UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

See accompanying notes.

See accompanying notes.

See accompanying notes.

Note 1. Summary of Significant Accounting Policies

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, 2017,March 31, 2018, and for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, is unaudited. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 20162017 included in the Company’s 20162017 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 20172018 and 2016,2017, the Company’s fiscal year will end or has ended on December 31, 201730, 2018 and January 1,December 31, 2017, respectively. For 20172018 and 2016,2017, the Company’s thirdfirst quarter ended on OctoberApril 1, 20172018 and OctoberApril 2, 2016,2017, respectively. For ease of reference, the calendar quarter end dates are used herein. The three and nine month periods ended September 30,March 31, 2018 and 2017 and 2016 each included 13 and 39 weeks, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the Companymanagement to make estimates and judgmentsassumptions that affect the reported amounts of assets and liabilities revenues and expenses, and related disclosuredisclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to customer programsliabilities at the date of the financial statements and incentives, bad debts, inventories, intangible assets, income taxes, stock-based compensation, contingenciesthe reported amounts of revenues and litigation. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable underexpenses during 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.reporting period. Actual results maycould differ from thesethose estimates.

Revenue Recognition

The Company records revenues primarily from product sales. These revenues are recorded net of rebates and other discounts. These rebates and discounts 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. Revenues from product sales are recorded upon passageRevenue is recognized when control of title and risk of lossthe products is transferred to the customer. Passage of titlecustomers in an amount that reflects the consideration the Company expects to receive from the customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the productdistinct performance obligations in the contract and recognition ofrecognizing revenue occurs upon deliverywhen the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligation is considered to be satisfied once the control of a product is transferred to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when salesthere are no uncertainties regarding payment terms are free on board (“FOB”) destination and at the timeor transfer of shipment when the sales terms are FOB shipping point and there is no right of return.control.

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, plant and equipment. The instrument is depreciated on a straight-line basis over the lower of the lease term or life of the instrument.

The Company has assigned internal resourcesadopted ASC 606 on January 1, 2018, using the modified retrospective transition method applied to assistthose contracts which were not completed as of that date. The cumulative effect of applying the new revenue standard to all incomplete contracts as of January 1, 2018 was not material and, therefore, did not result in an adjustment to retained earnings. The adoption of ASC 606 did not have a material impact on the Company's consolidated financial position, results of operations, equity or cash flows as of the adoption ofdate or for the new standard and is evaluating the impact of the new standard on its accounting policies, processes and system requirements. The Company has begun the process of identifying, categorizing and analyzing its various revenue streams, but has not yet completed its assessment of the impact. The Company will continue to evaluate the future impact and method of adoption of ASU 2014-09 and related amendments on the Consolidated Financial Statements and related disclosures throughout the remainder of 2017. The Company will adopt the new standard beginning Januarythree months ended March 31, 2018.

Note 2. Computation of Earnings (Loss) Per Share

Basic earnings (loss) per share ("EPS") is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding, including restricted stock units (“RSUs”) vested during the period. Diluted earnings per share (“EPS”) is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares consist of shares issuable from stock options, unvested RSUs and the 3.25% Convertible Senior Notes due 2020 (“Convertible Senior Notes”). Potentially dilutive common shares from outstanding stock options and unvested RSUs are determined using the average share price for each period under the treasury stock method. As discussed in Note 6, it isPotentially dilutive shares from the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal toConvertible Senior Notes are determined using the “principal portion” and deliveryif-converted method. Under the provisions of the “share amount”if-converted method, the Convertible Senior Notes are assumed to be converted and included in excessthe denominator of the conversion value overEPS calculation and the principal portioninterest expense, net of tax, recorded in cash or shares of common stock (“conversion premium”). connection with the Convertible Senior Notes is added back to net income.

The Convertible Senior Notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the notes.

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

Potentially dilutive shares excluded from the calculation above represent stock options when the combined exercise price and unrecognized stock-based compensation are greater than the average market price for the Company’s common stock because their effect is anti-dilutive.

Note 3. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories consisted of the following, net of immaterial excess and obsolete reserves, of $0.4 million and $0.7 million at September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively (in thousands):

Note 4. Other Current Liabilities

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

Note 5. Income Taxes

The Company is subject to periodic audits by domestic and foreign tax authorities. Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years from 2009 and forward are subject to examination by the U.S. authorities. The Company's state and foreign tax years for 2001 and 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 laws applied to the facts of each matter.

