QUIDEL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~LOSS~~(LOSS) INCOME

(in thousands; unaudited)

Three months ended
September 30, Nine months ended
September 30,
2015 2014 2015 2014
Net loss $ (762 ) $ (5,767 ) $ (5,702 ) $ (14,187 )
Other comprehensive income (loss), net of tax
Changes in cumulative translation adjustment (8 ) (20 ) 6
(35 )
Comprehensive loss $ (770 ) $ (5,787 ) $ (5,696 ) $ (14,222 )



	Three months ended March 31,
	2016			2015
Net (loss) income	$	(3,446	)	$	3,991
Other comprehensive (loss) income, net of tax
Changes in cumulative translation adjustment	2			17
Comprehensive (loss) income	$	(3,444	)	$	4,008

See accompanying notes.

~~Table of Contents~~

QUIDEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands; unaudited)


	Nine months ended September 30,						Three months ended March 31,
	2015			2014			2016			2015
OPERATING ACTIVITIES:
Net loss	$	(5,702	)	$	(14,187	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net (loss) income:							$	(3,446	)	$	3,991
Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:
Depreciation, amortization and other	17,537			20,578			6,123			6,202
Impairment loss	—			3,558
Stock-based compensation expense	5,713			4,772			1,980			2,068
Amortization of debt discount and deferred issuance costs	4,232			244			1,429			1,399
Change in deferred tax assets and liabilities	(6,368		)	(9,241		)	(2,629		)	1,285
Change in fair value of acquisition contingencies	—			42
Gain on extinguishment of Convertible Senior Notes							(421		)	—
Changes in assets and liabilities:
Accounts receivable	3,441			5,464			(7,719		)	15,782
Inventories	186			4,115			2,136			786
Income taxes receivable	234			153			119			372
Prepaid expenses and other current and non-current assets	(305		)	(609		)	(1,186		)	(457		)
Restricted cash	1,317			(5,078		)	63			(338		)
Accounts payable	(1,947		)	(780		)	1,150			(3,196		)
Accrued payroll and related expenses	772			406			(3,290		)	(870		)
Income taxes payable	729			119			(167		)	(2		)
Deferred grant revenue	(813		)	5,884			(1,746		)	(1,212		)
Other current and non-current liabilities	1,226			2,038			7			5,956
Net cash provided by operating activities	20,252			17,478
Net cash (used for) provided by operating activities							(7,597		)	31,766
INVESTING ACTIVITIES:
Acquisitions of property and equipment	(12,003		)	(8,492		)
Acquisition of intangibles	—			(92		)
Acquisitions of property, equipment and intangibles							(2,001		)	(2,867		)
Acquisition of Immutopics, net of cash acquired							(5,094		)	—
Net cash used for investing activities	(12,003		)	(8,584		)	(7,095		)	(2,867		)
FINANCING ACTIVITIES:
Payments on lease obligation	(375		)	(326		)	(141		)	(121		)
Repurchases of common stock	(27,617		)	(1,956		)	(20,079		)	(337		)
Repurchases of Convertible Senior Notes							(4,459		)	—
Proceeds from issuance of common stock	2,152			4,503			1,554			596
Payments of debt issuance costs	(365		)	—			—			(365		)
Payments on acquisition contingencies	(129		)	(2,112		)	(195		)	(129		)
Payment for acquisition holdback	(229		)	—
Net cash (used for) provided by financing activities	(26,563		)	109
Net cash used for financing activities							(23,320		)	(356		)
Effect of exchange rates on cash	(21		)	(26		)	(12		)	(9		)
Net (decrease) increase in cash and cash equivalents	(18,335		)	8,977			(38,024		)	28,534
Cash and cash equivalents, beginning of period	200,895			8,388			191,471			200,895
Cash and cash equivalents, end of period	$	182,560		$	17,365		$	153,447		$	229,429
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	3,744		$	725
Cash paid for income taxes	$	1,920		$	467
NON-CASH INVESTING ACTIVITIES:
Purchase of capital equipment by incurring current liabilities	$	1,433		$	269
NON-CASH FINANCING ACTIVITIES:
Reduction of other current liabilities upon issuance of restricted stock units	$	408		$	663



	Three months ended March 31,
	2016		2015
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	279	$	250
Cash paid for income taxes	$	103	$	121
NON-CASH INVESTING ACTIVITIES:
Purchase of capital equipment by incurring current liabilities	$	1,269	$	164
NON-CASH FINANCING ACTIVITIES:
Reduction of other current liabilities upon issuance of restricted stock units	$	539	$	408

See accompanying notes.

~~Table of Contents~~

Quidel Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of Quidel Corporation and its subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included.

The information at ~~September 30, 2015,~~March 31, 2016, and for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ is unaudited. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, ~~2014~~2015 included in the Company’s ~~2014~~2015 Annual Report on Form 10-K. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year.

For ~~2015~~2016 and ~~2014,~~2015, the Company’s fiscal year will end or has ended on January 1, 2017 and January 3, 2016, respectively. For 2016 and 2015, the Company’s first quarter ended on April 3, 2016 and ~~December 28, 2014, respectively. For~~March 29, 2015, ~~and 2014, the Company’s third quarter ended on September 27, 2015 and September 28, 2014,~~ respectively. For ease of reference, the calendar quarter end dates are used herein. The three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ each included 13 ~~and 39 weeks, respectively.~~

~~Change in Accounting Principle~~

The Company historically presented deferred debt issuance costs, or fees related to directly issuing debt, as assets on the Consolidated Balance Sheets. During the first quarter of 2015, the Company adopted guidance codified in ASU 2015-03, ~~Interest - Imputation of Interest~~ ~~(Subtopic 835-30),~~ ~~Simplifying the Presentation of Debt Issuance Costs~~. The guidance simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense using the effective interest method pursuant to ASC 835-30-35-2 through 35-3. The Company elected to early adopt the requirements of ASU 2015-03 effective the first quarter ended March 31, 2015 and applied this guidance retrospectively to all prior periods presented in the Company's financial statements.

The reclassification does not impact net income (loss) as previously reported or any prior amounts reported on the Consolidated Statements of Comprehensive Income (Loss) or the Consolidated Statements of Cash Flows. The following table presents the effect of the retrospective application of this change in accounting principle on the Company’s Consolidated Balance Sheets as of December 31, 2014:

Consolidated Balance Sheets (in thousands) As Reported December 31, 2014 Effect of Change in Accounting Principle After change in Accounting Principle
ASSETS
Current assets:
Prepaid expenses and other current assets $ 3,554
$ (640 ) $ 2,914
Total current assets 275,121
(640 ) 274,481
Other non-current assets 4,565
(3,499 ) 1,066
Total assets $ 451,550
$ (4,139 ) $ 447,411

LIABILITIES AND STOCKHOLDERS’ EQUITY
Long-term debt 142,097
(4,139 ) 137,958
Total liabilities and stockholders’ equity $ 451,550
$ (4,139 ) $ 447,411

~~Table of Contents~~

~~Comprehensive Loss~~weeks.

Comprehensive ~~loss~~(Loss) Income

Comprehensive (loss) income includes foreign currency translation adjustments excluded from the Company’s Consolidated Statements of Operations.

Use of Estimates

The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to revenue recognition, customer programs and incentives, bad debts, inventories, intangible assets, software development costs, stock-based compensation, restructuring, contingencies and litigation, contingent consideration, the fair value of the debt component of convertible debt instruments and income taxes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Revenue Recognition

The Company records revenues primarily from product sales. These revenues are recorded net of rebates and other discounts that are estimated at the time of sale, and are largely driven by various customer program offerings, including special pricing agreements, promotions and other volume-based incentives. Revenue from product sales are recorded upon passage of title and risk of loss to the customer. Passage of title to the product and recognition of revenue occurs upon delivery to the customer when sales terms are free on board (“FOB”) destination and at the time of shipment when the sales terms are FOB shipping point and there is no right of return.

A portion of product sales includes revenues for diagnostic kits, which are utilized on leased instrument systems under the Company’s “reagent rental” program. The reagent rental program provides customers the right to use the instruments at no separate cost to the customer in consideration for a multi-year agreement to purchase annual minimum amounts of consumables (“reagents” or “diagnostic kits”). When an instrument is placed with a customer under a reagent rental agreement, the Company retains title to the equipment and it remains capitalized on the Company’s Consolidated Balance Sheets as property and equipment. The instrument is depreciated on a straight-line basis over the ~~shorter of the lease term or the~~ life of the instrument. Depreciation expense is recorded in cost of sales included in the Consolidated Statements of Operations. The reagent rental agreements represent one unit of accounting as the instrument and consumables (reagents) are interdependent in producing a diagnostic result and neither has a stand-alone value with respect to these agreements. No revenue is recognized at the time of instrument placement. All revenue is recognized when the title and risk of loss for the diagnostic kits have passed to the customer.

Royalty income from the grant of license rights is recognized during the period in which the revenue is earned and the amount is determinable from the licensee. ~~The Company also earns income from the licensing of technology.~~

The Company earns income from grants for research and commercialization activities. On November 6, 2012, the Company was awarded a milestone-based grant totaling up to $8.3 million from the Bill and Melinda Gates Foundation to develop, manufacture and validate a quantitative, low-cost, nucleic acid assay for HIV drug treatment monitoring on the integrated Savanna MDx platform for use in limited resource settings. Upon execution of the grant agreement, the Company received $2.6 million to fund subsequent research and development activities and received milestone payments totaling $2.5 million in 2013. On September 10, 2014, the Company entered into an amended grant agreement with the Bill and Melinda Gates Foundation for additional funding of up to $12.6 million ~~with the intent~~in order to accelerate the development of the Savanna MDx platform in the developing world. Upon execution of the amended grant agreement, the Company received $10.6 million in cash. The Company received a payment of $2.4 million in April 2015 based on milestone achievements for both the original and the amended grant agreements and expects to receive the remaining milestone ~~payment~~payments of up to $2.8 million in 2016. Under the original and amended grant agreements, the Company recognizes grant revenue on the basis of the lesser of the amount recognized on a proportional performance basis or the amount of cash payments that are non-refundable as of the end of each reporting period. The Company recognized ~~$0.8~~$1.7 million and ~~$3.4~~$1.2 million for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014, respectively, and recognized $3.2 million and $4.7 million for the nine months ended September 30, 2015 and 2014, respectively, as grant revenue associated with this grant.~~respectively. Cash payments received are restricted as to use until expenditures contemplated in the grant are incurred or committed. ~~Therefore,~~None of the cash received under the grant was restricted as of March 31, 2016. The Company classified ~~$1.8 million and $3.1~~$0.1 million of funds received from the Bill and Melinda Gates Foundation as restricted cash as of ~~September 30, 2015 and~~ December 31, ~~2014, respectively.~~2015. In addition, the Company ~~has~~ classified ~~$5.5~~$1.9 million and ~~$6.3~~$3.7 million as deferred grant revenue as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, respectively.

