. While we have received FDA clearance for a number of tests, these products may not experience increased sales. Many factors may affect the market acceptance and commercial success of our products, including:the timely expansion of our menu of tests;our tests under development on a timely basis;the demand for the tests we introduce;systems;market.market and the successful launch of GeneXpert Omni, our new point-of-care diagnostic platform. We believe that successfully expanding our business in the Clinical market is critical to our long-term goals and success. We have limited ability to forecast future demand for our products in this market. In addition, we have committed substantial funds to licenses that are required for us to compete in the Clinical market. If we cannot successfully penetrate the Clinical market to fully exploit these licenses, these investments may not yield significant returns, which could harm our business.(“PMA”) or 510(k) clearance from the FDA prior to marketing. TheIn general, there are two types of FDA review processes applicable to our products: a premarket approval (“PMA”) and a 510(k) clearance process usually takes approximately 90 days from submission but can take longer.clearance. The PMA review process is much more costly, lengthy and uncertain, and generally takes from six months to one year or longer from submission, depending on whether an FDA advisory panel meeting is necessary. The 510(k) review process usually takes approximately 90 days from submission, although the process can take longer. Clinical studies are generally required to support both PMA and 510(k) submissions. Certain of our products for use on our GeneXpert and SmartCycler systems, when used for clinical purposes in the United States, may require PMA, and all such tests will most likely, at a minimum, require 510(k) clearance. We are planning clinical studies for other proposed products. Products intended for use in point-of-care settings, such as those intended to be used outside of the typical hospital laboratory environment (e.g., a non-waived physician office laboratory willlaboratory), require supplemental human factors clinical studies and an additional regulatory submission known as a CLIA waiver.waiver application. CLIA waiver applications typically takemay be submitted concurrently with a PMA or 510(k), or sequentially after a PMA or 510(k) review has been completed. Concurrent review of a CLIA waiver application with a PMA or 510(k) takes approximately 210 days from submission. Sequential review of a CLIA waiver application after a PMA approval or 510(k) clearance takes approximately 180 days for approval, and require additional studies.from submission. Clinical trials are expensive and time-consuming, as are human factors studies required for a CLIA waiver. In addition, the commencement or completion of any clinical trials may be delayed or halted for any number of reasons, including product performance, changes in intended use, changes in medical practice and the opinion of evaluator Institutional Review Boards. Additionally, since 2009, the FDA has significantly increased the scrutiny applied to its oversight of companies subject to its regulations, including 510(k) submissions, by hiring new investigators and increasing inspections of manufacturing facilities. We continue to monitor the CDRH’sFDA Office of In Vitro Diagnostics and Radiological Health's ("OIR") implementation of its plan of action and analyze how its decisions will impact the approval or clearance of our products and our ability to improve our systems and tests. The CDRHOIR also deferred action on several other initiatives, including the creation of a new class of devices that would be subject to heightened review processes, until thefollowing an Institute of Medicine issues a related report on the 510(k) regulatory process whichthat was released in late July 2011. Many of the actions proposed by the CDRHOIR could result in significant changes to the 510(k) process, which could complicate the product approval process, although we cannot predict the effect of such changes and cannot ascertain if such changes will have a substantive impact on the approval of our products. If we fail to adequately respond to the increased scrutiny and streamlined 510(k) submission process, our business may be adversely impacted. In 2014, the FDA issued several important guidance documents on assessing risks and benefits associated with use of a 510(k) approach for PMA products, pre- and post-market balance, expedited PMA, and on oversight of laboratory developed tests. While the overall goal of these guidance documents was to streamline the regulatory process by applying a risk-based approach to the requirements for data collection in the pre- and post-market periods, it is uncertain how the guidance documents will actually be implemented. Likewise, the oversight of laboratory developed tests would require laboratories that compete with high risk (PMA) tests to go through FDA review. It is unclear if this guidance will be finalized. If it is, competition for PMA tests from laboratories would be reduced.premarket clearance or PMA for devices, withdrawal of marketing clearances or approvals, or criminal prosecution. For example, on July 27, 2015 Cepheid received a warning letter from the FDA regarding the Xpert Norovirus test describing deficiencies in the production quality system at Cepheid’s Stockholm, Sweden manufacturing facility. We are working with the FDA on resolution of the deficiencies. The Xpert Norovirus test manufactured in Sweden is not sold or distributed in the United States. As a result, it is our expectation that routine production and sale of the Xpert Norovirus test in the United States will not be affected. International sales of this test are not subject to FDA regulation. Until we successfully resolve the issues raised in the warning letter, the FDA will not approve any Cepheid Class III product. Cepheid has some Class III products currently in development but these are not currently expected to be available until 2017.approval, and/or a CLIA waiver (as appropriate) from the FDA, any failure or material delay to obtain such clearance or approval could harm our business. If the FDA were to disagree with our regulatory assessment and conclude that approval or clearance is necessary to market the products, we could be forced to cease marketing the products and seek approval or clearance. In addition, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing, which may adversely affect our ability to obtain or maintain approval of our products and could harm our business.Our manufacturing facilities located in Sunnyvale and Lodi, California, Seattle, Washington and Stockholm, Sweden, where we assemble and produce the GeneXpert and SmartCycler systems, cartridges and other molecular diagnostic kits and reagents, are subject to periodic regulatory inspections by the FDA and other federal and state and foreign regulatory agencies. For example, these facilities are subject to Quality System Regulations (“QSR”) of the FDA and are subject to annual inspection and licensing by the States of California and Washington and European regulatory agencies. If we fail to maintain these facilities in accordance with the QSR requirements, international quality standards or other regulatory requirements, our manufacturing process could be suspended or terminated, which would prevent us from being able to provide products to our customers in a timely fashion and therefore harm our business.U.S.United States healthcare system, as well as future reforms, may have a material adverse effect on our financial condition and results of operations. March 2010, the U.S.United States President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “PPACA”), which makes changes that are expected to significantly impact the pharmaceutical and medical device industries. One of the principal aims of the PPACA as currently enacted is to expand health insurance coverage to approximately 32 million Americans who were previously uninsured. The PPACA contains a number ofprovisions designed to generate the revenues necessary to fund the coverage expansions among other things. This includes new fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013,a requirement that medical device manufacturers were required to pay an excise tax (or sales tax) of 2.3% of certain U.S.United States medical device revenues. Though there are some exceptions torevenue. Following additional legislation, the medical device excise tax thiswill apply beginning on January 1, 2018. This excise tax doeswill apply to all or most of our products sold within the United States.The taxes imposed by the PPACAStates and the expansion in the government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursement by payors for our products, and/or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations.In addition, other legislativeoperationsMore recently,For example, on August 2, 2011, the U.S.United States President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2024 unless additional Congressionalcongressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, , which as a result could mean that such providers have less available funds with which to purchase our products.U.S.United States government has in the past considered, is currently considering and may in the future consider healthcare policies and proposals intended to curb rising healthcare costs, including those that could significantly affect both private and public reimbursement for healthcare services. Further, state and local governments, as well as a number of foreign governments, are also considering or have adopted similar types of policies. Future significant changes in the healthcare systems in the United States or elsewhere, and current uncertainty about whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict whether other healthcare policies, including policies stemming from legislation or regulations affecting our business may be proposed or enacted in the future; what effect such policies would have on our business; or the effect ongoing uncertainty about these matters will have on the purchasing decisions of our customers.businessprogram has lower gross margins and, therefore, growth in our HBDC businessprogram as a percentage of total revenue negatively impacts our gross margins as a whole; andprogram.cyclecycles and lower gross margins and/or an adverse development relating to one or more of these risks could negatively impact our business, results of operations and financial condition. Additionally, our HBDC program facilitates the expansion of our commercial operations into additional geographic locations and, to the extent that our HBDC program is ineffective as a result of one or more of these risks, the international expansion of our commercial operations could suffer.We rely on licenses of key technology from third parties and may require additional licenses for many of our new product candidates.We rely on third-party licenses to be able to sell many of our products, and we could lose these third-party licenses for a number of reasons, including, for example, early terminations of such agreements due to breaches or alleged breaches by either party to the agreement. If we are unable to enter into a new agreement for licensed technologies, either on terms that are acceptable to us or at all, we may be unable to sell some of our products or access some geographic or industry markets. We also need to introduce new products and product features in order to market our products to a broader customer base and grow our revenues, and many new products and product features could require us to obtain additional licenses and pay additional license fees and royalties. Furthermore,for some markets, we intend to manufacture reagents and tests for use on our systems. We believe that manufacturing reagents and developing tests for our systems is important to our business and growth prospects but may require additional licenses, which may not be available on commercially reasonable terms or at all. Our ability to develop, manufacture and sell products, and our strategic plans and growth, could be impaired if we are unable to obtain these licenses or if these licenses are terminated or expire and cannot be renewed. We may not be able to obtain or renew licenses for a given product or product feature or for some reagents on commercially reasonable terms, if at all. Furthermore, some of our competitors have rights to technologies and reagents that we do not have which may put us at a competitive disadvantage in certain circumstances and could adversely affect our performance.molders,molders; in 2013, we acquired distributors in two of our international locations,locations; and in 2014, we re-acquired certain product distribution rights and acquired customer relationship assets from a former distributor in the United States. We have limited experience in successfully acquiring and integrating businesses, products and technologies, and even if we are able to consummate an acquisition or other investment, we may not realize the anticipated benefits of such acquisitions or investments, including our recent acquisitions. We may face risks, uncertainties and disruptions, including difficulties in the integration of the operations and services of these acquisitions or any other acquired company, integration of acquired technology with our products, diversion of our management’s attention from other business concerns, the potential loss of key employees or customers of the acquired businesses and impairment charges if future acquisitions are not as successful as we originally anticipate. If we fail to successfully integrate companies, assets, products or technologies that we acquire or if we fail to successfully exploit acquired product distribution rights and maintain acquired relationships with customers, our business could be harmed. Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments or issue shares of common stock as consideration in the acquisition, the issuance of which could be dilutive to our existing shareholders. In addition, our operating results may suffer because of acquisition-related costs or amortization expenses or charges relating to acquired intangible assets. Furthermore, identifying, contemplating, negotiating or completing an acquisition and integrating an acquired business, product or technology could significantly divert management and employee time and resources.rapid strengthening of the U.S. DollarUnited States dollar compared to foreign currencies, the volatility of the capital markets in the United States and abroad, and monetary and international financial uncertainties. These conditions have and may continue to make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and have caused our customers and potential customers to slow or reduce spending, particularly for systems. Furthermore, during economic uncertainty, our customers have experienced and may continue to experience issues gaining timely access to sufficient credit, which could result in their unwillingness to purchase products or an impairment of their ability to make timely payments to us. If that were to continue to occur, we might experience decreased sales, be required to increase our allowance for doubtful accounts and our days sales outstanding would be negatively impacted. Even with improved global economic conditions, it may take time for our customers to establish new budgets and return to normal purchasing patterns. We cannot predict the reoccurrencerecurrence or worsening of any economic slowdown or the sustainability of improved economic conditions, worldwide, in the United States or in our industry. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.industrial research products; pharmaceutical companies;companies developing drug discovery technologies; and(sequence detection systems) to the commercial market. Roche, Abbott, Becton Dickinson and Company, Qiagen N.V., Hologic Inc., Luminex Corporation, Meridian Bioscience, Inc., bioMerieux SA, and Quidel Corporation sell sequencenucleic acid detection systems, some with separate robotic batch DNA purification systems, and sell reagents to the Clinical market. Other companies, such as Nanosphere Inc., Alere Inc. (which announced an agreement to be acquired by Abbott in February 2016), and GenMark Diagnostics, Inc., offer molecular tests. Additionally, we anticipate that in the future, additional competitors will emerge that offer a broad range of competing products.revenues,revenue, delayed market acceptance, damaged reputation, diversion of development resources, legal claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. Such defects or errors could also prompt us to amend certain warning labels or narrow the scope of the use of our products, either of which could hinder our success in the market. Furthermore, any product failure in the overall USPS BDS program, even if it is unrelated to our products, could harm our business. Even after any underlying concerns or problems are resolved, any widespread concerns regarding our technology or any manufacturing defects or performance errors in our products could result in lost revenue, delayed market acceptance, damaged reputation, increased service and warranty costs and claims against us.If our direct selling efforts for our products fail, our business expansion plans could suffer and our ability to generate sales will be diminished.We have a relatively small sales force compared to somethatwhich are key to our long-term growth strategy. For example, we recently entered into a significant, non-exclusive agreement with a distribution partner offering our GeneXpert Systems to its non-acute care laboratory customers in the United States and intend to enter into additional distribution agreements to penetrate this market. Relying on distributors for our sales and marketing could harm our business for various reasons, including:distributors; andwe may not be able to negotiate future distributor agreements on acceptable terms.new products directly, we will have to invest in additional sales resources, including additional field sales personnel, which would increase future selling, general and administrative expenses. For example,as occurred in October 2014 when we terminated our distribution agreement with the Laboratory Supply Company and transitioned the smaller hospital market from a distributor sales model to a direct sales model. As a result,model, we are investingmay incur one-time costs related to such termination. Additionally, we will have to invest in alternative distribution agreements or additional sales resources to sell directly to the smaller hospital marketpersonnel, which would increase future selling expenses and are exposed toresult in transition risks, as a result of transitioning the smaller hospital market from a distributor sales model to a direct sales model, such as difficulties maintaining relationships with specific customers and hiring appropriately trained personnel, any of which could result in lower revenuesrevenue than we previously received from our distributor in that market. IfFurther, if we elect to distribute new products directly in other markets or in new geographic regions, then we would be exposed to similar risks.Ifdesireseek to enter into other distribution arrangements, we may not be able to enter into new distribution agreements on satisfactory terms, or at all. For example, we may desire to distribute our new point-of-care diagnostic platform through distributors and may not be able to enter into agreements relating to such distribution on satisfactory terms, or at all. If we fail to enter into acceptable distribution agreements or fail to successfully market our products, including our new point-of-care diagnostic platform, our product sales may decrease.breach.breach or improper actions. We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the United States. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology. Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. Furthermore, any efforts to enforce our proprietary rights could result in disputes and legal proceedings that could be costly and divert attention from our business.A significant portion of our sales are denominated in foreign currencies and currency fluctuations and hedging expenses may cause our revenue and earnings to fluctuate and our foreign currency hedging program may not adequately offset foreign currency exposure.A significant percentage of our product sales are denominated in foreign currencies, primarily the Euro. When the U.S. dollar strengthens against these foreign currencies, as it has recently, the relative value of sales made in the respective foreign currency decreases. Overall, we are a net receiver of foreign currencies and, therefore, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to those foreign currencies in which we transact significant amounts of business.We use foreign currency exchange forward contracts to hedge a portion of our forecasted revenue. We also hedge certain monetary assets and liabilities denominated in foreign currencies, which reduces but does not eliminate our exposure to currency fluctuations between the date a transaction is recorded and the date that cash is collected or paid. We cannot predict future fluctuations in the foreign currency exchange rate. If the U.S. dollar appreciates significantly against certain currencies and our hedging program does not sufficiently offset the effects of such appreciation, our results of operations will be adversely affected and our stock price may decline.Additionally, the expenses that we recognize in relation to our hedging activities can cause our earnings to fluctuate. The changes in interest rate spreads between the foreign currencies that we hedge and the U.S. dollar impact the level of hedging expenses that we recognize in a particular period.scientificengineering staff and on the development of adequate succession plans for such employees. If we lose the services of any of these persons and we are unable to find a suitable replacement in a timely manner, we may be challenged to effectively manage our business and execute our strategy, which could seriously harm our product development and commercialization efforts. In addition, we require skilled personnel in areas such as microbiology, clinical, sales, marketing and finance. We generally do not enter into employment agreements requiring these employees to continue in our employment for any period of time. Attracting, retaining, developing and training personnel, including management, with the requisite skills remains challenging, particularly in the Silicon Valley, where our main office is located. For example, in February 2015, our former Chief Financial Officer ("CFO"), who had served as CFO since April 2008, left Cepheid in February 2015, and his successor, who was appointed in April 2015, left Cepheid in August 2015. Following his departure, we announced the appointment of our company to pursue an opportunity with another companynew CFO in August 2015. The effectiveness of the new leader in this role and we are currently conductingany further transition as a formal search forresult of this change, could have a new permanent Chief Financial Officer. Ifnegative impact on our results of operations. Additionally, if at any point we are unable to hire, train, develop and retain a sufficient number of qualified employees to matchsupport our growth, our ability to conduct and expand our business could be seriously reduced.enterprise resource planning (or ERP)ERP system.are currently inrecently implemented a new ERP system that became operational at the beginning of the first quarter of 2015. This process of implementing an enterprise resource planning, or ERP, system. This is a lengthyhas been and expensive process. We have incurredcontinues to be complex and time-consuming and we expect to continue to incur additional expenses as we continue to make enhancements to our integrated financial and supply chain management systems. For example, since implementation we have experienced delays in connection with our implementation of an ERP system.customer billing and collection processes. Our anticipated ERP system implementation and additional enhancements to our financial and supply chain management systems may further disrupt our operations and may not result in improvements that outweigh its costs and may disrupt our operations.costs. Many companies have experienced delays and difficulties with the implementation of new or changed ERP systems that have had a negative effect on their business. IfAdditionally, our ability to forecast sales demand, ship products, manage our product inventory and record and report financial and management information on a timely and accurate basis could be impaired while we are unablemaking further enhancements to successfully plan, designour financial and supply chain management systems. Significant disruptions or implement the new ERP system, itoperational impacts could have a material adverse effectimpact on our financial position, results of operations and cash flows. There are many costs and risks associated with ERP system implementation, including:operation.inability to fill customer orders accurately and on a timely basis, or at all;delays in our billing and collection processes;inability to process payments to vendors accurately and in a timely manner;disruption of our internal control structure;inability to fulfill our SEC or other governmental reporting requirements in a timely or accurate manner;inability to fulfill federal, state and local tax filing requirements in a timely or accurate manner;increased demands on management and staff time to the detriment of other corporate initiatives; andsignificant capital and operating expenditures.
If we become subject to claims relating to improper handling, storage or disposal of hazardous materials, we could incur significant cost and time to comply.
revenue.
our collaborative partners may not devote sufficient resources to the success of our collaborations;
our collaborative partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;
our collaborative partners may be acquired by other companies and decide to terminate our collaborative partnership or become insolvent;
our collaborative partners may develop technologies or components competitive with our products;
components developed by collaborators could fail to meet specifications, possibly causing us to lose potential projects and subjecting us to liability;
disagreements with collaborators could result in the termination of the relationship or litigation;
collaborators may not have sufficient capital resources;
collaborators may pursue tests or other products that will not generate significant volume for us, but may consume significant research and development and manufacturing resources; and
we may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms.
Innew accounting rules or standards, such as the ordinary coursenew lease accounting or revenue recognition rules, may adversely impact our reported financial results and business, and may further require us to incur greater accounting fees.
underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition.
We maintain cash balances in our bank accounts that exceed the FDIC insurance limitation.
We maintain our cash assets at commercial banks in amounts in excess of the Federal Deposit Insurance Corporation insurance limit of $250,000. In the event of the commercial banks failing, we may lose the amount of our deposits over any federally-insured amount, which could have a material adverse effect on our financial conditions and our results of operations.
Our participation in the USPS BDS program may not result in predictable revenues in the future.
Our participation in the USPS BDS program involves significant uncertainties related to governmental decision-making and timing of purchases and is highly sensitive to changes in national priorities and budgets. The USPS continued to report significant losses for the 2014 and 2013 fiscal years. Budgetary pressures may result in reduced allocations to projects such as the BDS program, sometimes without advance notice. We cannot be certain that actual funding and operating parameters, or product purchases, will occur at currently expected levels or in the currently expected timeframe.
Compliance with laws and regulations governing public company corporate governance and reporting is complex and expensive.
We are subject to laws and regulations affecting our domestic and international operations in a number of areas. Many laws and regulations, notably those adopted in connection with the Sarbanes-Oxley Act of 2002 by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act and The NASDAQ Stock Market, impose obligations on public companies, such as ours, which have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices. Compliance with these laws, regulations and similar requirements can be onerous and inconsistent from jurisdiction to jurisdiction, which has required and will continue to require substantial management time and oversight and requires us to incur significant additional accounting, legal and compliance costs. Any such costs, that may arise in the future as a result of changes in these laws and regulations or in their interpretation could individually or in the aggregate make our products and services more expensive to our customers, delay the
introduction of new products in one or more regions or cause us to change or limit our business practices. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.
Additionally, changes to existing accounting rules and standards and the implementation of new accounting rules or standards, such as the new lease accounting or revenue recognition rules, may adversely impact our reported financial results and business, and may further require us to incur greater accounting fees.
Our operating results could be materially affected by unanticipated changes in our tax provisions or exposure to additional income tax liabilities.