Note 6. Debt

The Convertible Senior Notes will beare 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). 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 Notes 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 isDuring the first quarter of 2018, the last reported sales price of the Company’s intent and policy to settle conversions throughcommon stock was greater than 130% of the Convertible Senior Notes conversion price for 20 or more of the 30 consecutive trading days preceding the quarter-end. Consequently, the Convertible Senior Notes are convertible as of March 31, 2018. If the Convertible Senior Notes were converted as of March 31, 2018, the if-converted amount would exceed the principal by $1.4 million.

The Convertible Senior Notes may be settled in cash or a 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 principal portion in shares of common stock or cash.stock. Therefore, the Convertible Senior Notes have been classified as short-term as of March 31, 2018. 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 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 ninethree months ended September 30, 2017 and 2016,March 31, 2018, the Company recorded total interest expense of $8.2$2.6 million related to the Convertible Senior Notes, of which $4.1$1.3 million related to the amortization of the debt discount and issuance costs and $4.1$1.3 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 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.

During the ninethree months ended September 30,March 31, 2016, the Company repurchased and retired $5.2 million in principal amount of 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 Company made no repurchases in principal amount of the outstanding Convertible Senior Notes during the nineremainder of 2016 or during the year ended December 31, 2017.

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.prices, and is a Level 2 measurement.

The Credit Agreement includes an accordion feature that allows the facilityRevolving Credit Facility to be increased by $50.0 million upon the satisfaction of certain conditions. The FinancingSenior Credit Facility is guaranteed by certain material domestic subsidiaries of the Company (the “Guarantors”) and is secured by liens on substantially all of the assets of the Company and the Guarantors, excluding real property and certain other types of excluded assets. If the Company does not consummate a sale leaseback transaction with respect to the Summers Ridge property acquired as part of the Triage Business within 180 days of the closing of the Credit Agreement, the Company will also be required to grant the Lenders a mortgage on the real property associated with the Summers Ridge property.

Loans under the Credit Agreement will bear interest at a rate equal to (i) the London Interbank Offered Rate (“LIBOR”) plus the “applicable rate” or (ii) the “base rate” (defined as the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus one-half of one percent and (c) LIBOR plus one percent) plus the “applicable rate.” The initial applicable rate will beis 2.50% per annum for base rate loans and 3.50% per annum for LIBOR rate loans, and thereafter will be determined in accordance with a pricing grid based on the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement) ranging from 2.50% to 3.50% per annum for LIBOR rate loans and from 1.50% to 2.50% per annum for base rate loans. In addition, the Company will paypays a commitment fee on the unused portion of the Credit Agreement based on the Company’s Consolidated Leverage Ratio ranging from 0.10% to 0.50% per annum.

The Term Loan is subject to quarterly amortization of the principal amount on the last business day of each fiscal quarter of the Company (commencing on March 30, 2018) in such amounts as are set forth in the Credit Agreement. The Term Loan and the RevolvingSenior Credit Facility will mature on October 6, 2022, provided that if any of the Company’s 3.25% Convertible Senior Notes due 2020 (the “Convertible Senior Notes”) remain outstanding on the date that is 91 days prior to the maturity date of the Convertible Senior Notes, which is December 15, 2020, and the Company has not satisfied certain Refinancing Conditions (as defined in the Credit Agreement),refinancing conditions, then the maturity date for the Term Loan and the RevolvingSenior Credit Facility will be the date that is 91 days prior to the maturity date of the Convertible Senior Notes.

The Company must prepay loans outstanding under the Credit Agreement in an amount equal to 50% of Excess Cash Flow (as defined in the Credit Agreement) for each fiscal year (commencing with fiscal 2018) less any amount voluntarily prepaid during such fiscal year, but only if the Consolidated Senior Secured Leverage Ratio (as defined in the Credit Agreement) as of the last day of such fiscal year is greater than or equal to 1.25 to 1.00. The Company must also prepay loans outstanding under the Credit Agreement in an amount equal to 100% of the Net Cash Proceeds (as defined in the Credit Agreement) from (i) certain property dispositions and (ii) the receipt of certain other amounts not in the ordinary course of business, in each case, if not reinvested within a specified time period as contemplated in the Credit Agreement, and with a carve out of up to 30% of the Net Cash Proceeds offrom the contemplated sale leaseback transaction relating to the Company’s Summers Ridge property to the extent the excluded amounts are used for specified purposes.