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Fair Value Measurements

The Company uses the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures, ~~which~~that requires the valuation of assets and liabilities subject to fair value measurements using a three tiered approach and fair value measurement be classified and disclosed by the Company in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs ~~that~~which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The carrying amounts of the Company’s financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company establishes reserves for estimated uncollectible accounts and believes its reserves are adequate.

~~Changes to the recording of prior period freight billed to customers from sales and marketing expenses to revenues~~

The Company corrected immaterial errors in the classification of freight billed to customers of $0.3 million and $1.2 million for the three and nine months ended September 30, 2014, from sales and marketing expense as previously reported in the Consolidated Statements of Operations to revenues. The adjustments did not impact net income (loss) as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Statements of Cash Flows, Statements of Comprehensive (Loss) Income or Statements of Stockholders' Equity. Management evaluated the materiality both qualitatively and quantitatively and determined it was not material to the previously reported consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition. This guidance is intended to improve and converge with international standards relating to the financial reporting requirements for revenue from contracts with customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The original guidance was effective for annual reporting periods beginning after December 15, 2016. However, in July 2015, the FASB deferred by one year the effective dates of the new revenue recognition standard for entities reporting under GAAP. As a result, the standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2018.

In August 2014, the FASB issued guidance codified in ASU 2014-15 (Subtopic 205-40), Presentation of Financial Statements - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when

applicable). Management will be required to make this evaluation for both annual and interim reporting periods and will make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity’s ability to continue as a going concern. Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in ASC Topic 450, Contingencies. The guidance is effective for annual periods ending after December 15, 2016 and for interim reporting periods starting in the first quarter 2017, with early adoption permitted. The Company does not expect this guidance to have a significant impact on the consolidated financial statements and expects to adopt ~~ASU 2014-15~~the standard for the annual reporting period ended December 31, ~~2016, which is not expected to have a significant impact on the Company’s consolidated financial statements.~~2016.

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In February 2015, the FASB issued guidance codified in ASU 2015-02 (Topic 810), Consolidation - Amendments to the Consolidation Analysis. The guidance affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the guidance amends (i) the identification of variable interests (fees paid to a decision maker or service provider), (ii) the ~~Variable Interest Entity~~variable interest entity (VIE) characteristics for a limited partnership or similar entity and (iii) the primary beneficiary determination. The guidance is effective for annual periods ~~ending~~beginning after December 15, 2015 and for interim reporting periods starting in the first quarter 2016. The Company's adoption of this guidance in the first quarter of 2016 ~~with early adoption permitted. ASU 2015-02 is~~did not ~~expected to~~ have a significant impact on the ~~Company’s~~ consolidated financial statements.

In July 2015, the FASB issued guidance codified in ASU 2015-11 (Topic 330), Simplifying the Measurement of Inventory. The guidance applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted as of the beginning of an interim or annual reporting period. The ~~Company expects to early adopt ASU 2015-11~~Company's adoption of this guidance in the first quarter of 2016 ~~which is~~did not ~~expected to~~ have a significant an impact on the ~~Company’s~~ consolidated financial statements.

In February 2016, the FASB issued guidance codified in ASU 2016-02 (Topic 842), Leases. The guidance requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018 including interim periods within those years, with early adoption permitted. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2019.

In March 2016, the FASB issued guidance codified in ASU 2016-09 (Topic 718), Improvements to Employee Share Based Payments Accounting. Under the guidance, entities will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (APIC). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. In addition, entities will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Under current guidance, excess tax benefits are not recognized until the deduction reduces taxes payable. Companies will apply this part of the guidance using a modified retrospective transition method and will record a cumulative-effect adjustment in retained earnings for excess tax benefits not previously recognized. The guidance also allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, but all of the guidance must be adopted in the same period. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2017.

Note 2. Computation of ~~Loss~~(Loss) Earnings Per Share

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ basic ~~loss~~(loss) earnings per share was computed by dividing net ~~loss~~(loss) income by the weighted-average number of common shares outstanding, including restricted stock units (RSUs) vested during the period. Diluted earnings per share (“EPS”) reflects the potential dilution that could occur if the earnings were divided by the weighted-average number of common shares and potentially dilutive common shares from outstanding stock options as well as unvested ~~restricted stock units.~~RSUs. Potential dilutive common shares were calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company’s outstanding stock options and unvested ~~restricted stock units.~~RSUs.

For the three ~~and nine~~ months ended ~~September 30, 2015 and 2014,~~March 31, 2016, there were no differences between the number of common shares used for the basic and diluted EPS computation because the Company incurred a net loss and the effect would be anti-dilutive. Stock options and ~~shares of restricted stock~~RSUs that would have been included in the diluted EPS calculation if the Company had earnings amounted to ~~0.9 million and 1.0~~0.6 million for the three months ended ~~September 30, 2015 and 2014, respectively, and 1.0 million and 1.1 million for the nine months ended September 30, 2015 and 2014, respectively.~~March 31, 2016.

Additionally, stock options are excluded from the calculation of diluted EPS when the combined exercise price, unrecognized stock-based compensation and expected tax benefits upon exercise are greater than the average market price for the Company’s common stock because their effect is anti-dilutive. ~~Stock~~For the three months ended March 31, 2016 and 2015, stock options totaling ~~2.2~~3.1 million and ~~1.8~~1.0 million, ~~for the three and nine months ended September 30, 2015, respectively, and 1.2 million and 1.1 million for the three and nine months ended September 30, 2014,~~ respectively, were not included in the computation of diluted EPS because the exercise of such options would be anti-dilutive.

The following table reconciles the weighted-average shares used in computing basic and diluted earnings (loss) per share in the respective periods (in thousands):



	Three months ended March 31,
	2016	2015
Shares used in basic (loss) earnings per share (weighted-average common shares outstanding)	32,727	34,641
Effect of dilutive stock options and RSUs	—	1,104
Shares used in diluted (loss) earnings per share calculations	32,727	35,745

As discussed in Note 6, the Company issued Convertible Senior Notes (“Convertible Senior Notes”) in December 2014. It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in cash or shares of common stock (“conversion premium”). No conversion premium existed as of ~~September 30, 2015,~~March 31, 2016 and 2015; therefore, there was no dilutive impact from the Convertible Senior Notes to diluted ~~EPS.~~EPS during the three months ended March 31, 2016 and 2015.

Note 3. Inventories

Inventories are ~~recorded~~stated at the lower of cost (first-in, first-out) or ~~market.~~net realizable value. Inventories consisted of the following, net of reserves of ~~$0.4~~$0.5 million and ~~$2.2~~$0.7 million at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, respectively (in thousands):


	September 30, 2015		December 31, 2014		March 31, 2016		December 31, 2015
Raw materials	$	10,969	$	10,472	$	9,570	$	10,289
Work-in-process (materials, labor and overhead)	8,343		6,834		7,648		7,441
Finished goods (materials, labor and overhead)	5,256		7,457		7,602		8,658
Total inventories	$	24,568	$	24,763	$	24,820	$	26,388

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Note 4. Other Current Liabilities

Other current liabilities consist of the following (in thousands):


	September 30, 2015		December 31, 2014		March 31, 2016		December 31, 2015
Customer incentives and rebates	$	5,571	$	4,729
Customer incentives					$	3,179	$	4,030
Accrued research and development costs	183		990		683		773
Accrued interest	1,604		311		1,586		202
Other	1,880		2,013		1,577		1,994
Total other current liabilities	$	9,238	$	8,043	$	7,025	$	6,999

Note 5. Income Taxes

The Company recognized an income tax benefit of ~~$1.1~~$2.7 million and ~~$4.6~~a provision of $1.8 million for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively, which represents an effective tax rate of ~~59%~~44% and ~~44%~~31%, respectively. For the ~~nine~~three months ended ~~September 30, 2015 and 2014,~~March 31, 2016, the Company ~~recognized~~realized an ~~income tax benefit of $3.3 million and $8.9 million, respectively, which represents an effective tax rate of 36% and 39%, respectively. For the nine months ended September 30, 2015,~~increase in the effective tax rate ~~was lower~~as compared to the same ~~periods~~period of ~~2014~~2015 due primarily to the ~~valuation allowance recorded for state deferred~~federal research tax ~~assets, partially offset by~~credit in the first quarter of 2016. There was no federal ~~manufacturing deduction.~~research tax credit in the same period of the prior year as the credit provisions of the United States tax code had expired at the end of 2014 and were not reinstated until December 2015. In addition, the production deduction increased in the first quarter of 2016 compared to the same period of 2015.

The Company is subject to periodic audits by domestic and foreign tax authorities. ~~The Company’s~~Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years ~~for 2011~~from 2009 and forward are subject to examination by the U.S. authorities. ~~With few exceptions, the Company’s~~The Company's state and foreign tax years ~~beginning with~~for 2001 and ~~2003, respectively,~~forward are subject to examination by applicable tax authorities. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax ~~law~~laws applied to the facts of each matter.