Our determination of our tax liability (like any company’s determination of its tax liability) is subject to review by applicable tax authorities. Any adverse outcome of such a review could have an adverse effect on our operating results and financial condition. In addition, the determination of our provision for income taxes and other tax liabilities requires significant judgment including our determination of whether a valuation allowance against deferred tax assets is appropriate. We expect to maintain such valuation allowance as long as there is insufficient evidence that we will be able to realize the benefit of our deferred tax assets. We reassess the realizability of the deferred tax assets as facts and circumstances dictate. If after future assessments of the realizability of the deferred tax assets, we determine that a lesser or greater allowance is required, or that no such allowance is appropriate, we will record a corresponding change to the income tax expense and the valuation allowance in the period of such determination. The uncertainty surrounding the future realization of our net deferred tax assets could adversely impact our results of operations. Although we believe our estimates and judgments are reasonable, including those related to our valuation allowance, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, convertible debt, business combinations and intangible asset valuations, and litigation, are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition.
make it difficult for us to pay other obligations;
make it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;
require us to dedicate a substantial portion of our cash flow from operations to service the indebtedness, reducing the amount of cash flow available for other purposes; and
limit our flexibility in planning for and reacting to changes in our business.
common stock is risky. Furthermore, volatility in the stock price of other companies has often led to securities class action litigation against those companies. Any future securities litigation against us could result in substantial costs and divert management’s attention and resources, which could seriously harm our business, financial condition and results of operations. In February 2016, we finalized an agreement to purchase an additional 74,000 square feet of building space located in Lodi, California. Fiscal year ended December 31, 2014 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal year ended December 31, 2013 First Quarter Second Quarter Third Quarter Fourth Quarter Plan Category Equity compensation plans approved by security holders (1)(2)(3) Equity compensation plans not approved by security holders (4) Total Cepheid NASDAQ Composite NASDAQ Biotechnology 10 in stock or index, including reinvestment of dividends. Consolidated Statements of Operations Data: Revenue Cost of sales Gross profit on revenue Income (loss) from operations Net income (loss) Basic net income (loss) per common share Diluted net income (loss) per common share Shares used in computing basic net income (loss) per share Shares used in computing diluted net income (loss) per share Consolidated Balance Sheet Data: Cash, cash equivalents, short-term investments Working capital Total assets Short-term obligations: Current portion of note payable Current portion of deferred revenue Long-term obligations: Note payable, less current portion Convertible senior notes, net Accumulated deficit Total shareholders’ equity no further user intervention once the Xpert cartridge is loaded into the GeneXpert system; all three phases of PCR: 1) sample preparation, 2) amplification and 3) detection, are performed within the single sealed test cartridge automatically; primarily moderate complexity commercial availability in a variety of configurations ranging from one to 80 individual test modules, which enables testing in environments ranging from low volume testing to high volume, near-patient, core or central lab testing, and system capacity that can be expanded in support of growing test volumes by adding additional modules; notably, to our knowledge, the only truly scalable real-time PCR system that operates entirely within a closed system architecture, reducing hands-on time, reducing the likelihood of human error and contamination, and enabling nested PCR capability, a proven process for maximizing real-time PCR full random access whereby different tests for different targets may be run simultaneously in different modules in the same GeneXpert system, which increases potential utilization and throughput of the system and also enables on-demand or “STAT” testing, whereby the user can add a new test to the system at any time without regard to the stage of processing of any other test on the system. guidance. Our marketable debt securities have been classified and accounted for as available-for-sale. We determine the appropriate classification of our investments at the time of purchase and re-evaluate the designations at each balance sheet date. We classify our marketable debt securities as cash equivalents, short-term investments or non-current investments based on each instrument’s underlying effective maturity date. All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Marketable debt securities with effective maturities of 12 months or less are classified as short-term, and marketable debt securities with effective maturities greater than 12 months are classified as non-current. Our marketable debt securities are carried at fair value, with the unrealized gains and losses reported as a component of shareholders’ equity. The cost of securities sold is based upon the specific identification method. Interest and other income, net includes interest, dividends, amortization of purchase premiums and discounts and realized gains and losses on sales of securities. Expected term is determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. Expected volatility is based on the blend of historical volatility of the past period equal to our expected term and the current implied volatility. Risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award. Expected dividend is based on our expectation of issuing a dividend over the expected term. We have never issued dividends. Estimated forfeitures are based on voluntary termination behavior as well as analysis of actual option forfeitures. Our foreign currency cash flow hedges generally mature within twelve months. 2013 Revenue: System and other revenue Reagent and disposable revenue Total revenue Revenue by market: Clinical Systems Clinical Reagents Total Clinical Non-Clinical Total revenue our expanding menu of Xpert tests. Clinical Systems revenue decreased $1.7 million, or 2%, primarily driven by lower system sales to customers participating in our HBDC program. 2014. Non-Clinical revenue decreased $12.4 million, or 30% in 2014 compared to 2015. Geographic revenue information: North America Clinical Non-Clinical Total North America International Clinical Non-Clinical Total International Total revenue Non-Clinical revenue after a disposition of certain distributions rights related to non-Cepheid products in early 2015. International revenue increased $46.2 million, or 30%, in 2014 as compared to 2013. This increase was primarily driven by higher revenue from GeneXpert systems and 2016. Costs and operating expenses: Cost of sales Collaboration profit sharing Research and development Sales and marketing General and administrative Litigation contingencies and settlement Total costs and operating expenses newer commercial products, both of which currently have lower margins. a shift in customer mix. If sales to customers participating in our HBDC program are higher than anticipated, gross margin may be negatively impacted 2015. initiative and the development of our GeneXpert Omni for the point-of-care market. be comparable to 2015. 2016. Other expense, net Interest income Interest expense Foreign currency exchange gain/(loss) and other, net Total other expense, net Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities of $11.1 million in 2014 compared to 2013. Operating leases Purchase obligations Minimum royalties Debt obligations 1933, as amended. 2015. 2015. 25, 2016 25, 2016 Current assets: Cash and cash equivalents Short-term investments Accounts receivable, less allowance for doubtful accounts of $237 and $198 as of December 31, 2014 and 2013, respectively Inventory, net Prepaid expenses and other current assets Total current assets Property and equipment, net Investments Other non-current assets Intangible assets, net Goodwill Total assets Current liabilities: Accounts payable Accrued compensation Accrued royalties Accrued and other liabilities Current portion of deferred revenue Total current liabilities Long-term portion of deferred revenue Convertible senior notes, net Other liabilities Total liabilities Commitments and contingencies (Note 8) Shareholders’ equity: Preferred stock, no par value; 5,000,000 shares authorized, none issued or outstanding Common stock, no par value; 150,000,000 and 100,000,000 shares authorized, 70,904,388 and 68,556,392 shares issued and outstanding at December 31, 2014 and 2013, respectively Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Total shareholders’ equity Total liabilities and shareholders’ equity Revenue Costs and operating expenses: Cost of sales Collaboration profit sharing Research and development Sales and marketing General and administrative Legal contingencies and settlements Total costs and operating expenses Loss from operations Other income (expense): Interest income Interest expense Foreign currency exchange gain (loss) and other, net Other expense, net Loss before income taxes Benefit from (provision for) income taxes Net loss Basic net loss per share Diluted net loss per share Shares used in computing basic net loss per share Shares used in computing diluted net loss per share Net loss Other comprehensive loss, net of taxes of $0: Foreign currency translation adjustments Change in unrealized gains and losses related to cash flow hedges: Gain (loss) recognized in other comprehensive loss, net (Gain) loss reclassified from accumulated comprehensive loss to the statement of operations, net Change in unrealized gains and losses related to available-for-sale investments, net: Gain (loss) recognized in other comprehensive loss, net (Gain) reclassified from accumulated comprehensive loss to the statement of operations, net Comprehensive loss Balance at December 31, 2011 Net loss Unrealized gain (loss) related to cash flow hedging Foreign currency translation adjustment Issuance of shares of common stock under employee and director option plans Shares issued for purchase of a business Stock-based compensation related to stock options and awards and employee stock purchase plans Issuance of shares of common stock under employee stock purchase plans Balance at December 31, 2012 Net loss Unrealized gain (loss) related to cash flow hedging Unrealized gain (loss) related to available-for-sale investments, net Issuance of shares of common stock under employee and director option plans Stock-based compensation related to stock options and awards and employee stock purchase plans Issuance of shares of common stock under employee stock purchase plans Balance at December 31, 2013 Net loss Unrealized gain related to cash flow hedging Unrealized loss related to available-for-sale investments, net Issuance of shares of common stock under employee and director option plans Stock-based compensation related to stock options and awards and employee stock purchase plans Equity component of convertible senior notes Purchase of convertible note capped call hedge Excess tax benefits from stock-based compensation Issuance of shares of common stock under employee stock purchase plans Balance at December 31, 2014 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of property and equipment Amortization of intangible assets Unrealized foreign exchange differences Amortization of debt discount and transaction costs Impairment of acquired intangible assets, licenses, property and equipment Stock-based compensation expense Excess tax benefits from stock-based compensation Changes in operating assets and liabilities: Accounts receivable Inventory Prepaid expenses and other current assets Other non-current assets Accounts payable and other current and non-current liabilities Accrued expense for estimated legal contingency Accrued compensation Deferred revenue Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Payments for technology licenses Cost of acquisitions, net Proceeds from sales of marketable securities and investments Proceeds from maturities of marketable securities and investments Purchases of marketable securities and investments Transfer to restricted cash Net cash used in investing activities Cash flows from financing activities: Net proceeds from the issuance of common shares and exercise of stock options Excess tax benefits from stock-based compensation Proceeds from bank borrowing Proceeds from borrowings of convertible senior notes, net of issuance costs Purchase of convertible note capped call hedge Principal payments of notes payable Net cash provided by financing activities Effect of foreign exchange rate change on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period operations. Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s marketable debt securities have been classified and accounted for as available-for-sale. The Company determines the appropriate classification of its investments at the time of purchase and re-evaluates the designations at each balance sheet date. The Company classifies its marketable debt securities as cash equivalents, short-term investments or non-current investments based on each instrument’s underlying effective maturity date. All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Marketable debt securities with effective maturities of 12 months or less are classified as short-term, and marketable debt securities with effective maturities greater than 12 months are classified as non-current. The Company’s marketable debt securities are carried at fair value, with the unrealized gains and losses reported within accumulated other comprehensive loss, a component of shareholders’ equity. The cost of securities sold is based upon the specific identification method. Interest and other income, net includes interest, dividends, amortization of purchase premiums and discounts and realized gains and losses on sales of securities. Supplemental Cash Flow Information Cash paid for interest Cash paid for taxes Property and equipment and intangible assets acquired included in accounts payable, other accrued expense and other current liabilities Net Raw Materials Work in Process Finished Goods Inventory 2014. Land Building Scientific equipment Manufacturing equipment Computers and software Office furniture Leasehold improvements Less accumulated depreciation and amortization Balance at beginning of year Costs incurred and charged against reserve Accrual related to current year product sales Balance at end of year Accrued expense for estimated legal contingency Derivative liabilities Accrued warranty reserve Accrued payment related to asset acquisition Income tax payable Other Accrued and other liabilities Deferred tax liabilities Deferred rent Non-current income tax payable Other Other liabilities time-to-time. hedges, if any, are recognized in current earnings. Basic: Net loss Basic weighted shares outstanding Net loss per share Diluted: Net loss Basic weighted shares outstanding Effect of dilutive securities: Stock options, ESPP, restricted stock units, restricted stock awards and convertible senior notes Diluted weighted shares outstanding Net loss per share Balance as of December 31, 2014: Assets: Cash and cash equivalents Short-term investments: Asset-backed securities Corporate debt securities Commercial Paper Government agency securities Other securities Total short-term investments Foreign currency derivatives Investments: Asset-backed securities Corporate debt securities Government agency securities Other securities Total investments Total Liabilities: Foreign currency derivatives Total Balance as of December 31, 2013: Assets: Cash and cash equivalents Short-term investments: Commercial paper Corporate debt securities Government agency securities Total short-term investments Foreign currency derivatives Investments: Asset-backed securities Corporate debt securities Government agency securities United States government securities Other securities Total investments Total Liabilities: Foreign currency derivatives Contingent consideration Total Balance as of December 31, 2014: Liabilities: Convertible senior notes Total Balance as of December 31, 2013: Liabilities: Convertible senior notes Total Balance as of December 31, 2014: Short-term investments: Asset-backed securities Commercial paper Corporate debt securities Government agency securities Other securities Amounts classified as cash equivalents Total short-term investments Investments: Asset-backed securities Corporate debt securities Government agency securities Other securities Total investments Balance as of December 31, 2013: Short-term investments: Commercial paper Corporate debt securities Government agency securities Amounts classified as cash equivalents Total short-term investments Investments: Asset-backed securities Corporate debt securities Government agency securities United States government securities Other securities Total investments Gross realized gains Gross realized losses Realized gains, net Balance at December 31, 2014: Asset-backed securities Corporate debt securities Government agency securities Other securities Total Balance at December 31, 2013: Asset-backed securities Corporate debt securities Government agency securities Other securities Total Debt securities: Mature in one year or less Mature after one year through three years Mature in more than three years Total debt securities Securities with no contractual maturity Total 2013. Fair Value of Derivates Designated as Hedge Fair Value of Derivates Not Designated as Hedge Instruments Derivative Assets (a): Foreign exchange contracts Derivative Liabilities (b): Foreign exchange contracts Derivative Assets (a): Foreign exchange contracts Derivative Liabilities (b): Foreign exchange contracts Cash flow hedges: Foreign exchange contracts Total Balance, December 31, 2014 Licenses Technology acquired in acquisitions Customer relationships and other intangible assets acquired in acquisitions Balance, December 31, 2013 Licenses Technology acquired in acquisitions Customer relationships and other intangible assets acquired in acquisitions For the Years Ending December 31, 2015 2016 2017 2018 2019 Thereafter Total expected future annual amortization transaction as an asset acquisition and recorded two intangible assets: re-acquired exclusive distribution rights, and re-acquired distribution rights and customer relationships of $0.9 million and $19.9 million, respectively. The remaining $0.2 million was recorded as settlement for pre-existing relationships in the statements of operations in 2014. United States Foreign Total Current Federal State Foreign Deferred Federal State Foreign Benefit (provision) for income taxes United States Federal statutory income tax rate State taxes, net of federal benefit Foreign income taxed at other than U.S. rates Change in liabilities for uncertain positions Change in valuation allowance Other Effective tax rate Net operating loss carryforwards Inventory Reserves and Accruals Fixed and Intangible Assets Research and other credit carryforwards Stock-based compensation expense Other Total deferred tax assets Valuation allowance for deferred tax assets Total deferred tax liability Net deferred tax liability assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The provisions have been applied prospectively and had a one-time impact of reducing both current deferred tax assets and non-current deferred tax liabilities by approximately $5.4 million as of December 31, 2015. Prior periods were not retrospectively adjusted, as permitted by the ASU. expire between 2020 through 2025. As a result, tax reserves for the relevant years were released. Balance at beginning of year Increase related to current year tax positions Increase (decrease) for tax positions of prior years Decrease due to lapse of statute Decrease due to settlements Balance at end of year 2015. during any calendar quarter commencing after the calendar quarter ending on March 31, 2014 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; during the five business day period after any five consecutive trading day period (the “Notes Measurement Period”) in which the “trading price” (as the term is defined in the Indenture) per $1,000 principal amount of notes for each trading day of such Notes Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock on such trading day and the conversion rate on each such trading day; or upon the occurrence of specified corporate events. calculated as the present value of implied future payments based on the $345 million aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the Notes. The $75 million difference between the aggregate principal amount of $345 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the Notes were not considered redeemable. Liability component: Principal Less: debt discount, net of amortization Net carrying amount Equity component (a) 1.25% coupon Amortization of debt transaction costs Amortization of debt discount Convertible Senior Notes Operating leases Purchase obligations Minimum royalties Debt obligations system modules. Obligations Outstanding December 31, 2011 Granted Exercised Forfeited Outstanding December 31, 2012 Granted Exercised Forfeited Outstanding December 31, 2013 Granted Exercised Forfeited Outstanding December 31, 2014 Exercisable, December 31, 2014 Vested and expected to vest December 31, 2014 Outstanding December 31, 2011 Granted Vested Cancelled Outstanding December 31, 2012 Granted Vested Cancelled Outstanding December 31, 2013 Granted Vested Cancelled Outstanding December 31, 2014 2006 Plan: Options, RSUs and awards outstanding for all plans Reserved for future grants 2012 ESPP OPTION SHARES: Expected Term (in years) Volatility Expected Dividends Risk Free Interest Rates Estimated Forfeitures Weighted Average Fair Value ESPP SHARES: Expected Term (in years) Volatility Expected Dividends Risk Free Interest Rates Weighted Average Fair Value Cost of sales Research and development Sales and marketing General and administrative Total stock-based compensation expense 2015 and 2014, respectively. Revenue: System and other revenue Reagent and disposable revenue Total revenue Revenue by market: Clinical Systems Clinical Reagents Total Clinical Non-Clinical Total revenue Geographic revenue information: North America Clinical Non-Clinical Total North America International Clinical Non-Clinical Total International Total revenue 2014. 