Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________________________
FORM 10-Q
  ____________________________________________________________________________
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20162017
or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number: 0-10961
 ____________________________________________________________________________ 
QUIDEL CORPORATION
(Exact name of registrant as specified in its charter)
  ____________________________________________________________________________
Delaware 94-2573850
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
12544 High Bluff Drive, Suite 200, San Diego, California 92130
(Address of principal executive offices, including zip code)
(858) 552-1100
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
____________________________________________________________________________ 
Indicate by check mark whether the Registrant:registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x¨Accelerated filer¨
x
     
Non-accelerated filer 
(Do not check if a smaller reporting company) ¨
Smaller reporting company¨
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act.¨
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of OctoberJuly 21, 2016, 32,643,5572017, 33,440,376 shares of the registrant's common stock were outstanding.
 

Table of Contents

INDEX
 
PART I—FINANCIAL INFORMATION
 
ITEM 1. Financial Statements (unaudited)
 
Consolidated Balance Sheets as of SeptemberJune 30, 20162017 and December 31, 20152016
3
Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016
4
Consolidated Statements of Comprehensive Loss(Loss) Income for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016
5
Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20162017 and 20152016
6
Notes to Consolidated Financial Statements
8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
1719
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
2428
ITEM 4. Controls and Procedures
2528
PART II—OTHER INFORMATION
 
ITEM 1. Legal Proceedings
2529
ITEM 1A. Risk Factors
2529
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
2630
ITEM 3. Defaults Upon Senior Securities
2631
ITEM 4. Mine Safety Disclosures
2631
ITEM 5. Other Information
2631
ITEM 6. Exhibits
2732
Signatures
2833


PART I    FINANCIAL INFORMATION
 
ITEM 1.    Financial Statements
QUIDEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value; unaudited)
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
ASSETS      
Current assets:      
Cash and cash equivalents$153,363
 $191,471
$175,048
 $169,508
Accounts receivable, net26,191
 18,398
19,836
 24,990
Inventories23,364
 26,388
22,964
 26,045
Restricted cash—
 63
Prepaid expenses and other current assets5,617
 4,344
7,405
 4,851
Total current assets208,535
 240,664
225,253
 225,394
Property, plant and equipment, net50,204
 52,547
51,015
 50,858
Goodwill83,864
 80,730
91,676
 83,834
Intangible assets, net28,616
 31,833
29,777
 27,639
Deferred tax asset—non-current4,746
 —
247
 —
Other non-current assets532
 731
569
 525
Total assets$376,497
 $406,505
$398,537
 $388,250
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable$11,296
 $8,675
$11,215
 $16,047
Accrued payroll and related expenses7,907
 9,627
9,426
 9,642
Current portion of lease obligation624
 585
114
 98
Current portion of contingent consideration (see Note 9)630
 1,286
Deferred grant revenue—
 3,658
Current portion of contingent consideration4,317
 2,826
Other current liabilities4,891
 6,999
6,255
 4,999
Total current liabilities25,348
 30,830
31,327
 33,612
Long-term debt142,986
 143,297
147,081
 144,340
Lease obligation, net of current portion3,560
 4,032
3,919
 3,979
Contingent consideration—non-current (see Note 9)4,445
 4,230
Contingent consideration—non-current374
 2,349
Deferred tax liability—non-current55
 1,970
63
 58
Income taxes payable985
 910
1,101
 1,045
Deferred rent2,054
 2,296
1,782
 1,965
Other non-current liabilities317
 264
302
 272
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, 2016 and December 31, 2015—
 —
Common stock, $.001 par value per share; 97,500 shares authorized; 32,644 and 33,323 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively33
 33
Preferred stock, $.001 par value per share; 5,000 shares authorized; none issued or outstanding at June 30, 2017 and December 31, 2016—
 —
Common stock, $.001 par value per share; 97,500 shares authorized; 33,413 and 32,897 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively33
 33
Additional paid-in capital199,049
 209,121
214,380
 204,905
Accumulated other comprehensive loss(30) (31)(18) (53)
(Accumulated deficit) retained earnings(2,305) 9,553
Accumulated deficit(1,807) (4,255)
Total stockholders’ equity196,747
 218,676
212,588
 200,630
Total liabilities and stockholders’ equity$376,497
 $406,505
$398,537
 $388,250
See accompanying notes.

QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
 
Three months ended 
 September 30,		 Nine months ended 
 September 30,		Three months ended 
 June 30,		 Six months ended 
 June 30,
2016 2015 2016 20152017 2016 2017 2016
Total revenues$49,341
 $46,812
 $138,795
 $143,717
$38,267
 $39,133
 $111,959
 $89,454
Costs and expenses              
Cost of sales (excludes amortization of intangible assets of $1,590, $1,590, $4,770 and $4,751, respectively)17,728
 16,961
 54,295
 53,566
Cost of sales (excludes amortization of intangible assets of $1,623, $1,590, $3,245 and $3,180, respectively)17,755
 17,318
 41,325
 36,567
Research and development8,801
 8,419
 31,164
 25,575
7,627
 9,656
 15,502
 22,363
Sales and marketing11,853
 12,112
 36,376
 35,823
12,360
 12,206
 25,915
 24,523
General and administrative6,561
 5,889
 20,532
 22,039
6,783
 6,430
 13,903
 13,600
Amortization of intangible assets from acquired businesses and technology2,273
 2,219
 6,782
 6,638
2,390
 2,290
 4,681
 4,509
One-time acquisition costs2,379
 252
 2,431
 371
Total costs and expenses47,216
 45,600
 149,149
 143,641
49,294
 48,152
 103,757
 101,933
Operating income (loss)2,125
 1,212
 (10,354) 76
Operating (loss) income(11,027) (9,019) 8,202
 (12,479)
Interest expense, net(3,006) (3,090) (8,619) (9,046)(2,778) (2,924) (5,603) (5,613)
Loss before taxes(881) (1,878) (18,973) (8,970)
Benefit for income taxes(309) (1,116) (7,115) (3,268)
Net loss$(572) $(762) $(11,858) $(5,702)
Basic and diluted loss per share$(0.02) $(0.02) $(0.36) $(0.17)
Shares used in basic and diluted per share calculation32,673
 33,683
 32,645
 34,313
(Loss) income before income taxes(13,805) (11,943) 2,599
 (18,092)
(Benefit) provision for income taxes(1,963) (4,103) 151
 (6,806)
Net (loss) income$(11,842) $(7,840) $2,448
 $(11,286)
Basic earnings (loss) per share$(0.35) $(0.24) $0.07
 $(0.35)
Diluted earnings (loss) per share$(0.35) $(0.24) $0.07
 $(0.35)
Shares used in basic per share calculation33,500
 32,541
 33,351
 32,632
Shares used in diluted per share calculation33,500
 32,541
 34,295
 32,632
See accompanying notes.


QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(LOSS) INCOME
(in thousands; unaudited)
 
 Three months ended 
 September 30,		 Nine months ended 
 September 30,
 2016 2015 2016 2015
Net loss$(572) $(762) $(11,858) $(5,702)
Other comprehensive (loss) income, net of tax       
Changes in cumulative translation adjustment3
 (8) 1
 6
Comprehensive loss$(569) $(770) $(11,857) $(5,696)
 Three months ended 
 June 30,		 Six months ended 
 June 30,
 2017 2016 2017 2016
Net (loss) income$(11,842) $(7,840) $2,448
 $(11,286)
Other comprehensive income (loss), net of tax       
Changes in cumulative translation adjustment26
 (4) 35
 (2)
Comprehensive (loss) income$(11,816) $(7,844) $2,483
 $(11,288)
See accompanying notes.


QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Nine months ended 
 September 30,		Six months ended 
 June 30,
2016 20152017 2016
OPERATING ACTIVITIES:      
Net loss$(11,858) $(5,702)
Adjustments to reconcile net loss to net cash (used for) provided by operating activities:   
Net income (loss)$2,448
 $(11,286)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:   
Depreciation, amortization and other17,597
 17,537
11,577
 12,410
Stock-based compensation expense5,820
 5,713
4,059
 4,086
Amortization of debt discount and deferred issuance costs4,266
 4,232
2,741
 2,854
Change in deferred tax assets and liabilities(7,375) (6,368)(247) (7,218)
Change in fair value of acquisition contingencies(589) —
Gain on extinguishment of Convertible Senior Notes(421) —
—
 (421)
Changes in assets and liabilities:      
Accounts receivable(7,464) 3,441
5,156
 2,494
Inventories3,544
 186
3,216
 3,818
Income taxes receivable(248) 234
(866) 63
Prepaid expenses and other current and non-current assets(1,047) (305)(1,908) (915)
Restricted cash63
 1,317
—
 63
Accounts payable984
 (1,947)(4,064) (1,942)
Accrued payroll and related expenses(1,867) 772
637
 (1,526)
Income taxes payable(12) 729
38
 (2)
Deferred grant revenue(3,658) (813)—
 (2,697)
Other current and non-current liabilities(2,541) 1,226
1,220
 (2,237)
Net cash (used for) provided by operating activities:(4,806) 20,252
Net cash provided by (used for) operating activities:24,007
 (2,456)
INVESTING ACTIVITIES:      
Acquisitions of property, equipment and intangibles(7,860) (12,003)(8,070) (5,424)
Acquisition of Immutopics, net of cash acquired(5,061) —
Acquisition of businesses, net of cash acquired(14,655) (5,094)
Net cash used for investing activities:(12,921) (12,003)(22,725) (10,518)
FINANCING ACTIVITIES:      
Payments on lease obligation(433) (375)(44) (285)
Repurchases of common stock(20,096) (27,617)(488) (20,079)
Repurchases of Convertible Senior Notes(4,459) —
—
 (4,459)
Proceeds from issuance of common stock4,821
 2,152
5,265
 2,098
Payments of debt issuance costs—
 (365)
Payments on acquisition contingencies(207) (129)(486) (195)
Payment for acquisition holdback—
 (229)
Net cash used for financing activities:(20,374) (26,563)
Net cash provided by (used for) financing activities:4,247
 (22,920)
Effect of exchange rates on cash(7) (21)11
 (10)
Net decrease in cash and cash equivalents(38,108) (18,335)
Net increase (decrease) in cash and cash equivalents5,540
 (35,904)
Cash and cash equivalents, beginning of period191,471
 200,895
169,508
 191,471
Cash and cash equivalents, end of period$153,363
 $182,560
$175,048
 $155,567

Nine months ended 
 September 30,		Six months ended 
 June 30,
2016 20152017 2016
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:      
Cash paid for interest$3,331
 $3,744
$3,140
 $3,243
Cash paid for income taxes$459
 $1,920
Income tax paid$1,182
 $409
NON-CASH INVESTING ACTIVITIES:      
Purchase of property, equipment and intangibles by incurring current liabilities
$1,866
 $1,433
$2,404
 $953
NON-CASH FINANCING ACTIVITIES:      
Reduction of other current liabilities upon issuance of restricted share units$539
 $408
$903
 $539

See accompanying notes.

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 SeptemberJune 30, 2016,2017, and for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, is unaudited. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 20152016 included in the Company’s 20152016 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 20162017 and 2015,2016, the Company’s fiscal year will end or has ended on December 31, 2017 and January 1, 2017, and January 3, 2016, respectively. For 20162017 and 2015,2016, the Company’s thirdsecond quarter ended on OctoberJuly 2, 20162017 and September 27, 2015,July 3, 2016, respectively. For ease of reference, the calendar quarter end dates are used herein. The three and ninesix month periods ended SeptemberJune 30, 20162017 and 20152016 each included 13 and 39 weeks, respectively.weeks.
Comprehensive Loss(Loss) Income
Comprehensive loss(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,income taxes, stock-based compensation, contingencies and litigation, contingent consideration, the fair value of the debt component of convertible debt instruments and income taxes.litigation. 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. RevenueRevenues 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 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 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 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 payments of $2.4 million in April 2015 and $2.8 million in July 2016 based on milestone achievements for both the original and the amended grant agreements. Under the original and amended grant agreements, the Company recognizesrecognized grant revenue on the basis of the lesser of the amount recognized on a proportional performance basis or the amount of cash payments that arewere non-refundable as of the end of each reporting period. The Company recognized grant revenue of $3.8$1.0 million and $0.8$2.7 million as grant revenue for the three and six months ended SeptemberJune 30, 2016, and 2015, respectively, and recognized $6.5 million and $3.2 million for the nine months ended September 30, 2016 and 2015, respectively. Cash payments received arewere restricted as to use until expenditures contemplated in the grant arewere incurred or committed. As of September 30,December, 31, 2016 all payment related milestones have beenwere achieved and all of the grant revenue of $20.9 million has been recorded.was fully recognized. As such, the Company recognized no grant revenue during the three and six months ended June 30, 2017.
Fair Value Measurements
The Company uses the fair value hierarchy established in ASCAccounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures,whichrequires 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 which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
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.
Reclassifications
The Company recorded immaterial reclassifications of one-time acquisition costs totaling $0.3 million and $0.4 million for three and six months ended June 30, 2016, respectively, from general and administrative expense as previously reported in the Consolidated Statements of Operations to conform to current year presentation. The Company believes these reclassifications provide greater clarity and insight into the consolidated financial statements for the periods presented. The reclassification did not impact the net 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.
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 (“ASU 2014-09”). 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 ofhas issued several amendments to the new revenue recognition standard, for entities reporting under GAAP. As a result, thewhich include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses, and principal vs. agent

considerations. The standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein.
The Company has assigned internal resources to assist in the adoption of the new standard and is currently evaluating the impact of this guidancethe new standard on its accounting policies, processes and expectssystem 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 2017. The Company will adopt the new standard in the first quarter ofbeginning January 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 the standard for the annual reporting period ended December 31, 2016.
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 (VIE) characteristics for a limited partnership or similar entity and (iii) the primary beneficiary determination. The guidance is effective for annual periods 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 did not have a significant impact on the 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's adoption of this guidance in the first quarter of 2016 did not have a significant impact on the 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,therein, 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. Share-Based Payment AccountingUnder (“ASU 2016-09”). This guidance includes provisions to simplify several aspects of accounting for share-based payment transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liability, and classification on the guidance, entities will no longer record excessstatement of cash flows. ASU 2016-09 includes a requirement that the tax benefits and certain tax deficiencies in additional paid-in capital (APIC). Instead, they will record all excess tax benefits and tax deficiencies aseffect related to the settlement of share-based awards be recorded within income tax expense or benefit in the income statement,statement. The simplification of income tax accounting for share-based payment transactions also impacts the computation of weighted-average diluted shares outstanding under the treasury stock method. The Company adopted ASU 2016-09 in the first quarter of 2017 and APIC pools will be eliminated. In addition, entities will recognizethe impact of the adoption resulted in the following:
Upon adoption, the balance of the unrecognized excess tax benefits regardless of whether$1.8 million was recorded as an increase to deferred tax assets and a corresponding increase to the benefit reduces taxes payablevaluation allowance, resulting in the current period. Under current guidance, excessno impact to retained earnings.
Excess tax benefits from share-based arrangements are to be classified within cash flow from operating activities, rather than as cash flow from financing activities. The Company applied this provision on a retrospective basis and the prior period statement of cash flows was adjusted. This adoption did not recognized untilhave a material impact on the deduction reduces taxes payable. CompaniesCompany’s cash flows.
The Company elected to continue to estimate the number of awards expected to be forfeited and adjust the estimate when appropriate, as is currently required. This adoption did not have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.
There was no material impact on the computation of weighted-average diluted shares outstanding.