Note 6. Debt

3.25% Convertible Senior Notes due 2020

In December 2014, the Company issued ~~Convertible Senior Notes in the~~$172.5 million aggregate principal amount of ~~$172.5 million. The~~3.25% Convertible Senior Notes ~~have a coupon rate of 3.25% and are~~ due 2020. Debt issuance costs of approximately $5.1 million were ~~incurred, of which $4.2 million consisted~~primarily comprised of underwriters fees, legal, accounting and other professional fees of which $4.2 million were capitalized and are recorded as a reduction to long-term debt and are being amortized to interest expense ~~using the effective interest method~~ over the six-year term of the Convertible Senior Notes. The remaining $0.9 million of debt issuance costs ~~are~~were allocated as a component of equity in additional paid-in capital. Deferred issuance costs related to the Convertible Senior Notes were ~~$3.7~~$3.2 million and ~~$4.1~~$3.5 million as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, respectively.

The Convertible Senior Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock based on an initial conversion rate, subject to adjustment, of 31.1891 shares per $1,000 principal amount of the Convertible Senior Notes (which represents an initial conversion price of approximately $32.06 per share) on the business day immediately preceding September 15, 2020. The conversion will occur in the following circumstances and to the following extent: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015, if the last reported sales price of the Company’s common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the notes in effect on each applicable trading day; (2) during the five consecutive business day period following any five consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Senior Note for each such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; or (3) upon the occurrence of specified events described in the indenture for the Convertible Senior Notes. On or after September 15, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances.

It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment inof an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the principal portion in shares of common stock or cash. In general, for each $1,000 in principal, the “principal portion” of cash upon settlement is defined as the lesser of $1,000, or the conversion value during the 25-day observation period as described in the

indenture for

~~Table of Contents~~

the Convertible Senior Notes. The conversion value is the sum of the daily conversion value which is the product of the effective conversion rate divided by 25 days and the daily volume weighted average price (“VWAP”) of the Company’s common stock. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000.

The Company pays 3.25% interest per annum on the principal amount of the Convertible Senior Notes semi-annually in arrears in cash on June 15 and December 15 of each year. The Convertible Senior Notes mature on December 15, 2020. During the ~~nine~~three months ended ~~September 30, 2015,~~March 31, 2016, the Company recorded total interest expense of ~~$8.2~~$2.8 million related to the Convertible Senior Notes of which ~~$4.0~~$1.4 million related to the amortization of the debt discount and issuance costs and ~~$4.2~~$1.4 million related to the coupon due semi-annually. During the three months ended March 31, 2015, the Company recorded total interest expense of $2.7 million related to the Convertible Senior Notes of which $1.3 million related to the amortization of the debt discount and issuance costs and $1.4 million related to the coupon due semi-annually.

If a fundamental change, as defined in the indenture for the Convertible Senior Notes, such as an acquisition, merger, or liquidation of the Company, occurs prior to the maturity date, subject to certain limitations, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of their Convertible Senior Notes for cash at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.

The Company accounts separately for the liability and equity components of the Convertible Senior Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because the Company ~~has~~had no outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the Convertible Senior Notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry with similar credit ratings and with similar maturity, the Company estimated the implied interest rate of its Convertible Senior Notes to be 6.9%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, which were defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Convertible Senior Notes, which resulted in a fair value of the liability component of $141.9 million upon issuance, calculated as the present value of implied future payments based on the $172.5 million aggregate principal amount. The $30.7 million difference between the cash proceeds of $172.5 million and the estimated fair value of the liability component was recorded in additional paid-in capital, net of tax and issuance costs, as the Convertible Senior Notes were not considered redeemable.

As a policy election under applicable guidance related to the calculation of diluted net EPS, the Company elected the combination settlement method as its stated settlement policy and applied the treasury stock method in the calculation of dilutive impact of the Convertible Senior Notes. The Convertible Senior Notes were not convertible as of ~~September 30,~~March 31, 2016 and 2015; therefore there was no dilutive impact during the three months ended March 31, 2016 and 2015. If the Convertible Senior Notes were converted as of ~~September 30, 2015,~~March 31, 2016, the if-converted value would not exceed the principal amount.

~~Table~~During the three months ended March 31, 2016, the Company repurchased and retired $5.2 million in principal amount of ~~Contents~~the outstanding Convertible Senior Notes. The aggregate cash used for the transaction was $4.5 million. The repurchase resulted in a reduction in debt of $4.4 million and a reduction in additional paid-in capital of $0.5 million with a gain on extinguishment of Convertible Senior Notes of $0.4 million included in interest expense, net in the Consolidated Statements of Operations.

The following table summarizes information about the equity and liability components of the Convertible Senior Notes (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market prices.


	September 30, 2015			December 31, 2014			March 31, 2016			December 31, 2015
Principal amount of Convertible Senior Notes outstanding	$	172,500		$	172,500		$	167,314		$	172,500
Unamortized discount of liability component	(26,893		)	(30,403		)	(23,767		)	(25,703		)
Unamortized debt issuance costs ~~(1)~~	(3,661		)	(4,139		)	(3,236		)	(3,500		)
Net carrying amount of liability component	141,946			137,958			140,311			143,297
Less: current portion	—			—			—			—
Long-term debt	$	141,946		$	137,958		$	140,311		$	143,297
Carrying value of equity component, net of issuance costs	$	29,758		$	29,758		$	29,211		$	29,758
Fair value of outstanding Convertible Senior Notes ~~(2)~~	$	166,023		$	190,613		$	149,746		$	170,120
Remaining amortization period of discount on the liability component	5.3 years			6.0 years			4.8 years			5.0 years

~~(1) Includes reclassification of $0.6 million from prepaid expenses and other current assets and $3.5 million from other non-current assets as of December 31, 2014.~~

(2) Subsequent to the issuance of the financial statements for the year ended December 31, 2014, the Company discovered an error in its disclosure of the fair value of outstanding convertible senior notes. The fair value of the Convertible Senior Notes at December 31, 2014 was $190.6 million instead of the amount originally disclosed in the Company’s Annual Report on Form 10-K, which inappropriately reflected only the book value of the long-term debt component of the Convertible Senior Notes, which was $142.1 million. The revision in the disclosure of fair value for the Convertible Senior Notes did not impact net loss as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive (Loss) Income, Statements of Cash Flows or Statements of Stockholders' Equity as of and for the year ended December 31, 2014.

Line of Credit

On August 10, 2012, the Company entered into an amended and restated $140.0 million senior secured syndicated credit facility (the “Senior Credit Facility”) that matures on August 10, 2017. As part of this amendment, the Company incurred an additional $1.0 million in deferred financing costs related to the Senior Credit Facility. ~~The Company had previously recorded $0.6 million related to the prior credit facility.~~ Deferred financing costs are amortized on a straight-line basis over the term of the Senior Credit Facility. ~~The Company presents debt issuance costs as an asset when there is no associated liability.~~ As of ~~September 30, 2015,~~March 31, 2016, the Company had deferred financing costs related to the Senior Credit Facility of ~~$0.3~~$0.1 million included as a portion of other non-current assets and $0.3 million included as a portion of prepaid expenses and other current assets. As of December 31, ~~2014,~~2015, the Company had deferred financing costs related to the Senior Credit Facility of ~~$0.5~~$0.2 million included as a portion of other non-current assets and $0.3 million included as a portion of prepaid expenses and other current assets. The Senior Credit Facility bears interest at either the London Interbank Offered Rate (“LIBOR”) or the base rate, plus, in each case, an applicable margin. The base rate is equal to the highest of (i) the lender’s prime rate, (ii) the federal funds rate plus one-half of one percent and (iii) LIBOR plus one percent. The applicable margin is generally determined in accordance with a performance pricing grid based on the Company’s leverage ratio and ranges from 1.25% to 2.50% for LIBOR rate loans and from 0.25% to 1.50% for base rate loans. The agreement governing the Senior Credit Facility includes certain customary ~~limitations,~~covenants, including among ~~others: limitation on~~others, limitations on: liens; ~~limitation on~~ mergers, consolidations and dispositions of assets; ~~limitation on~~ debt; ~~limitation on~~ dividends, stock redemptions and the redemption and/or prepayment of other debt; ~~limitation on~~ investments (including loans and advances) and acquisitions; and ~~limitation on~~ transactions with affiliates. The Company is also subject to financial covenants, which include (i) a funded debt to adjusted EBITDA ratio (as defined in the Senior Credit Facility, with adjusted EBITDA generally calculated as earnings before, among other adjustments, interest, taxes, depreciation, amortization, and stock-based compensation) not to exceed 3:1 as of the end of each fiscal quarter, and (ii) an interest coverage ratio of not less than 3:1 as of the end of each fiscal quarter. Funded debt is defined as outstanding borrowings on the Senior Credit Facility plus Convertible Senior Notes, less the Company’s domestic cash and cash equivalents in excess of $15.0 million. The Senior Credit Facility is secured by substantially all present and future assets and properties of the Company and is senior to the Convertible Senior Notes.

~~As of September 30, 2015 and December 31, 2014, the Company had no borrowings outstanding. The Company had $95.9 million available under the Senior Credit Facility as of September 30, 2015.~~ The Company’s ability to borrow under the Senior Credit Facility fluctuates from time to time due to, among other factors, the Company’s borrowings under the facility, ~~and~~ its funded debt to adjusted EBITDA ratio and interest coverage ratio. As of ~~September 30,~~March 31, 2016 and December 31, 2015, the Company ~~was in compliance with all financial covenants.~~had no borrowings outstanding and due to the limitations of the interest coverage ratio, the Company had no borrowing capacity under the Senior Credit Facility at March 31, 2016.

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Note 7. Stockholders’ Equity

Issuances and Repurchases of Common Stock

During the ~~nine~~three months ended ~~September 30, 2015, 69,828~~March 31, 2016, 74,913 shares of common stock were issued in conjunction with the vesting and release of ~~restricted stock units, 92,164~~RSUs, 60,511 shares of common stock were issued due to the exercise of stock options and ~~52,677~~41,162 shares of common stock were issued in connection with the Company’s employee stock purchase plan (the “ESPP”), resulting in net proceeds to the Company of approximately ~~$2.2~~$1.6 million. During the ~~nine~~three months ended ~~September 30, 2015, 1,211,769~~March 31, 2016, 1,152,386 shares of outstanding common stock were repurchased under the Company’s previously announced share repurchase program for approximately ~~$27.2~~$19.6 million. Additionally, ~~17,181~~24,932 shares of outstanding common stock were repurchased in connection with payment of minimum tax withholding obligations for certain employees relating to the lapse of restrictions on certain ~~restricted stock units~~RSUs for

approximately $0.4 million. As of ~~September 30, 2015,~~March 31, 2016, there was ~~$22.9~~$35.0 million available under the Company’s share repurchase program.