2014 Total revenue Costs and operating expenses: Cost of sales Collaboration profit sharing Research and development Sales and marketing General and administrative Legal contingencies and settlements Total cost and operating expenses Loss from operations Other expense, net Loss before income tax expense Provision for income tax expense Net Loss Basic net loss per share Diluted net loss per share Weighted average shares used in computing basic net loss per share Weighted average shares used in computing diluted net loss per share Gross profit on sales: Sales Cost of sales 2013 Total revenue Costs and operating expenses: Cost of sales Collaboration profit sharing Research and development Sales and marketing General and administrative Total cost and operating expenses Income (loss) from operations Other income (expense), net Income (loss) before income tax expense Provision for income tax expense Net income (loss) Basic net income (loss) per share Diluted net income (loss) per share Weighted average shares used in computing basic net income (loss) per share Weighted average shares used in computing diluted net income (loss) per share Gross profit on sales: Sales Cost of sales ended December 31, 2015, there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 26, 2016. 26, 2016. 26, 2016. 26, 2016. Description Allowance for doubtful accounts: Year ended December 31, 2012 Year ended December 31, 2013 Year ended December 31, 2014 Signature Title Date Exhibit Number Description of Exhibit Form File No. Exhibit Filing Date Filed Herewith 8-K 8-A 10-Q 10-Q S-8 8-K 8-K 8-K S-1 S-1 S-1 10-K 10-Q 10-Q 8-K 8-K Exhibit Number Description of Exhibit Form File No. Exhibit Filing Date Filed Herewithwillis likely to continue to be highly volatile in the future. During fiscal year 2014,2015, the closing sale price of our common stock on The NASDAQ Global Select Market ranged from $37.64$30.02 to $55.41$63.52 per share. Because our stock price has been volatile, investing in ourData breaches and cyber-attacks could compromise our intellectual property or other sensitive information and cause significant damage to our business and reputation.In the ordinary course of our business, we maintain sensitive data on our networks, including our intellectual property and proprietary or confidential information relating to our business and that of our customers and business partners. The secure maintenance of this information is critical to our business and reputation. We believe that companies have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to a state-sponsored attack. Cyber threats may be generic, or they may be custom-crafted against our information systems. Over the past year, cyber-attacks have become more prevalent and much harder to detect and defend against. Our network and storage applications may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These data breaches and any unauthorized access or disclosure of our information or intellectual property could compromise our intellectual property and expose other confidential information and sensitive business information. There can be no assurance that our systems and data protection efforts will prevent future business interruptions or loss of data. Cyber-attacks could also cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business.ITEM 1B.UNRESOLVED STAFF COMMENTSNone.ITEM 2.PROPERTIES30, 2015,31, 2016, we owned or leased approximately 680,000800,000 square feet of building space, primarily in the United States.States, of which approximately 83,000 square feet relates to a new headquarters building in Sunnyvale, California that we have not yet occupied. We own a building in Toulouse, France, and the remaining building space we occupy is pursuant to leases expiring through May 2029. Our manufacturing sites are located in the United States and Sweden.ITEM 3.LEGAL PROCEEDINGShas beenwas convened to address these issues in confidential proceedings. On July 30, 2013, the panel determined that it had jurisdiction to decide the claims, a determination that we appealed to the Swiss Federal Supreme Court. On October 2, 2013, the arbitration panel determined that it would proceed with the arbitration while this appeal was pending. On February 27, 2014 the Swiss Federal Supreme Court upheld the jurisdiction of the arbitration panel to hear the case, and the case is continuing. We believe that we have not violated any provision of the agreement and that the asserted claim of the 375 Patent is expired, invalid, unenforceable and not infringed.sheet. However, givensheet and this continues to be our best estimate for this potential loss as of December 31, 2015. If we were to incur a loss in the arbitration proceeding, depending on the ruling of the arbitrators, we could also be responsible for certain attorneys’ fees and interest; however, at this time, we are unable to estimate these potential amounts. Given the inherent uncertainty of arbitration and the nature of the claims in this matter, it is possible that we may incur an additional material charge, but an estimate of such a charge cannot be made at this time. We continue to strongly dispute Roche’s claims and intend to vigorously defend against them.United States PatentUSPTO and Trademark Office and the Companywe filed a motion with the Court to stay this lawsuit pending the outcome of the IPR. On January 7, 2015, the Court issued an order staying the lawsuit pending the outcome of the IPR. On March 16, 2015, we filed a second petition for IPR of an additional claim of the 723 Patent. On June 11, 2015, the USPTO issued a decision declining to institute the first requested IPR. On July 13, 2015, we filed a request for reconsideration of the first petition for IPR with respect to certain challenged claims. On September 16, 2015, the USPTO denied the request for reconsideration. On September 17, 2015, the USPTO decided to institute our second petition for IPR. We believe that the possibility that these legal proceedings will result in a material loss is remote. various claims, complaints and legal actions that arise from time to time in the normal course of business. Other than as described above, we do not believe we are party to any currently pending legal proceedings that will result in a material adverse effect on our business. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.ITEM 4.MINE SAFETY DISCLOSURESITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF THE EQUITY SECURITIES High Low $ 55.89 $ 44.20 54.51 40.15 50.46 36.94 56.47 42.26 $ 39.52 $ 32.25 40.31 31.56 39.62 30.95 47.21 36.17 High Low Fiscal year ended December 31, 2015 First Quarter $ 59.62 $ 52.19 Second Quarter 61.15 53.14 Third Quarter 63.52 44.17 Fourth Quarter 45.75 30.02 Fiscal year ended December 31, 2014 First Quarter $ 55.89 $ 44.20 Second Quarter 54.51 40.15 Third Quarter 50.46 36.94 Fourth Quarter 56.47 42.26 12, 2015,18, 2016, the last reported sale price of our common stock on The NASDAQ Global Select Market was $58.90$28.40 per share. On February 12, 2015,18, 2016, there were approximately 108103 holders of record of our common stock. The actual number of shareholders is greater than the number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. The number of holders of record also does not include shareholders whose shares may be held in trust by other entities.2014.2015. All outstanding awards relate to our common stock. Number of
Securities to
be Issued
upon
Exercise of
Outstanding
Options,
Warrants
and Rights Weighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights Number of
Securities
Remaining
Available for
Future
Issuances
under Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column (a)) (a) (b) (c) 6,051,998 $ 32.88 6,156,000 226,002 $ 41.57 — 6,278,000 $ 33.20 6,156,000 Plan Category Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights Weighted Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuances under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (a) (b) (c) Equity compensation plans approved by security holders (1)(2)(3) 6,237,434 $ 39.38 8,756,000 Equity compensation plans not approved by security holders (4) 203,566 $ 41.79 — Total 6,441,000 $ 39.46 8,756,000 (1) The number of securities remaining available for future issuance in column (c) includes (1) 2,210,0002,495,000 shares of common stock authorized and available for issuance under our 2012 Employee Stock Purchase Plan (“2012 ESPP”) and (2) 3,946,0006,261,000 shares of common stock authorized and available for issuance under out 2006our 2015 Equity Incentive Plan (“2006 Plan”("2015 Plan"). The number of shares authorized for issuance under the 2012 ESPP is subject to an annual increase equal to the lesser of (i) 500,000 shares or (ii) an amount determined by the Compensation and Organizational Development Committee of theour Board of Directors. The number of securities to be issued to participants in column (a) does not include shares of common stock to be issued to participants in consideration of aggregate participant contributions under the 2012 ESPP as of December 31, 2014.2015.(2) We issueissued securities under our 2015 Plan and 2006 Equity Incentive Plan (the "2006 Plan") in forms other than options, warrants or rights. WeIn the future, we may issue stock awards, including but not limited to restricted stock awards, restricted stock units, stock bonus awards, stock appreciation rights and performance share awards. Under the terms of our 20062015 Plan, each award other than a stock option or stock appreciation right will reduce the number of shares remaining available for future issuance in column (c) by 1.752.17 shares for each share subject to such award.(3) We have made awards of restricted stock under our 2006 Plan in forms, such asand restricted stock units under our 2015 Plan and 2006 Plan that do not require a payment by the recipient to us at the time of exercise or vesting. Accordingly, the weighted average exercise price in column (b) does not take these awards into consideration.(4) Includes 59,12556,625 shares of common stock issuable to Michael Fitzgerald, an executive officer, of the Company, 56,77140,625 shares of common stock issuable to Warren Kocmond, an executive officer, of the Company, and 110,106106,316 shares of common stock issuable to Peter Farrell, an executive officer, of the Company, each made as a non-plan inducement grants pursuant to Section 5635(c)(4) of The NASDAQ Stock Market Rules.12/31/2009December 31, 2010 and its relative performance is tracked through December 31, 2015.2014. 12/09 12/10 12/11 12/12 12/13 12/14 100.00 182.29 275.72 271.31 373.97 433.81 100.00 117.61 118.70 139.00 196.83 223.74 100.00 106.73 122.40 166.72 286.55 379.71 12/10 12/11 12/12 12/13 12/14 12/15 Cepheid 100.00 151.25 148.84 205.15 237.98 160.57 NASDAQ Composite 100.00 100.53 116.92 166.19 188.78 199.95 NASDAQ Biotechnology 100.00 113.92 153.97 263.29 348.49 369.06 ITEM 6.SELECTED CONSOLIDATED FINANCIAL DATA Years Ended December 31, 2014 2013 2012 2011 2010 (In thousands, except per share data) $ 470,141 $ 401,292 $ 331,212 $ 277,575 $ 212,468 229,327 207,933 153,365 122,840 105,135 240,814 193,359 177,847 154,735 107,333 (34,086 ) (16,010 ) (21,324 ) 3,815 (5,344 ) $ (50,149 ) $ (17,965 ) $ (20,043 ) $ 2,627 $ (5,917 ) $ (0.72 ) $ (0.27 ) $ (0.30 ) $ 0.04 $ (0.10 ) $ (0.72 ) $ (0.27 ) $ (0.30 ) $ 0.04 $ (0.10 ) 70,069 67,485 65,812 62,735 59,712 70,069 67,485 65,812 66,750 59,712 December 31, 2014 2013 2012 2011 2010 (In thousands) $ 293,392 $ 74,909 $ 95,779 $ 115,008 $ 79,538 381,264 148,528 147,090 148,153 95,565 793,574 394,604 331,544 286,670 220,611 175 194 183 — 1,679 13,447 8,183 9,599 8,176 8,207 1,073 1,479 1,685 — 4,991 278,213 — — — — (293,712 ) (243,563 ) (225,598 ) (205,555 ) (208,182 ) $ 354,215 $ 285,240 $ 247,542 $ 211,833 $ 153,662 Fiscal Year 2015 2014 2013 2012 2011 (In thousands, except per share data) Operating Results Revenue $ 538,576 $ 470,141 $ 401,292 $ 331,212 $ 277,575 Cost of sales 269,864 229,327 207,933 153,365 122,840 Gross profit on revenue 268,712 240,814 193,359 177,847 154,735 Income (loss) from operations (30,862 ) (34,086 ) (16,010 ) (21,324 ) 3,815 Net income (loss) (48,530 ) (50,149 ) (17,965 ) (20,043 ) 2,627 Per Share Data Basic net income (loss) per common share $ (0.67 ) $ (0.72 ) $ (0.27 ) $ (0.30 ) $ 0.04 Diluted net income (loss) per common share (0.67 ) (0.72 ) (0.27 ) (0.30 ) 0.04 Shares used in computing basic net income (loss) per share 71,928 70,069 67,485 65,812 62,735 Shares used in computing diluted net income (loss) per share 71,928 70,069 67,485 65,812 66,750 Balance Sheet Information Cash, cash equivalents, short-term investments $ 322,715 $ 293,392 $ 74,909 $ 95,779 $ 115,008 Total assets 821,647 793,574 394,604 331,544 286,670 Short-term obligations: Current portion of note payable 173 175 194 183 — Current portion of deferred revenue 12,778 13,447 8,183 9,599 8,176 Long-term obligations: Note payable, less current portion 820 1,073 1,479 1,685 — Convertible senior notes, net 287,863 278,213 — — — Accumulated deficit (342,242 ) (293,712 ) (243,563 ) (225,598 ) (205,555 ) Total shareholders’ equity 369,983 354,215 285,240 247,542 211,833 Other Data Working capital $ 413,986 $ 381,264 $ 148,528 $ 147,090 $ 148,153 market and Non-Clinical markets. Our systems enable rapid,fast, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. Our objective is to become the leading supplier of integrated systems and tests for molecular diagnostics. Key elements of our strategy to achieve this objective include:•Provide a fully-integrated molecular testing solution to the Clinical market. We are focusing our investments on selling our systems and tests to the Clinical market and we believe our GeneXpert system will continue to significantly expand our presence in the Clinical market due to its ability to deliver accurate and rapid results, ease of use, flexibility and scalability. Features of the GeneXpert system and Xpert tests include:Clinical Laboratory Improvement Amendments (“CLIA”)CLIA categorized, amplified molecular tests, which means the GeneXpert system can be operated without the need for highly-trained laboratory technologists;sensitivity;sensitivity and•Continue to develop and market new tests. We currently plan to capitalize on our strengths in nucleic acid chemistry and molecular biology to continue to develop new tests for our systems and offer our customers the broadest menu of Xpert tests designed to address many of the highest volume molecular test opportunities. Our strategy is to offer a portfolio of Xpert tests spanning healthcare-associated infections, critical infectious disease, sexual health, women’s health, virology, oncology and genetics. For example, Xpert CT/NG and Xpert MTB/RIF were made commercially available in the United States in 2013 and Xpert Norovirus and Xpert Flu/RSV XC were made commercially available in the United States in 2014. Xpert HPV, Xpert Carba-R, Xpert Norovirus, Xpert Flu/RSV XC and Xpert Trichomonas were all made commercially available in all markets that recognize CE Marks during 2014 and Xpert HIV-1 Viral Load achieved CE Mark in December 2014.•Obtain additional target rights. We expect to continue to expand our collaborations with academic institutions and commercial organizations to develop and obtain rights to various infectious disease and oncology targets. In addition, we expect to focus key business development activities on identifying infectious disease and oncology targets held by academic institutions or commercial organizations for potential license or acquisition.•Extend geographic reach.Our European sales and marketing operations are headquartered in France. As of December 31, 2014, we had direct sales forces in Australia, the Benelux region, France, Germany, Hong Kong, Italy, South Africa and the United Kingdom, and we have offices in Brazil, China, Dubai, India, Japan and Singapore. We expect to continue to expand our international commercial operations capability on both a direct and distributor basis in 2015 and future years.•Extend High Burden Developing Countries sales programs. We are developing and expect to continue to expand our presence in HBDCs following the World Health Organization’s endorsement of the Xpert MTB/RIF test in late 2010 to deliver GeneXpert systems and Xpert tests to HBDCs at a discount to our standard commercial prices. We believe that participation in the HBDC program considerably broadens the geographic reach of our products and increases recognition of the Cepheid brand and product portfolio.valuation,and warranty accrual,provisions, stock-based compensation, litigation settlement,income taxes, and foreign currency hedging and income taxes to be critical accounting policies. A number of significant estimates, assumptions and judgments are inherent in our determination of when to recognize revenue, how to evaluate our long-lived-assets, the calculation of our inventory valuation adjustments,and warranty accrual,provisions, settlements related to litigation, valuation of our foreign currency hedges and stock-based compensation expense. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.Pronouncements”Pronouncements,” for a discussion of new and recently adopted accounting guidance All revenue recognized from reagent rentals are included in reagent and disposable sales. Please see Note 12 of our Consolidated Financial Statements “Segment and Significant Concentrations”. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance.including research and developmentearned under grants and government sponsored research and collaboration agreements. Revenue is derived from cost-type contracts with the U.S. government.agreements, which are recognized on a contract-specific basis. Revenue and profit under cost-plus service contracts is recognized as costs are incurred plus negotiated fees. Fixed fees on cost-plus serviceFor certain contracts, are recognized ratably overwe utilize the contractproportional performance period as services are performed. Contractmethod of revenue recognition which requires that we estimate the total amount of costs include laborto be expended for a project and related employee benefits, subcontractingrecognize revenue equal to the portion of costs and other direct costs, as well as allocations of allowable indirect costs. For contract change orders, claims or similar items,incurred to date. We exercise judgment is required forwhen estimating the amounts, assessing the potential for realization, and determining whether realization is probable. From timelevel of effort required to time, facts develop that require revisionscomplete a project. The estimated total costs to complete a project are subject to revision from time-to-time.their estimated fair value at the date of acquisition, less accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from three to 15 years, on a straight-line basis.years. Amortization of intangible assets is primarily included in cost of sales, research and development and sales and marketing in the Consolidated Statements of Operations.anthe intangible asset to assess whether or not a potential impairment exists. If the carrying value exceeds our estimate of future undiscounted cash flows, an impairment value is calculated as the excess of the carrying value of the intangible asset over our estimate of its estimated fair market value. Events or circumstances which could trigger an impairment review include a significant adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition, significant changes in our use of acquired assets, our overall business strategy, or significant negative industry or economic trends. We did not recognize any significant impairment charges in 2015 or 2014. In 2014, 2013, and 2012, we recorded an impairment charge of $0.1 million, $1.3 million and $1.4 million, respectively, to cost of sales primarily related to acquired technology for one of our legacy products.theour sole reporting unit and therefore, goodwill was tested for impairment at the enterprise level. As of December 31, 2014,2015, there has been no impairment of goodwill. We do not have intangible assets with indefinite useful lives other than goodwill. Restricted Cash, Short-Term Investments, and Non-Current InvestmentsInterest and other income, net includes interest, dividends, amortization of purchase premiums and discounts and realized gains and losses on sales of securities.Restricted cash consists of cash contractually restricted for use to develop the Xpert Ebola test in accordance with our agreement with BMGF. At December 31, 2014, prepaid expense and other current assets include $1.9 million of restricted cash. the our debt securities, this assessment takes into account the severity and duration of the decline in value, our intent to sell the security, whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and whether or not we expect to recover the entire amortized cost basis of the security (that is, a credit loss exists).In connection with these matters, weWe regularly assess on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements ifIf we determine that it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated.estimated, we record a liability in the financial statements. If a reasonable estimate of a known or probable loss cannot be made, but awe are able to estimate the potential range of probable losses can be estimated,loss, we record a liability based on the low-end of the estimated range of losses is recognized if no amount within the range is a better estimate than any other amount.loss. If a loss is not probable but is reasonably possible but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. We expense legal fees as incurred. A substantial decrease in demand for our products or the introduction generally 12 to 24 months from the date of sale and for certain products our disposable products, to be free from defects, when handled according to product specifications, for the stated life of such products. Accordingly, a provision for the estimated cost of warranty repair or replacement is recorded at the time revenue is recognized. Our estimated warranty provision is established usingbased on our estimate of future failure rates and the related estimated cost of the future costs of repairing any system failures during the warranty periodrepair or replacing any disposable products with defects.replacement. Significant increases in the failure rates of our products could lead to increased warranty costs and require us to increase our warranty provision.itwe will generate sufficient taxable income in future periods to realize the benefit of itsour deferred tax assets.For the year endedWe accrued penalties and interest of $0.3 million during 2015 and in total, as of December 31, 2015, has recognized a liability for penalties and interest of $0.4 million. During 2014 2013 and 2012,2013, we did not recognize any significant interest or penalties related to uncertain tax positions in the consolidated statementspositions. As of operations, and at December 31, 2014 and 2013, we had accrued no significant accrued interest or penalties.expenseexpenses denominated in currencies other than the U.S.United States dollar. OurWe also enter into non-qualifying foreign currency cash flow hedges generally mature within twelve months.forward contracts to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities. For derivative instruments that are designated and qualify as cash flow hedges, we initially record the effective portion of the gain or loss on the derivative instrument in accumulatedis reported as a component of other comprehensive income or loss, a separate component of shareholders’ equity(loss) and subsequently reclassify these