In January 2017, the FASB issued guidance codified in ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). Under this new guidance, an entity will apply this partno longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the guidance usingfair value of a modified retrospective transition methodreporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will recordcompare the fair value of a cumulative-effect adjustment in retained earningsreporting unit with its carrying amount and recognize an impairment charge 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 amount by which the carrying amount exceeds the reporting unit's fair value. The guidance is effective for fiscal years beginning after December 15, 2016,2019 including interim periods within those fiscal years. Earlytherein, with early adoption is permitted, but all of the guidance must be adopted in the same period.permitted. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2017.2020.
Note 2. Computation of LossEarnings (Loss) Per Share
For the three and ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015, basic lossearnings (loss) per share was computed by dividing net lossearnings (loss) by the weighted-average number of common shares outstanding, including restricted stock units (RSUs)(“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 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 RSUs.
As
The following table reconciles the effect would be anti-dilutive, 0.9 millionweighted-average shares used in computing basic and 0.8 million of outstanding stock options and RSUs were excluded from the computation of lossdiluted earnings (loss) per share forin the three and nine months ended September 30, 2016, respectively, and 0.9 million and 1.0 million of outstanding stock options and RSUs were excluded from the computation of loss per share for the three and nine months ended September 30, 2015, respectively.respective periods (in thousands):
Additionally, stock options are
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
Shares used in basic earnings (loss) per share (weighted-average common shares outstanding)33,500
 32,541
 33,351
 32,632
Effect of dilutive stock options and RSUs—
 —
 944
 —
Shares used in diluted earnings (loss) per share calculation33,500
 32,541
 34,295
 32,632
Potentially dilutive shares excluded from calculation due to anti-dilutive effect1,291
 3,240
 1,465
 3,166
Potentially dilutive shares excluded from the calculation of diluted EPSabove represent stock options when the combined exercise price and 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. StockAdditionally, stock options totaling 1.9 million and 2.9 million forRSUs that would have been included in the

three and nine months ended September 30, 2016, respectively, and 2.2 million and 1.8 diluted EPS calculation if the Company had earnings amounted to 1.1 million for the three and nine months ended SeptemberJune 30, 2015 were not2017. Stock options and RSUs that would have been included in the computation of diluted EPS becausecalculation if the exercise of such options would be anti-dilutive.Company had earnings amounted to 0.7 million for both the three and six months ended June 30, 2016.
As discussed in Note 6, the Company issued its 3.25% Convertible Senior Notes due 2020 (“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 SeptemberJune 30, 20162017 and 2015;2016; therefore, there was no dilutive impact from the Convertible Senior Notes to diluted EPS during the three and ninesix months ended SeptemberJune 30, 20162017 and 2015.2016.
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 reserves of $0.6$0.5 million and $0.7 million at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively (in thousands):
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
Raw materials$9,378
 $10,289
$9,104
 $9,297
Work-in-process (materials, labor and overhead)8,591
 7,441
7,665
 7,990
Finished goods (materials, labor and overhead)5,395
 8,658
6,195
 8,758
Total inventories$23,364
 $26,388
$22,964
 $26,045
Note 4. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
Customer incentives$2,173
 $4,030
$4,852
 $3,766
Accrued interest1,586
 202
227
 227
Other1,132
 2,767
1,176
 1,006
Total other current liabilities$4,891
 $6,999
$6,255
 $4,999
Note 5. Income Taxes
The Company recognized an income tax benefit of $0.3$2.0 million and $1.1$4.1 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, which represents an effective tax rate of 35%14% and 59%34%, respectively. TheFor the three months ended June 30, 2017, the effective tax rate was higher forlower compared to the three months ended September 30, 2015same period of 2016 due to a yearprojected utilization of net operating loss and credit carryforwards available to date adjustment for theoffset 2017 domestic taxable income. The Company recorded a full year effective

valuation allowance against these tax rate.attributes during 2016. The Company recognized an income tax expense of $0.2 million and an income tax benefit of $7.1 million and $3.3$6.8 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, which represents an effective tax rate of 38%6% and 36%38%, respectively. For the ninesix months ended SeptemberJune 30, 2016,2017, the effective tax rate benefit was higher as comparedlower primarily due to the same periodprojected utilization of 2015 due primarilynet operating loss and credit carryforwards available to the federal researchoffset 2017 domestic taxable income. The Company recorded a full valuation allowance against these tax credit inattributes during 2016. There was no federal research tax credit for the nine months ended September 30, 2015 as the credit provisions of the United States tax code had expired at the end of 2014 and were not reinstated until December 2015.
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
3.25% Convertible Senior Notes due 2020
In December 2014, the Company issued $172.5 million aggregate principal amount of 3.25%its Convertible Senior Notes due 2020.Notes. Debt issuance costs of approximately $5.1 million were 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 using the effective interest method to interest expense over the six-year term of the Convertible Senior Notes. The remaining $0.9 million of debt issuance costs were allocated as a component of equity in additional paid-in capital. Deferred issuance costs related to the Convertible Senior Notes were $2.9$2.4 million and $3.5$2.8 million as of SeptemberJune 30, 20162017 and December 31, 2015,2016, 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 NoteNotes 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 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. 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 averageweighted-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 ninesix months ended SeptemberJune 30, 2016,2017, the Company recorded total interest expense of $8.2$5.5 million related to the Convertible Senior Notes, of which $4.1$2.8 million related to the amortization of the debt discount and issuance costs and $4.1$2.7 million related to the coupon due semi-annually. During the ninesix months ended SeptemberJune 30, 2015,2016, the Company recorded total interest expense of $8.2$5.5 million related to the Convertible Senior Notes, of which $4.0$2.7 million related to the amortization of the debt discount and issuance costs and $4.2$2.8 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.