Stock-Based Compensation

The compensation expense related to the Company’s stock-based compensation plans included in the accompanying Consolidated Statements of Operations was as follows (in thousands):

Three months ended September 30, Nine months ended September 30,

2015 2014 2015 2014
Cost of sales $ 113
$ 103
$ 454
$ 431
Research and development 268
221
562
786
Sales and marketing 351
222
1,228
702
General and administrative 987
747
3,469
2,853
Total stock-based compensation expense $ 1,719
$ 1,293
$ 5,713
$ 4,772



	Three months ended March 31,
	Three months ended March 31,
	2016			2015
Cost of sales	$	235		$	237
Research and development	297			17
Sales and marketing	(63		)	502
General and administrative	1,511			1,312
Total stock-based compensation expense	$	1,980		$	2,068

Total compensation expense recognized for the three months ~~and nine months~~ ended ~~September 30, 2015~~March 31, 2016 includes ~~$1.1 million and $3.5~~$1.4 million related to stock options and $0.6 million ~~and $2.2 million~~ related to ~~restricted stock units, respectively.~~RSUs. Stock-based compensation expense for sales and marketing resulted in a net credit of $0.1 million due to forfeitures of options and RSUs in the first quarter of 2016. Total compensation expense recognized for the three ~~and nine~~ months ended ~~September 30, 2014~~March 31, 2015 includes ~~$0.9 million and $3.3~~$1.4 million related to stock options and ~~$0.4 million and $1.5~~$0.7 million related to ~~restricted stock units, respectively.~~RSUs. As of ~~September 30, 2015,~~March 31, 2016, total unrecognized compensation expense related to non-vested stock options was ~~$7.5~~$8.2 million, which is expected to be recognized over a weighted-average period of approximately ~~2.4~~2.9 years. As of ~~September 30, 2015,~~March 31, 2016, total unrecognized compensation expense related to non-vested ~~restricted stock units~~RSUs was ~~$3.0~~$3.6 million, which is expected to be recognized over a weighted-average period of approximately ~~2.7~~3.0 years. Compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the three ~~and nine~~ months ended ~~September 30, 2015 and 2014.~~March 31, 2016 or 2015.

The estimated fair value of each stock option ~~award~~ was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the option grants.

Nine months ended September 30,

2015 2014
Risk-free interest rate 1.48 % 1.59 %
Expected option life (in years) 6.23
5.77
Volatility rate 40 % 42 %
Dividend rate — % — %



	Three months ended March 31,
	Three months ended March 31,
	2016		2015
Risk-free interest rate	1.46	%	1.45	%
Expected option life (in years)	6.46		6.22
Volatility rate	36	%	40	%
Dividend rate	—	%	—	%

The weighted-average fair value of stock options granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015 was $5.85 and ~~2014 was~~ $9.60, ~~and $10.95,~~ respectively. The Company granted ~~616,994~~626,413 and ~~542,020~~544,247 stock options during the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively. The weighted-average fair value of ~~restricted stock units~~RSUs granted during the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015 was $15.39 and ~~2014 was $23.47 and $25.34,~~$23.58, respectively. The Company granted ~~146,164~~131,972 and ~~116,319~~103,118 shares of ~~restricted stock units~~RSUs during the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively. The fair value of ~~restricted stock units~~RSUs is determined based on the closing market price of the Company’s common stock on the grant date.

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Note 8. Industry and Geographic Information

The Company operates in one reportable segment. Sales to customers outside the U.S. represented ~~$18.8~~$9.8 million ~~(13%~~(19%) and ~~$16.7~~$7.4 million ~~(14%~~(12%) of total revenue for the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively. As of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, balances due from foreign customers were ~~$4.3~~$6.2 million and ~~$5.5~~$5.6 million, respectively.

The Company had sales to individual customers in excess of 10% of total revenues, as follows:

Nine months ended September 30,

2015 2014
Customer:
A 23 % 16 %
B 16 % 16 %
C 11 % 10 %
50 % 42 %



	Three months ended March 31,
	Three months ended March 31,
	2016		2015
Customer:
A	16	%	13	%
B	15	%	18	%
C	9	%	20	%
	40	%	51	%

As of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, accounts receivable from customers with balances due in excess of 10% of total accounts receivable totaled ~~$23.5~~$23.6 million and ~~$23.7~~$12.0 million, respectively.

Note 9. Commitments and Contingencies

Legal

The Company is involved in various claims and litigation matters from time to time in the ordinary course of business. Management believes that all such current legal actions, in the aggregate, will not have a material adverse effect on the Company. The Company also maintains insurance, including coverage for product liability claims, in amounts ~~that~~which management believes are appropriate given the nature of its business. At ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, the Company had ~~$0.3~~$0.2 million accrued as a liability for various legal matters where the Company deemed the liability probable and estimable.

Licensing Arrangements

The Company has entered into various licensing and royalty agreements, which largely require payments based on specified product sales as well as the achievement of specified milestones. The Company had royalty and license expenses relating to those agreements of approximately ~~$0.1~~$0.2 million for both of the three months ended ~~September 30, 2015~~March 31, 2016 and ~~2014. The Company had royalty and license expenses relating to those agreements of approximately $0.5 million and $0.6 million for the nine months ended September 30, 2015 and 2014, respectively.~~2015.

Research and Development Agreements

The Company has entered into various research and development agreements that provide it with rights to develop, manufacture and market products using the intellectual property and technology of its collaborative partners. Under the terms of certain of these agreements, the Company is required to make periodic payments based on achievement of certain milestones or resource expenditures. These milestones generally include achievement of prototype assays, validation lots and clinical trials. At ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, total future commitments under the terms of these agreements are estimated at ~~$3.8~~$5.6 million and ~~$4.3~~$4.2 million, respectively. The commitments will fluctuate as ~~we agree~~the Company agrees to new phases of development under the existing arrangements.

Contingent Consideration

In conjunction with the acquisition of BioHelix Corporation (“BioHelix”) in May 2013, the Company agreed to contingent consideration ranging from $5.0 million to ~~$13.0~~$10.0 million upon achievement of certain ~~research and development milestones and~~ revenue targets through 2018. At December 31, 2014, all research and development milestones had been achieved and all payments related to research and development milestones had been disbursed. No payments related to the royalty revenue earn-out were disbursed during the three months ended September 30, 2015 and 2014. Payments of $0.1 million and $49,000 related to the revenue royalty earn-out were disbursed during the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, the current portion of the contingent consideration is $0.6 million and the

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~~non-current portion of the contingent consideration is $4.9 million.~~ The fair value of ~~the remaining contingent consideration related to~~ the revenue royalty earn-out to be settled in cash is estimated based on the Monte Carlo Simulation Model. Payments of $0.2 million and $0.1 million related to the revenue royalty earn-out were disbursed during the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the current portion of the contingent consideration is $1.1 million and the non-current portion of the contingent consideration is $4.2 million.

In August 2013, the Company ~~completed a business combination accomplished by acquiring~~acquired the assets of AnDiaTec GmbH & Co. KG (“AnDiaTec”), a privately-held, diagnostics company, based in Germany. The Company agreed to contingent consideration of up to €0.5 million ($0.6 million based on the ~~September 30, 2015~~March 31, 2016 currency conversion rate) upon achievement of certain revenue targets through 2018. As of ~~September 30, 2015,~~March 31, 2016, the current portion of the contingent consideration is ~~$25,000~~$18,000 and the non-current portion of the contingent consideration is $0.1 ~~million, based on the Monte Carlo Simulation Model.~~million. In addition, the Company agreed to pay the founder of AnDiaTec contingent payments of up to €3.0 million ($3.4 million based on the ~~September 30, 2015~~March 31, 2016 currency conversion rate) upon achievement of certain research and development milestones, subject to continued employment. The Company paid ~~$0.3~~$0.7 million and $0.4 million for the achievement of agreed upon research and development milestones during the three months ended ~~September 30,~~March 31, 2016 and 2015, and $0.6 million during the three months ended September 30, 2014. The Company paid $1.2 million and $0.9 million for the achievement of agreed upon research and development milestones during the nine months ended September 30, 2015 and 2014,

respectively. ~~In October 2015, the Company paid $0.5 million for the achievement of agreed upon research and development milestones that were accrued for as of September 30, 2015.~~ These costs are recorded as compensation expense included in research and development expense in the Consolidated Statements of Operations.

~~Note 10. Lease Obligation~~

In the fourth quarter of 2013, the Company entered into a lease for approximately 30,000 square feet of office space and moved the executive and administrative functions into this facility in the second quarter of 2014. The lease expires in 2022 with options to extend the lease for two additional five-year periods. This operating lease included a lease incentive for tenant improvements of $1.7 million, which has been included as a leasehold improvement in property, plant and equipment and as deferred rent. At September 30, 2015, the total deferred rent was $2.6 million, of which $0.3 million was included in other current liabilities.