amountsis recognized into earnings within the same financial statement line item as the hedged item in the period during which the hedged transaction is realized. The notional principle amounts of our outstandingGains and losses on the derivative financial instruments designated asrepresenting either hedge ineffectiveness or discontinued cash flow hedges, if any, are $117.2 million and $96.6 million as of December 31, 2014 and 2013, respectively. The notional principle amounts of our outstanding derivative instruments not designated as cash flow hedges is $30.4 million and $24.2 million as of December 31, 2014 and 2013, respectively. During fiscal year 2014, there was no significant impact to results of operations as a result of discontinued cash flow hedges.recognized in current earnings. Our exposures to foreign currency risks may change over time and could have a material adverse impact on our financial results.2013 and 2012 Years Ended December 31, Years Ended December 31, 2014 2013 $ Change % Change 2013 2012 $ Change % Change $ 90,849 $ 76,763 $ 14,086 18 % $ 76,763 $ 65,111 $ 11,652 18 % 379,292 324,529 54,763 17 % 324,529 266,101 58,428 22 % $ 470,141 $ 401,292 $ 68,849 17 % $ 401,292 $ 331,212 $ 70,080 21 % RevenueThe following table illustrates Years Ended December 31, Years Ended December 31, 2015 2014 $ Change % Change 2014 2013 $ Change % Change Revenue by market: Clinical Systems $ 82,999 $ 84,695 $ (1,696 ) (2 )% $ 84,695 $ 66,980 $ 17,715 26 % Clinical Reagents 426,914 356,427 70,487 20 % 356,427 292,941 63,486 22 % Total Clinical $ 509,913 $ 441,122 $ 68,791 16 % $ 441,122 $ 359,921 $ 81,201 23 % Non-Clinical 28,663 29,019 $ (356 ) (1 )% 29,019 41,371 (12,352 ) (30 )% Total revenue $ 538,576 $ 470,141 $ 68,435 15 % $ 470,141 $ 401,292 $ 68,849 17 % the2015 as compared to 2014. Clinical Reagents revenue grew $70.5 million or 20% due to our growing installed base of GeneXpert instruments and Non-Clinical markets (in thousands): Years Ended December 31, Years Ended December 31, 2014 2013 $ Change % Change 2013 2012 $ Change % Change $ 84,695 $ 66,980 $ 17,715 26 % $ 66,980 $ 52,805 $ 14,175 27 % 356,427 292,941 63,486 22 % 292,941 233,503 59,438 25 % $ 441,122 $ 359,921 $ 81,201 23 % $ 359,921 $ 286,308 $ 73,613 26 % 29,019 41,371 (12,352 ) -30 % 41,371 44,904 (3,533 ) -8 % $ 470,141 $ 401,292 $ 68,849 17 % $ 401,292 $ 331,212 $ 70,080 21 % customers.customers, including a large HBDC system sale in China. Clinical Reagents revenue grew $63.5 million or 22% due to our growing installed base of GeneXpert instruments and our expanding menu of Xpert tests.Total Clinicalincreased $73.6 million, or 26%, in 2013 as compared2015 was comparable to 2012. The increase in Clinical revenues for 2013 was led by growth in Clinical Reagents associated with new GeneXpert instrument placements to new and existing customers and broader test menu adoption among existing customers. Clinical Reagent revenue growth was driven by an increase of $18.3 million, or 77%, in our HBDC tests, primarily our Xpert MTB/RIF test. Commercial Clinical Reagents revenue grew by $41.1 million, or 20%, due to the 22% increase in Xpert test revenues, driven by growth in our healthcare-associated infection tests, Xpert CT/NG, Xpert MTB/RIF, and Xpert Flu. Clinical Systems revenue increased by $14.2 million, or 27%, primarily driven by an increase in shipments to customers in our HBDC program, along with increased Commercial Clinical placements.2013. The decrease was2013, primarily due todriven by decreased revenue from anthrax test cartridges sold under the USPS BDS program and decreases in contract, grant and research revenue. Non-Clinical revenue decreased $3.5 million, or 8% in 2013 compared to 2012. The decrease was primarily due to decreases in industrial revenue and contract, grant and research revenue.20152016 with the growth of our installed base of GeneXpert systems, the continued expansion of our test menu, and the adoption of additional tests within our customer base. We expect that Non-Clinical market revenue will decline in 20152016 compared to 2014. Years Ended December 31, Years Ended December 31, 2014 2013 $ Change % Change 2013 2012 $ Change % Change $ 247,120 $ 212,362 $ 34,758 16 % $ 212,362 $ 190,021 $ 22,341 12 % 24,905 36,998 (12,093 ) -33 % 36,998 38,632 (1,634 ) -4 % 272,025 249,360 22,665 9 % 249,360 228,653 20,707 9 % $ 194,002 $ 147,559 $ 46,443 31 % $ 147,559 $ 96,286 $ 51,273 53 % 4,114 4,373 (259 ) -6 % 4,373 6,273 (1,900 ) -30 % 198,116 151,932 46,184 30 % 151,932 102,559 49,373 48 % $ 470,141 $ 401,292 $ 68,849 17 % $ 401,292 $ 331,212 $ 70,080 21 % Years Ended December 31, Years Ended December 31, 2015 2014 $ Change % Change 2014 2013 $ Change % Change Geographic revenue information: North America Clinical $ 290,374 $ 247,120 $ 43,254 18 % $ 247,120 $ 212,362 $ 34,758 16 % Non-Clinical 27,635 24,905 2,730 11 % 24,905 36,998 (12,093 ) (33 )% Total North America $ 318,009 $ 272,025 $ 45,984 17 % $ 272,025 $ 249,360 $ 22,665 9 % International Clinical $ 219,539 $ 194,002 $ 25,537 13 % $ 194,002 $ 147,559 $ 46,443 31 % Non-Clinical 1,028 4,114 (3,086 ) (75 )% 4,114 4,373 (259 ) (6 )% Total International $ 220,567 $ 198,116 $ 22,451 11 % $ 198,116 $ 151,932 $ 46,184 30 % Total revenue $ 538,576 $ 470,141 $ 68,435 15 % $ 470,141 $ 401,292 $ 68,849 17 % driven by driven by higher revenue of Xpert tests and higher systems revenue. North American Non-Clinical revenue decreased $12.1 million, or 33%, due to decreased revenue from anthrax test cartridges under the USPS BDS program and decreases in contract, grant and research revenue. North American Clinical$22.3$22.5 million, or 12%11%, in 20132015 as compared to 2012. This increase in North American revenue in 2013 was2014 primarily driven by a 16% increase in Xpert test revenue, primarily due to growth in revenue from our healthcare-associated infection tests (including Xpert MRSA and Xpert C.difficile) and our Xpert CT/NG test to new and existing customers,higher sales of Clinical reagents partially offset by lower sales of GeneXpert instruments to customers participating in our HBDC program and a decreasesignificant reduction in non-Xpert system and test revenue.clinicalClinical reagents to both commercial and HBDC customers. International$49.4 million, or 48%,17% in 2013 as2015 compared to 2012. This increase was primarily driven2014. We use foreign currency exchange forward contracts to hedge a portion of our forecasted revenue. We estimate the foreign currency movements relative to the United States dollar negatively impacted 2015 net revenue by 44% growthapproximately $10.1 million, inclusive of net hedge gains of approximately $7.4 million, which were recorded as revenue.Commercial Xpert tests, Commercial Clinical system placements and growthrevenue in HBDC revenue, both systems and our Xpert MTB/RIF test.2013 and 20122013 (in thousands): Years Ended December 31, Years Ended December 31, 2014 2013 $ Change % Change 2013 2012 $ Change % Change $ 229,327 $ 207,933 $ 21,394 10 % $ 207,933 $ 153,365 $ 54,568 36 % 5,154 7,512 (2,358 ) -31 % 7,512 7,183 329 5 % 96,851 80,197 16,654 21 % 80,197 71,673 8,524 12 % 97,848 79,941 17,907 22 % 79,941 61,907 18,034 29 % 55,047 41,719 13,328 32 % 41,719 43,298 (1,579 ) -4 % 20,000 — 20,000 100 % — 15,110 (15,110 ) -100 % $ 504,227 $ 417,302 $ 86,925 21 % $ 417,302 $ 352,536 $ 64,766 18 % Years Ended December 31, Years Ended December 31, 2015 2014 $ Change % Change 2014 2013 $ Change % Change Costs and operating expenses: Cost of sales $ 269,864 $ 229,327 $ 40,537 18 % $ 229,327 $ 207,933 $ 21,394 10 % Collaboration profit sharing 5,826 5,154 672 13 % 5,154 7,512 (2,358 ) (31 )% Research and development 115,756 96,851 18,905 20 % 96,851 80,197 16,654 21 % Sales and marketing 115,368 97,848 17,520 18 % 97,848 79,941 17,907 22 % General and administrative 62,624 55,047 7,577 14 % 55,047 41,719 13,328 32 % Litigation contingencies and settlement — 20,000 (20,000 ) (100 )% 20,000 — 20,000 100 % Total costs and operating expenses $ 569,438 $ 504,227 $ 65,211 13 % $ 504,227 $ 417,302 $ 86,925 21 % on sales and amortization of intangible assets related to technology licenses, and intangibles assets acquired in business combinations. Cost20132015 as compared to 2012.51% in 2014. The increasedecrease was primarily attributedattributable to increased shipmentsthe product mix, with higher HBDC sales and higher sales of some of our Clinical System and Clinical Reagent products.Our gross margin percentage decreased to 48% in 2013 as compared to 54% in 2012. The decrease was primarily attributable to manufacturing inefficiencies resulting from challenges in scaling our manufacturing capacity, including intermittent interruptions in the supply of Xpert cartridge parts, as well as an increase in our HBDC sales, which has lower gross margins, and the U.S. medical device tax under the Affordable Care Act.modestly in 20152016 primarily driven by lower Clinical Reagent unit costs due to manufacturing efficienciescost improvements and higher volumethe suspension of sales, partiallythe medical device excise tax, offset by the unfavorable impact of the foreign currency exchange rates, principally the currency exchange rate for the Euro and the U.S. dollar.The increase in collaboration profit sharing in 2013 was the result of increased anthrax cartridge sales under the USPS BDS program. We currently expect our 2016 collaboration profit sharing expenses will decrease in 2015 due to an expected decrease in anthrax cartridge salesbe comparable to the USPS.and depreciation, and amortization of certain intangible assets. assets, license fees, and milestone payments related to in-licensed products if it is determined that they have no alternative future use. Research and development expenses increased $18.9 million, or 20%, in 2015 as compared to 2014. This increase is primarily due to an increase in clinical trial costs, increased headcount and engineering costs related primarily to our high-level multiplexing initiative and the development of our GeneXpert Omni for the point-of-care market.Research and development expenses increased $8.5 million, or 12%, in 2013 as compared to 2012. This increase is primarily due to an increase in headcount and restructuring expenses, offset by a decrease in clinical trial costs. an increase in our research and development expenses, as a percentage of salesrevenue, in 2016 to be comparable or slightly down from 2015. On a dollar basis, we expect research and development expenses to increase in 2016 compared to 2015 driven primarily by ana significant increase in our clinical trial costs for products currently under development, and an increase in engineering costs related primarily to our high-level multiplexing initiative.Sales and marketing expenses increased $18.0 million, or 29%, in 2013 as compared to 2012. The increase is primarily due to increased headcount and sales and marketing program costs. an increase in our sales and marketing expenses, as a percentage of revenuesrevenue, in 20152016 to support the ongoing expansion of our sales force and commercial operations.2013, which2013. The increase was primarily due to increased headcount and higher legal fees.General and administrative expenses decreased $1.6 million, or 4%, in 2013 as compared to 2012. The decrease is primarily due to decreased legal expenses due to a litigation settlement that was reached during 2012.grow commensurate with ourdecrease modestly as a percentage of revenue growth in 2015. and settlementsour ongoingan evaluation of the facts and circumstances of our on-going arbitration with Roche we believebelieved that it iswas probable that the arbitration proceeding could result in a material loss to Cepheid. Accordingly, we recorded an estimated charge of $20 million as our best estimate of such potential loss as of December 31, 2014, which was included in Accrued and other liabilities in our consolidated balance sheet. However,This continues to be our best estimate for this potential loss as of December 31, 2015, however, given the inherent uncertainty of arbitration and the nature of the claims in this matter, it is possible that we may incur an additional material charge, but an estimate of such a charge cannot be made at this time. We continue to strongly dispute Roche’s claims and intend to vigorously defend against them. The legal contingencies and settlements are explained further in Note 9 of these Consolidated Financial Statements.Litigation contingencies and settlements decreased by $15.1 million or 100%, in 2013 as compared to 2012. During 2012, we entered into a settlement regarding certain issues under a license agreement. Pursuant to the settlement, we paid $17.3 million in cash, of which $15.1 million was recorded as Litigation settlement.2013 and 20122013 (in thousands): 2014 2013 $ Change 2013 2012 $ Change $ 1,119 $ 45 $ 1,074 $ 45 $ 26 $ 19 (12,609 ) (137 ) (12,472 ) (137 ) (147 ) 10 (2,016 ) (715 ) (1,301 ) (715 ) 117 (832 ) $ (13,506 ) $ (807 ) $ (12,699 ) $ (807 ) $ (4 ) $ (803 ) 2015 2014 $ Change % Change 2014 2013 $ Change % Change Other income (expense) Interest income $ 1,898 $ 1,119 $ 779 70 % $ 1,119 $ 45 $ 1,074 2,387 % Interest expense (14,659 ) (12,609 ) (2,050 ) 16 % (12,609 ) (137 ) (12,472 ) 9,104 % Foreign currency exchange loss and other, net (3,644 ) (2,016 ) (1,628 ) 81 % (2,016 ) (715 ) (1,301 ) 182 % Total other expense, net $ (16,405 ) $ (13,506 ) $ (2,899 ) 21 % $ (13,506 ) $ (807 ) $ (12,699 ) 1,574 % equivalent orequivalents, and investment balances, interest expense related to senior convertible notes, loans, or notes payable balances outstanding during the period and the net effect of foreign currency exchange transactions, including the net effect of non-qualifying derivative activities. Interest income increased by $0.8 million in 2015 as compared to 2014, which was primarily a result of an increase in average asset balances in our investment portfolio as a result of the issuance of our senior convertible notes in February 2014. Interest expense increased by $2.1 million in 2015 as compared to 2014, primarily due to increased accretion of the convertible note discount into interest expense from the issuance of senior convertible notes in February 2014. Foreign currency exchange loss and other, net increased $1.6 million in 2015 as compared to 2014, primarily due to the strengthening of the United States dollar.this increase iswhich was primarily a result of increased cash, cash equivalent and investments resulting from the issuance of the senior convertible notes in February 2014. Interest expense increased by $12.5 million in 2014 as compared to 2013, primarily driven by the interest expense from the issuance of senior convertible notes. Foreign currency exchange loss and other, net increased by $1.3 million in 2014 as compared to 2013, the increase primarily relatesdue to the strengthening of the U.S.United States dollar.Other expense, net increased by $0.8 million in 2013 as compared to 2012, the increase primarily relates to strengthening of the US Dollar. Years Ended December 31, 2014 2013 2012 (In thousands) $ 9,194 $ 15,012 $ 2,928 (325,725 ) (70,981 ) (49,311 ) 349,208 26,638 27,163 As Years Ended December 31, 2015 2014 2013 (In thousands) Net cash provided by operating activities $ 31,070 $ 9,194 $ 15,012 Net cash used in investing activities (39,878 ) (325,725 ) (70,981 ) Net cash provided by financing activities 27,549 349,208 26,638 December 31, 2014, we had $96.7 million inoperating cash flows is cash equivalents, $196.7 million in short-term investments, $1.9 million in restrictedcollections from customers and our primary cash (recorded as prepaid expensesoutflows are purchases of inventory and other current assets) and $79.7 million in non-current investments. The increases in cash and cash equivalents, short-term investments, and non-current investments from December 31, 2013 were a result of the net proceeds from issuance of senior convertible notes in 2014. Our short-term and non-current securities investment portfolio is invested primarily in highly-rated securities and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade with the objective of minimizing the potential risk of principal loss.The netpersonnel-related expenses. Net cash provided by operating activities was $9.2during fiscal 2015 increased $21.9 million compared with fiscal 2014, primarily due to the following:year ended December 31,impact of non-cash items in 2015 compared to 2014;ItThis favorable change was primarily compriseddue to improved collections and timing of net losscash receipts; andeffectinventory balance, which contributed to a net $14.2 million favorable change in our operating cash flow primarily due to reduced volume and timing of cash provided by non-cash expensespurchases; partially offset by working capital uses of cash. Non-cash expenses are comprised of stock-based compensation expense, depreciation and amortization expenses, impairment of acquired intangible assets and licenses and amortization of debt discount and transaction costs and unrealized foreign exchange differences. Cash used by changes working capital for the year ended December 31, 2014 was primarily driven by increases in inventory, accounts receivables and prepaid expenses and other current assets, partially offset by increases in accounts payable, accrued expense for estimated legal contingency accrued compensation and deferred revenue.The netin 2015 compared to 2014 when we recorded an estimated charge of $20 million.was $15.0during fiscal 2014 decreased $5.8 million compared with fiscal 2013, primarily due to the following:year ended December 31, 2013. It was primarily comprisedimpact of net loss andnon-cash in 2014 compared to 2013;effectincrease of cash providedthe accounts receivable balance driven by non-cash expensesthe impact of increased revenue and timing of collections; and working capital usescash. Non-cash expenses are comprised$20 million increase in accrued expense for estimated legal contingency due to the estimated charge of stock-based$20 million that was recorded during fiscal 2014 with having no corresponding accrual in 2013;depreciation and amortization expenses, amortization of intangible assets, and impairment of acquired intangible assets and licenses. Cash used by changes in working capital for the year ended December 31, 2013 was$6.3 million primarily driven by increasesthe increase in inventory, accounts receivablesheadcount in fiscal 2014 compared with fiscal 2013; and prepaid expensesother current assets partially offset by increases in accounts payable, accrued compensation and deferred revenue.The net cashcontracts.was $325.7 millionare primarily for the year ended December 31, 2014. It was primarily comprised of the purchasecapital expenditures and purchases of marketable securities after the issuance of our senior convertible notes, capital expenditures mainly related to our new ERP system, leasehold improvements of our buildings under operating lease and the purchase of additional manufacturing equipment and the cost of an acquisition, partially offset by proceeds from the sales and maturities of marketable securities.The net cash used in investing activities was $71.0 million for the year ended December 31, 2013. It was primarily comprised of the purchase of fixed assets, mainly related to leasehold improvements of our buildings under operating lease and the purchase of additional manufacturing equipment, the purchase of marketable securities and investments and the cost of acquisitions, net of cash, partially offset by the proceeds from the sales and maturities of marketable securities and investments.We currently expect a moderate decreaseproceeds from sale of equipment and intangible assets. Net cash used in our capital expenditures in 2015; however, we will continueinvesting activities during fiscal 2015 decreased $285.8 million compared with fiscal 2014. Fiscal 2014 investment purchases were higher due to invest in the capacity and continued automation of our manufacturing operations to support the growth in our GeneXpert test revenue.The net cash provided by financing activities was $349.2 million for the year ended December 31, 2014. It was primarily comprised of proceeds frominitial investment purchases made after the issuance of the senior convertible notes in February, 2014, partially offset by lower cash outflow for acquisitions by $15.0 million.cash used to purchase capped call contracts and net proceeds from sales or maturities during fiscal 2014 compared with fiscal 2013 and a net increase of $14.3 million cash outflows for acquisitions in 2014 compared to 2013.issuancecontract. At December 31, 2014, restricted cash of common shares$1.9 million was included in prepaid expense and exerciseother current assets and consisted of stock options.The netcash contractually restricted for use to develop the Xpert Ebola test in accordance with our agreement with BMGF.was $26.6during fiscal 2015 decreased $321.7 million forcompared with fiscal 2014, primarily due to the year ended December 31, 2013. It was primarily comprisednet proceeds of net proceeds$310.7 million from the issuance of our convertible senior notes, net of purchase of a related capped call transaction during fiscal 2014, and a decrease in net proceeds from issuance of common sharesstock of $11.0 million in 2015 compared to 2014.exercisean increase in net proceeds from issuance of common stock options.20142015 (in thousands): Payments Due by Period Total Less
Than 1
Year 1-3
Years 3-5
Years More
Than 5