InDuring the first quarter ofsix months ended June 30, 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 six months ended June 30, 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.
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
Principal amount of Convertible Senior Notes outstanding$167,314
 $172,500
$167,314
 $167,314
Unamortized discount of liability component(21,413) (25,703)(17,808) (20,221)
Unamortized debt issuance costs(2,915) (3,500)(2,425) (2,753)
Net carrying amount of liability component142,986
 143,297
147,081
 144,340
Less: current portion—
 —
—
 —
Long-term debt$142,986
 $143,297
$147,081
 $144,340
Carrying value of equity component, net of issuance costs$29,211
 $29,758
$29,211
 $29,211
Fair value of outstanding Convertible Senior Notes$168,054
 $170,120
$186,353
 $165,223
Remaining amortization period of discount on the liability component4.3 years
 5.0 years
3.5 years
 4.0 years
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 SeptemberJune 30, 20162017 and 2015;2016; therefore there was no dilutive impact during the three and six months months ended SeptemberJune 30, 20162017 and 2015.2016. If the Convertible Senior Notes were converted as of SeptemberJune 30, 2016,2017, the if-converted value would not exceed the principal amount.
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. Deferred financing costs are amortized on a straight-line basis over the term of the Senior Credit Facility. As of September 30, 2016, the Company had deferred financing costs related to the Senior Credit Facility of $0.3 million included as a portion of prepaid expenses and other current assets. As of December 31, 2015, the Company had deferred financing costs related to the Senior Credit Facility of $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 covenants, including among others, limitations on: liens; mergers, consolidations and dispositions of assets; debt; dividends, stock redemptions and the redemption and/or prepayment of other debt; investments (including loans and advances) and acquisitions; and 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.
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, its funded debt to adjusted EBITDA ratio and interest coverage ratio. As of December 31, 2015, the Company had no borrowings outstanding. Due to the limitations of the interest coverage ratio, the Company had no borrowing capacity under the Senior Credit Facility at September 30, 2016.
Note 7. Stockholders’ Equity
Issuances and Repurchases of Common Stock
During the nine months ended September 30, 2016, 110,446The Company issued 95,669 shares of common stock were issued in conjunction with the vesting and release of RSUs, 305,227411,781 shares of common stock were issued due toupon the exercise of stock options and 82,68232,358 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 $4.8 million. During$5.3 million during the ninesix months ended SeptemberJune 30, 2016, 1,152,3862017. The Company repurchased no shares of common stock under its previously announced share repurchase program during six months ended June 30, 2017. The Company withheld 23,579 shares of outstanding common stock werein connection with payment of minimum tax withholding obligations for certain employees relating

to the lapse of restrictions on certain RSUs for approximately $0.5 million during the six months ended June 30, 2017. The Company repurchased 1,152,386 shares of common stock under the Company’sits previously announced share repurchase program for approximately $19.6 million. Additionally, 25,699million during the six months ended June 30, 2016. The Company withheld 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 RSUs for approximately $0.4 million.million during the six months ended June 30, 2016. As of SeptemberJune 30, 2016,2017, there was $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,
 
  2016 2015 2016 2015
 Cost of sales$129
 $113
 $498
 $454
 Research and development365
 268
 1,006
 562
 Sales and marketing376
 351
 645
 1,228
 General and administrative864
 987
 3,671
 3,469
 Total stock-based compensation expense$1,734
 $1,719
 $5,820
 $5,713
  Three months ended June 30, Six months ended June 30,
 
  2017 2016 2017 2016
 Cost of sales$107
 $134
 $237
 $369
 Research and development404
 344
 816
 641
 Sales and marketing437
 332
 907
 269
 General and administrative1,190
 1,296
 2,099
 2,807
 Total stock-based compensation expense$2,138
 $2,106
 $4,059
 $4,086
Total compensation expense recognized for the three and ninesix months ended SeptemberJune 30, 20162017 includes $1.1$1.0 million and $3.5$2.1 million related to stock options and $0.6$1.1 million and $2.3$2.0 million related to RSUs, respectively.RSUs. Total compensation expense recognized for the three and ninesix months ended SeptemberJune 30, 20152016 includes $1.1 million and $3.5$2.5 million related to stock options and $0.6$1.0 million and $2.2$1.6 million related to RSUs, respectively.RSUs. As of SeptemberJune 30, 2016,2017, total unrecognized compensation expense related to non-vested stock options was $6.9$6.2 million, which is expected to be recognized over a weighted-average period of approximately 2.52.4 years. As of SeptemberJune 30, 2016,2017, total unrecognized compensation expense related to non-vested RSUsrestricted stock was $3.5$6.7 million, which is expected to be recognized over a weighted-average period of approximately 2.6 years. Compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the three and ninesix months ended SeptemberJune 30, 20162017 or 2015.2016.
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.
  Nine months ended September 30,
 
  2016 2015
 Risk-free interest rate1.47% 1.48%
 Expected option life (in years)6.59
 6.23
 Volatility rate36% 40%
 Dividend rate—% —%
  Six months ended June 30,
 
  2017 2016
 Risk-free interest rate2.31% 1.47%
 Expected option life (in years)6.63
 6.59
 Volatility rate36% 36%
 Dividend rate—% —%
The weighted-average fair value of stock options granted during the ninesix months ended SeptemberJune 30, 2017 and 2016 was $8.71 and 2015 was $5.97, and $9.60, respectively. The Company granted 670,733253,844 and 616,994670,733 stock options during the ninesix months ended SeptemberJune 30, 20162017 and 2015, respectively. The weighted-average fair value of RSUs granted during the nine months ended September 30, 2016, and 2015 was $16.06 and $23.47, respectively. The Company granted 182,425 and 146,164 shares of

RSUs during the nine months ended September 30, 2016 and 2015, 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 six months ended June 30, 2017 and 2016 was $21.55 and $15.51, respectively. The Company granted 332,216 and 167,925 shares of restricted stock during the six months ended June 30, 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 $23.1$14.7 million (17%(13%) and $18.8$16.5 million (13%(18%) of total revenue for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, balances due from foreign customers were $4.1$4.5 million and $5.6$6.8 million, respectively.

The Company had sales to individual customers in excess of 10% of total revenues, as follows:
  Nine months ended September 30,
 
  2016 2015
 Customer:   
 A16% 23%
 B14% 16%
 C13% 11%
  43% 50%
  Six months ended June 30,
 
  2017 2016
 Customer:   
 A22% 14%
 B16% 13%
 C15% 13%
  53% 40%
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, accounts receivable from customers with balances due in excess of 10% of total accounts receivable totaled $18.5$8.2 million and $12.0$13.9 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 which management believes are appropriate given the nature of its business. No accrual hasaccruals have been recorded as of SeptemberJune 30, 2017 or as of December 31, 2016 related to such matters as they are not probable and/or reasonably estimable. At December 31, 2015, the Company had $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 by the Company 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 and $0.3 million for each of the three months ended SeptemberJune 30, 2017 and 2016, and 2015.respectively. The Company had royalty and license expenses relating to those agreements of approximately $0.6$0.4 million and $0.5 million for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively.
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 SeptemberAs of June 30, 20162017 and December 31, 2015,2016, total future commitments under the terms of these agreements are estimated at $2.8$0.8 million and $4.2$2.3 million, respectively. The commitments will fluctuate as 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 $10.0 million upon achievement of certain revenue targets through May 2018. The fair value of the revenue royalty earn-out to be settled in cash is estimated using a discounted revenue model. Due to changes in the estimated payments and a shorter discounting period, the fair value of the contingent consideration liabilities