During 1999, the Company completed a sale and leaseback transaction of its San Diego McKellar facility. The facility was sold for $15.0 million, of which $3.8 million was capital contributed by the Company. The sale was an all cash transaction, netting the Company approximately $7.0 million. The Company ~~is a 25% limited partner in the partnership that acquired the facility. The transaction was deemed a financing transaction under the guidance in ASC Topic 840-40,~~ ~~Accounting for Sales~~recorded contingent consideration of ~~Real Estate~~. The assets sold remain on the books of the Company and will continue to be depreciated over the estimated useful life. In December 2009, the Company amended the terms of its lease agreement. The amended terms include a new ten-year lease term through December 2019, with options to extend the lease for up to three additional five-year periods. The Company is amortizing the lease obligation over the new lease term. The amount of the monthly rental payments remains the same under the amendment. In August 2015, the lease agreement was amended to extend the timing to January 1, 2016 to exercise an option in the lease to purchase the general partner’s interest in the partnership for a fixed price. The Company has determined that the partnership is a variable interest entity (VIE). The Company is not, however, the primary beneficiary of the VIE as it does not absorb the majority of the partnership’s expected losses or receive a majority of the partnership’s residual returns. The Company made lease payments$0.4 million related to the ~~partnership~~acquisition of ~~approximately $0.3 million for each of the three months ended September 30, 2015 and 2014 and $0.9 million and $0.8 million for the nine months ended September 30, 2015 and 2014, respectively.~~Immutopics, Inc. (Immutopics) in March 2016 as discussed in Note 11.

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Note ~~11.~~10. Fair Value Measurements

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods (in thousands):


	September 30, 2015								December 31, 2014								March 31, 2016								December 31, 2015
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents	$	168,123	$	—	$	—	$	168,123	$	3,057	$	—	$	—	$	3,057	$	133,249	$	—	$	—	$	133,249	$	133,147	$	—	$	—	$	133,147
Total assets measured at fair value	$	168,123	$	—	$	—	$	168,123	$	3,057	$	—	$	—	$	3,057	$	133,249	$	—	$	—	$	133,249	$	133,147	$	—	$	—	$	133,147
Liabilities:
Contingent consideration	—		—		5,607		5,607		—		—		5,756		5,756		—		—		5,676		5,676		—		—		5,516		5,516
Total liabilities measured at fair value	$	—	$	—	$	5,607	$	5,607	$	—	$	—	$	5,756	$	5,756	$	—	$	—	$	5,676	$	5,676	$	—	$	—	$	5,516	$	5,516

~~Impairment Loss~~

During the three months ended September 30, 2014, we determined we would not be able to recover the carrying value of certain capitalized software, purchased in-process research and development and manufacturing line assets related to the Project Stella (Bobcat) assets and related technology. As a result, we recorded an impairment loss totaling $3.6 million. No such loss was recorded during the three months ended September 30, 2015.

Interest Expense, net

Interest expense ~~consists~~primarily relates to accrued interest for the coupon and accretion of ~~fees paid to maintain our ability to borrow under~~ the ~~Senior Credit Facility, interest paid~~discount on our ~~lease obligation for our San Diego McKellar facility, and interest expense associated with our~~ $172.5 million ~~aggregate~~

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~~principal amount of~~ 3.25% Convertible Senior Notes due 2020 (“Convertible Senior Notes”) issued in December 2014 ~~as applicable.~~and interest paid on our lease obligation associated with our San Diego McKellar facility. The ~~increase~~decrease in interest expense of ~~$2.9~~$0.2 million for the three months ended ~~September 30, 2015~~March 31, 2016 was primarily due to ~~the coupon interest and amortization~~a gain on extinguishment of ~~the~~ debt ~~discount and issuance costs~~ related to the repurchase of $5.2 million in principal of our Convertible Senior Notes. ~~There were no borrowings under the Senior Credit Facility during the three months ended September 30, 2015 or September 30, 2014.~~

Income Taxes

Our effective tax rate for the three months ended ~~September 30,~~March 31, 2016 and 2015 was 44% and ~~2014 was 59% and 44%~~31%, respectively. We recognized an income tax benefit of ~~$1.1~~$2.7 million and ~~$4.6~~a provision of $1.8 million for the three months ended ~~September 30,~~March 31, 2016 and 2015, ~~and 2014,~~ respectively. For the three months ended ~~September 30, 2015,~~March 31, 2016, the effective tax ~~rate~~benefit was higher as compared to the ~~third quarter~~

same period of ~~2014~~2015 due primarily to the federal ~~manufacturing deduction and other discrete items calculated over a small pre-tax loss.~~

~~Nine months ended September 30, 2015 compared to the nine months ended September 30, 2014~~

~~Total Revenues~~

~~The following table compares total revenues for the nine months ended September 30, 2015 and 2014 (in thousands, except percentages):~~

For the nine months ended
September 30, Increase (Decrease)
2015 2014 $ %
Infectious disease net product sales $ 103,123
$ 80,400
$ 22,723
28 %
Women’s health net product sales 27,876
25,581
2,295
9 %
Gastrointestinal disease net product sales 5,393
5,558
(165 ) (3 )%
Other net product sales 3,250
2,946
304
10 %
Royalty, license fees and grant revenue 4,075
5,720
(1,645 ) (29 )%
Total revenues $ 143,717
$ 120,205
$ 23,512
20 %

For the nine months ended September 30, 2015, total revenue increased to $143.7 million from $120.2 million in the prior year. The Company realized growth in infectious disease, women's health and other revenues. The increase in the infectious disease category was primarily due to stronger Influenza and Strep A product sales. The increase in the women's health category was driven by growth for our Thyretain, hCG, Bone Health and Autoimmune/Complement product lines. Royalty, license fees and grant revenue decreased year over year due to decreased grant revenues associated with the amended Bill and Melinda Gates Foundation grant.

~~Cost of Sales~~

Cost of sales was $53.6 million, or 37% of total revenues for the nine months ended September 30, 2015 compared to $52.9 million, or 44% of total revenues for the nine months ended September 30, 2014. The decrease in cost of sales as a percentage of total revenues is primarily driven by the expiration of the amortization of the Alere settlement and improved manufacturing efficiencies. This is partially offset by lower grant revenues and higher depreciation expense related to the Sofia instruments.

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~~Operating Expenses~~

~~The following table compares operating expenses for the nine months ended September 30, 2015 and 2014 (in thousands, except percentages):~~

For the nine months ended September 30,
2015 2014
Operating
expenses As a % of
total
revenues Operating
expenses As a % of
total
revenues
Increase (Decrease)
$ %
Research and development 25,575
18 % 28,714
24 % $ (3,139 ) (11 )%
Sales and marketing 35,823
25 % 31,567
26 % $ 4,256
13 %
General and administrative 22,039
15 % 18,949
16 % $ 3,090
16 %
Amortization of intangible assets from acquired businesses and technology 6,638
5 % 6,623
6 % $ 15
— %
Impairment loss —
— % 3,558
3 % $ (3,558 ) N/A

~~Research and Development Expense~~

Research and development expense for the nine months ended September 30, 2015 decreased from $28.7 million to $25.6 million due primarily to a decrease in development spend for the Savanna MDx platform partially offset by an increase in development spend for our next generation Sofia instrument.

~~Research and development expenses include direct external costs such as fees paid to consultants, and internal direct and indirect costs such as compensation and other expenses for~~ research and development personnel, supplies and materials, clinical trials and studies, facility costs and depreciation. We expect our research and development costs to be significant as we move other product candidates into preclinical and clinical trials and advance our existing development programs and product candidates into later stages of development.

~~Sales and Marketing Expense~~

Sales and marketing expense for the nine months ended September 30, 2015 increased from $31.6 million to $35.8 million compared with the prior year period, due primarily to increased compensation costs associated with higher revenues and additional investment in our sales organization through expansion and training of a larger sales force.

~~General and Administrative Expense~~

General and administrative expense for the nine months ended September 30, 2015 increased from $18.9 million to $22.0 million compared with the prior year period, due primarily to an increase of $2.4 million in one-time fees for professional services and internal costs related to business development activities incurredtax credit in the first quarter of ~~2015~~2016. There was no federal research tax credit in the prior quarter as the credit provisions of the United States tax code had expired at the end of 2014 and ~~have concluded. Additional increases over prior year include higher stock-based compensation and medical device excise tax.~~

~~Amortization~~were not reinstated until December 2015. In addition, the production deduction increased in the first quarter of ~~Intangible Assets from Acquired Businesses and Technology~~

Amortization of intangible assets from acquired businesses consists of customer relationships, purchased technology and patents and trademarks acquired in connection with our more recent acquisitions of Diagnostic Hybrids, Inc., BioHelix, and AnDiaTec.

~~Impairment Loss~~

During the nine months ended September 30, 2014, we determined we would not be able to recover the carrying value of certain capitalized software, purchased in-process research and development and manufacturing line assets related2016 compared to the ~~Project Stella (Bobcat) assets and related technology. As a result, we recorded an impairment loss totaling $3.6 million. No such loss was recorded during the nine months ended September 30,~~same period of 2015.

~~Interest Expense, net~~

Interest expense consists of fees paid to maintain our ability to borrow under the Senior Credit Facility, interest paid on our lease obligation for our San Diego McKellar facility, and interest expense associated with our $172.5 million aggregate

~~Table of Contents~~

principal amount of 3.25% Convertible Senior Notes issued in December 2014, as applicable. The increase in interest expense of $8.1 million for the nine months ended September 30, 2015 was primarily due to the coupon interest and amortization of the debt discount and issuance costs related to the Convertible Senior Notes. There were no borrowings under the Senior Credit Facility during the nine months ended September 30, 2015 or September 30, 2014.

~~Income Taxes~~

For the nine months ended September 30, 2015 and 2014, we recognized an income tax benefit of $3.3 million and $8.9 million, respectively. Our effective tax rates for the nine months ended September 30, 2015 and 2014 was 36% and 39%, respectively. For the nine months ended September 30, 2015, the effective tax rate was lower primarily due to the change in valuation allowance related to certain state deferred tax assets, partially offset by an increase in the federal manufacturing deduction.