Years $ 79,042 $ 11,411 $ 23,597 $ 19,706 $ 24,328 43,271 43,271 — — — 3,395 559 1,183 295 1,358 373,031 4,313 8,625 8,625 351,468 $ 498,739 $ 59,554 $ 33,405 $ 28,626 $ 377,154 Payments Due by Period Total Operating leases $ 107,504 $ 13,711 $ 30,834 $ 23,045 $ 39,914 Purchase obligations 50,421 50,421 — — — Minimum royalties 11,354 635 975 940 8,804 Debt obligations 368,719 4,313 8,625 8,625 347,156 $ 537,998 $ 69,080 $ 40,434 $ 32,610 $ 395,874 period.period net of lease incentives. Net rent expense for all operating leases for the years ended December 31, 2015, 2014 and 2013 and 2012 was $10.9 million, $11.6 million and $10.2 million, and $8.4 million, respectively.2014,2015, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of 1933.revenuesrevenue and reduce expenses, which depend on a number of factors outside our control, including general global economic conditions. For example, our future cash use will depend on, among other things, market acceptance of our new products, the resources we devote to developing and supporting our products, continued progress of our research and development of potential products, our ability to gain FDA clearance for our new products, the need to acquire licenses to new technology or to use our technology in new markets, expansion through acquisitions and the availability of other financing.$1.5$1.4 million. In addition, if a 100 basis point change in overall interest rates were to occur in 2015,2016, our interest income would not change significantly in relation to amounts we would expect to earn, based on our cash, cash equivalents, and investments as of December 31, 2014.$5.3$4.7 million.20142015 were transacted in U.S.United States dollars. As a corporation with international and domestic operations, we are exposed to changes in foreign exchange rates. Our international revenue is predominantly in European countries and South Africa and is denominated in a number of currencies, primarily the Euro, United States dollar, British Pound, South African Rand, and Australian dollar. In our international operations, we pay payroll and other expenses in local currencies. For the years ended December 31, 2014, 2013, and 2012, international sales were 42%, 38%, and 32%, respectively, of our sales. Our international sales are predominantly in Europe and South Africa. Our exposures to foreign currency risks may change over time and could have a material adverse impact on our financial results.willexpect to continue to usehedge our foreign currency hedging programsexposure in the future and may use currency forward contracts, currency options, and/or other common derivative financial instruments commonly utilized to reduce financial market risks if it is determinedforeign currency risk. We have performed a sensitivity analysis as of December 31, 2015 based on a model that such hedging activities are appropriate to reduce risk. Ameasures the impact of a hypothetical 10% adverse change in theforeign exchange rates upward or downward into the United States dollar (with all other variables held constant) on our portfolio ofunderlying estimated major foreign currency contractsexposures, net of derivative financial instruments. The foreign exchange rates used in the model were based on the spot rates in effect as of December 31, 2015. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign exchange rates would have decreased or increased, respectively,an unfavorable impact on the underlying cash flow exposure, net of our unrealized loss by approximatelyforeign exchange derivative financial instruments, of $5.0 million atas of December 31, 2014. We do not hold or purchase any currency contracts for trading purposes. Page 4546484950515253832014.2015. Ernst & Young LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the our internal control over financial reporting.26, 201525, 2016 John L. Bishop Daniel E. Madden Chairman and Chief Executive Officer Executive Vice President, Corporate Controller and Acting Chief Financial Officer2014,2015, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Cepheid’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.2014,2015, based on the COSO criteria.20142015 and 2013,2014, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 20142015 of Cepheid and our report dated February 26, 201525, 2016 expressed an unqualified opinion thereon./s/ Ernst & Young LLP 26, 201520142015 and 2013,2014, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014.2015. Our audits also included the financial statement schedule listed in the Index at Part IV Item 15(b). These financial statements and schedule are the responsibility of Cepheid’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.20142015 and 2013,2014, and the consolidated results of its operations, comprehensive loss and its cash flows for each of the three years in the period ended December 31, 2014,2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.2014,2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 201525, 2016 expressed an unqualified opinion thereon./s/ Ernst & Young LLP 26, 2015CEPHEID December 2014 2013 (In thousands, except share data) ASSETS $ 96,663 $ 66,072 196,729 8,837 68,809 52,202 132,635 103,866 24,274 13,037 519,110 244,014 115,765 84,886 79,731 9,820 7,847 958 31,440 15,245 39,681 39,681 $ 793,574 $ 394,604 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 50,435 $ 52,609 33,760 22,009 5,443 5,245 34,761 7,440 13,447 8,183 137,846 95,486 4,532 3,424 278,213 — 18,768 10,454 439,359 109,364 — — 422,151 383,379 225,529 145,900 247 (476 ) (293,712 ) (243,563 ) 354,215 285,240 $ 793,574 $ 394,604 December 31, 2015 2014 (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 112,568 $ 96,663 Short-term investments 210,147 196,729 Accounts receivable, less allowance for doubtful accounts of $383 and $237 as of December 31, 2015 and 2014, respectively 66,550 68,809 Inventory, net 148,690 132,635 Prepaid expenses and other current assets 18,515 24,274 Total current assets 556,470 519,110 Property and equipment, net 127,639 115,765 Investments 62,175 79,731 Other non-current assets 10,441 7,847 Intangible assets, net 25,241 31,440 Goodwill 39,681 39,681 Total assets $ 821,647 $ 793,574 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 57,771 $ 50,435 Accrued compensation 39,015 33,760 Accrued royalties 5,469 5,443 Accrued and other liabilities 27,451 34,761 Current portion of deferred revenue 12,778 13,447 Total current liabilities 142,484 137,846 Long-term portion of deferred revenue 5,538 4,532 Convertible senior notes, net 287,863 278,213 Other liabilities 15,779 18,768 Total liabilities 451,664 439,359 Commitments and contingencies (Note 9) Shareholders’ equity: Preferred stock, no par value; 5,000,000 shares authorized, none issued or outstanding — — Common stock, no par value; 150,000,000 shares authorized, 72,415,317 and 70,904,388 shares issued and outstanding at December 31, 2015 and 2014, respectively 449,704 422,151 Additional paid-in capital 263,429 225,529 Accumulated other comprehensive income (loss), net (908 ) 247 Accumulated deficit (342,242 ) (293,712 ) Total shareholders’ equity 369,983 354,215 Total liabilities and shareholders’ equity $ 821,647 $ 793,574 CEPHEID Years Ended December 31 2014 2013 2012 (In thousands, except per share data) $ 470,141 $ 401,292 $ 331,212 229,327 207,933 153,365 5,154 7,512 7,183 96,851 80,197 71,673 97,848 79,941 61,907 55,047 41,719 43,298 20,000 — 15,110 504,227 417,302 352,536 (34,086 ) (16,010 ) (21,324 ) 1,119 45 26 (12,609 ) (137 ) (147 ) (2,016 ) (715 ) 117 (13,506 ) (807 ) (4 ) (47,592 ) (16,817 ) (21,328 ) (2,557 ) (1,148 ) 1,285 $ (50,149 ) $ (17,965 ) $ (20,043 ) $ (0.72 ) $ (0.27 ) $ (0.30 ) $ (0.72 ) $ (0.27 ) $ (0.30 ) 70,069 67,485 65,812 70,069 67,485 65,812 Years Ended December 31, 2015 2014 2013 (In thousands, except per share data) Revenue $ 538,576 $ 470,141 $ 401,292 Costs and operating expenses: Cost of sales 269,864 229,327 207,933 Collaboration profit sharing 5,826 5,154 7,512 Research and development 115,756 96,851 80,197 Sales and marketing 115,368 97,848 79,941 General and administrative 62,624 55,047 41,719 Legal contingencies — 20,000 — Total costs and operating expenses 569,438 504,227 417,302 Loss from operations (30,862 ) (34,086 ) (16,010 ) Other income (expense): Interest income 1,898 1,119 45 Interest expense (14,659 ) (12,609 ) (137 ) Foreign currency exchange loss and other, net (3,644 ) (2,016 ) (715 ) Other expense, net (16,405 ) (13,506 ) (807 ) Loss before income taxes (47,267 ) (47,592 ) (16,817 ) Provision for income taxes (1,263 ) (2,557 ) (1,148 ) Net loss $ (48,530 ) $ (50,149 ) $ (17,965 ) Basic net loss per share $ (0.67 ) $ (0.72 ) $ (0.27 ) Diluted net loss per share $ (0.67 ) $ (0.72 ) $ (0.27 ) Shares used in computing basic net loss per share 71,928 70,069 67,485 Shares used in computing diluted net loss per share 71,928 70,069 67,485 CEPHEID 2014 2013 2012 (In thousands) $ (50,149 ) $ (17,965 ) $ (20,043 ) — — 140 146 (118 ) (401 ) 735 (427 ) 285 (159 ) 15 — (36 ) (2 ) — $ (49,463 ) $ (18,497 ) $ (20,019 ) 2015 2014 2013 (In thousands) Net loss $ (48,530 ) $ (50,149 ) $ (17,965 ) Other comprehensive loss, before tax: Change in unrealized gains and losses related to cash flow hedges: Gain (loss) recognized in other comprehensive loss, net (1,303 ) 146 (118 ) (Gain) loss reclassified from accumulated comprehensive loss to the statement of operations, net 665 735 (427 ) Change in unrealized gains and losses related to available-for-sale investments, net: Gain (loss) recognized in other comprehensive loss, net (391 ) (159 ) 15 Gain reclassified from accumulated comprehensive loss to the statement of operations, net (26 ) (36 ) (2 ) Other comprehensive loss, before tax (49,585 ) (49,463 ) (18,497 ) Income tax expense related to items of accumulated other comprehensive income (loss), net (100 ) — — Comprehensive loss $ (49,685 ) $ (49,463 ) $ (18,497 ) CEPHEID Common Stock (In thousands) Shares Amount Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income (Loss) Accumulated
Deficit Total Share-
holders’ Equity 64,157 $ 324,211 $ 93,144 $ 33 $ (205,555 ) $ 211,833 (20,043 ) (20,043 ) — — — (117 ) — (117 ) — — — 140 — 140 2,060 22,373 — — — 22,373 157 4,577 — — — 4,577 — — 24,073 — — 24,073 230 4,706 — — — 4,706 66,604 355,867 117,217 56 (225,598 ) 247,542 (17,965 ) (17,965 ) — — — (545 ) — (545 ) — — — 13 — 13 1,740 22,159 — — — 22,159 — — 28,683 — — 28,683 212 5,353 — — 5,353 68,556 383,379 145,900 (476 ) (243,563 ) 285,240 (50,149 ) (50,149 ) — — — 881 — 881 — — — (158 ) — (158 ) 2,144 32,733 — — — 32,733 — — 31,632 — — 31,632 73,013 73,013 (25,082 ) (25,082 ) — — 66 — — 66 204 6,039 — — — 6,039 70,904 422,151 225,529 247 (293,712 ) 354,215 Common Stock (In thousands) Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Balance at December 31, 2012 66,604 $ 355,867 $ 117,217 $ 56 $ (225,598 ) $ 247,542 Net loss (17,965 ) (17,965 ) Unrealized loss related to cash flow hedging, net (545 ) (545 ) Unrealized gain related to available-for-sale investments, net 13 13 Issuance of shares of common stock under employee and director option plans 1,740 22,159 22,159 Stock-based compensation related to stock options and awards and employee stock purchase plans 28,683 28,683 Issuance of shares of common stock under employee stock purchase plans 212 5,353 5,353 Balance at December 31, 2013 68,556 383,379 145,900 (476 ) (243,563 ) 285,240 Net loss (50,149 ) (50,149 ) Unrealized gain related to cash flow hedging, net 881 881 Unrealized loss related to available-for-sale investments, net (158 ) (158 ) Issuance of shares of common stock under employee and director option plans 2,144 32,733 32,733 Stock-based compensation related to stock options and awards and employee stock purchase plans 31,632 31,632 Equity component of convertible senior notes 73,013 73,013 Purchase of convertible note capped call hedge (25,082 ) (25,082 ) Excess tax benefits from stock-based compensation 66 66 Issuance of shares of common stock under employee stock purchase plans 204 6,039 6,039 Balance at December 31, 2014 70,904 422,151 225,529 247 (293,712 ) 354,215 Net loss (48,530 ) (48,530 ) Unrealized loss related to cash flow hedging, net (638 ) (638 ) Unrealized loss related to available-for-sale investments, net (417 ) (417 ) Income tax expense related to items of accumulated other comprehensive income (loss), net (100 ) (100 ) Issuance of shares of common stock under employee and director option plans 1,296 20,623 20,623 Stock-based compensation related to stock options and awards and employee stock purchase plans 37,847 37,847 Excess tax benefits from stock-based compensation 53 53 Issuance of shares of common stock under employee stock purchase plans 215 6,930 6,930 Balance at December 31, 2015 72,415 $ 449,704 $ 263,429 $ (908 ) $ (342,242 ) $ 369,983 CEPHEID Years Ended December 31, 2014 2013 2012 (In thousands) $ (50,149 ) $ (17,965 ) $ (20,043 ) 21,604 17,769 13,446 4,739 5,418 4,965 1,836 419 — 8,600 — — — 2,855 1,399 32,207 27,635 24,496 (66 ) — — (16,606 ) (6,960 ) (6,443 ) (29,346 ) (32,638 ) (5,105 ) (5,184 ) (5,263 ) (2,714 ) (2 ) 150 (172 ) 3,438 17,334 (5,740 ) 20,000 — — 11,751 5,421 (1,736 ) 6,372 837 575 9,194 15,012 2,928 (46,979 ) (47,526 ) (23,150 ) — (1,125 ) (2,140 ) (18,000 ) (3,669 ) (24,021 ) 115,881 2,503 — 102,733 1,347 — (477,485 ) (22,511 ) — (1,875 ) — — (325,725 ) (70,981 ) (49,311 ) 38,615 27,512 27,079 66 — — — — 156 335,789 — — (25,082 ) — — (180 ) (874 ) (72 ) 349,208 26,638 27,163 (2,086 ) (376 ) (9 ) 30,591 (29,707 ) (19,229 ) 66,072 95,779 115,008 $ 96,663 $ 66,072 $ 95,779 Years Ended December 31, 2015 2014 2013 (In thousands) Cash flows from operating activities: Net loss $ (48,530 ) $ (50,149 ) $ (17,965 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of property and equipment 27,251 21,604 17,769 Amortization of intangible assets 6,273 4,739 5,418 Unrealized foreign exchange differences 2,742 1,836 419 Amortization of debt discount and transaction costs 10,252 8,600 — Impairment of acquired intangible assets, licenses, property and equipment 224 — 2,855 Stock-based compensation expense 36,977 32,207 27,635 Excess tax benefits from stock-based compensation (53 ) (66 ) — Gain on the disposal of property, equipment and intangible assets (28 ) — — Other non-cash items 579 — — Changes in operating assets and liabilities: Accounts receivable 2,259 (16,606 ) (6,960 ) Inventory (15,114 ) (29,346 ) (32,638 ) Prepaid expenses and other current assets (387 ) (5,184 ) (5,263 ) Other non-current assets (1,139 ) (2 ) 150 Accounts payable and other current and non-current liabilities 4,170 3,438 17,334 Accrued expense for estimated legal contingency — 20,000 — Accrued compensation 5,256 11,751 5,421 Deferred revenue 338 6,372 837 Net cash provided by operating activities 31,070 9,194 15,012 Cash flows from investing activities: Capital expenditures (37,671 ) (46,979 ) (47,526 ) Payments for technology licenses — — (1,125 ) Cost of acquisitions, net (3,000 ) (18,000 ) (3,669 ) Proceeds from sale of equipment and an intangible asset 999 — — Proceeds from sales of marketable securities and investments 52,192 115,881 2,503 Proceeds from maturities of marketable securities and investments 231,758 102,733 1,347 Purchases of marketable securities and investments (281,259 ) (477,485 ) (22,511 ) Transfer to restricted cash (2,897 ) (1,875 ) — Net cash used in investing activities (39,878 ) (325,725 ) (70,981 ) Cash flows from financing activities: Net proceeds from the issuance of common shares and exercise of stock options 27,658 38,615 27,512 Excess tax benefits from stock-based compensation 53 66 — Proceeds from borrowings of convertible senior notes, net of issuance costs — 335,789 — Purchase of convertible note capped call hedge — (25,082 ) — Principal payments of notes payable (162 ) (180 ) (874 ) Net cash provided by financing activities 27,549 349,208 26,638 Effect of foreign exchange rate change on cash and cash equivalents (2,836 ) (2,086 ) (376 ) Net increase (decrease) in cash and cash equivalents 15,905 30,591 (29,707 ) Cash and cash equivalents at beginning of period 96,663 66,072 95,779 Cash and cash equivalents at end of period $ 112,568 $ 96,663 $ 66,072 CEPHEID20142015rapid,fast, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. On July 1, 2012, the Company changedfor certainof all of the Company’s subsidiaries. The Company remeasures its foreign subsidiaries from the local currencysubsidiaries’ monetary assets and liabilities to the U.S. dollar due to changesand records the net gains or losses resulting from remeasurement in “Foreign currency exchange loss and other, net” in the way these businesses and their operations are structured and managed. As a result, all foreign subsidiaries are using the U.S. dollar as the functional currency effective July 1, 2012. Prior to this change, adjustments resulting from translating the foreign currency financialconsolidated statements of these subsidiaries into the U.S. dollar had been included as a separate component of accumulated other comprehensive income (loss). Upon the change of the functional currency, these subsidiaries no longer generate further translation adjustments, and the accumulated translation adjustments from prior periods will continue to remain a component of accumulated other comprehensive income (loss).Net loss includes the gains and losses arising from transactions denominated in a currency other than the functional currency of a location, the remeasurement of assets and liabilities of foreign subsidiaries using U.S. dollars as their functional currency, and the realized results of the Company’s foreign currency hedging activities. Restricted Cash, Short-Term Investments and Non-Current InvestmentsInterest and other income, net includes interest, dividends, amortization of purchase premiums and discounts and realized gains and losses on sales of securities.Restricted cash consists of cash contractually restricted for use to develop the Xpert Ebola test in accordance with the Company’s agreement with BMGF. At December 31, 2014, prepaid expense and other current assets include $1.9 million of restricted cash. Years Ended December 31, 2014 2013 2012 (In thousands) $ 2,145 $ 109 $ 124 $ 572 $ 632 $ 1,051 $ 8,506 $ 674 $ 1,031 Years Ended December 31, 2015 2014 2013 (In thousands) Supplemental Cash Flow Information Cash paid for interest $ 4,383 $ 2,145 $ 109 Cash paid for taxes $ 2,086 $ 572 $ 632 Property, equipment and intangible assets acquired but not yet paid at end of period $ 7,551 $ 8,506 $ 674 58%66% and 55%58% of the Company’s cash and cash equivalents as of December 31, 2015 and 2014, and 2013, respectively.net revenuesales to customers and distributors located in the United States and other countries.distributors. The Company performs credit evaluations of its customers’ financial condition. The Company provides reserves for potential credit losses but has not experienced significant losses to date. There was one direct customer whose accounts receivable balance represented 26%11% and 14%26% of total accounts receivable as of December 31, 2015 and 2014, and 2013, respectively.2013 and 2012.2013. No single country outside of the United States or South Africa represented more than 10% of the Company’s total revenuesrevenue or total assets in any period presented.AllocationThe allocation of fixed production overheadsoverhead to conversioninventory costs is based on normal capacity of production.production capacity. Abnormal amounts of idle facility expense, freight, handling costs, and spoilage are expensed as incurred, and not included in overhead. The Company maintains provisions for excess and obsolete inventory based on management’s estimates of forecasted demand and, where applicable, product expiration. A substantial decrease in demand for the Company’s products or the introduction December 31 2014 2013 $ 36,287 $ 35,760 51,691 36,580 44,657 31,526 $ 132,635 $ 103,866 December 31 2015 2014 Raw Materials $ 39,267 $ 36,287 Work in Process 62,153 51,691 Finished Goods 47,270 44,657 Inventory $ 148,690 $ 132,635 $1.6$2.5 million and $2.1$1.6 million were included in inventory as of December 31, 2015 and 2014, and 2013, respectively.During 2014, there wasThere were no indicationindications of impairment of property and equipment. In 2013,equipment for the Company concluded that certain manufacturing capital assets would not be utilizedyears ended December 31, 2015 and therefore had no future realizable value and thus an impairment was recorded of approximately $1.3 million as cost of sales. December 31 2014 2013 $ 21 $ 21 3,364 3,970 52,619 42,845 56,426 45,339 24,402 13,923 9,929 7,887 66,842 48,879 $ 213,603 $ 162,864 (97,838 ) (77,978 ) $ 115,765 $ 84,886 December 31 2015 2014 Land $ 21 $ 21 Building 3,737 3,364 Scientific equipment 60,403 52,619 Manufacturing equipment 69,155 56,426 Computers and software 33,291 24,402 Office furniture 11,993 9,929 Leasehold improvements 72,670 66,842 $ 251,270 $ 213,603 Less accumulated depreciation and amortization (123,631 ) (97,838 ) $ 127,639 $ 115,765 and 2012 totaled $27.3 million, $21.6 million and $17.8 million, and $13.4 million, respectively.$10.3$6.1 million and $1.9$10.3 million during the years ended December 31, 20142015 and 2013,2014, respectively. Upon being placed in service, these assets are depreciatedamortized over an estimated useful life of 3 to 5 years.anthe intangible asset to assess whether or not a potential impairment exists. If the carrying value exceeds the Company’s estimate of future undiscounted cash flows, an impairment value is calculated as the excess of the carrying value of the intangible asset over the Company’s estimate of its fair market value. Events or circumstances which could trigger an impairment review include a significant adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition, significant changes in the Company’s use of acquired assets, the Company’s overall business strategy, or significant negative industry or economic trends. The Company did not recognize any significant impairment charges in 2015 or 2014. In 2014, 2013, and 2012, the Company recorded an impairment charge of $0.1 million, $1.3 million and $1.4 million, respectively, to cost of sales primarily related to acquired technology for one of its legacy products.theour sole reporting unit and therefore, goodwill was tested for impairment at the enterprise level. As of December 31, 2014,2015, there has been no impairment of goodwill. The Company does not have intangible assets with indefinite useful lives other than goodwill.certainfor our disposable products to be free from defects, when handled according to product specifications, for the stated life of such products. Accordingly, a provision for the estimated cost of warranty repair or replacement is recorded at the time revenue is recognized. The Company’s warranty provision is established using management’s estimate of future failure rates and future coststhe estimated cost of repairing any failures during the warranty periodrepair or replacing any disposable products with defects.replacement. The activities in the warranty provision consisted of the following (in thousands): 2014 2013 2012 $ 3,326 $ 1,953 $ 1,981 (1,310 ) (783 ) (690 ) 1,768 2,156 662 $ 3,784 $ 3,326 $ 1,953 2015 2014 2013 Balance at beginning of year $ 3,784 $ 3,326 $ 1,953 Settlements/Adjustments (2,821 ) (1,310 ) (783 ) Provisions 843 1,768 2,156 Balance at end of year $ 1,806 $ 3,784 $ 3,326 December 31 2014 2013 $ 20,000 $ — 3,812 1,555 3,784 3,326 3,000 — 1,028 559 3,137 2,000 $ 34,761 $ 7,440 December 31 2015 2014 Accrued expense for estimated legal contingency $ 20,000 $ 20,000 Derivative liabilities 1,298 3,812 Accrued warranty reserve 1,806 3,784 Accrued payment related to asset acquisition — 3,000 Income tax payable 391 1,028 Other 3,956 3,137 Accrued and other liabilities $ 27,451 $ 34,761 December 31 2014 2013 $ 6,261 $ 921 7,721 5,908 2,150 877 2,636 2,748 $ 18,768 $ 10,454 December 31 2015 2014 Deferred tax liabilities ¹ $ 1,152 $ 6,261 Deferred rent 8,165 7,721 Non-current income tax payable 1,801 2,150 Other 4,661 2,636 Other liabilities $ 15,779 $ 18,768 ¹ The Company early adopted ASU 2015-17 on a prospective basis, which resulted in the reclassification of rental.rental agreement ("reagent rental"). Under a reagent rental, the Company retains title to the instrument and earns revenue for the usage of the instrument and related maintenance services through the amount charged for reagents and other disposables. Under a reagent rental agreement, a customer may commit to purchasing minimum quantities of reagents at stated prices over a defined contract term, which is typically between three and five years. Revenue is recognized over the term of a reagent rental as reagents and other disposables are shipped and all other revenue recognition criteria have been met. All revenue recognized from reagent rental are included in reagent and disposable sales in Note 12, “Segment and Significant Concentrations”.the Company’sour best estimate of the selling price of an element in a transaction. The Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services or other future