changed, resulting in a gain of $0.6 million recorded to cost of sales in the Consolidated Statements of Operations during the three and nine months ended September 30, 2016. There were no changes to the fair value of the contingent consideration for the three and nine months ended September 30, 2015. No payments related to the revenue royalty earn-out were disbursed during the three months ended September 30, 2016 and 2015. Payments of $0.2 million and $0.1 million related to the revenue royalty earn-out were disbursed during the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, the current portion of the contingent consideration is $0.6 million and the non-current portion of the contingent consideration is $4.1 million.
In August 2013, the Company 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, 2016 currency conversion rate) upon achievement of certain revenue targets through 2018. As of September 30, 2016, the Company has included $0.1 million in the non-current portion of contingent consideration related to these revenue targets. 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, 2016 currency conversion rate) upon achievement of certain research and development milestones, subject to continued employment. The Company paid $0.3 million for the achievement of agreed upon research and development milestones during the three months ended September 30, 2015 and none during the three months ended September 30, 2016. The Company paid $0.9 million and $1.2 million for the achievement of agreed upon research and development milestones during the nine months ended September 30, 2016 and 2015, respectively. These costs are recorded as compensation expense included in research and development expense in the Consolidated Statements of Operations. As of September 30, 2016, there are no remaining research and development milestones to be achieved.
The Company recorded contingent consideration of $0.4 million related to the acquisition of Immutopics, Inc. ("Immutopics") in March 2016 as discussed in Note 11.
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):
September 30, 2016 December 31, 2015June 30, 2017 December 31, 2016
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets:                              
Cash equivalents$133,450
 $—
 $—
 $133,450
 $133,147
 $—
 $—
 $133,147
$130,820
 $—
 $—
 $130,820
 $133,540
 $—
 $—
 $133,540
Total assets measured at fair value$133,450
 $—
 $—
 $133,450
 $133,147
 $—
 $—
 $133,147
$130,820
 $—
 $—
 $130,820
 $133,540
 $—
 $—
 $133,540
Liabilities:                              
Contingent consideration—
 —
 5,075
 5,075
 —
 —
 5,516
 5,516
—
 —
 4,691
 4,691
 —
 —
 5,175
 5,175
Total liabilities measured at fair value$—
 $—
 $5,075
 $5,075
 $—
 $—
 $5,516
 $5,516
$—
 $—
 $4,691
 $4,691
 $—
 $—
 $5,175
 $5,175
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 ninesix month periods ended SeptemberJune 30, 20162017 and the year ended December 31, 2015.2016.
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 accountaccounts and commercial paper. As such, the carrying value of cash equivalents approximates fair value. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the carrying value of cash equivalents was $133.5$130.8 million and $133.1$133.5 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 million as of June 30, 2017 and $5.2 million as of December 31, 2016. The Company assesses the fair value of contingent consideration to be settled in cash related to 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. In the first quarter of 2016, the Company recorded an additional contingent liability of $0.4 million for the acquisition of Immutopics (see Note 11). Due to changes in the estimated payments and a shorter discounting period related to the BioHelix contingent consideration, the fair value of the contingent consideration liabilities changed during the three and nine months ended September 30, 2016. These changes resulted in a $0.6 million gain recorded to cost of sales in the Consolidated Statements of Operations during the three and nine months ended September 30, 2016. There were no changes to the fair value of the contingent consideration for the three and nine months ended September 30, 2015.

Changes in estimated fair value of contingent consideration liabilities from December 31, 20152016 through SeptemberJune 30, 20162017 are as follows (in thousands):

Contingent consideration liabilities
(Level 3 measurement)
Balance at December 31, 2015$5,516
Cash payments(207)
Net gain recorded for fair value adjustments(589)
Additional liability recorded for current period acquisition353
Unrealized gain on foreign currency translation2
Balance at September 30, 2016$5,075


Contingent consideration liabilities
(Level 3 measurement)
Balance at December 31, 2016$5,175
Cash payments(486)
Unrealized loss on foreign currency translation2
Balance at June 30, 2017$4,691
Note 11. Acquisition
On March 18, 2016,May 16, 2017 the Company acquired Immutopics, Inc.the InflammaDry® and AdenoPlus® diagnostic businesses from RPS Diagnostics ("RPS"), a privately-held, life science research company, baseddeveloper and manufacturer of rapid, point-of-care ("POC") diagnostic tests for the eye health and primary care markets, for approximately $14.0 million in San Clemente, California.cash. The purchase price has been preliminarily allocated as follows: $6.1 million to purchased technology, $7.8 million to goodwill and the remaining value to inventory and property and equipment. The acquisition has been accounted for in conformity with ASC Topic 805, Business Combinations. TotalThe InflammaDry and AdenoPlus products are rapid, lateral-flow based, POC products for the detection of infectious and inflammatory diseases and conditions of the eye. Revenues for these products are reflected in the Company’s Immunoassay revenue category. The purchase price allocation related to this acquisition is preliminary as the Company obtains additional information related to working capital items.

Note 12. Subsequent Events
Pending Acquisition of Triage Business
On July 15, 2017, the Company entered into a Purchase Agreement (the “Triage Purchase Agreement”) with Alere Inc., a Delaware corporation (“Seller”), QTB Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company (“Purchaser”), and, for the limited purposes set forth therein, Abbott Laboratories, an Illinois corporation (“Abbott”), pursuant to which Seller agreed to sell, and Purchaser agreed to acquire, Seller’s cardiovascular and toxicology Triage® MeterPro business (the “Triage Business”). As aggregate consideration for the acquisition was $5.5 million, which included $5.1Triage Business, the Company will pay $400.0 million in initial cash paymentsat the closing of the acquisition (subject to an inventory adjustment as set forth in the Triage Purchase Agreement) and $0.4assume certain post-closing liabilities. The Company expects to fund the cash purchase price for the Triage Business with a combination of cash on hand and new debt financing.
The closing of the acquisition of the Triage Business is subject to certain closing conditions, including: (i) the consummation of the transactions contemplated by the Agreement and Plan of Merger, dated as of January 30, 2016, as amended on April 13, 2017, by and among Seller, Abbott and Angel Sub, Inc. (“Abbott/Alere”), pursuant to which Seller will become a wholly-owned subsidiary of Abbott (the “Abbott/Alere Merger”), (ii) no law or judgment (whether temporary, preliminary or permanent) shall have been promulgated, entered, enforced, enacted or issued by any governmental authority, including a court, that remains in effect and that prohibits, enjoins or makes illegal the consummation of the transactions, (iii) the consummation of the transactions contemplated by the BNP Purchase Agreement (as discussed below), and (iv) other customary closing conditions. Consummation of the acquisition of the Triage Business is expected to occur concurrent with, or as soon as practicable following, the closing of the Abbott/Alere Merger.
Pending Acquisition of BNP Business
Also on July 15, 2017, the Company entered into a Purchase Agreement (the “BNP Purchase Agreement”) with Seller, Purchaser, and, for the limited purposes set forth therein, Abbott, pursuant to which Seller agreed to sell, and Purchaser agreed to acquire, assets and liabilities relating to Seller’s contractual arrangement with Beckman Coulter, Inc. for the supply by Seller of antibodies and other inputs related to, and distribution of, the Triage® BNP Test (the “BNP Product”) for the Beckman Coulter Access Family of Immunoassay Systems (the “BNP Business”). As aggregate consideration for the BNP Business, the Company will pay up to $40.0 million in fair valuecash, payable in five annual installments of contingent$8.0 million, the first of which will be paid approximately six months following the closing of the transactions contemplated by the BNP Purchase Agreement, and assume certain post-closing liabilities. The cash purchase price is subject to an inventory adjustment as set forth in the BNP Purchase Agreement. The obligation to pay the annual installments will (i) terminate if our net sales of BNP Product fall below a specified amount in the European Economic Area and certain other specified market conditions occur, and (ii) accelerate, and be immediately payable, if the Company transfers or conveys certain associated rights, assets or properties. The Company intends to fund the cash purchase price for the BNP Business from cash on hand.
The closing of the acquisition of the BNP Business is subject to certain closing conditions, including: (i) the consummation of the Abbott/Alere Merger, (ii) no law or judgment (whether temporary, preliminary or permanent) shall have been promulgated, entered, enforced, enacted or issued by any governmental authority, including a court, that remains in effect and that prohibits, enjoins or makes illegal the consummation of the transactions, (iii) the consummation of the transactions contemplated by the Triage Purchase Agreement, and (iv) other customary closing conditions. The acquisition of the BNP Business is expected to occur at, or as soon as practicable following, the closing of the Abbott/Alere Merger.
Commitment Letter
Also, on July 15, 2017, in connection with the entry into the Triage Purchase Agreement, the Company entered into a commitment letter (the “Commitment Letter”) with Bank of America, N.A. (“Bank of America”) and JPMorgan Chase Bank, N.A. (“JPMorgan” and together with Bank of America, the “Initial Lenders”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (or any of its designated affiliates, “MLPFS”) and JPMorgan (“JPMS” and together with MLPFS, the “Lead Arrangers”). The Commitment Letter provides that, in connection with the transactions contemplated by the Triage Purchase Agreement and subject to the conditions set forth in the Commitment Letter, the Initial Lenders will provide to the Company a $245.0 million senior secured term loan facility (the “Term Loan”) and a $25.0 million revolving credit facility (the “Revolving Credit Facility,” and together with the Term Loan, the “Financing”).
The Company intends to use, along with cash on hand, the proceeds of the Term Loan and a portion of the Revolving Credit Facility to pay the consideration based upon achievementfor the Triage Business and associated fees and costs for its acquisitions of the Triage Business and the BNP Business.