Liquidity and Capital Resources

As of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, the principal sources of liquidity consisted of the following (in thousands):

September 30, 2015 December 31, 2014
Cash and cash equivalents $ 182,560
$ 200,895
Restricted cash 1,810
3,127
Cash, cash equivalents, and restricted cash $ 184,370
$ 204,022
Working capital including cash, cash equivalents, and restricted cash $ 214,753
$ 238,096
Amount available to borrow under the Senior Credit Facility $ 95,900
$ 95,700



	March 31, 2016		December 31, 2015
Cash and cash equivalents	$	153,447	$	191,471
Restricted cash	—		63
Cash, cash equivalents and restricted cash	$	153,447	$	191,534
Working capital including cash, cash equivalents and restricted cash	$	181,903	$	209,834

As of ~~September 30, 2015,~~March 31, 2016, we had ~~$182.6~~$153.4 million in cash and cash equivalents, a $38.0 million decrease from December 31, 2015. During the period, we repurchased $24.5 million in ~~large part due to the issuance of $172.5 million aggregate principal amount of 3.25%~~common stock and Convertible Senior Notes and used $5.1 million to acquire Immutopics. Our cash requirements fluctuate as a result of numerous factors, such as the extent to which we generate cash from operations, progress in ~~December 2014~~research and development projects, competition and technological developments and the time and expenditures required to obtain governmental approval of our products. In addition, we intend to continue to evaluate candidates for new product lines, company or technology acquisitions or technology licensing. If we decide to proceed with any such transactions, we may need to incur additional debt, or issue additional equity, to successfully complete the transactions.

Our primary source of liquidity, other than our holdings of cash and cash ~~generated~~equivalents, has been cash flows from operations. Our ability to generate cash from operations ~~for~~provides us with the ~~nine months ended September 30, 2015. During the year ended December 31, 2014,~~financial flexibility we ~~received $10.6 million~~need to meet operating, investing, and ~~during the nine months ended September 30, 2015 we received $2.4 million, pursuant to the Bill~~financing needs. We anticipate that our current cash and ~~Melinda Gates Foundation grant agreement, which was restricted as to use until expenditures contemplated in the grant were incurred or committed. We recorded this restricted~~ cash ~~as a current asset as we anticipate making expenditures under the grant within one year. As of September 30, 2015, restricted~~equivalents, together with cash ~~was $1.8 million.~~

~~Cash~~ provided by operating activities ~~was $20.3 million during~~will be sufficient to fund our near term capital and operating needs for at least the ~~nine months ended September 30, 2015. We had a net loss~~next 12 months. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include expenditures related to:

support of ~~$5.7 million,~~commercialization efforts related to our current and future products, including non-cash charges of $17.5 million of depreciation and amortization of intangible assets and property and equipment, stock-based compensation of $5.7 million, and amortization of debt discount and deferred issuance costs of $4.2 million. We also had a decrease in accounts receivable of $3.4 million due to the seasonal natureexpansion of our ~~business. Cash provided by operating activities was $17.5 million during~~direct sales force and field support resources both in the ~~nine months ended September 30, 2014. We had a net loss~~United States and abroad;

acquisitions of ~~$14.2 million, including non-cash charges of $20.6 million of depreciation and amortization of intangible assets and property and~~ equipment and ~~stock-based compensation of $4.8 million. We also had a decrease~~other fixed assets for use in ~~accounts receivable of $5.5 million due to the seasonal nature~~our current and future manufacturing and research and development facilities;

repurchases of our ~~business.~~

Our investing activities used $12.0 million during the nine months ended September 30, 2015 and $8.6 million during the nine months ended September 30, 2014 primarily related to the acquisition of production equipment, Sofia instruments available for lease and building improvements.

We are planning approximately $6.0 million in capital expenditures for the remainder of 2015. The primary purpose for our capital expenditures is to acquire manufacturing and scientific equipment, to purchase or develop information technology, and to implement facility improvements. We plan to fund these capital expenditures with cash flow from operations and other available sources of liquidity.

~~Cash used by financing activities was $26.6 million during the nine months ended September 30, 2015 and was primarily related to repurchases of~~outstanding common stock ~~under~~or Convertible Senior Notes;

the continued advancement of research and development efforts;

potential strategic acquisitions and investments; and

repayments of our ~~share repurchase program at a cost of approximately $27.2 million. Additionally, we made payments of debt issuance costs of $0.4 million and payments on the~~ lease obligation of $0.4 million. These amounts were partially offset by proceeds from issuance of common stock of $2.2 million. Cash provided by financing activities was $0.1 million during the nine months ended September 30, 2014 and primarily related to proceeds from issuance

~~Table of Contents~~

~~of common stock of $4.5 million offset by repurchases of common stock of $2.0 million and payments on acquisition contingencies of $2.1 million.~~obligation.

In December 2014, we issued Convertible Senior Notes in the aggregate principle amount of $172.5 million. The Convertible Senior Notes have a coupon rate of 3.25% and are due 2020. The Convertible Senior Notes were not convertible as of ~~September 30, 2015.~~March 31, 2016. For detailed information of the terms of the Convertible Senior Notes, see Note 6 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report under the heading “3.25% Convertible Senior Notes due 2020,” which is incorporated by reference herein.

On August 10, 2012, we entered into an amended and restated $140.0 million Senior Credit Facility that matures on August 10, 2017. As of ~~September 30, 2015~~March 31, 2016, the Company had no borrowings under the Senior Credit Facility and due to the limitations of the interest coverage ratio, we had no borrowing capacity under the Senior Credit Facility. At the current time, we do not anticipate the need in the near term to utilize the Senior Credit Facility. As of December 31, ~~2014,~~2015, we had no borrowings outstanding under the Senior Credit Facility. ~~As of September 30, 2015, we were in compliance with all financial covenants.~~ For detailed information of the terms of the Senior Credit Facility see Note 6 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report under the heading “Line of Credit,” which is incorporated by reference herein.

~~Our~~As of March 31, 2016, we have $5.7 million in fair value of contingent considerations associated with prior acquisitions to be settled in future periods.

In January 2016, our board of directors authorized an amendment to replenish the amount available to repurchase up to an aggregate of $50.0 million in shares of common stock or Senior Convertible Notes under our share repurchase program. During the three months ended March 31, 2016, we used $19.6 million to repurchase our outstanding shares under the share repurchase program and $4.5 million to repurchase $5.2 million in principal amount of our outstanding Senior Convertible Notes.

We received $2.4 million during the year ended December 31, 2015 pursuant to the Bill and Melinda Gates Foundation grant agreement, which was restricted as to use until expenditures contemplated in the grant were incurred or committed. We recorded this restricted cash ~~requirements fluctuate~~ as a ~~result~~current asset as we anticipated making expenditures under the grant within one year. As of ~~numerous factors, such~~March 31, 2016, there was no restricted cash.

We expect our revenue and the resulting operating income, as well as the ~~extent~~status of each of our new product development programs, will significantly impact our cash management decisions. Our future capital requirements and the adequacy of our available funds will depend on many factors, including:

our ability to ~~which we generate cash from operations,~~successfully commercialize and further develop our technologies and create innovative products in our markets;

scientific progress in our research and development ~~projects, competition and technological developments~~programs and the ~~time~~magnitude of those programs;

competing technological and ~~expenditures required~~market developments; and

the need to ~~obtain governmental approval~~enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.

Cash Flow Summary




	2016			2015
Net cash (used for) provided by operating activities:	$	(7,597	)	$	31,766
Net cash used for investing activities:	(7,095		)	(2,867		)
Net cash used for financing activities:	(23,320		)	(356		)
Effect of exchange rates on cash	(12		)	(9		)
Net (decrease) increase in cash and cash equivalents	$	(38,024	)	$	28,534

Cash used by operating activities was $7.6 million during the three months ended March 31, 2016. We had a net loss of $3.4 million, including non-cash charges of $6.1 million of depreciation and amortization of intangible assets and property and equipment, stock-based compensation of $2.0 million, and amortization of debt discount and deferred issuance costs of $1.4 million. We also had an increase in accounts receivable of $7.7 million due to the seasonal nature of our ~~products.~~business. Cash provided by operating activities was $31.8 million during the three months ended March 31, 2015. We had net income of $4.0 million, including non-cash charges of $6.2 million of depreciation and amortization of intangible assets and property and equipment, and stock-based compensation of $2.1 million. We also had a decrease in accounts receivable of $15.8 million due to the seasonal nature of our business.

Our investing activities used $7.1 million during the three months ended March 31, 2016 primarily related to the $5.1 million of net cash used for the acquisition of Immutopics as more fully described in Note 11 in the Notes to the Consolidated Financial Statements included in this quarterly report. In addition, we ~~intend~~used cash for investing activities associated with the acquisition of production equipment and Sofia instruments available for lease. Our investing activities used $2.9 million during the three months ended March 31, 2015 primarily related to ~~continue~~the acquisition of production equipment, Sofia instruments available for lease and building improvements.

We are planning approximately $15.0 million in capital expenditures for the remainder of 2016. The primary purpose for our capital expenditures is to ~~evaluate candidates for new product line, company~~acquire manufacturing and scientific equipment, to purchase or develop information technology, ~~acquisitions or technology licensing. If we decide~~and to ~~proceed~~implement facility improvements. We plan to fund these capital expenditures with ~~any such transactions, we may need to incur additional debt, or issue additional equity, to successfully complete the transactions. Based on our current~~ cash ~~position~~flow from operations and ~~our current assessment of future operating results, we believe that our existing~~other available sources of ~~liquidity will be adequate to meet our operating needs~~liquidity.

Cash used by financing activities was $23.3 million during the ~~next 12 months.~~three months ended March 31, 2016 and was primarily related to repurchases of common stock under our share repurchase program at a cost of approximately $19.6 million, repurchase of Convertible Senior Notes under our share repurchase program at a cost of approximately $4.5 million and payments on acquisition contingencies of $0.2 million. These amounts were partially offset by proceeds from issuance of common stock of $1.6 million. Cash used by financing activities was $0.4 million during the three months ended March 31,

2015 and was primarily related to repurchases of common stock of $0.3 million, payments on acquisition contingencies of $0.1 million and payments of debt issuance costs of $0.4 million. These amounts were partially offset by proceeds from issuance of common stock of $0.6 million.

Seasonality

Sales of our infectious disease products are subject to, and significantly affected by, the seasonal demands of the cold and flu seasons, prevalent during the fall and winter. As a result of these seasonal demands, we typically experience lower sales volume in the second and third quarters of the calendar year, and typically have higher sales in the first and fourth quarters of the calendar year. Historically, sales of our infectious disease products have varied from year to year based in large part on the severity, length and timing of the onset of the cold and flu season.