performance obligations. The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance.including research and developmentearned under grants and government sponsored research and collaboration agreements. Revenue is derived from cost-type contracts with the U.S. government.agreements, which are recognized on a contract-specific basis. Revenue and profit under cost-plus service contracts is recognized as costs are incurred plus negotiated fees. Fixed fees on cost-plus serviceFor certain contracts, are recognized ratably over the contractCompany utilizes the proportional performance period as services are performed. Contractmethod of revenue recognition which requires that the Company estimates the total amount of costs include laborto be expended for a project and related employee benefits, subcontractingrecognize revenue equal to the portion of costs and other direct costs, as well as allocations of allowable indirect costs. For contract change orders, claims or similar items,incurred to date. The Company exercises judgment is required forwhen estimating the amounts, assessing the potential for realization, and determining whether realization is probable. From timelevel of effort required to time, facts develop that require revisions of revenue recognized or cost estimates. To the extent thatcomplete a revised estimate affects the current or an earlier period, the cumulative effect of theproject. The estimated total costs to complete a project are subject to revision is recognized in the period in which the facts requiring the revision become known. Advance payments received in excess of amounts earned, such as funds received in advance of products to be delivered or services to be performed, are classified as deferred revenue until earned.During 2012, the Company entered into agreements with BMGF, The United States Agency for International Development (“USAID”) and UNITAID to reduce the price of the Company’s Multi-Drug Resistant Tuberculosis test to $9.98 for customers in the HBDC program. The Company received one-time payments of $3.5 million each from BMGF and USAID in 2012 and $3.2 million from UNITAID during 2013. Based on the terms of the agreements, the Company recognized revenue related to the BMGF and USAID agreements on a per-unit basis. Under the UNITAID agreement, the Company is recognizing the $3.2 million of revenue on a straight line basis over a period of ten years. For the years ended December 31, 2014, 2013 and 2012, the Company recognized revenue of $0.3 million, $2.7 million, and $4.8 million, respectively, related to these three agreements.In determiningof the stock-based compensation expense, the Company uses the Black–Scholes model and a single option award approach, which requires the input of subjective assumptions. These assumptions include: estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of the Company’s common stock price over the expected term (expected volatility), the risk-free interest rate (interest rate), expected dividends and the number of shares subject to options that will ultimately not complete their vesting requirements (forfeitures). Changes in the following assumptions can materially affect the estimate of the fair value of stock–based compensation.Expected term is determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedulesConsolidated Balance Sheets as prepaid expenses and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.Expected volatility is based on the blend of historical volatility of the past period equal to the Company’s expected termother current assets or accrued and the current implied volatility.Risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.Expected dividend is based on the Company’s expectation of issuing a dividend over the expected term. The Company has never issued dividends.Estimated forfeitures are based on voluntary termination behavior as well as analysis of actual option forfeitures.Foreign Currency HedgingThe Company uses forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue, cost of sales and operating expenses denominated in currencies other than the U.S. dollar. The Company also enters into non-qualifying foreign currency forward contracts to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities. The Company’s foreign currency cash flow hedges mature generally within twelve months. Company initially records the effective portion of the gain or loss on the derivative instrument in accumulatedis reported as a component of other comprehensive income or loss, a separate component of shareholders’ equity(loss) and subsequently reclassify these amountsis recognized into earnings within the same financial statement line item as the hedged item in the period during which the hedged transaction is realized. For non-qualifyingGains and losses on the derivative financial instruments the Company records the gainrepresenting either hedge ineffectiveness or loss for each period in earnings. During years ended December 31, 2014 and 2013, there was no significant impact to the results of operations as a result of ineffectivediscontinued cash flow hedges.5,267,000 and 4,145,0005,267,000 for the years ended December 31, 2015, 2014 and 2013, and 2012, respectively. Years ended December 31, 2014 2013 2012 $ (50,149 ) $ (17,965 ) $ (20,043 ) 70,069 67,485 65,812 $ (0.72 ) $ (0.27 ) $ (0.30 ) $ (50,149 ) $ (17,965 ) $ (20,043 ) 70,069 67,485 65,812 — — — 70,069 67,485 65,812 $ (0.72 ) $ (0.27 ) $ (0.30 ) Years ended December 31, 2015 2014 2013 Basic: Net loss $ (48,530 ) $ (50,149 ) $ (17,965 ) Basic weighted shares outstanding 71,928 70,069 67,485 Net loss per share $ (0.67 ) $ (0.72 ) $ (0.27 ) Diluted: Net loss $ (48,530 ) $ (50,149 ) $ (17,965 ) Basic weighted shares outstanding 71,928 70,069 67,485 Effect of dilutive securities: Stock options, ESPP, restricted stock units, restricted stock awards and convertible senior notes — — — Diluted weighted shares outstanding 71,928 70,069 67,485 Net loss per share $ (0.67 ) $ (0.72 ) $ (0.27 ) in the itsas taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it is more likely than not that it will generate sufficient taxable income in future periods to realize the benefit of its deferred tax assets.In connection with these matters, theThe Company regularly assesses on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded inIf the financial statements ifCompany determines that it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated.estimated, it records a liability in the financial statements. If a reasonable estimate of a known or probable loss cannot be made, but athe Company is able to estimate the potential range of probable losses can be estimated,loss, the Company records a liability based on the low-end of the estimated range of losses is recognized if no amount within the range is a better estimate than any other.loss. If a loss is not probable but is reasonably possible but not probable and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. The Company expenses legal fees as incurred.20172018 using one of two retrospective transition methods. The Company has not yet selected a transition method nor has it determined the potential effects on its consolidated financial statements.20142015 and December 31, 20132014 (in thousands): Level 1 Level 2 Level 3 Total $ 76,065 $ 20,598 $ — $ 96,663 52,220 52,220 — 64,202 — 64,202 — 56,096 — 56,096 15,003 15,003 — 9,208 — 9,208 — 196,729 — 196,729 — 3,887 — 3,887 — 12,713 — 12,713 — 22,679 — 22,679 — 39,532 — 39,532 — 4,807 — 4,807 — 79,731 — 79,731 $ 76,065 $ 300,945 $ — $ 377,010 $ — $ 3,812 $ — $ 3,812 $ — $ 3,812 $ — $ 3,812 Level 1 Level 2 Level 3 Total $ 64,772 $ 1,300 $ — $ 66,072 — 5,448 — 5,448 — 1,881 — 1,881 — 1,508 — 1,508 — 8,837 — 8,837 — 873 — 873 — 1,891 — 1,891 — 1,975 — 1,975 — 3,405 — 3,405 — 2,149 — 2,149 — 400 — 400 — 9,820 — 9,820 $ 64,772 $ 20,830 $ — $ 85,602 $ — $ 1,555 $ — $ 1,555 — — 310 310 $ — $ 1,555 $ 310 $ 1,865 Balance at December 31, 2015 Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 84,625 $ 27,943 $ — $ 112,568 Short-term investments: Asset-backed securities — 51,973 — 51,973 Corporate debt securities — 81,600 — 81,600 Commercial Paper — 48,762 — 48,762 Government agency securities — 12,684 — 12,684 Other securities — 15,128 — 15,128 Total short-term investments — 210,147 — 210,147 Foreign currency derivatives — 1,431 — 1,431 Investments: Asset-backed securities — 11,818 — 11,818 Corporate debt securities — 36,414 — 36,414 Government agency securities — 11,944 — 11,944 Other securities — 1,999 — 1,999 Total investments — 62,175 — 62,175 Total $ 84,625 $ 301,696 $ — $ 386,321 Liabilities: Foreign currency derivatives $ — $ 1,298 $ — $ 1,298 Total $ — $ 1,298 $ — $ 1,298 Balance at December 31, 2014 Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 76,065 $ 20,598 $ — $ 96,663 Short-term investments: Asset-backed securities — 52,220 — 52,220 Corporate debt securities — 64,202 — 64,202 Commercial paper — 56,096 — 56,096 Government agency securities — 15,003 — 15,003 Other securities — 9,208 — 9,208 Total short-term investments — 196,729 — 196,729 Foreign currency derivatives — 3,887 — 3,887 Investments: Asset-backed securities — 12,713 — 12,713 Corporate debt securities — 22,679 — 22,679 Government agency securities — 39,532 — 39,532 Other securities — 4,807 — 4,807 Total investments — 79,731 — 79,731 Total 76,065 300,945 — 377,010 Liabilities: Foreign currency derivatives $ — $ 3,812 $ — $ 3,812 Total $ — $ 3,812 $ — $ 3,812 20142015 and 2013,2014, were as follows (in thousands): Level 1 Level 2 Level 3 Total $ — $ 382,232 $ — $ 382,232 $ — $ 382,232 $ — $ 382,232 Level 1 Level 2 Level 3 Total $ — $ — $ — $ — $ — $ — $ — $ — Balance at December 31, 2015 Level 1 Level 2 Level 3 Total Liabilities: Convertible senior notes $ — $ 307,481 $ — $ 307,481 Total $ — $ 307,481 $ — $ 307,481 Balance at December 31, 2014 Level 1 Level 2 Level 3 Total Liabilities: Convertible senior notes $ — $ 382,232 $ — $ 382,232 Total $ — $ 382,232 $ — $ 382,232 2014.Level 3 liabilities, consisting2015.2014,2015, were classified as available-for-sale securities, with changes in fair value recognized in accumulated other comprehensive loss, a component of shareholders’ equity. Classification ofThe Company classifies its marketable debt securities as a current asset iscash equivalents, short-term investments or non-current investments based on the intended holding period and realizability of the investment.each instrument’s underlying effective maturity date. The following tables summarize available-for-sale marketable securities (in thousands): Cost Gross Unrealized
Gain Gross Unrealized
Loss Estimated Fair
Value $ 52,240 $ 3 $ (23 ) $ 52,220 76,683 12 — 76,695 64,244 2 (45 ) 64,201 15,000 3 — 15,003 9,206 2 — 9,208 (20,598 ) — — (20,598 ) $ 196,775 $ 22 $ (68 ) $ 196,729 $ 12,724 $ — $ (12 ) $ 12,712 22,709 — (29 ) 22,680 39,583 — (51 ) 39,532 4,815 — (8 ) 4,807 $ 79,831 $ — $ (100 ) $ 79,731 Cost Gross Unrealized
Gain Gross Unrealized
Loss Estimated Fair
Value $ 6,747 $ 1 $ — $ 6,748 1,881 — — 1,881 1,506 2 — 1,508 (1,300 ) — — (1,300 ) $ 8,834 $ 3 $ — $ 8,837 $ 1,890 $ 1 $ — $ 1,891 1,970 5 — 1,975 3,405 1 (1 ) 3,405 2,145 4 — 2,149 400 — — 400 $ 9,810 $ 11 $ (1 ) $ 9,820 ForBalance at December 31, 2015 Cost Short-term investments: Asset-backed securities $ 52,102 $ — $ (129 ) $ 51,973 Commercial paper 76,711 3 (9 ) 76,705 Corporate debt securities 81,777 — (177 ) 81,600 Government agency securities 12,701 — (17 ) 12,684 Other securities 15,122 7 (1 ) 15,128 Amounts classified as cash equivalents (27,943 ) — — (27,943 ) Total short-term investments $ 210,470 $ 10 $ (333 ) $ 210,147 Investments: Asset-backed securities $ 11,884 $ — $ (66 ) $ 11,818 Corporate debt securities 36,530 3 (119 ) 36,414 Government agency securities 11,999 — (55 ) 11,944 Other securities 2,001 — (2 ) 1,999 Total investments $ 62,414 $ 3 $ (242 ) $ 62,175 Balance at December 31, 2014 Cost Short-term investments: Asset-backed securities $ 52,240 $ 3 $ (23 ) $ 52,220 Commercial paper 76,683 12 — 76,695 Corporate debt securities 64,244 2 (45 ) 64,201 Government agency securities 15,000 3 — 15,003 Other securities 9,206 2 — 9,208 Amounts classified as cash equivalents (20,598 ) — — (20,598 ) Total short-term investments $ 196,775 $ 22 $ (68 ) $ 196,729 Investments: Asset-backed securities $ 12,724 $ — $ (12 ) $ 12,712 Corporate debt securities 22,709 — (29 ) 22,680 Government agency securities 39,583 — (51 ) 39,532 Other securities 4,815 — (8 ) 4,807 Total investments $ 79,831 $ — $ (100 ) $ 79,731 year ended December 31, 2014 and 2013, $115.9 million and $2.5 million, respectively, of proceeds from salessale of marketable securities were collected. The Company determines gains$52.2 million and losses from sales of marketable securities based on specific identification of$115.9 million for the securities sold.years ended December 31, 2015 and 2014, respectively. Gross realized gains and losses from sales of marketable securities, all of which are reported as a component of “Interest and other“Other income net”(expense)” in the Consolidated Statements of Operations, were for the years ended December 31, 20142015 and 20132014 (in thousands): Years Ended December 31, 2014 2013 $ 36 $ 2 — — $ 36 $ 2 Years Ended December 31, 2015 2014 Gross realized gains $ 26 $ 36 Gross realized losses — — Realized gains, net $ 26 $ 36 20142015 and December 31, 2013,2014, and the duration of time that such losses had been unrealized (in thousands) were: Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 54,580 $ (35 ) $ — $ — $ 54,580 $ (35 ) 79,360 (74 ) — — 79,360 (74 ) 39,532 (51 ) — — 39,532 (51 ) 4,807 (8 ) — — 4,807 (8 ) $ 178,279 $ (168 ) $ — $ — $ 178,279 $ (168 ) Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 600 $ — $ — $ — $ 600 $ — 1,180 — — — 1,180 — 1,104 (1 ) — — 1,104 (1 ) 200 — — — 200 — $ 3,084 $ (1 ) $ — $ — $ 3,084 $ (1 ) Balance at December 31, 2015 Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Asset-backed securities $ 57,866 $ (192 ) $ 5,923 $ (3 ) $ 63,789 $ (195 ) Corporate debt securities 101,701 (289 ) 8,911 (7 ) 110,612 (296 ) Government agency securities 24,628 (72 ) — — 24,628 (72 ) Commercial paper 11,374 (9 ) — — 11,374 (9 ) Other securities 7,496 (3 ) — — 7,496 (3 ) Total $ 203,065 $ (565 ) $ 14,834 $ (10 ) $ 217,899 $ (575 ) Balance at December 31, 2014 Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Asset-backed securities $ 54,580 $ (35 ) $ — $ — $ 54,580 $ (35 ) Corporate debt securities 79,360 (74 ) — — 79,360 (74 ) Government agency securities 39,532 (51 ) — — 39,532 (51 ) Other securities 4,807 (8 ) — — 4,807 (8 ) Total $ 178,279 $ (168 ) $ — $ — $ 178,279 $ (168 ) has evaluated suchmarketable securities, which consist of investments in asset-backed securities, corporate debt securities, government agency securities, commercial paper, and other securities as of December 31, 2015 and 2014 and has determined that there was no indication of other-than-temporary impairments. This determination was based on several factors, including the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the debt issuer, and the Company’s intent and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.20142015 and December 31, 2013,2014, by contractual maturity (in thousands): December 31, 2014 December 31, 2013 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value $ 150,133 $ 150,105 $ 10,134 $ 10,137 135,675 135,566 9,810 9,820 11,396 11,387 — — 297,204 297,058 19,944 19,957 — — 55 55 $ 297,204 $ 297,058 $ 19,999 $ 20,012 December 31, 2015 December 31, 2014 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Debt securities: Mature in one year or less $ 186,311 $ 186,118 $ 150,133 $ 150,105 Mature after one year through three years 106,377 106,086 135,675 135,566 Mature in more than three years 8,139 8,061 11,396 11,387 Total 300,827 300,265 297,204 297,058 business exposure to foreign currency exchange risk. The Company may enter into foreign currency forward contracts to offset some of the foreign exchange risk on expected future cash flows on certain forecasted revenue and cost of salesexpenses and on certain existing assets and liabilities.The Company records all derivatives in the Consolidated Balance Sheet at fair value. The Company’s accounting treatment of these instruments is based on whether the instruments are designated as hedge or non-hedge instruments. For derivative instruments that are designated and qualify as cash flow hedges, the Company initially records the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss, a separate component of shareholders’ equity and subsequently reclassify these amounts into earnings within the same financial statement line item as the hedged item in the period during which the hedged transaction is realized. The ineffective portions of cash flow hedges are recorded in foreign currency exchange loss and other, net. Gains and losses related to derivatives that are designated as hedging instruments are recorded in the financial statement line item to which the derivative relates.gainloss of $0.2$0.4 million and a net deferred lossgain of $0.6$0.2 million associated with cash flow hedges recorded in AOCI as of December 31, 20142015 and December 31, 2013,2014, respectively. Deferred gains and losses associated with cash flow hedges of forecasted foreign currency revenue are recognized as a component of revenuesrevenue in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of forecasted expenses are recognized as a component of cost of sales, research and development expense, sales and marketing expense and general and administrative expense in the same period as the related expenses are recognized. The Company’s hedged transactions as of December 31, 20142015 are expected to occur within twelve months.2013 and 2012.2013 and 2012,2013, the Company recognized a gain of $5.2 million, $2.3 million, $0.1 million, and $0.4$0.1 million respectively, as a component of foreign currency exchange loss and other, net. These amounts represent the net gain or loss on the derivative contracts and do not include changes in the related exposures or ineffective portion or amounts excluded from the effectiveness testing of cash flow hedges.$117.2$117.6 million and $96.6$117.2 million as of December 31, 20142015 and 2013,2014, respectively. The notional principle amounts of the Company’s outstanding derivative instruments not designated as cash flow hedges is $30.4$25.9 million and $24.2$30.4 million as of December 31, 2015 and 2014, and 2013, respectively.20142015 and 20132014 (in thousands): December 31, 2014
Instruments Total Fair Value $ 3,887 $ — $ 3,887 (3,685 ) (127 ) (3,812 ) December 31, 2013 Fair Value of Derivates
Designated as Hedge
Instruments Fair Value of Derivates
Not Designated as Hedge
Instruments Total Fair Value $ 782 $ 91 $ 873 (1,446 ) (109 ) (1,555 ) December 31, 2015 Total Fair Value Derivative Assets (a): Foreign exchange contracts $ 1,390 $ 41 $ 1,431 Derivative Liabilities (b): Foreign exchange contracts (1,250 ) (48 ) (1,298 ) December 31, 2014 Fair Value of Derivatives
Designated as Hedge
Instruments Fair Value of Derivatives
Not Designated as Hedge
Instruments Total Fair Value Derivative Assets (a): Foreign exchange contracts $ 3,887 $ — $ 3,887 Derivative Liabilities (b): Foreign exchange contracts (3,685 ) (127 ) (3,812 ) a) The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as other current assets in the Consolidated Balance Sheets. b) The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued other liabilities in the Consolidated Balance Sheets. 20142015 and 20132014 (in thousands): Years Ended Gain (Loss) Recognized in
OCI - Effective Portion Gain (Loss) Reclassified
from AOCI into Income -
Effective Portion Loss Recognized - Ineffective Portion
and Amount Excluded from Effectiveness Testing December 31,
2014 December 31,
2013 December 31,
2014 (a) December 31,
2013 (b) Location December 31,
2014 December 31,
2013 $ 146 $ (118 ) $ (735 ) $ 427
Foreign currency
exchange loss
and other, net
$ (46 ) $ (10 ) $ 146 $ (118 ) $ (735 ) $ 427 $ (46 ) $ (10 ) Years Ended December 31, 2015 2014 2015 (a) 2014 (b) Location 2015 2014 Cash flow hedges: Foreign exchange contracts $ (1,303 ) $ 146 $ (665 ) $ (735 ) $ (236 ) $ (46 ) Total $ (1,303 ) $ 146 $ (665 ) $ (735 ) $ (236 ) $ (46 ) a) Includes gains and losses reclassified from AOCI into net income for the effective portion of cash flow hedges, of which a loss of $8.2 million within costs and operating expenses and a gain of $7.5 million within sales, respectively, were recognized within the Consolidated Statement of Operations for the year ended December 31, 2015. b) Includes gains and losses reclassified from AOCI into net income for the effective portion of cash flow hedges, of which a loss of $1.1 million within costs and operating expenses and a gain of $0.4 million within sales, respectively, were recognized within the Consolidated Statement of Operations for the year ended December 31, 2014. b)Includes gains and losses reclassified from AOCI into net income for the effective portion of cash flow hedges, of which a gain of $1.3 million within costs and operating expenses and a loss of $0.9 million within sales, respectively, were recognized within the Consolidated Statement of Operations for the year ended December 31, 2013.Intangible assets related to licenses are recorded at cost, less accumulated amortization. Intangible assets related to technology and other intangible assets acquired in acquisitions are recorded at fair value at the date of acquisition, less accumulated amortization. Intangible assets are amortized over their estimated useful lives, ranging from 3 to 15 years, on a straight-line basis. Amortization of intangible assets is primarily included in cost of sales, research and development and sales and marketing in the Consolidated Statements of Operations. Gross Carrying
Amount Accumulated
Amortization Net Carrying
Amount $ 13,594 $ (8,477 ) $ 5,117 8,613 (8,613 ) — 36,582 (10,259 ) 26,323 $ 58,789 $ (27,349 ) $ 31,440 $ 13,767 $ (6,787 ) $ 6,980 8,613 (8,613 ) — 15,748 (7,483 ) 8,265 $ 38,128 $ (22,883 ) $ 15,245 In 2014, the Balance, December 31, 2015 Licenses $ 11,454 $ (7,280 ) $ 4,174 Technology acquired in acquisitions 8,613 (8,613 ) — Customer relationships and other intangible assets acquired in acquisitions 35,849 (14,782 ) 21,067 $ 55,916 $ (30,675 ) $ 25,241 Balance, December 31, 2014 Licenses $ 13,594 $ (8,477 ) $ 5,117 Technology acquired in acquisitions 8,613 (8,613 ) — Customer relationships and other intangible assets acquired in acquisitions 36,582 (10,259 ) 26,323 $ 58,789 $ (27,349 ) $ 31,440 determined two acquired intangible assets were impaired, as there was no future use of the assets. As a result, the Company recorded andid not recognize any significant impairment expense of $0.1 million primarily to cost of salescharges in the Statement of Operations in the year ended December 31,2015 or 2014. In 2013, the Company determined an acquired intangible asset related to existing technology of one of the Company’s legacy products, as well as certain acquired technology assets, were impaired, as there was no future use of the assets. As a result, the Company recorded an impairment expense of $1.3 million primarily to cost of sales in the Statement of Operations in the year ended December 31, 2013.$5.4 million and $5.0$5.4 million for the years ended December 31, 2015, 2014 2013 and 2012,2013, respectively. The expected future annual amortization expense of intangible assets recorded on the Company’s consolidated balance sheet as of December 31, 20142015 is as follows (in thousands): Amortization