The commitment to provide the Financing remains subject to certain conditions, including consummation of the acquisitions; the negotiation and execution of definitive documentation consistent with the Commitment Letter; the delivery of certain revenue targets through September 2024. The Immutopics portfoliofinancial information; the absence of products willa material adverse effect on the Triage Business; the accuracy of specified representations and warranties of Abbott/Alere in the Triage Purchase Agreement and specified representations and warranties of the Company to be includedset forth in the definitive loan documents; the Lead Arrangers having been provided a specified period to syndicate the Financing, with the Company's MicroVue products that serveassistance of the bone health research community.Company as set forth in the Commitment Letter; and other customary closing conditions. The actual documentation governing the Financing has not been finalized, and accordingly, the actual terms may differ from the description of such terms in the Commitment Letter.

ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, our reliance on development of new technologies, fluctuations in our operating results resulting from seasonality, 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, changes in sales levels as it relates to the absorption of our fixed costs, lower than anticipated market penetration of our products, 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 intellectual property;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 including the acquisitions of the Triage Business and BNP Business (defined below) and to integrate companies or technologies we have acquired or may acquire;acquire including our ability to achieve anticipated synergies and process improvements; intellectual property risks, including but not limited to, infringement litigation; our debt service requirements; 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; limitations andthe impact of restrictive covenants in our Senior Credit Facility;credit agreements and our ability to comply with these covenants, including our ability to incur additional 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; our ability to generate cash, including to service our debt; our need for additional funds to finance our capital or operating needs; volatilitythe financial soundness of our customers and disruption in the global capital and credit markets;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; compliance with other government regulations, such as safe working conditions, manufacturing practices, environmental protection, fire hazard and disposal of hazardous substances; third-party reimbursement policies; our ability to meet demand for our products; interruptions in our supply of raw materials; product defects; business risks not covered by insurance and exposure to other litigation claims; interruption to our computer systems; 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; our significant debt service requirements; the possibility that we may incur additional indebtedness; 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 the 20162017 fiscal year; the closing and the timing of the closing of our acquisitions of the Triage Business and the BNP Business and the source of funds relating thereto; projected capital expenditures for the remainder of the 20162017 fiscal year and our source of funds for such expenditures; the sufficiency of our liquidity and capital resources; our strategy, goals and objectives; anticipated new product and development results; expected growth and the sources of that growth;future commitments under existing research development agreements; the impact and timing of expected adoption of new accounting standards; that we will continue to make substantial expenditures for sales and marketing, manufacturing and research and development activities; that we may enter into additional foreign currency exchange risk sharing arrangements; our exposure to claims and litigation; expectations regarding grant revenues and expenditures in the remainder of 2016; and our intention to continue to evaluate new 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, 2015,2016, and elsewhere herein and in reports and registration statements that we file with the Securities and Exchange Commission (the “SEC”) from time to time, should be carefully considered. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Quarterly Report.

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 rapid diagnostic testing solutions. These diagnostic testing solutions primarily include applications in infectious diseases, women’s healthare separated into our four product categories, including: immunoassays, molecular assays, virology and gastrointestinal diseases.specialty products. 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 United StatesU.S. through a network of national and regional distributors and through a direct sales force. Internationally, we sell and market primarily through distributor arrangements.
Recent Developments
On May 16, 2017, we acquired the InflammaDry® and AdenoPlus® diagnostic businesses from RPS Diagnostics (“RPS”) a developer and manufacturer of rapid, point-of-care (“POC”) diagnostic tests for the eye health and primary care markets, for approximately $14.0 million in cash. The InflammaDry and AdenoPlus products are rapid, lateral-flow based, POC products for the detection of infectious and inflammatory diseases and conditions of the eye. See Note 11 of the Notes to the Consolidated Financial Statements for additional information.
On July 15, 2017, we entered into the Triage Purchase Agreement pursuant to which we agreed to acquire from Alere its cardiovascular and toxicology Triage® MeterPro business (the “Triage Business”). As aggregate consideration for the Triage Business, we will pay $400.0 million in cash at the closing of the acquisition (subject to an inventory adjustment as set forth in the Triage Purchase Agreement) and assume certain post-closing liabilities. Consummation of the transactions contemplated by the Triage Purchase Agreement is subject to a number of closing conditions, including approval of our acquisition of the Triage Business by the Federal Trade Commission (the “FTC”) and the European Commission (the “EC”) and other regulatory approvals. Abbott/Alere are divesting the Triage Business in connection with review by the FTC and the EC of the proposed merger of Alere into a wholly-owned subsidiary of Abbott, pursuant to which Alere will become a wholly-owned subsidiary of Abbott (the “Abbott/Alere Merger”), which remains subject to FTC and EC approvals and other regulatory approvals. See Note 12 of the Notes to the Consolidated Financial Statements for additional information.
Also on July 15, 2017, we entered into the BNP Purchase Agreement pursuant to which we agreed to acquire from Alere assets and liabilities relating to Alere’s contractual arrangement with Beckman Coulter, Inc. for the supply by Alere of antibodies and other inputs related to, and distribution of, the Triage® BNP Test for the Beckman Coulter Access Family of Immunoassay Systems (the “BNP Business”). As aggregate consideration for the BNP Business, we will pay up to $40.0 million in cash (subject to an inventory adjustment as set forth in the BNP Purchase Agreement), payable in five annual installments of $8.0 million, the first of which will be paid approximately six months following the closing of the transactions contemplated by the BNP Purchase Agreement, and assume certain post-closing liabilities. Our acquisition of the BNP Business is subject to a number of closing conditions, including approval of our acquisition of the BNP Business by the FTC and EC and other regulatory approvals. Abbott/Alere are divesting the BNP Business in connection with review by the EC of the Abbott/Alere Merger. See Note 12 of the Notes to the Consolidated Financial Statements for additional information.
Outlook
We continue to realize expansion of our Sofia footprint and molecular platforms. For the remainder of 2016,2017, we will continue to focus on managing our business and delivering long-term sustainable growth through the creation of a broader-based diagnostic company serving our existing customers as well as targeting larger and faster growing markets. We will continue to invest in research and development, focused on expansion of our Sofia and molecular programs. In addition, we continue to invest in our commercial organization and related marketing programs, in support of recent product launches. We will focus on closing the proposed acquisitions of the Triage Business and the BNP Business (the “Proposed Acquisitions”) and will also continue to evaluate opportunities to acquire new product lines, technologies and companies that would enable us to expand more quickly.