Off-Balance Sheet Arrangements

At ~~September 30,~~March 31, 2016 and December 31, 2015, we did not have any relationships or other arrangements with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Pronouncements

Information about recently adopted and proposed accounting pronouncements is included in Note 1 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report under the ~~headings “Change in Accounting Principle” and~~heading “Recent Accounting Pronouncements” and is incorporated by reference herein.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with ~~GAAP.~~accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to ~~revenue recognition,~~ customer programs and incentives, ~~stock-based compensation,~~ bad debts, inventories, intangible assets, software development costs, stock-based compensation, restructuring, contingencies and litigation, contingent consideration, the fair value of the debt component of the convertible debt instruments, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these ~~estimates.~~estimates under different assumptions or conditions.

A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, ~~2014.~~2015.

~~Table of Contents~~

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We had no borrowings outstanding under our Senior Credit Facility at ~~September 30, 2015.~~March 31, 2016. If we had borrowings under the credit facility, the interest rate would have been ~~1.45%~~1.69% as of ~~September 30, 2015. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not increase our annual interest expense as there are no borrowings.~~March 31, 2016.

We are not subject to interest rate risk on our Convertible Senior Notes as the notes have a fixed interest rate of 3.25%. For fixed rate debt, changes in interest rates will generally affect the fair value of the debt instrument, but not our earnings or cash flows. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to changes in interest rates.

The Company’s current investment policy with respect to cash and cash equivalents focuses on maintaining acceptable levels of interest rate risk and liquidity. Although the Company continually evaluates the placement of investments, as of ~~September 30, 2015,~~March 31, 2016, cash and cash equivalents were placed in money market or overnight funds that we believe are highly liquid and not subject to material market fluctuation risk.

Foreign Currency Exchange Risk

The majority of our international sales are negotiated for and paid in U.S. dollars. Nonetheless, these sales are subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general economic conditions in those markets. Continued change in the values of the Euro, the Japanese Yen and other foreign currencies against the U.S. Dollar could have an impact on our business, financial condition and results of operations. We do not currently hedge against exchange rate fluctuations, which means that we are fully exposed to exchange rate changes. In addition, we have agreements with a number of foreign vendors whereby we evenly share the foreign currency exchange fluctuation risk. We may, in the future, enter into similar such arrangements.

ITEM 4. Controls and Procedures

Evaluation of disclosure controls and procedures: We have performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~September 30, 2015~~March 31, 2016 to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in internal control over financial reporting: There was no change in our internal control over financial reporting during the quarter ended ~~September 30, 2015~~March 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

The information set forth in the section entitled “Legal” under Note 9 of the Notes to the Consolidated Financial Statements, included in Part I, Item I of this Quarterly Report, is incorporated herein by reference.

ITEM 1A. Risk Factors

There has been no material change in our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2014.~~2015. For a detailed description of our risk factors, refer to Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2014.~~2015.

~~Table of Contents~~

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The table below sets forth information regarding repurchases of our common stock by us during the three months ended ~~September 27, 2015:~~March 31, 2016:

Period
Total number
of shares
purchased (1)

Average
price paid
per share

Total number
of shares purchased
as part of publicly
announced plans or programs

Approximate dollar
value of shares that
may yet be
purchased
under the plans or programs (2)
June 29, 2015 - July 26, 2015 367,850
$ 22.82
367,850
$ 27,215,670
July 27, 2015 - August 23, 2015 109,735
20.66
108,456
24,974,539
August 24, 2015 - September 27, 2015 103,404
20.45
103,313
22,861,536
Total 580,989
$ 21.99
579,619
$ 22,861,536



Period	Total number of shares purchased (1)	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs (2)
January 4, 2016 - January 31, 2016	764,739	$	17.20	763,707	$	45,955,148
February 1, 2016 - February 28, 2016	395,692	16.69		388,679	35,006,981		(3)
February 29, 2016 - April 3, 2016	16,887	16.36		—	35,006,981
Total	1,177,318	$	17.02	1,152,386	$	35,006,981

(1) In addition to our share repurchase program, we repurchased ~~1,370~~24,932 shares of common stock from employees in connection with payment of minimum tax withholding obligations relating to the lapse of restrictions on certain ~~restricted stock units~~RSUs during the three months ended ~~September 30, 2015.~~March 31, 2016.

(2) On ~~February 24, 2015, our~~January 25, 2016, we announced that the Board of Directors authorized an amendment to ~~extend our~~the Company's previously announced stock repurchase ~~program. The Board~~program to (i) replenish the amount available for repurchase under the program back to the previously authorized repurchase amount of ~~Directors has authorized us~~$50.0 million, (ii) approve the addition of repurchases of the Company's Convertible Senior Notes under the program and (iii) extend the expiration date of the program to January 25, 2018. Under the amended program, the Company may repurchase, in the aggregate, up to ~~an aggregate of~~ $50.0 million in shares of its common stock and/or its Convertible Senior Notes. The amounts provided in this column give effect to the repurchase of our Convertible Senior Notes that are in addition to the repurchases of our common stock ~~under~~shown in this table.

(3) In February 2016, we repurchased $5.2 million in principal amount of our ~~stock repurchase program. Any shares~~outstanding Convertible Senior Notes for an aggregate cash amount of ~~common stock repurchased under this program will no longer be deemed outstanding upon repurchase and will be returned~~$4.5 million as discussed in Note 6 in the Notes to ~~the pool of authorized shares. The repurchase program will expire on February 24, 2017 unless extended by our Board of Directors.~~Consolidated Financial Statements.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

~~Table of Contents~~

ITEM 6. Exhibits



Exhibit Number
3.1		Restated Certificate of Incorporation of Quidel Corporation. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form ~~10-Q for the quarter ended September 30, 2010.~~8-K filed on February 27, 2015.)
3.2		Certificate of Amendment to the Restated Certificate of Incorporation of Quidel Corporation. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on May 6, 2015.)
3.3		Amended and Restated Bylaws of Quidel Corporation. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on ~~February 27, 2015.~~May 21, 2012.)
4.1		Certificate of Designations of Series C Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010.)
10.1(1)		2016 Cash Incentive Compensation Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on February 12, 2016.)
10.2(1)		2016 Employee Deferred Bonus Compensation Program. (Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K filed on February 12, 2016.)
10.3(1)		2016 Equity Incentive Plan Grants to the Company’s Executive Officers. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K filed on February 12, 2016.)
10.4(1)		2016 Annual Base Salaries for the Company’s Executive Officers. (Incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K filed on February 12, 2016.)
10.5		Amendment No. 45 to Credit Agreement, dated as of ~~August 6, 2015,~~March 25, 2016, by and among Quidel Corporation, as Borrower, Diagnostic Hybrids, Inc., as Guarantor, each lender party thereto, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line ~~Lender.~~Lender, U.S. Bank National Association as Syndication Agent, and Compass Bank as Documentation Agent. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8‑K filed on ~~August 12, 2015.~~March 30, 2016.)
10.2(1)*		~~Employment Offer Letter, dated October 4, 2015, between the Registrant and Edward K. Russell.~~
10.3(1)*		~~Agreement Re: Change in Control, entered into on October 12, 2015, between the Registrant and Edward K. Russell.~~
31.1*		Certification by Principal Executive Officer of Registrant pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification by Principal Financial Officer of Registrant pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certifications by Principal Executive Officer and Principal Financial Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Label Linkbase Document
101.PRE*		XBRL Taxonomy Presentation Linkbase Document

_____________________________

* Filed herewith.

(1) Indicates a management plan or compensatory arrangement

~~Table of Contents~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




Date: ~~October~~April 29, ~~2015~~2016	QUIDEL CORPORATION

	/s/ DOUGLAS C. BRYANT
	Douglas C. Bryant
	President and Chief Executive Officer (Principal Executive Officer)

	/s/ RANDALL J. STEWARD
	Randall J. Steward
	Chief Financial Officer (Principal Financial Officer)

~~Table of Contents~~

Exhibit Index



Exhibit Number
3.1		Restated Certificate of Incorporation of Quidel Corporation. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form ~~10-Q for the quarter ended September 30, 2010.~~8-K filed on February 27, 2015.)
3.2		Certificate of Amendment to the Restated Certificate of Incorporation of Quidel Corporation. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on May 6, 2015.)
3.3		Amended and Restated Bylaws of Quidel Corporation. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on ~~February 27, 2015.~~May 21, 2012.)
4.1		Certificate of Designations of Series C Junior Participating Preferred Stock. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2010.)
10.1(1)		2016 Cash Incentive Compensation Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on February 12, 2016.)
10.2(1)		2016 Employee Deferred Bonus Compensation Program. (Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K filed on February 12, 2016.)
10.3(1)		2016 Equity Incentive Plan Grants to the Company’s Executive Officers. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K filed on February 12, 2016.)
10.4(1)		2016 Annual Base Salaries for the Company’s Executive Officers. (Incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K filed on February 12, 2016.)
10.5		Amendment No. 45 to Credit Agreement, dated as of ~~August 6, 2015,~~March 25, 2016, by and among Quidel Corporation, as Borrower, Diagnostic Hybrids, Inc., as Guarantor, each lender party thereto, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line ~~Lender.~~Lender, U.S. Bank National Association as Syndication Agent, and Compass Bank as Documentation Agent. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8‑K filed on ~~August 12, 2015.~~March 30, 2016.)
10.2(1)*		~~Employment Offer Letter, dated October 4, 2015, between the Registrant and Edward K. Russell.~~
10.3(1)*		~~Agreement Re: Change in Control, entered into on October 12, 2015, between the Registrant and Edward K. Russell.~~
31.1*		Certification by Principal Executive Officer of Registrant pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification by Principal Financial Officer of Registrant pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certifications by Principal Executive Officer and Principal Financial Officer of Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Label Linkbase Document
101.PRE*		XBRL Taxonomy Presentation Linkbase Document

___________________________

* Filed herewith.