The Credit Agreement contains affirmative and negative covenants that are customary for credit agreements of this nature. The negative covenants include, among other things, limitations on asset sales, mergers, indebtedness, liens, dividends and other distributions, investments and transactions with affiliates. The Credit Agreement contains two financial covenants: (i) a maximum Consolidated Leverage Ratio (as defined in the Credit Agreement) as of the last day of each fiscal quarter for the most recently completed four fiscal quarters of (a) 5.00 to 1.00 for the fiscal quarter ending December 31, 2017, (b) 4.25 to 1.00 for the fiscal quarters ending March 31, 2018 through December 31, 2018 and (c) 3.50 to 1.00 for the fiscal quarter ending March 31, 2019 and each fiscal quarter thereafter; and (ii) a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.25 to 1.00 as of the end of any fiscal quarter for the most recently completed four fiscal quarters. The Company was in compliance with all financial covenants as of March 31, 2018.

Note 7. Stockholders’ Equity

TheDuring the three months ended March 31, 2018, the Company issued 99,669202,851 shares of common stock in conjunction with the vesting and release of RSUs, 954,527RSUs. The Company also issued 291,555 shares of common stock upon the exercise of stock options and 58,09921,342 shares of common stock in connection with the Company’s employee stock purchase plan (the “ESPP”), resulting in net proceeds to the Company of approximately $15.2$5.7 million during the ninethree months ended September 30, 2017.March 31, 2018. The Company repurchased no shares of common stock under its previously announced share repurchase program during nine months ended September 30, 2017. The Company withheld

During the three months ended March 31, 2017, the Company repurchased 1,152,386issued 57,713 shares of common stock under its previously announced share repurchase program forin conjunction with the vesting and release of RSUs. The Company also issued 222,378 shares of common stock upon the exercise of stock options and 32,358 shares of common stock in connection with the Company’s ESPP, resulting in net proceeds to the Company of approximately $19.6$3.1 million during the ninethree months ended September 30, 2016.March 31, 2017. The Company withheld 25,69921,538 shares of outstanding common stock in connection with payment of minimum tax withholding obligations for certain employees relating to the lapse of restrictions on certain RSUs with a value of approximately $0.4 million during the ninethree months ended September 30, 2016. March 31, 2017.

As discussed in Note 6, during the three months ended March 31, 2018, the Company issued 2,427,547 of September 30, 2017, there was $35.0common stock in exchange for $70.2 million available underin aggregate principal of the Company’s share repurchase program.Convertible Senior Notes.

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

Total compensation expense recognized for the three and nine months ended September 30, 2017March 31, 2018 includes $1.0 million and $3.1 million related to stock options and $0.9 million and $2.8$1.9 million related to RSUs. Total compensation expense recognized for the three and nine months ended September 30, 2016March 31, 2017 includes $1.1 million and $3.5 million related to stock options and $0.6 million and $2.3$0.8 million related to RSUs. As of September 30, 2017,March 31, 2018, total unrecognized compensation expense related to non-vested stock options was $5.3$7.0 million, which is expected to be recognized over a weighted-average period of approximately 2.12.3 years. As of September 30, 2017,March 31, 2018, total unrecognized compensation expense related to non-vested restricted stock was $6.1$13.5 million, which is expected to be recognized over a weighted-average period of approximately 2.42.5 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, 2017March 31, 2018 or 2016.2017.

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

The weighted-average fair value of stock options granted during the ninethree months ended September 30,March 31, 2018 and 2017 was $18.76 and 2016 was $8.71 and $5.97,$8.55, respectively. The Company granted 253,844158,758 and 670,733230,261 stock options during the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively. The fair value of RSUs is determined based on the closing market price of the Company’s common stock on the grant date. The weighted-average fair value of RSUs granted during the ninethree months ended September 30,March 31, 2018 and 2017 was $46.48 and 2016 was $21.61 and $16.06,$21.06, respectively. The Company granted 335,716184,377 and 182,425289,338 shares of restricted stock during the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.

Note 8. Industry and Geographic Information

The Company operates in one reportable segment. Sales to customers outside the U.S. represented $21.6$41.9 million (13%(25%) and $23.1$8.3 million (17%(11%) of total revenue for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively. As of September 30, 2017March 31, 2018 and December 31, 2016,2017, balances due from foreign customers were $4.7$22.0 million and $6.8$18.8 million, respectively.

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

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, accounts receivable from customers with balances due in excess of 10% of total accounts receivable totaled $34.2$58.4 million and $13.9$44.4 million, respectively.