Three months ended SeptemberJune 30, 20162017 compared to the three months ended SeptemberJune 30, 20152016
Total Revenues
The following table compares total revenues for the three months ended SeptemberJune 30, 20162017 and 20152016 (in thousands, except percentages):
 For the three months ended    
September 30, Increase (Decrease)
 2016 2015 $ %
Infectious disease net product sales$32,774
 $33,393
 $(619) (2)%
Women’s health net product sales10,164
 9,478
 686
 7 %
Gastrointestinal disease net product sales1,711
 1,803
 (92) (5)%
Royalty, grant and other revenue4,692
 2,138
 2,554
 119 %
Total revenues$49,341
 $46,812
 $2,529
 5 %
 For the three months ended    
June 30, Increase (Decrease)
 2017 2016 $ %
Immunoassays$21,983
 $21,848
 $135
 1 %
Molecular3,214
 2,236
 978
 44 %
Virology9,218
 9,861
 (643) (7)%
Specialty products3,090
 3,258
 (168) (5)%
Royalties, grants and other762
 1,930
 (1,168) (61)%
Total revenues$38,267
 $39,133
 $(866) (2)%
For the three months ended SeptemberJune 30, 2016,2017, total revenue increaseddecreased to $49.3$38.3 million from $46.8$39.1 million in the prior period. The Company realized declinesmajor driver was in the infectious disease category primarily due to lower Influenza product sales slightly offset with an increaseroyalties, grants and other category. The decline in sales of Strep A products. The increase in the women's health category was driven by our Bone Health, Autoimmune/Complement and Thyretain product lines. The acquisition of Immutopics, Inc. ("Immutopics") contributed to the growth in our Bone Health product line. Royalty, license fees and grant revenue increased year over year due primarily to timing of grant revenues associated with the amended Bill and Melinda Gates Foundation grant were fully recognized by the third quarter of 2016. The increase in our molecular revenues was driven by continued gains on our Solana platform. These increases were slightly offset by a decrease in virology and our Savanna MDx development program.specialty products revenue. The virology decline was due primarily to a decline in the sales of respiratory products.

Cost of Sales
Cost of sales was $17.7$17.8 million, or 36%46% of total revenues, for the three months ended SeptemberJune 30, 20162017 compared to $17.0$17.3 million, or 36%44% of total revenues, for the three months ended SeptemberJune 30, 2015. Cost2016. The increase in cost of sales was due to higher depreciation expense related to the increased number of Sofia and Solana instrument placements and costs associated with the integration of the InflammaDry and AdenoPlus diagnostic businesses acquired from RPS. These increases in cost of sales also contributed to the increase of cost of sales as a percentage of total revenues. Also impacting the increase in cost of sales as a percentage of revenues was the decrease in grant revenue remained flat compared toas the prior year.revenues associated with the amended Bill and Melinda Gates Foundation grant were fully recognized in the third quarter of 2016.
Operating Expenses
The following table compares operating expenses for the three months ended SeptemberJune 30, 20162017 and 20152016 (in thousands, except percentages):
For the three months ended September 30,    For the three months ended June 30,    
2016 2015    2017 2016    
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)
$ %$ %
Research and development$8,801
 18% $8,419
 18% $382
 5 %$7,627
 20% $9,656
 25% $(2,029) (21)%
Sales and marketing$11,853
 24% $12,112
 26% $(259) (2)%$12,360
 32% $12,206
 31% $154
 1 %
General and administrative$6,561
 13% $5,889
 13% $672
 11 %$6,783
 18% $6,430
 16% $353
 5 %
Amortization of intangible assets from acquired businesses and technology$2,273
 5% $2,219
 5% $54
 2 %$2,390
 6% $2,290
 6% $100
 4 %
One-time acquisition costs$2,379
 6% $252
 1% $2,127
 844 %
Research and Development Expense
Research and development expense for the three months ended SeptemberJune 30, 2016 increased2017 decreased from $8.4$9.7 million to $8.8$7.6 million due primarily to an increasea decrease in development spending for the next generation Sofia and the Savanna MDx platform and an increase inreduced spending on clinical trials spending for Solana products. These increases are offset by lower spending for the development of our Lyra products.trials.

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. Our research and development spending will continue to be centered around our immunoassay and molecular platforms.
Sales and Marketing Expense
Sales and marketing expense for the three months ended SeptemberJune 30, 2016 decreased2017 increased from $12.1$12.2 million to $11.9$12.4 million compared with the prior year period. This decrease isperiod, due primarily to reducedthe increased personnel travel and trainingconsulting costs slightly offset by additional investments in our Virena platform, which is our wireless cellular instrument managementassociated with the InflammaDry and surveillance system.AdenoPlus diagnostic businesses acquired from RPS during the second quarter of 2017.
General and Administrative Expense
General and administrative expense for the three months ended SeptemberJune 30, 20162017 increased from $5.9$6.4 million to $6.6$6.8 million compared with the prior period. The increase wasperiod, due primarily to the integration costs associated with the acquisition of Immutopics and professional services, partially offset by the suspension of the medical device excise tax.higher incentive compensation expense. General and administrative expense primarily includes personnel costs, information technology, facilities and professional service fees.
Amortization of Intangible Assets from Acquired Businesses and Technology
Amortization of intangible assets from acquired businesses and technology for the three months ended June 30, 2017 increased from $2.3 million to $2.4 million due primarily to additional amortization of purchased technology associated with the InflammaDry and AdenoPlus diagnostic businesses acquired from RPS during the second quarter of 2017. Amortization expense consists of customer relationships, purchased technology and patents and trademarks acquired in connection with our acquisitions of Diagnostic Hybrids, Inc., BioHelix, AnDiaTec,previous and Immutopics. Amortization of intangibles assetscurrent year acquisitions.
One-time Acquisition Costs
One-time acquisition costs for the three months ended SeptemberJune 30, 20162017 increased by $0.1from $0.3 million to $2.3$2.4 million compared with the prior periodyear period. This increase is primarily dueattributable to amortization of intangible assets acquired withprofessional services related to the Immutopics acquisition in March 2016.Proposed Acquisitions.

Interest Expense, net
Interest expense primarily relates to accrued interest for the coupon and accretion of the discount on our $172.5 million 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 $3.0$2.8 million and $2.9 million for each of the three months ended SeptemberJune 30, 2017 and 2016, and 2015.respectively.
Income Taxes
Our effective tax rate for the three months ended SeptemberJune 30, 2017 and 2016 was 14% and 2015 was 35% and 59%34%, respectively. We recognized an income tax benefit of $0.3$2.0 million and $1.1$4.1 million for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The effective tax rate was higherlower for the three months ended SeptemberJune 30, 20152017 due to the projected utilization of net operating loss and credit carryforwards available to offset 2017 domestic taxable income. The Company recorded a year to date adjustment for the full year effectivevaluation allowance against these tax rate.attributes during 2016.