Expense $ 6,348 5,746 5,384 5,301 4,182 4,479 $ 31,440 For the Years Ending December 31, 2016 $ 5,816 2017 5,448 2018 5,118 2019 4,168 2020 3,891 Thereafter 800 Total expected future amortization $ 25,241 Theon October 1, 2014 in order to directly serve the smaller hospital market. The totalfor an aggregate purchase price for this transaction wasof $21.0 million, of which $18.0 million was paid in cash in 2014, and $3.0 million was retained subject to certain final price adjustments. This retained amount was recorded in “Accrued and other liabilities” in the Balance Sheet at December 31, 2014 and was paid in January, 2015. The Company accounted for the December 31 2014 2013 2012 $ (51,993 ) $ (19,802 ) $ (26,307 ) 4,401 2,985 4,979 $ (47,592 ) $ (16,817 ) $ (21,328 ) December 31 2015 2014 2013 United States $ (49,673 ) $ (51,993 ) $ (19,802 ) Foreign 2,406 4,401 2,985 Total $ (47,267 ) $ (47,592 ) $ (16,817 ) Years Ended December 31, 2014 2013 2012 $ (4 ) $ 56 $ — (92 ) 9 (150 ) (2,595 ) (1,770 ) (207 ) $ (2,691 ) $ (1,705 ) $ (357 ) $ — $ — $ 312 — — — 134 557 1,330 $ 134 $ 557 $ 1,642 $ (2,557 ) $ (1,148 ) $ 1,285 Years Ended December 31, 2015 2014 2013 Current Federal $ 100 $ (4 ) $ 56 State (199 ) (92 ) 9 Foreign (1,359 ) (2,595 ) (1,770 ) $ (1,458 ) $ (2,691 ) $ (1,705 ) Deferred Federal $ — $ — $ — State — — — Foreign 195 134 557 $ 195 $ 134 $ 557 Benefit (provision) for income taxes $ (1,263 ) $ (2,557 ) $ (1,148 ) Years Ended December 31, 2014 2013 2012 34.0 % 34.0 % 34.0 % -0.2 % 0.1 % -0.7 % -0.2 % 4.4 % 2.0 % -1.6 % -5.6 % -1.9 % -37.4 % -40.0 % -28.7 % 0.0 % 0.3 % 1.3 % -5.4 % -6.8 % 6.0 % Years Ended December 31, 2015 2014 2013 United States Federal statutory income tax rate 34.0 % 34.0 % 34.0 % State taxes, net of federal benefit (0.4 )% (0.2 )% 0.1 % Foreign income taxed at other than U.S. rates (1.2 )% (0.2 )% 4.4 % Change in liabilities for uncertain positions 0.4 % (1.6 )% (5.6 )% Change in valuation allowance (35.5 )% (37.4 )% (40.0 )% Other — % — % 0.3 % Effective tax rate (2.7 )% (5.4 )% (6.8 )% December 31, 2014 2013 $ 35,278 $ 36,314 5,342 3,115 12,199 4,808 11,884 10,112 14,850 13,792 14,641 15,341 9,300 6,984 103,494 90,466 (78,832 ) (90,466 ) (25,544 ) (927 ) $ (882 ) $ (927 ) December 31, 2015 2014 Net operating loss carryforwards $ 45,248 $ 35,278 Inventory 4,452 5,342 Reserves and Accruals 12,229 12,199 Fixed and Intangible Assets 13,816 11,884 Research and other credit carryforwards 18,081 14,850 Stock-based compensation expense 18,615 14,641 Other 8,243 9,300 Total deferred tax assets 120,684 103,494 Valuation allowance (98,902 ) (78,832 ) Net deferred tax assets 21,782 24,662 Acquired intangible assets (1,051 ) (960 ) Convertible debt discount (21,436 ) (24,584 ) Net deferred tax liability $ (705 ) $ (882 ) million and by $8.4 million during the years ended December 31, 2015, 2014 and 2013, respectively.2012, respectively.2014,2015, the Company had federal and state net operating loss carryforwards of $296.3$341.4 million and $386.5$366.1 million, respectively, which, if not utilized, will expire in the years 20152016 through 2034.2035. As of December 31, 2014,2015, the Company had federal research and development tax credits of $11.6$13.1 million, which expire in the years 2018 through 2034,2035, and state research and development tax credits of $13.8$15.2 million, which carry forward indefinitely. The Company also had foreign tax credits of $0.1$1.6 million which expires in the year 2019.$8.8$4.5 million and $5.2$8.8 million at December 31, 20142015 and 2013,2014, respectively, are considered to be indefinitely reinvested, and, accordingly, no provisions for federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both federal income taxes, subject to an adjustment for foreign income tax credits and withholding taxes payable to various foreign countries. The tax impact of the distribution of such foreign earnings to the United States parent would not be significant as the Company’s net operating loss carryforward amount exceeds the amount of undistributed earnings.Sweden.France. Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its consolidated financial statements for any additional taxes that the Company may be required to pay as a result of such examination.20142015 remain open to examination. In addition, the Company files tax returns in multiple foreign taxing jurisdictions with open tax years ranging from 20092010 to 2015. During 2015, a tax audit concluded in Sweden for the years 2012 through 2014. 2014 2013 2012 $ 9,241 $ 7,397 $ 6,979 1,245 1,844 829 (188 ) — (276 ) — — (64 ) — — (71 ) $ 10,298 $ 9,241 $ 7,397 2015 2014 2013 Balance at beginning of year $ 10,298 $ 9,241 $ 7,397 Increase related to current year tax positions 907 1,245 1,844 Decrease for tax positions of prior years (189 ) (188 ) — Decrease due to lapse of statute — — — Decrease due to settlements (431 ) — — Balance at end of year $ 10,585 $ 10,298 $ 9,241 20142015 and 2013,2014, the total gross unrecognized tax benefits were $10.3$10.6 million and $9.2$10.3 million, respectively, which, if recognized, would affect the Company’s effective tax rate, before consideration of certain valuation allowances. The Company anticipates that the total unrecognized tax benefits will not significantly change due to the settlement of audits and the expiration of statutes of limitations in the 12 months following December 31, 2014.TheRelated to the unrecognized tax benefits noted above, the Company recognizesaccrued penalties and interest of $0.3 million during 2015 and in total, as of December 31, 2015, has recognized a liability for penalties related to uncertain tax positions in income tax expense. Inand interest of $0.4 million. During 2014 2013 and 2012,2013, the Company did not recognize any significant interest or penalties related to uncertain tax positions. As of December 31, 2014 2013 and 2012,2013, the Company had accrued no significant interest or penalties.precedingpreceeding August 1, 2020, the Notes will be convertible at the option of holders during certain periods, only upon satisfaction of certain conditions set forth below. On or after August 1, 2020, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion rate at any time regardless of whether the conditions set forth below have been met.2014,2015, the Notes are not yet convertible.as of December 31, 2014 (in thousands): $ 345,000 (66,787 ) $ 278,213 73,013 Year Ended December 31, Liability component: 2015 2014 Principal $ 345,000 $ 345,000 Less: debt discount, net of amortization (57,137 ) (66,787 ) Net carrying amount $ 287,863 $ 278,213 Equity component (a) 73,013 73,013 a) Recorded in the consolidated balance sheet within additional paid-in capital, net of $2.0 million transaction costs in equity. Year ended December 31, 2014 $ 3,844 387 8,213 $ 12,444 Year Ended December 31, 2015 2014 1.25% coupon $ 4,312 $ 3,844 Amortization of debt transaction costs 602 387 Amortization of debt discount 9,650 8,213 $ 14,564 $ 12,444 2014,2015, the fair value of the Notes, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the Notes in an over-the-counter market (Level 2), and carrying value of debt instruments (carrying value excludes the equity component of the Company’s convertible notes classified in equity) were as follows (in thousands): December 31, 2014 December 31, 2013 Fair Value Carrying Value Fair Value Carrying Value $ 382,232 $ 278,213 $ — $ — December 31, 2015 December 31, 2014 Fair Value Carrying Value Fair Value Carrying Value Convertible Senior Notes $ 307,481 $ 287,863 $ 382,232 $ 278,213 $54.14$36.53 on December 31, 2014,2015, the if-converted value of the Notes was less than their respective principal amounts.20142015 and 2013,2014, the Company had notes payable outstanding of $1.2$1.0 million and $1.7$1.2 million related to a loan received from the Company’s landlord in Sweden for tenant improvements. The note carries an interest rate of 4%. There are no debt covenants associated with the note. The note payable balance will be repaid by 2016.20142015 (in thousands): Payments Due by Period Total Less Than 1
Year 1-3 Years 3-5 Years More Than
5 Years $ 79,042 $ 11,411 $ 23,597 $ 19,706 $ 24,328 43,271 43,271 — — — 3,395 559 1,183 295 1,358 373,031 4,313 8,625 8,625 351,468 $ 498,739 $ 59,554 $ 33,405 $ 28,626 $ 377,154 Payments Due by Period Total 1-3 Years 3-5 Years Operating leases $ 107,504 $ 13,711 $ 30,834 $ 23,045 $ 39,914 Purchase obligations 50,421 50,421 — — — Minimum royalties 11,354 635 975 940 8,804 Debt obligations 368,719 4,313 8,625 8,625 347,156 $ 537,998 $ 69,080 $ 40,434 $ 32,610 $ 395,874 As of December 31, 2014, the Company leased approximately 680,000 square feet ofprimarily in the United States. The building space the Company occupies is pursuant to leasesunder arrangements expiring up through May 2029. The Company’s manufacturing sites are located in the United States and Sweden. Certain of these lease arrangements contain escalation clauses whereby monthly rent increases over time. Rent expense is recognized on a straight-line basis over the lease period. As of December 31, 20142015 and 2013,2014, the Company accrued $1.1$2.0 million and $1.0$1.1 million, respectively, of asset retirement obligations for certain buildings currently under lease. The Company recorded approximately $0.4 million in new liability and $0.5 million of accretion expense in 2015 and there were no settlement or revision in the estimated cash flows in the current period. Net rent expense for all operating leases for the years ended December 31, 2015, 2014 and 2013 and 2012 was $10.9 million, $11.6 million and $10.2 million, and $8.4 million, respectively.reagents.obligationshas beenwas convened to address these issues in confidential proceedings. On July 30, 2013, the panel determined that it had jurisdiction to decide the claims, a determination that the Company appealed to the Swiss Federal Supreme Court. On October 2, 2013, the arbitration panel determined that it would proceed with the arbitration while this appeal was pending. On February 27, 2014 the Swiss Federal Supreme Court upheld the jurisdiction of the arbitration panel to hear the case, and the case is continuing. The Company believes that it has not violated any provision of the agreement and that the asserted claim of the 375 Patent is expired, invalid, unenforceable, and not infringed.sheet. However, givensheets. This continues to be the Company's best estimate for this potential loss as of December 31, 2015. If the Company were to incur a loss in the arbitration proceeding, depending on the ruling of the arbitrators, the Company could also be responsible for certain attorneys’ fees and interest; however, at this time, the Company is unable to estimate these potential amounts. Given the inherent uncertainty of arbitration and the nature of the claims in this matter, it is possible that wethe Company may incur an additional material charge, but an estimate of such a charge cannot be made at this time. The Company continues to strongly dispute Roche’s claims and intendintends to vigorously defend against them. various claims, complaints and legal actions that arise from time to time in the normal course of business. Other than as described above, the Company does not believe it is party to any currently pending legal proceedings that will result in a material adverse effect on its business. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.27, 2006,28, 2015, the Company’sCompany's shareholders approved the 20062015 Equity Incentive Plan ("2015 Plan"), which was approved by the Board in February 2006. On April 27,2015. The 2015 Plan replaced the 2006 Equity Incentive Plan ("2006 Plan") and, together with our 2012 Employee Stock Purchase Plan, are the Board also terminated the Company’s 1997 Stock Option Plan (“1997 Plan”). No new grants will be made under the 1997 Plan,only plans currently being used to provide stock-based incentive compensation to our eligible employees and non-employee directors. However, options or restricted stock units granted or shares issued under the 19972006 Plan that were outstanding on the date the 19972006 Plan was terminatedreplaced by the 2015 Plan will remain subject to the terms of the 19972006 Plan. Shares of common stock reserved for issuance under the 20062015 Plan include (i) an initial authorization of 3,800,0004,600,000 shares of common stock, (ii) any reserved shares reserved but unissuednot issued or subject to outstanding grants under the 19972006 Plan ason the effective date of the date the 1997 Plan was terminated andApril 28, 2015, (iii) shares that are subject to options or other awards granted under the 19972006 Plan that are cancelled, forfeited, repurchased or that expire by their terms without shares being issued after the effective date for any reason, (iv) shares issued under the 2006 Plan before or after the effective date pursuant to the exercise of options or stock appreciation rights that are, after the effective date, forfeited, (v) shares issued under the 2006 Plan that are repurchased by the Company at the original issue price, and (vi) shares that are subject to options or expire after the 1997 Plan termination. On April 24, 2008, shareholders approved an increase to the number of shares of common stock reserved for issuanceother awards granted under the 2006 Plan by 1,800,000. On April 29, 2010, shareholders approvedthat otherwise terminate without shares being issued. The following shares may not be made available for future grant and issuance under the 2015 Plan: (a) shares withheld under the 2015 Plan to pay the exercise or purchase price or to satisfy tax withholding obligations; (b) shares not issued or delivered as a result of the net settlement of an increase tooutstanding stock option or stock appreciation right; or (c) shares repurchased with the proceeds of an option exercise price. The Company will reserve and keep available a sufficient number of shares to satisfy the requirements of common stock reserved for issuanceall outstanding awards granted under the 2006 Plan by 3,800,000. On April 24, 2012, shareholders approved an increase to the number2015 Plan.20062015 Plan, the Company may grant incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”), restricted stock awards (“RSAs”), stock bonus awards (“SBAs”), stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance share awards (“PSAs”PAs”). ISOs may be granted only to employees and directors of the Board, and all other awards may be granted to Company employees, andconsultants, directors, and to consultants, independent contractors and advisorsnon-employee directors of the Company foror any parent or subsidiary of the Company provided that they render bona fide services rendered.not in connection with the offer and sale of securities in a capital-raising transaction. Any award other than a stockan option or a SAR shall reduce the number of shares available for issuance by 2.17 shares, which differs from the 2006 Plan, which reduced it by only 1.75 shares for each share subject to such award (for a stockshares. Awards issued as an option or a SAR this ratio is 1:1).shall reduce the number of shares available for issuance by the number of shares underlying the award, regardless of the number of shares actually issued upon exercise of the award. The 20062015 Plan is administered by the Compensation and Organizational Development Committee of the Board (“Committee”("Committee"). or by the Board acting as the Committee. RSAs, SBAs, RSUs and PSAsPAs (collectively, “Full Value Equity Awards”) with vesting or settlement restrictions, as applicable, based upon completion of performance goals, have a minimum one-year vesting or settlement restriction period (the “One-Year Restriction Period”) and all other vesting or settlement restrictions, as applicable, for Full Value Equity Awards shall have a minimum three-year vesting or settlement restriction period (the “Three-Year Restriction Period” and together with the One-Year Restriction Period, the “Minimum Restriction Periods”). The Company may grant Full Value Equity Awards without taking into account the Minimum Restriction Periods, provided, that, the Company does not grant more than 10%5% of the aggregate shares of common stock reserved and available for grant and issuance underpursuant to the 20062015 Plan without thesuch Minimum Restriction Periods. The following provides a general description of each type of award under the 20062015 Plan. As of December 31, 2014,2015, the Company had 3,945,8636,260,590 shares of the Company’s common stock reserved for future issuance under the 20062015 Plan. of grant and then on a pro rata basis over the following 36 months.termination.termination on each RSU. If RSUs are awarded based on performance goals, the Committee will determine the extent that the RSU is earned. The number of shares subject to the RSU may be fixed or may vary depending on performance goals determined by the Committee. While the RSU shall be paid currently, under certain circumstances the Committee may permit the participant to defer settlement of the RSU.all plansthe 2015 Plan, the 2006 Plan and non-plan grants is as follows (in thousands, except weighted average exercise price and weighted average remaining contractual term): Shares Weighted
Average
Exercise Price Weighted
Average
Remaining
Contractual Term
(in years) Instrinsic
Value 7,699 $ 17.54 1,141 $ 36.68 (1,920 ) $ 12.93 (110 ) $ 32.23 6,810 $ 21.81 1,553 $ 38.55 (1,579 ) $ 16.19 (308 ) $ 32.19 6,476 $ 26.70 1,471 $ 46.36 (1,930 ) $ 19.72 (436 ) $ 40.64 5,581 $ 33.20 4.12 $ 116,854 3,122 $ 26.09 2.90 $ 87,580 5,385 $ 32.84 4.06 $ 114,721 Shares Outstanding December 31, 2012 6,810 $ 21.81 Granted 1,553 $ 38.55 Exercised (1,579 ) $ 16.19 Forfeited (308 ) $ 32.19 Outstanding December 31, 2013 6,476 $ 26.70 Granted 1,471 $ 46.36 Exercised (1,930 ) $ 19.72 Forfeited (436 ) $ 40.64 Outstanding December 31, 2014 5,581 $ 33.20 Granted 1,332 $ 55.36 Exercised (1,084 ) $ 23.97 Forfeited (387 ) $ 47.32 Outstanding December 31, 2015 5,442 $ 39.46 4.05 $ 20,116 Exercisable, December 31, 2015 3,195 $ 32.51 2.93 $ 19,899 Vested and expected to vest December 31, 2015 5,278 $ 39.11 4.00 $ 20,102 $54.14$36.53 on the last trading day of 20142015 and the exercise price, times the number of shares for options where the exercise price is below the closing stock price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised was $34.1 million, $58.2 million, $37.0 million, and $54.5$37.0 million for the years ended December 31, 2015, 2014, and 2013, and 2012, respectively.award activity, which consists of RSAs and RSUs activity under the 2015 Plan and the 2006 Plan and non-plan RSA and RSU grants, is as follows (in thousands, except weighted average grant date fair value): Shares Weighted
Average
Grant Date
Fair Value 596 $ 25.87 271 $ 36.90 (209 ) $ 27.62 (16 ) $ 34.29 642 $ 29.74 412 $ 38.23 (262 ) $ 29.81 (50 ) $ 34.17 742 $ 34.13 377 $ 46.83 (327 ) $ 34.11 (94 ) $ 39.35 698 $ 40.30 Shares Outstanding December 31, 2012 642 $ 29.74 Granted 412 $ 38.23 Vested (262 ) $ 29.81 Cancelled (50 ) $ 34.17 Outstanding December 31, 2013 742 $ 34.13 Granted 377 $ 46.83 Vested (327 ) $ 34.11 Cancelled (94 ) $ 39.35 Outstanding December 31, 2014 698 $ 40.30 Granted 737 $ 52.23 Vested (317 ) $ 39.65 Cancelled (118 ) $ 47.56 Outstanding December 31, 2015 1,000 $ 48.44 RSAs and RSUs granted in 2013, 2014, 2013 and 2012,through April 28, 2015 reduced the number of shares available for future grant by a factor of 1.75 for each share subject to such award. Based on the closing price per share of the Company’s common stock of $54.14$36.53 and $46.67$54.14 on the last trading day in 20142015 and in 2013,2014, respectively, the total pre-tax intrinsic value of all outstanding stock awards as of December 31, 20142015 and December 31, 20132014 was $37.8$36.5 million and $34.5$37.8 million, respectively. Total fair value of stock awards vested was $16.0 million, $14.8 million, $10.0 million, and $7.4$10.0 million for the years ended December 31, 2015, 2014 and 2013, and 2012, respectively.The 2000 Employee Stock Purchase Plan (“2000 ESPP”) was adopted in April 2000, amended in June 2003, April 2009 and April 2012 and terminated effective August 1, 2012. The 2000 ESPP permitted eligible employees of the Company and its participating subsidiaries to purchase common stock at a discount up to a maximum of 15% of compensation through payroll deductions during defined two-year offering periods consisting of four, six-month purchase periods. The price at which stock was purchased under the 2000 ESPP was equal to 85% of the fair market value of the common stock on the first day of the two-year offering period or the last day of the six-month purchase period, whichever was lower.2014,2015, the Company has reserved shares of common stock for future issuance as follows (in thousands): Payments Due by Period