Note 9. Commitments and Contingencies

The approximate future minimum lease payments of the Summers Ridge Property are $6.2 million for 2019, $6.4 million for 2020, $6.6 million for 2021, $6.8 million for 2022, $7.0 million for 2023 and $73.0 million in the aggregate after 2023.

From time to time, the Company is involved in variousother litigation and proceedings, including matters related to product liability claims, commercial disputes and litigationintellectual property claims, as well as regulatory, employment, and other claims related to our business. The Company accrues for legal claims when, and to the extent that, amounts associated with the claims become probable and are reasonably estimable. The actual costs of resolving legal claims may be substantially higher or lower than the amounts accrued for those claims. For those matters from timeas to time inwhich we are not able to estimate a possible loss or range of loss, we are not able to determine whether the ordinary courseloss will have a material adverse effect on our business, financial condition or results of business. operations or liquidity. No accrual has been recorded as of March 31, 2018 and December 31, 2017 related to such matters as they are not probable and/or reasonably estimable. 

Management believes that all such current legal actions, in the aggregate, will not have a material adverse effect on the Company. However, the resolution of, or increase in any accruals for, one or more matters may have a material adverse effect on the Company's results of operations and cash flows.

The Company also maintains insurance, including coverage for product liability claims, in amounts which management believes are appropriate given the nature of its business. No accruals have been recorded as of September 30, 2017 or as of December 31, 2016 related to such matters as they are not probable and/or reasonably estimable.

Note 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):

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 categories of the fair value hierarchy during the three and nine month periods ended September 30, 2017March 31, 2018 and the year ended December 31, 2016.2017.

The Company used Level 1 inputs to determine the fair value of its cash equivalents, which primarily consist of funds held in government money market accounts and commercial paper. As such, the carrying value of cash equivalents approximates fair value. During the third quarter of 2017, the Company converted all cash equivalents to cash, and therefore, had no cash equivalents as of September 30, 2017. As of March 31, 2018 and December 31, 2016,2017, the carrying value of cash equivalents was $133.5 million.$101.8 million and $36.1 million, respectively.

In conjunction with the acquisitions of BioHelix Corporation in May 2013, AnDiaTec GmbH & Co. KG in August 2013 and Immutopics, Inc. in March 2016, the Company has recorded contingent consideration of $4.7$3.6 million as of September 30, 2017March 31, 2018 and $5.2$4.6 million as of December 31, 2016.2017. The Company assesses the fair value of contingent consideration to be settled in cash related to these prior acquisitions using a discounted revenue model. Significant assumptions used in the measurement include revenue projections and discount rates. This fair value measurement of contingent consideration is based on significant inputs not observed in the market and thus represent Level 3 measurements.

Changes in estimated fair value of contingent consideration liabilities from December 31, 20162017 through September 30, 2017March 31, 2018 are as follows (in thousands):

Note 11. Acquisition

The fair value of the Senior Credit Agreement entered intodeferred consideration was determined to be $220.6 million on October 6, 2017.the acquisition date based on the net present value of cash payments using an estimated borrowing rate using a quoted price for a similar liability. The fair value of contingent consideration on the acquisition date was $19.7 million and was calculated using a discounted probability weighted valuation model.

In this Quarterly Report, all references to “we,” “our” and “us” refer to Quidel Corporation and its subsidiaries.