(1) Indicates a management plan or compensatory arrangement

2928



Delaware		94-2573850
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	(Do not check if a smaller reporting company) ¨	Smaller reporting company	¨



PART I—FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015	3
Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~	4
Consolidated Statements of Comprehensive ~~Loss~~(Loss) Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~	5
Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~	6
Notes to Consolidated Financial Statements	78
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1817
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	2523
ITEM 4. Controls and Procedures	2524
PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings	2524
ITEM 1A. Risk Factors	2524
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	2625
ITEM 3. Defaults Upon Senior Securities	2625
ITEM 4. Mine Safety Disclosures	2625
ITEM 5. Other Information	2625
ITEM 6. Exhibits	2726
Signatures	2827


	September 30, 2015			December 31, 2014			March 31, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	182,560		$	200,895		$	153,447		$	191,471
Accounts receivable, net	31,020			34,466			26,446			18,398
Inventories	24,568			24,763			24,820			26,388
Deferred tax asset—current	7,754			8,316
Restricted cash	1,810			3,127			—			63
Prepaid expenses and other current assets	3,371			2,914			5,333			4,344
Total current assets	251,083			274,481			210,046			240,664
Property, plant and equipment, net	52,267			49,226			51,957			52,547
Goodwill	80,733			80,748			83,828			80,730
Intangible assets, net	34,138			41,890			32,159			31,833
Other non-current assets	821			1,066			768			731
Total assets	$	419,042		$	447,411		$	378,758		$	406,505
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,003		$	12,421		$	11,338		$	8,675
Accrued payroll and related expenses	9,264			8,349			6,147			9,627
Current portion of lease obligation	710			509			596			585
Current portion of contingent consideration (see Note 9)	598			733
Current portion of contingent consideration							1,125			1,286
Deferred grant revenue	5,517			6,330			1,912			3,658
Other current liabilities	9,238			8,043			7,025			6,999
Total current liabilities	36,330			36,385			28,143			30,830
Long-term debt	141,946			137,958			140,311			143,297
Lease obligation, net of current portion	4,041			4,617			3,880			4,032
Contingent consideration—non-current (see Note 9)	5,009			5,023
Contingent consideration—non-current							4,551			4,230
Deferred tax liability—non-current	7,956			14,890			56			1,970
Income taxes payable	1,746			806			910			910
Deferred rent	2,335			2,228			2,222			2,296
Other non-current liabilities	265			493			282			264
Commitments and contingencies (see Note 9)
Stockholders’ equity:
Preferred stock, $.001 par value per share; 5,000 shares authorized; none issued or outstanding at September 30, 2015 and December 31, 2014	—			—
Common stock, $.001 par value per share; 97,500 shares authorized; 33,419 and 34,433 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	33			34
Preferred stock, $.001 par value per share; 5,000 shares authorized; none issued or outstanding at March 31, 2016 and December 31, 2015							—			—
Common stock, $.001 par value per share; 97,500 shares authorized; 32,323 and 33,323 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively							32			33
Additional paid-in capital	209,474			229,374			192,293			209,121
Accumulated other comprehensive loss	(23		)	(29		)	(29		)	(31		)
Retained earnings	9,930			15,632			6,107			9,553
Total stockholders’ equity	219,414			245,011			198,403			218,676
Total liabilities and stockholders’ equity	$	419,042		$	447,411		$	378,758		$	406,505


	Three months ended September 30,						Nine months ended September 30,						Three months ended March 31,
	2015			2014			2015			2014			2016			2015
Total revenues	$	46,812		$	41,193		$	143,717		$	120,205		$	50,321		$	61,701
Costs and expenses
Cost of sales (excludes amortization of intangible assets of $1,590, $1,571, $4,751, and $4,713, respectively)	16,961			16,768			53,566			52,917
Cost of sales (excludes amortization of intangible assets of $1,590 and $1,571, respectively)													19,249			21,112
Research and development	8,419			11,506			25,575			28,714			12,707			8,051
Sales and marketing	12,112			11,396			35,823			31,567			12,317			11,788
General and administrative	5,889			5,879			22,039			18,949			7,289			9,860
Amortization of intangible assets from acquired businesses and technology	2,219			2,207			6,638			6,623			2,219			2,201
Impairment loss	—			3,558			—			3,558
Total costs and expenses	45,600			51,314			143,641			142,328			53,781			53,012
Operating income (loss)	1,212			(10,121		)	76			(22,123		)
Operating (loss) income													(3,460		)	8,689
Interest expense, net	(3,090		)	(224		)	(9,046		)	(955		)	(2,689		)	(2,895		)
Loss before benefit for income taxes	(1,878		)	(10,345		)	(8,970		)	(23,078		)
Benefit for income taxes	(1,116		)	(4,578		)	(3,268		)	(8,891		)
Net loss	$	(762	)	$	(5,767	)	$	(5,702	)	$	(14,187	)
Basic and diluted loss per share	$	(0.02	)	$	(0.17	)	$	(0.17	)	$	(0.41	)
Weighted shares used in basic and diluted per share calculation	33,683			34,480			34,313			34,340
(Loss) income before taxes													(6,149		)	5,794
(Benefit) provision for income taxes													(2,703		)	1,803
Net (loss) income													$	(3,446	)	$	3,991
Basic (loss) earnings per share													$	(0.11	)	$	0.12
Diluted (loss) earnings per share													$	(0.11	)	$	0.11
Shares used in basic per share calculation													32,727			34,641
Shares used in diluted per share calculation													32,727			35,745



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Consolidated Balance Sheets (in thousands)	As Reported December 31, 2014		Effect of Change in Accounting Principle			After change in Accounting Principle
ASSETS
Current assets:
Prepaid expenses and other current assets	$	3,554	$	(640	)	$	2,914
Total current assets	275,121		(640		)	274,481
Other non-current assets	4,565		(3,499		)	1,066
Total assets	$	451,550	$	(4,139	)	$	447,411

LIABILITIES AND STOCKHOLDERS’ EQUITY
Long-term debt	142,097		(4,139		)	137,958
Total liabilities and stockholders’ equity	$	451,550	$	(4,139	)	$	447,411



	Three months ended September 30,				Nine months ended September 30,
	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Cost of sales	$	113	$	103	$	454	$	431
Research and development	268		221		562		786
Sales and marketing	351		222		1,228		702
General and administrative	987		747		3,469		2,853
Total stock-based compensation expense	$	1,719	$	1,293	$	5,713	$	4,772


	Contingent consideration liabilities (Level 3 measurement)			Contingent consideration liabilities (Level 3 measurement)
Balance at December 31, 2014	$	5,756
Balance at December 31, 2015				$	5,516
Cash payments	(129		)	(195		)
Additional liability recorded for current period acquisition				353
Unrealized gain on foreign currency translation	(20		)	2
Balance at September 30, 2015	$	5,607
Balance at March 31, 2016				$	5,676


	For the three months ended									For the three months ended
	September 30,				Increase (Decrease)					March 31,				Increase (Decrease)
	2015		2014		$			%		2016		2015		$			%
Infectious disease net product sales	$	33,393	$	26,301	$	7,092		27	%	$	36,434	$	48,447	$	(12,013	)	(25	)%
Women’s health net product sales	9,478		8,760		718			8	%	9,123		9,251		(128		)	(1	)%
Gastrointestinal disease net product sales	1,803		1,995		(192		)	(10	)%	1,716		1,731		(15		)	(1	)%
Other net product sales	1,091		410		681			166	%
Royalty, license fees and grant revenue	1,047		3,727		(2,680		)	(72	)%
Royalty, grant and other revenue										3,048		2,272		776			34	%
Total revenues	$	46,812	$	41,193	$	5,619		14	%	$	50,321	$	61,701	$	(11,380	)	(18	)%


	For the three months ended September 30,													For the three months ended March 31,
	2015				2014									2016				2015
	Operating expenses		As a % of total revenues		Operating expenses		As a % of total revenues		Increase (Decrease)					Operating expenses		As a % of total revenues		Operating expenses		As a % of total revenues		Increase (Decrease)
	Operating expenses		As a % of total revenues		Operating expenses		As a % of total revenues		$			%		Operating expenses		As a % of total revenues		Operating expenses		As a % of total revenues		$			%
Research and development	$	8,419	18	%	$	11,506	28	%	$	(3,087	)	(27	)%	$	12,707	25	%	$	8,051	13	%	$	4,656		58	%
Sales and marketing	$	12,112	26	%	$	11,396	28	%	$	716		6	%	$	12,317	24	%	$	11,788	19	%	$	529		4	%
General and administrative	$	5,889	13	%	$	5,879	14	%	$	10		—	%	$	7,289	14	%	$	9,860	16	%	$	(2,571	)	(26	)%
Amortization of intangible assets from acquired businesses and technology	$	2,219	5	%	$	2,207	5	%	$	12		1	%	$	2,219	4	%	$	2,201	4	%	$	18		1	%
Impairment loss	$	—	—	%	$	3,558	9	%	$	(3,558	)	N/A



	For the nine months ended
	September 30,				Increase (Decrease)
	2015		2014		$			%
Infectious disease net product sales	$	103,123	$	80,400	$	22,723		28	%
Women’s health net product sales	27,876		25,581		2,295			9	%
Gastrointestinal disease net product sales	5,393		5,558		(165		)	(3	)%
Other net product sales	3,250		2,946		304			10	%
Royalty, license fees and grant revenue	4,075		5,720		(1,645		)	(29	)%
Total revenues	$	143,717	$	120,205	$	23,512		20	%



	For the nine months ended September 30,
	2015			2014
	Operating expenses	As a % of total revenues		Operating expenses	As a % of total revenues		Increase (Decrease)
	Operating expenses	As a % of total revenues		Operating expenses	As a % of total revenues		$			%
Research and development	25,575	18	%	28,714	24	%	$	(3,139	)	(11	)%
Sales and marketing	35,823	25	%	31,567	26	%	$	4,256		13	%
General and administrative	22,039	15	%	18,949	16	%	$	3,090		16	%
Amortization of intangible assets from acquired businesses and technology	6,638	5	%	6,623	6	%	$	15		—	%
Impairment loss	—	—	%	3,558	3	%	$	(3,558	)	N/A