Total $ 6,278 3,946 2,210 $ 12,434 2015 Plan: Options, RSUs and awards outstanding for all plans 6,441 Reserved for future grants 6,261 2012 ESPP 2,495 $ 15,197 2013 and 20122013 was estimated using the following assumptions: Years Ended December 31, 2014 2013 2012 4.40 4.41 4.38 0.38 0.44 0.53 0.00 % 0.00 % 0.00 % 1.71 % 0.90 % 0.80 % 6.75 % 7.61 % 7.63 % $ 15.71 $ 14.17 $ 15.70 1.24 1.25 1.25 0.33 0.42 0.54 0.00 % 0.00 % 0.00 % 0.22 % 0.19 % 0.18 % $ 12.13 $ 12.10 $ 13.13 Years Ended December 31, 2015 2014 2013 OPTION SHARES: Expected Term (in years) 4.46 4.40 4.41 Volatility 0.36 0.38 0.44 Expected Dividends — % — % — % Risk Free Interest Rates 1.47 % 1.71 % 0.90 % Estimated Forfeitures 6.14 % 6.75 % 7.61 % Weighted Average Fair Value $ 17.73 $ 15.71 $ 14.17 ESPP SHARES: Expected Term (in years) 1.20 1.24 1.25 Volatility 0.34 0.33 0.42 Expected Dividends — % — % — % Risk Free Interest Rates 0.39 % 0.22 % 0.19 % Weighted Average Fair Value $ 16.43 $ 12.13 $ 12.10 2013 and 20122013 (in thousands).: Years Ended December 31, 2014 2013 2012 $ 4,086 $ 2,930 $ 3,087 9,516 8,540 7,563 6,048 5,636 5,032 12,557 10,529 8,814 $ 32,207 $ 27,635 $ 24,496 Years Ended December 31, 2015 2014 2013 Cost of sales $ 4,423 $ 4,086 $ 2,930 Research and development 10,776 9,516 8,540 Sales and marketing 7,819 6,048 5,636 General and administrative 14,029 12,557 10,529 Total stock-based compensation expense $ 37,047 $ 32,207 $ 27,635 $3.6 million, and $2.4$3.6 million for the years ended December 31, 2015, 2014 and 2013, and 2012, respectively.2014,2015, the total compensation expense related to unvested stock option grants under the Company’s 19972006 Plan and 20062015 Plan but not yet recognized was $32.0$28.3 million, which is net of estimated forfeitures of $6.6$2.5 million. This expense will be amortized on a straight line basis over a weighted average period of 2.62.5 years and will be adjusted for subsequent changes in estimated forfeitures.2014,2015, the total compensation expense related to RSAs and RSUs under the 2006 Plan and 2015 Plan not yet recognized was $23.4$37.6 million, which is net of estimated forfeitures of $4.9$4.2 million. This expense will be amortized on a straight line basis over a weighted average period of 2.62.9 years and will be adjusted for subsequent changes in estimated forfeitures.2014,2015, the total compensation expense related to options to purchase the Company’s common shares under the 2012 ESPP but not yet recognized was $1.6$2.1 million. The expense will be amortized on a straight-line basis over the two-year offering period, as such term is defined in the 2012 ESPP.and 2012 were $2.4 million, $1.9 million, and $1.5 million, and $1.2 million, respectively.(1) between 5% and 75% of their base salary and(2) between 5% and 100% of any cash-based incentive awards payable to a participant.(1) between 5% and 75% of their base salary and (2) between 5% and 100% of any cash-based incentive awards payable to a participant. hashad a balance of $1.2 million and $0.4 million as of December 31, 2014.total revenue (in thousands): Years Ended December 31, 2014 2013 2012 $ 90,849 $ 76,763 $ 65,111 379,292 324,529 266,101 $ 470,141 $ 401,292 $ 331,212 The following table summarizes revenue in the Clinical and Non-Clinical markets (in thousands): Years Ended December 31, 2014 2013 2012 $ 84,695 $ 66,980 $ 52,805 356,427 292,941 233,503 $ 441,122 $ 359,921 $ 286,308 29,019 41,371 44,904 $ 470,141 $ 401,292 $ 331,212 Years Ended December 31, 2015 2014 2013 Revenue by market: Clinical Systems $ 82,999 $ 84,695 $ 66,980 Clinical Reagents 426,914 356,427 292,941 Total Clinical $ 509,913 $ 441,122 $ 359,921 Non-Clinical 28,663 29,019 41,371 Total revenue $ 538,576 $ 470,141 $ 401,292 Years Ended December 31, 2014 2013 2012 $ 247,120 $ 212,362 $ 190,021 24,905 36,998 38,632 272,025 249,360 228,653 $ 194,002 $ 147,559 $ 96,286 4,114 4,373 6,273 198,116 151,932 102,559 $ 470,141 $ 401,292 $ 331,212 Years Ended December 31, 2015 2014 2013 Geographic revenue information: North America Clinical $ 290,374 $ 247,120 $ 212,362 Non-Clinical 27,635 24,905 36,998 Total North America 318,009 272,025 249,360 International Clinical $ 219,539 $ 194,002 $ 147,559 Non-Clinical 1,028 4,114 4,373 Total International 220,567 198,116 151,932 Total revenue $ 538,576 $ 470,141 $ 401,292 revenuesrevenue of $306.2 million, $264.1 million and $237.8 million and $216.6 million for revenues from U.S.sales to United States customers for the years ended December 31, 2015, 2014 and 2013, and 2012. The Company recognized salesrespectively. No single country outside of $37.3 million, $41.6 million, and $22.8 million to customers in South Africathe United States represented more than 10% of the Company’s total revenue for the years ended December 31, 2015, 2014 2013, and 2012, respectively. As2013. December 31, 2015 December 31, 2014 United States $ 108,210 96,038 Other regions 19,429 19,727 Total long-lived assets $ 127,639 $ 115,765 20142015 and 2013, the Company has long lived-assets (excluding intangible assets) of $96.0 million and $63.9 million, respectively, which reside in the United States. As of December 31, 2014 and 2013, the Company has long-lived assets of $19.8 million and $21.0 million, respectively, which reside primarily in Sweden and countries in the European Monetary Union.$7.5 million and $7.2$7.5 million for the years ended December 31, 2015, 2014, 2013 2012 respectively. The total revenuesrevenue and cost of sales related to these cartridge sales are included in the respective balances in the consolidated statement of operations.rapidfast test that can detect mycobactriummycobacterium tuberculosis and associated rifampin resistance from human sputum samples. Under the agreement, the Company was responsible for the development of a 6-color GeneXpert instrument to accomplish such test and the development of an enhanced manufacturing line for the manufacture of test cartridges used in the test. FIND reimbursed the Company at agreed upon amounts. The term of the development portion of the agreement was 30 months, which was subsequently extended an additional five months. In July 2009, the agreement was extended for another year for further specified enhancements. The supply term of the agreement is for 12 years, unless terminated by either party in accordance with relevant provisions of the agreement. In January 2011, the agreement was extended for another year and a new agreement was signed for the development of the Company’s Xpert HIV Viral Load test. Under the Xpert HIV agreement, FIND agreed to fund $5.1 million in development costs throughout the two-year contract. In December 2014, the Xpert HIV-1 Viral Load achieved CE-IVD status under the European Directive onIn Vitro Diagnostic Medical Devices.In the first quarter of 2011, the Company and FIND entered into a $1.0 million agreement with FIND to fund the development of a remote calibration kit for its GeneXpert system family.Mycobacteriummycobacterium tuberculosis (TB)("TB") with increased sensitivity to aid in detection of patients with smear-negative TB, which is often associated with HIV co-infection. Xpert MTB/RIF Ultra will run on existing 6-color GeneXpert Systems. Under the Xpert MTB/RIF Ultra agreement, FIND agreed to fund up to $3.0 million in development costs throughout the two-year contract. and $2.2 million in “System and other revenues” for the years ended December 31, 2015, 2014 and 2013, and 2012, respectively.During2013 and 2012,2013, the Company recognized revenue of $0.3 million, $2.7$0.3 million and $4.8$2.7 million, respectively, related to the BMGF, USAID and UNITAID agreements. Xpert Ebolarapidfast test that could be run on the Company’s installed base of GeneXpert Systems in developing countries. In addition to Xpert Ebola, the Company is evaluating deployment of the Company’s RemoteXpert cloud-based monitoring software. For the year ended December 31, 2014,2015, the Company recognized revenue of $0.5$2.9 million related to the agreement. The $1.9 million unused cash is contractually restricted for use only to develop the Xpert Ebola test in accordance with our agreement with BMGF and it is recorded as restricted cash and included in prepaid expenses and other current assets.TheA director of the Company was the President and Chief Executive Officer of Geisinger is also a directoruntil the second quarter of the Company.2015. Net revenues recorded from sales to Geisinger were approximately $2.4 million, $1.7 million, and $1.5 million for the years ended December 31, 2015, 2014, and 2013, respectively. There was no significant revenue for the year ended December 31, 2012. As of December 31, 2014,2015, the Company had accounts receivable of approximately $0.2$0.3 million due from Geisinger.CEPHEID Mar 31 June 30 Sep 30 Dec 31 (Unaudited) (In thousands, except per share data) $ 106,907 $ 116,503 $ 115,209 $ 131,522 53,083 59,568 56,791 $ 59,885 1,291 649 1,291 1,923 21,740 23,998 23,541 27,572 23,458 23,502 23,913 26,975 13,667 14,340 13,069 13,971 — — — 20,000 113,239 122,057 118,605 150,326 (6,332 ) (5,554 ) (3,396 ) (18,804 ) (2,291 ) (3,370 ) (3,573 ) (4,272 ) (8,623 ) (8,924 ) (6,969 ) (23,076 ) (680 ) (919 ) (266 ) (692 ) $ (9,303 ) $ (9,843 ) $ (7,235 ) $ (23,768 ) (0.13 ) (0.14 ) (0.10 ) (0.34 ) $ (0.13 ) $ (0.14 ) $ (0.10 ) $ (0.34 ) 69,272 69,968 70,326 70,689 69,272 69,968 70,326 70,689 $ 106,907 $ 116,503 $ 115,209 $ 131,522 (53,083 ) (59,568 ) (56,791 ) (59,885 ) $ 53,824 $ 56,935 $ 58,418 $ 71,637 Mar 31 June 30 Sep 30 Dec 31 (Unaudited) (In thousands, except per share data) $ 91,938 $ 96,012 $ 100,081 $ 113,261 42,892 52,889 51,669 $ 60,483 2,110 1,425 1,410 2,567 17,727 18,572 18,558 25,340 19,126 19,105 19,788 21,922 9,763 9,612 9,490 12,854 91,618 101,603 100,915 123,166 320 (5,591 ) (834 ) (9,905 ) 374 (717 ) (200 ) (264 ) 694 (6,308 ) (1,034 ) (10,169 ) (381 ) (272 ) (347 ) (148 ) $ 313 $ (6,580 ) $ (1,381 ) $ (10,317 ) 0.00 (0.10 ) (0.02 ) (0.15 ) $ 0.00 $ (0.10 ) $ (0.02 ) $ (0.15 ) 66,824 67,295 67,573 68,230 69,406 67,295 67,573 68,230 $ 91,938 $ 96,012 $ 100,081 $ 113,261 (42,892 ) (52,889 ) (51,669 ) (60,483 ) $ 49,046 $ 43,123 $ 48,412 $ 52,778 Mar 31 June 30 Sept 30 Dec 31 2015 Total revenue $ 132,637 $ 132,475 $ 126,465 $ 146,999 Costs and operating expenses: Cost of sales 61,201 69,377 67,681 71,605 Collaboration profit sharing 1,267 1,326 1,286 1,947 Research and development 23,986 28,092 32,909 30,769 Sales and marketing 25,936 28,078 28,664 32,690 General and administrative 15,642 16,352 15,401 15,229 Total cost and operating expenses 128,032 143,225 145,941 152,240 Income (loss) from operations 4,605 (10,750 ) (19,476 ) (5,241 ) Other expense, net (4,175 ) (4,726 ) (3,601 ) (3,903 ) Income (loss) before income tax expense 430 (15,476 ) (23,077 ) (9,144 ) (Provision for) benefit from income taxes 476 (1,254 ) 176 (661 ) Net Income (loss) $ 906 $ (16,730 ) $ (22,901 ) $ (9,805 ) Basic net income (loss) per share 0.01 (0.23 ) (0.32 ) (0.14 ) Diluted net income (loss) per share $ 0.01 $ (0.23 ) $ (0.32 ) $ (0.14 ) Weighted average shares used in computing basic net income (loss) per share 71,262 71,861 72,199 72,374 Weighted average shares used in computing diluted net income (loss) per share 73,189 71,861 72,199 72,374 Gross profit on revenue: Revenue $ 132,637 $ 132,475 $ 126,465 $ 146,999 Cost of sales (61,201 ) (69,377 ) (67,681 ) (71,605 ) $ 71,436 $ 63,098 $ 58,784 $ 75,394 Mar 31 June 30 Sept 30 Dec 31 2014 Total revenue $ 106,907 $ 116,503 $ 115,209 $ 131,522 Costs and operating expenses: Cost of sales 53,083 59,568 56,791 59,885 Collaboration profit sharing 1,291 649 1,291 1,923 Research and development 21,740 23,998 23,541 27,572 Sales and marketing 23,458 23,502 23,913 26,975 General and administrative 13,667 14,340 13,069 13,971 Legal contingencies — — — 20,000 Total cost and operating expenses 113,239 122,057 118,605 150,326 Loss from operations (6,332 ) (5,554 ) (3,396 ) (18,804 ) Other expense, net (2,291 ) (3,370 ) (3,573 ) (4,272 ) Loss before income tax expense (8,623 ) (8,924 ) (6,969 ) (23,076 ) Provision for income taxes (680 ) (919 ) (266 ) (692 ) Net loss $ (9,303 ) $ (9,843 ) $ (7,235 ) $ (23,768 ) Basic net loss per share (0.13 ) (0.14 ) (0.10 ) (0.34 ) Diluted net loss per share $ (0.13 ) $ (0.14 ) $ (0.10 ) $ (0.34 ) Weighted average shares used in computing basic net loss per share 69,272 69,968 70,326 70,689 Weighted average shares used in computing diluted net loss per share 69,272 69,968 70,326 70,689 Gross profit on revenue: Revenue $ 106,907 $ 116,503 $ 115,209 $ 131,522 Cost of sales (53,083 ) (59,568 ) (56,791 ) (59,885 ) $ 53,824 $ 56,935 $ 58,418 $ 71,637 2014,2015, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(a) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended). Based on the evaluation, we concluded that the design and operation of our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports filed and submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and 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.There were no significant changesfourth quarter of 2014.20152016 annual meeting of shareholders to be held on April 28, 2015.ITEM 11. EXECUTIVE COMPENSATION20152016 annual meeting of shareholders to be held on April 28, 2015.20152016 annual meeting of shareholders to be held on April 28, 2015.26, 2016. The information required by this item with respect to Item 201(d) of Regulation S-K regarding securities authorized for issuance under equity compensation plans is contained in Item 5 of Part I of this Annual Report on Form 10-K under the heading “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities—Equity Compensation Plan Information.”ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE20152016 annual meeting of shareholders to be held on April 28, 2015.20152016 annual meeting of shareholders to be held on April 28, 2015.(b)Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2014, 2013 and 2012. Balance at
Beginning of
Year Costs and
Expenses Deductions Balance at
End of Year (In thousands) $ 61 $ 135 $ (20 ) $ 176 176 63 (41 ) 198 198 44 (5 ) 237 Description Deductions (In thousands) Allowance for doubtful accounts: Year ended December 31, 2013 $ 176 $ 63 $ (41 ) $ 198 Year ended December 31, 2014 198 44 (5 ) 237 Year ended December 31, 2015 237 146 — 383 CEPHEID By: Corporate Controller and Acting Chief Financial Officer (Principal Financial and Accounting Officer) Chairman and Chief Executive Officer February 26, 201525, 2016John L. Bishop (Principal Executive Officer) /S/ DANIEL E. MADDEN February 26, 2015Daniel E. MaddenExecutive Vice President, Corporate Controller and Acting Chief Financial Officer (Principal Financial and Accounting Officer) February 25, 2016 Daniel E. Madden Director February 26, 201525, 2016Thomas L. Gutshall Director February 26, 201525, 2016Thomas D. Brown Director February 26, 201525, 2016Robert Easton Lead Independent Director February 26, 201525, 2016Cristina H. Kepner DEAN O. MORTONWAYNE G. PATERSON Director February 26, 201525, 2016Dean O. MortonWayne G. Paterson Executive Vice President and Chief Medical February 26, 201525, 2016David H. Persing, M.D., Ph.D. and Technology Officer and Director Director February 26, 201525, 2016Hollings C. Renton Director February 26, 201525, 2016Glenn D. Steele, Jr., M.D., Ph.D. 3.1 Certificate of Amendment of the Fifth Amended and Restated Articles of Incorporation of Cepheid and Fifth Amended and Restated Articles of Incorporation of Cepheid 10-Q 3.1 8/06/2014 3.2 Amended and Restated Bylaws 3.01 10/31/2011 3.3 Certificate of Determination specifying the terms of the Series A Junior Participating Preferred Stock of registrant, as filed with the Secretary of State to the State of California on October 2, 2002 3.02 10/4/2002 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Specimen Common Stock Certificate 4.01 7/31/2002 4.3 Indenture, dated as of February 10, 2014 between Cepheid and Wells Fargo Bank, National Association, as trustee 4.1 5/06/14 10.1* 1997 Stock Option Plan, as amended 333-106181 4.2 6/17/2003 10.2* 2000 Employee Stock Purchase Plan, as amended 10.01 10/31/2011 10.3* 2012 Employee Stock Purchase Plan 99.02 4/26/2012 10.4* 2006 Equity Incentive Plan, as amended, and restated 99.01 4/24/2014 10.5* Form of Indemnification Agreement between Cepheid and its officers and directors 333-34340 10.6 4/7/2000 10.6† License Agreement, dated March 4, 1997, between Cepheid and The Regents of the University of California, Lawrence Livermore National Laboratory 333-34340 10.9 6/7/2000 10.7† Thermal Cycler Supplier Agreement, dated April 15, 2000, between Cepheid and PE Biosystems, a division of PE Corporation 333-34340 10.16 5/18/2000 10.8† Collaboration Agreement between Applied Biosystems and Cepheid dated October 11, 2002 10.28 3/25/2003 10.9† IVD Products Patent License Agreement between Cepheid and F. Hoffmann-La Roche Ltd, effective July 1, 2004 10.28 8/9/2004 10.10† Real-Time Instrument Patent License Agreement between Applera Corporation and Cepheid, dated April 5, 2004 10.29 8/9/2004 10.11 Facility lease agreement between Cepheid and Teachers Insurance & Annuity Association of America, Inc. dated May 13, 2005 99.01 5/18/2005 10.12* Employment offer letter between Cepheid and David H. Persing dated July 21, 2005 99.01 7/26/2005 Description of Exhibit Form File No. Exhibit Filing Date 3.1 Certificate of Amendment of the Fifth Amended and Restated Articles of Incorporation of Cepheid and Fifth Amended and Restated Articles of Incorporation of Cepheid 10-Q 3.1 8/6/2014 3.2 Amended and Restated Bylaws 8-K 3.01 10/31/2011 3.3 Certificate of Determination specifying the terms of the Series A Junior Participating Preferred Stock of registrant, as filed with the Secretary of State to the State of California on October 2, 2002 8-A 3.02 10/4/2002 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Specimen Common Stock Certificate 10-Q 4.01 7/31/2002 4.3 Indenture, dated as of February 10, 2014 between Cepheid and Wells Fargo Bank, National Association, as trustee 10-Q 4.1 5/6/2014 10.1* 1997 Stock Option Plan, as amended S-8 333-106181 4.2 6/17/2003 10.2* 2012 Employee Stock Purchase Plan 8-K 99.02 4/26/2012 10.3* 2006 Equity Incentive Plan, as amended, and restated 8-K 99.01 4/24/2014 10.4* 2015 Equity Incentive Plan 10-Q 10.2 8/7/2015 10.5* Form of Indemnification Agreement between Cepheid and its officers and directors S-1 333-34340 10.6 4/7/2000 10.6† License Agreement, dated March 4, 1997, between Cepheid and The Regents of the University of California, Lawrence Livermore National Laboratory S-1 333-34340 10.9 6/7/2000 10.7† Thermal Cycler Supplier Agreement, dated April 15, 2000, between Cepheid and PE Biosystems, a division of PE Corporation S-1 333-34340 10.16 5/18/2000 10.8† Collaboration Agreement between Applied Biosystems and Cepheid dated October 11, 2002 10-K 10.28 3/25/2003 10.9† IVD Products Patent License Agreement between Cepheid and F. Hoffmann-La Roche Ltd, effective July 1, 2004 10-Q 10.28 8/9/2004 10.10† Real-Time Instrument Patent License Agreement between Applera Corporation and Cepheid, dated April 5, 2004 10-Q 10.29 8/9/2004 10.11 Facility lease agreement between Cepheid and Teachers Insurance & Annuity Association of America, Inc. dated May 13, 2005 8-K 99.01 5/18/2005 10.12* Employment offer letter between Cepheid and David H. Persing dated July 21, 2005 8-K 99.01 7/26/2005 10.13* Form of Stock Option Grant Agreement with certain executive officers of Cepheid approved by Cepheid’s Compensation and Organizational Development Committee of the Board of Directors on April 27, 2005 10-Q 10.3 8/4/2005 10.14* Employment Agreement dated January 24, 2007, by and between Cepheid and John L. Bishop 8-K 10.1 1/29/2007 10.15 Share Purchase Agreement dated February 14, 2007, by and between Cepheid, Altana Technology Projects GmbH, and Altana Pharma AG 8-K 2.1 2/20/2007 10.16* Employment Agreement dated February 6, 2008, by and between Cepheid and Andrew D. Miller 8-K 10.01 2/11/2008 10.17* Form of Change of Control Retention and Severance Agreement between Cepheid and each of its executive officers, as amended 10-K 10.18 2/27/2014 10.18 Office Lease dated February 28, 2008, between BRCP Caribbean Portfolio, LLC, and Cepheid 10-Q 10.1 5/7/2008 10.19* Employment offer letter between Cepheid and Warren C. Kocmond dated April 12, 2013 8-K 10.01 5/7/2013 10.20* Employment offer letter between Cepheid and Dan Madden dated May 14, 2014 10-Q 10.10 10/30/2015 10.21* Employment offer letter between Cepheid and Ilan Daskal dated April 2, 2015 8-K 10.01 4/7/2015 10.22* Separation Agreement between Cepheid and Ilan Daskal dated August 21, 2015 10-Q 10.20 10/30/2015 10.23* Employment offer letter between Cepheid and Scott Campbell dated May 24, 2010 X 10.24 Lease Agreement dated September 18, 2015, by and between Cepheid and The Irvine Company LLC 10-Q 10.3 10/30/2015 10.25† Purchase Agreement, dated as of September 30, 2014, between Cepheid and Laboratory Supply Company 10-Q 10.1 11/4/2014 10.26 Base Capped Call Transaction Confirmation, dated as of February 4, 2014 between Cepheid and Morgan Stanley & Co. International plc 8-K 99.01 2/10/2014 10.27 Additional Capped Call Transaction Confirmation, dated as of February 5, 2014 between Cepheid and Morgan Stanley & Co. International plc 8-K 99.02 2/10/2014 10.28 Base Capped Call Transaction Confirmation, dated as of February 4, 2014 between Cepheid and Jefferies LLC 8-K 99.03 2/10/2014 10.29 Additional Capped Call Transaction Confirmation, dated as of February 5, 2014 between Cepheid and Jefferies LLC 8-K 99.04 2/10/2014 10.30 Base Capped Call Transaction Confirmation, dated as of February 4, 2014 between Cepheid and Goldman, Sachs & Co 8-K 99.05 2/10/2014 10.31 Additional Capped Call Transaction Confirmation, dated as of February 5, 2014 between Cepheid and Goldman, Sachs & Co 8-K 99.06 2/10/2014 21.1 List of Subsidiaries X 23.1 Consent of Independent Registered Public Accounting Firm X 24.1 Power of Attorney (see Signature page to this annual report) X 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X ExhibitNumberDescription of ExhibitFormFile No.ExhibitFiling DateFiledHerewith10.13*Form of Stock Option Grant Agreement with certain executive officers of Cepheid approved by Cepheid’s Compensation and Organizational Development Committee of the Board of Directors on April 27, 200510-Q10.38/4/200510.14*Employment Agreement dated January 24, 2007, by and between Cepheid and John L. Bishop8-K10.11/29/2007 10.15* Share Purchase Agreement dated February 14, 2007, by and between Cepheid, Altana Technology Projects GmbH, and Altana Pharma AG 8-K 2.1 2/20/2007 10.16* Employment Agreement dated February 6, 2008, by and between Cepheid and Andrew D. Miller 8-K 10.01 2/11/2008 10.17* Form of Change of Control Retention and Severance Agreement between Cepheid and each of its executive officers, as amended 10-K 10.18 2/27/2014 10.18 Office Lease dated February 28, 2008, between BRCP Caribbean Portfolio, LLC, and Cepheid 10-Q 10.1 5/7/2008 10.19† Confidential Settlement Agreement, dated as of September 24, 2012 by and between Cepheid and Abaxis, Inc. 10-Q 10.1 11/2/2012 10.20* Employment offer letter between Cepheid and Warren C. Kocmond dated April 12, 2013 8-K 10.01 5/7/2013 10.21* Employment offer letter between Cepheid and Michael Fitzgerald dated December 22, 2011 10-K 10.27 2/27/2014 10.22* Employment offer letter between Cepheid and James Post dated November 11, 2013. 10-K 10.27 2/27/2014 10.23* Separation Agreement, effective October 29, 2014, between Cepheid and James Post. X 10.24* Offer Letter between Cepheid and Peter Farrell. 10-Q 10.1 8/06/2014 10.25† Purchase Agreement, dated as of September 30, 2014, between Cepheid and Laboratory Supply Company. 10-Q 10.1 11/4/2014 10.26 Base Capped Call Transaction Confirmation, dated as of February 4, 2014 between Cepheid and Morgan Stanley & Co. International plc. 8-K 99.01 2/10/2014 10.27 Additional Capped Call Transaction Confirmation, dated as of February 5, 2014 between Cepheid and Morgan Stanley & Co. International plc. 8-K 99.02 2/10/2014 10.28 Base Capped Call Transaction Confirmation, dated as of February 4, 2014 between Cepheid and Jefferies LLC. 8-K 99.03 2/10/2014 10.29 Additional Capped Call Transaction Confirmation, dated as of February 5, 2014 between Cepheid and Jefferies LLC. 8-K 99.04 2/10/2014 10.30 Base Capped Call Transaction Confirmation, dated as of February 4, 2014 between Cepheid and Goldman, Sachs & Co. 8-K 99.05 2/10/2014 10.31 Additional Capped Call Transaction Confirmation, dated as of February 5, 2014 between Cepheid and Goldman, Sachs & Co. 8-K 99.06 2/10/2014 ExhibitNumberDescription of ExhibitFormFile No.ExhibitFiling DateFiledHerewith 21.1List of SubsidiariesX 23.1Consent of Independent Registered Public Accounting FirmX 24.1Power of Attorney (see Signature page to this annual report)X 31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002X 31.2Certification of Principal Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002X 32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002X 32.2Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002X101.INSXBRL Instance DocumentX101.SCHXBRL Taxonomy Extension Schema DocumentX101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentX101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentX101.LABXBRL Taxonomy Extension Label Linkbase DocumentX101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentX*Management contract or compensatory plan or arrangement.† Confidential treatment has been granted with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. 92