Future Uncertainties and Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws that involve material risks, assumptions and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially from those that may be described or implied in the forward-looking statements. As such, no forward-looking statement can be guaranteed. Differences in actual results and performance may arise as a result of a number of factors including, without limitation, the risks set forth in Part II, Item 1A of this Form 10-Q; our reliance on developmentsales of new technologies,our influenza diagnostic tests; fluctuations in our operating results resulting from the timing of the onset, length and severity of cold and flu seasons, seasonality, government and media attention focused on influenza and the related potential impact on humans from novel influenza viruses, adverse changes in competitive conditions in domestic and international markets, the reimbursement system currently in place and future changes to that system, changes in economic conditions in our domestic and international markets, lower than anticipated market penetration of our products, the quantity of our product in our distributors’ inventory or distribution channels, changes in the buying patterns of our distributors, and changes in the healthcare market and consolidation of our customer base; our development and protection of proprietary technology rights; our development of new technologies, products and markets; our reliance on a limited number of key distributors; our reliance on sales of our influenza diagnostics tests; our ability to manage our growth strategy, including our ability to effect strategic acquisitions and to integrate companies or technologies we have acquired or may acquire including our ability to achieve anticipated synergies and process improvements; intellectual property risks, including but not limited to, infringement litigation; our inability to settle conversions of our Convertible Senior Notes in cash; the effect on our operating results from the trigger of the conditional conversion feature of our Convertible Senior Notes; the amount of, and our ability to repay, renew or extend, our outstanding debt and its impact on our operations and our ability to obtain financing; our ability to generate cash, including to service our debt; our need for additional funds to finance our capital or operating needs; the financial soundness of our customers and suppliers; acceptance of our products among physicians and other healthcare providers; competition with other providers of diagnostic products; adverse actions or delays in new product reviews or related to currently-marketed products by the U.S. Food and Drug Administration (the “FDA”) or other regulatory authorities or loss of any previously received regulatory approvals or clearances; changes in government policies; our exposure to claims and litigation, including litigation currently pending against us; costs of or our failure to comply with government regulations in addition to FDA regulations; compliance with other government regulations such as safe working conditions, manufacturing practices, environmental protection, fire hazardrelating to the handling, storage and disposal of hazardous substances; third-party reimbursement policies; our failure to comply with laws and regulations relating to billing and payment for healthcare services; our ability to meet demand for our products; interruptions in our supply of raw materials; product defects; business risks not covered by insurance andinsurance; our exposure to other litigation claims; interruption to our computer systems;cyber-based attacks and security breaches; competition for and loss of management and key personnel; international risks, including but not limited to, compliance with product registration requirements, exposure to currency exchange fluctuations and foreign currency exchange risk sharing arrangements, longer payment cycles, lower selling prices and greater difficulty in collecting accounts receivable, reduced protection of intellectual property rights, political and economic instability, taxes, and diversion of lower priced international products into U.S. markets; changes in tax rates and exposure to additional tax liabilities or assessments; risks relating to the acquisition and integration of the Triage and BNP Businesses; Alere’s failure to perform under various transition agreements relating to our acquisition of the Triage and BNP Businesses; that we may incur substantial costs to build our information technology infrastructure to transition the Triage and BNP Businesses; that we may have to write off goodwill relating to our acquisition of the Triage and BNP Businesses; our ability to manage our growth strategy; the level of our indebtedness; the amount of, and our ability to repay, renew or extend, our outstanding debt and its impact on our operations and our ability to obtain financing; that substantially the Senior Credit Facility is secured by substantially all of our assets; our prepayment requirements under the Senior Credit Facility; the agreements for our indebtedness place operating and financial restrictions on the Company; that an event of default could trigger acceleration of our outstanding indebtedness; the effect on our operating results from the trigger of the conditional conversion feature of our Convertible Senior Notes; that we may incur additional indebtedness; increases in interest rate relating to our variable rate debt; dilution resulting from future sales of our equity; volatility in our stock price; provisions in our charter documents, Delaware law and the indenture governing our Convertible Senior Notes that might delay or impede stockholder actions with respect to business combinations or similar transactions; and our intention of not paying dividends. Forward-looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “might,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “goal,” “project,” “strategy,” “future,” and similar words, although some forward-looking statements are expressed differently. Forward-looking statements in this Quarterly Report include, among others, statements concerning: our outlook for the remainder of 2018 regarding our strategy; revenue growth, gross margins and earnings, including the sources of expected growth; that we expect to continue to make substantial expenditures for research and development activities; projected capital expenditures for the remainder of the 2017 fiscal year2018; and our source of funds for such expenditures; the sufficiency of our liquidity and capital resources; our strategy, goals, initiatives and objectives; anticipated new product and development results; future commitments under existing research development agreements; the impact and timing of expected adoption of new accounting standards; that we will continueour exposure to, make substantial expendituresand defenses against, claims and litigation; the sufficiency of our liquidity and our short-term needs for sales and marketing, manufacturing and research and development activities;capital; that we may enter intoincur additional foreign currency exchange risk sharing arrangements; our exposure to claims and litigation;debt or issue additional equity; and our intention to continue to evaluate newtechnology, product lines technology and acquisition opportunities. The risks described under “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016,2017, and elsewhere herein and in reports and registration statements that we file with the Securities and Exchange Commission (the “SEC”) from

The following should be read in conjunction with the Consolidated Financial Statements and Notes thereto beginning on page 3 of this Quarterly Report. Except as required by law, we undertake no obligation to publicly release the results of any revision or update of these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We have a leadership position in the development, manufacturing and marketing of diagnostic testing solutions. These diagnostic testing solutions are separated into our four product categories, including: immunoassays,categories: rapid immunoassay, cardiac immunoassay, specialized diagnostic solutions and molecular assays, virology and specialty products.diagnostic solutions. We sell our products directly to end users and distributors, in each case, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, leading universities, retail clinics, pharmacies and wellness screening centers. We market our products in the U.S. through a network of national and regional distributors and a direct sales force. Internationally, we sell primarily through distributor arrangements.

Outlook

We continueanticipate revenue growth during the full year 2018 and a related positive impact on gross margin and earnings. This growth is expected to realize expansionbe driven primarily by the full year impact of our footprint for Sofia and molecular platforms. For the remainder of 2017, we will focus on integrating the Triage and BNP Businesses, and increased sales of our Sofia assays and molecular products. In addition, we expect continued and significant investment in research and development activities as we invest in our next generation immunoassay and molecular platforms. We will continue toour focus on prudently managing our business and delivering long-term sustainable growth throughsolid financial results, while at the creation of a broader-based diagnostic company serving our existing customers as well as targeting larger and faster growing markets. We willsame time striving to continue to invest inintroduce new products to the market and maintaining our emphasis on research and development focused on expansion of our immunoassay and molecular programs. In addition,investments for longer term growth. Finally, we continue to invest in our commercial organization and related marketing programs, in support of recent product launches. We will also continue to evaluate opportunities to acquire new product lines, technologies and companies that would enable us to expand more quickly.companies.

The following table compares total revenues for the three months ended September 30,March 31, 2018 and 2017 and 2016 (in thousands, except percentages):

For the three months ended September 30, 2017,March 31, 2018, total revenue increased to $50.9$169.1 million from $49.3$73.7 million in the prior period. The increase in total revenues was driven by Cardiac Immunoassay revenue from the acquisition of the Triage and BNP Businesses in October 2017. The Company realized increases in immunoassayRapid Immunoassay revenues due to growth inhigher revenues of Influenza and Strep A products bolstered by a severe cold and RSV products,flu season, as well as the addition of InflammaDry® and AdenoPlus® diagnostic productsproduct businesses acquired from RPS.RPS Diagnostics in May 2017. The increase in our molecular revenues was driven by continued gains on our Solana platform. These increases were partially offset by a decline in grant revenues of approximately $3.8 million as the amended Bill and Melinda Gates Foundation grant was fully recognized by the third quarter of 2016.

Cost of sales was $19.4Gross profit increased by 119% over prior year to $106.3 million, or 38%63% of total revenues,revenue for the three months ended September 30, 2017March 31, 2018, compared to $17.7$48.5 million, or 36%66% of total revenues,revenue for the three months ended September 30, 2016.March 31, 2017. The increase in cost of salesincreased gross profit was mainly driven by higher revenues. Inimproved product mix and increased sales volumes of Influenza products, Strep A products and the addition costs increasedof the Cardiac Immunoassay products from the acquisition of the Triage and BNP Businesses in October 2017. Gross margin declined slightly compared to the same period in the prior year due to the amortization of inventory step-up to fair value and the amortization of intangible assets associated with the integration of the InflammaDryTriage and AdenoPlus diagnostic businesses acquired from RPS and higher depreciation expense related to the increased number of Sofia and Solana instrument placements. These increases also contributed to the increased cost of sales as a percentage of total revenues. Additionally, the decrease in grant revenue contributed to the increase in cost of sales as a percentage of total revenues.BNP Businesses.

Operating Expenses

The following table compares operating expenses for the three months ended September 30,March 31, 2018 and 2017 and 2016 (in thousands, except percentages):

Research and development expense for the three months ended September 30, 2017 decreasedMarch 31, 2018 increased from $8.8$7.9 million to $7.5$12.6 million due primarily to a decrease in outside service spending in support ofadditional expenses associated with the Savanna MDxTriage and Sofia platforms.BNP Businesses.

Research and development expenses include direct external costs such as fees paid to third-party contractors and 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.

Sales and marketing expense for the three months ended September 30, 2017March 31, 2018 increased $1.0from $14.2 million to $12.9$28.6 million due primarily to thedriven by increased personnel and consulting costsexpenses associated with the InflammaDrynewly acquired Triage and AdenoPlus diagnostic businesses acquired from RPS during the second quarter of 2017.BNP Businesses, increased compensation, stock compensation and freight expenses associated with higher revenues.

General and administrative expense for the three months ended September 30, 2017March 31, 2018 increased from $6.4$7.1 million lastto $10.5 million compared with the prior year period primarily due to $6.6 million this year, due primarily toadditional costs associated with the Triage and BNP Businesses, higher incentivestock compensation and stock based compensation expense.legal fees. General and administrative expense primarily includes personnel costs, information technology, facilities and professional service fees.

InterestOther Expense, netNet

Interest expense, primarily relates to accrued interest for the coupon and accretion of the discount on our 3.25% Convertible Senior Notes due 2020 (“Convertible Senior Notes”) issued in December 2014 and interest paid on our lease obligation associated with our San Diego McKellar facility. Interest expense was $2.8 million and $3.0 million for the three months ended September 30, 2017 and 2016, respectively.

Income Taxes

ForOur effective tax rate for the ninethree months ended September 30,March 31, 2018 and 2017 was 12% and 2016, we13%, respectively. We recognized an income tax expense of $0.4$4.7 million and an income tax benefit of $7.1$2.1 million respectively. Forfor the ninethree months ended September 30,March 31, 2018 and 2017, the

respectively. The effective tax rate was lower for the three months ended March 31, 2018 primarily due to the federal statutory rate and Foreign Derived Intangible Income ("FDII") benefits arising from the enactment of the Tax Act effective for tax years beginning on or after January 1, 2018 and the impact to our valuation allowance from utilization of deferred tax assets to shield our tax liability.

The Tax Act significantly revises how companies compute their U.S corporate tax liability by, among other provisions, reducing the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as no tax benefit was provided for losses incurred in United States Federal and certain state jurisdictions because those losses are offset by a full valuation allowance. The Company also has recorded tax expense for foreign jurisdictions and certain state jurisdictions during this time period.the transition tax.

Liquidity and Capital Resources

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the principal sources of liquidity consisted of the following (in thousands): 

Our primary source of liquidity, other than our holdings of cash and cash equivalents, has been cash flows from operations.operations, debt financings and proceeds from issuance of common stock. Cash generated from operations provides us with the financial flexibility we need to meet normal operating, investing, and financing needs. We anticipate that our current cash and cash equivalents, together with cash provided by operating activities will be sufficient to fund our near term capital and operating needs for at least the next 12 months. Normal 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:  

In December 2014, we issued Convertible Senior Notes in the aggregate principal 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 convertibleprincipal balance outstanding as of September 30, 2017.March 31, 2018 was $97.1 million. 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, which is incorporated by reference herein.

As of September 30, 2017,March 31, 2018, we have $4.7$249.2 million in fair value of deferred and contingent considerations associated with prior acquisitions to be settled in future periods.

On October 6, 2017, the Company entered into the Credit Agreement, which provided the Company with a $245.0 million Term Loan and a $25.0 million Revolving Credit Facility. The Term Loan and the Revolving Credit Facility will mature on October 6, 2022. On the closing date of the Credit Agreement, the Company borrowed the entire amount of the Term Loan and $10.0 million under the Revolving Credit Facility. The Company used the proceeds of the Term Loan along with its cash on

We expect our revenue and operating expenses will significantly impact our cash management decisions. Our future capital requirements and the adequacy of our available funds to service our long-term debt and to fund working capital expenditures and business development efforts will depend on many factors, including:

Cash provided by operating activities was $16.5of $35.8 million during the ninethree months ended September 30, 2017. The add backMarch 31, 2018 reflects net income of non-cash items$34.0 million and adjustments of $27.7 million associated with depreciation, amortization, loss on extinguishment of debt, amortization of inventory step-up to fair value, accretion of interest on deferred consideration, and stock-based compensation contributed $27.9 million to operating cash flows during the nine months ended September 30, 2017.compensation. Offsetting this were a net loss of $3.1 million andwas a net working capital use of $8.4 million.$28.2 million, primarily related to an increase in accounts receivable. For the ninethree months ended September 30, 2016,March 31, 2017, cash usedprovided by operating activities was $4.8 million. The major contributors to the use of cash during the nine months ended September 30, 2016 were a$29.6 million reflected net loss $11.9 million, a change in deferred tax assets and liabilitiesincome of $7.4$14.3 million and a net working capital useadjustments of $9.7 million. Offsetting this use of cash was the add back of non-cash items of $27.7$9.0 million related to depreciation, amortization and stock based compensation. Additionally, a net working capital contribution of $6.3 million contributed to the increase.

Our investing activities used $27.2provided $141.7 million during the ninethree months ended September 30, 2017March 31, 2018 primarily for the acquisitiondue to sales of the InflammaDry and AdenoPlus diagnostic businesses from RPS, as more fully described in Note 11 in the Notes to the Consolidated Financial StatementsSummers Ridge property for approximately $13.7$146.6 million. Additionally, we used $12.8$4.9 million on production equipment, building improvements and Sofia and Solana instruments available for lease and intangible assets. Our investing activities used $12.9$3.7 million during the ninethree months ended September 30, 2016, with $5.1 million of net cash usedMarch 31, 2017, primarily for the acquisition of Immutopics, Inc. In addition, we used cash for investing activities associated with the acquisition of production equipment, building improvements and Sofia and Solana instruments available for lease.lease and building improvements.

We are currently planning approximately $5.0$25.0 million in capital expenditures for the remainder of 2017.2018. The primary purpose for our capital expenditures is to acquire manufacturing and scientific equipment, to purchase or develop information technology, Sofia and Solana instruments and to implement facility improvements. We plan to fund these capital expenditures with the cash on our balance sheet.

Cash used by financing activities was $111.8 million during the three months ended March 31, 2018 and was primarily related to payments on the Term Loan of $101.8 million, payments on the Revolving Credit Facility of $10.0 million, repurchases of common stock of $3.2 million, transaction costs related to the debt exchange of $1.4 million, and payments on acquisition contingencies of $1.0 million, partially offset by proceeds from issuance of stock of $5.7 million. Cash provided by financing activities was $14.1$2.1 million during the ninethree months ended September 30,March 31, 2017, and was primarily related to proceeds from the issuance of common stock of $15.2 million,$3.1 million. These amounts were partially offset by repurchases of common stock of $0.5$0.4 million and payments on acquisition-relatedacquisition related contingencies of $0.5 million. Cash used by financing activities was $20.4 million during the nine months ended September 30, 2016, of which $20.1 million was used for repurchases of common stock primarily related to our share repurchase program, and $4.5 million was used for the repurchase of Convertible Senior Notes. These amounts were partially offset by proceeds from the issuance of common stock of $4.8 million. 

Seasonality

Off-Balance Sheet Arrangements

At September 30, 2017March 31, 2018 and December 31, 2016,2017, we did not have any relationships 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 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 is based on our consolidated financial statements, which have been prepared in accordance with 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, management evaluates its estimates, including those related to customer programs and incentives, bad debts, inventories,stock-based compensation, goodwill and intangible assets, business combinations, income taxes, stock-based compensation, contingencies and litigation.convertible debt. 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 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, 2016.2017. Other than the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as described in Note 1 to the Consolidated Financial Statements in this Quarterly Report, there were no material changes to our critical accounting policies and estimates during the three months ended March 31, 2018.

ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk

We are not subject to interest rate risk on our Convertible Senior Notes as the notes have a fixed interest rate.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.

Our current investment policy with respect to our cash and cash equivalents focuses on maintaining acceptable levels of interest rate risk and liquidity. Although we periodically evaluate our placement of investments, as of September 30, 2017,March 31, 2018, we did not have any cash and cash equivalents placed in funds held in government money market accounts and commercial paper.

Sales to customers outside the U.S. represented $41.9 million (25%) of total revenue for the three months ended March 31, 2018, and balance due from foreign customers was $22.0 million as of March 31, 2018. We recognized $0.2 million in foreign exchange loss for the three months ended March 31, 2018 and an immaterial foreign exchange gain for the three months ended March 31, 2017. The majority of our international sales are negotiated for and paid in U.S. dollars. Nonetheless, these sales are subject toforeign 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 changewhich involves currency risks. Change in the values of the Euro, the Chinese Renminbi, the Japanese Yen and other foreign currencies could result in currency gains and losses and 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

ITEM 4.    Controls and Procedures

PART II OTHER INFORMATION

ITEM 1.    Legal Proceedings

The information set forth in the section entitled “Legal”“Litigation and Other Legal Proceedings” 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

The table below sets forth information regarding repurchases of our common stock by us during the three months ended September 30, 2017.March 31, 2018.

ITEM 3.    Defaults Upon Senior Securities

None.

ITEM 4.    Mine Safety Disclosures

Not applicable.

ITEM 5.    Other Information

None.

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.

Exhibit Index