NineSix months ended SeptemberJune 30, 20162017 compared to the ninesix months ended SeptemberJune 30, 20152016
Total Revenues
The following table compares total revenues for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 (in thousands, except percentages):
 For the nine months ended    
September 30, Increase (Decrease)
 2016 2015 $ %
Infectious disease net product sales$93,357
 $103,123
 $(9,766) (9)%
Women’s health net product sales29,975
 27,876
 2,099
 8 %
Gastrointestinal disease net product sales5,014
 5,393
 (379) (7)%
Royalty, grant and other revenue10,449
 7,325
 3,124
 43 %
Total revenues$138,795
 $143,717
 $(4,922) (3)%
 For the six months ended    
June 30, Increase (Decrease)
 2017 2016 $ %
Immunoassays$79,516
 $54,351
 $25,165
 46 %
Molecular6,325
 4,344
 1,981
 46 %
Virology19,214
 20,701
 (1,487) (7)%
Specialty products5,655
 5,666
 (11) — %
Royalties, grants and other1,249
 4,392
 (3,143) (72)%
Total revenues$111,959
 $89,454
 $22,505
 25 %
For the ninesix months ended SeptemberJune 30, 2016,2017, total revenue decreasedincreased to $138.8$112.0 million from $143.7$89.5 million in the prior year. The Company realized declinesincreases in the infectious disease categoryimmunoassay revenues due primarily to lower sales ofgrowth in Influenza and other Respiratory products slightly offset with an increase in sales of Strep A products.products,
bolstered by a robust cold and flu season. The increase in the women's health categoryour molecular revenues was driven by continued gains on our Bone Health, Autoimmune/Complement and ThyretainSolana
platform. These increases were partially offset by a decrease in virology product lines. The acquisitionrevenues as we see a trend of Immutopics contributedconversion to the growth in our Bone Health product line. For the nine months ended September 30, 2016, royalty, grantmolecular. Royalties, grants and other revenue increased by $3.1 million due primarily to timing of grantdecreased as the revenues associated with the amended Bill and Melinda Gates Foundation grant and our Savanna MDx development program.were fully recognized by the third quarter of 2016.
Cost of Sales
Cost of sales was $54.3 million, or 39% of total revenues for the nine months ended September 30, 2016 compared to $53.6$41.3 million, or 37% of total revenues, for the ninesix months ended SeptemberJune 30, 2015.2017 compared to $36.6 million, or 41% of total revenues, for the six months ended June 30, 2016. The increase in cost of sales was due to higher
revenues and the decrease in cost of sales as a percentage of total revenuerevenues was primarily driven by the unfavorablefavorable product mix, with lower
higher Influenza and molecular product sales in the same period as compared to the prior year.

Operating Expenses
The following table compares operating expenses for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 (in thousands, except percentages):
For the nine months ended September 30,    For the six months ended June 30,    
2016 2015    2017 2016    
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)
$ %$ %
Research and development31,164
 22% 25,575
 18% $5,589
 22 %15,502
 14% 22,363
 25% $(6,861) (31)%
Sales and marketing36,376
 26% 35,823
 25% $553
 2 %25,915
 23% 24,523
 27% $1,392
 6 %
General and administrative20,532
 15% 22,039
 15% $(1,507) (7)%13,903
 12% 13,600
 15% $303
 2 %
Amortization of intangible assets from acquired businesses and technology6,782
 5% 6,638
 5% $144
 2 %4,681
 4% 4,509
 5% $172
 4 %
One-time acquisition costs2,431
 2% 371
 —% $2,060
 555 %
Research and Development Expense
Research and development expense for the ninesix months ended SeptemberJune 30, 2016 increased2017 decreased from $25.6$22.4 million to $31.2$15.5 million due primarily to an increasea decrease in development spending for the Savanna MDx platform and our next generation Sofia instrument and an increase in clinical trials spending for Solana products. These increases are offset by lowerreduced spending on development of our Lyra products.clinical trials.
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.

Sales and Marketing Expense
Sales and marketing expense for the ninesix months ended SeptemberJune 30, 20162017 increased $0.6$1.4 million to $36.4$25.9 million compared with the prior year period, due primarily to additional investment in our Virena platform. This increase was partially offsetthe increased personnel and consulting costs associated with reduced personnel, travelthe InflammaDry and training costs as well as lower stock-based compensation expense.AdenoPlus diagnostic businesses acquired from RPS.
General and Administrative Expense
General and administrative expense for the ninesix months ended SeptemberJune 30, 2016 decreased2017 increased from $22.0$13.6 million to $20.5$13.9 million compared with the prior year period. The decline wasperiod, due primarily to business development expenditures in the prior year period that did not repeat for the nine months ended September 30, 2016, as well as the suspension of the medical device excise tax. These decreases were partially offset by increased integration costs associated with the acquisition of Immutopics and stock-basedhigher incentive compensation expense. General and administrative expense primarily includes personnel costs, information technology, facilities and professional service fees.
Amortization of Intangible Assets from Acquired Businesses and Technology
Amortization of intangible assets from acquired businesses and technology for the six months ended June 30, 2017 increased from $4.5 million to $4.7 million due primarily to additional amortization of purchased technology associated with the InflammaDry and AdenoPlus diagnostic businesses acquired from RPS during the second quarter of 2017. Amortization expense consists of customer relationships, purchased technology and patents and trademarks acquired in connection with our acquisitions of Diagnostic Hybrids, Inc., BioHelix, AnDiaTec,previous and Immutopics. Amortization of intangibles assetscurrent year acquisitions.
One-time Acquisition Costs
One-time acquisition costs for the ninesix months ended SeptemberJune 30, 20162017 increased by $0.1from $0.4 million to $6.8$2.4 million as compared with the prior periodyear period. This increase is primarily dueattributable to amortization of intangible assets acquired withprofessional services related to the Immutopics acquisition in March 2016.Proposed Acquisitions.
Interest Expense, net
Interest expense consistsprimarily relates to accrued interest for the coupon and accretion of fees paid to maintain our ability to borrow under the Senior Credit Facility, interest paiddiscount on our lease obligation for our San Diego McKellar facility and interest expense associated with our Convertible Senior Notes issued in December 2014. The decrease in2014 and interest paid on our lease obligation associated with our San Diego McKellar facility. Interest expense of $0.4was flat to the prior year at $5.6 million for the ninesix months ended SeptemberJune 30, 2016 was primarily due to a gain on extinguishment of debt related to the repurchase of $5.2 million in principal of our Convertible Senior Notes during the first quarter of 2016.2017.

Income Taxes
For the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, we recognized an income tax expense of $0.2 million and an income tax benefit of $7.1 million and $3.3$6.8 million, respectively. Our effective tax rates for the ninesix months ended SeptemberJune 30, 2017 and 2016 was 6% and 2015 was 38% and 36%, respectively. For the ninesix months ended SeptemberJune 30, 2016,2017, the effective tax rate was higherlower primarily due to the federal researchprojected utilization of net operating loss and credit carryforwards available to offset 2017 domestic taxable income. The Company
recorded a full valuation allowance against these tax credit inattributes during 2016. There was no federal research tax credit in the nine months ended September 30, 2015 as the credit provisions of the United States tax code had expired at the end of 2014 and were not reinstated until December 2015.
Liquidity and Capital Resources
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, the principal sources of liquidity consisted of the following (in thousands): 
 September 30, 2016 December 31, 2015
Cash and cash equivalents$153,363
 $191,471
Restricted cash—
 63
Cash, cash equivalents and restricted cash$153,363
 $191,534
Working capital including cash, cash equivalents and restricted cash$183,187
 $209,834
 June 30, 2017 December 31, 2016
Cash and cash equivalents$175,048
 $169,508
Working capital including cash and cash equivalents$193,926
 $191,782

As of SeptemberJune 30, 2016,2017, we had $153.4$175.0 million in cash and cash equivalents, a $38.1$5.5 million decreaseincrease from December 31, 2015. During the nine months ended September 30, 2016, we repurchased an aggregate of $24.6 million in common stock and Convertible Senior Notes and used $5.1 million to acquire Immutopics.2016. Our cash requirements fluctuate as a result of numerous factors, such as the extent to which we generate cash from operations, progress in research and development projects, competition and technological developments and the time and expenditures required to obtain governmental approval of our products. We will also require financing for the Proposed Acquisitions, as discussed below. 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 equivalents, has been cash flows from operations. Our ability to generate cashCash 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. Operatingmonths apart from the financing of the Proposed Acquisitions. 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 apart from the financing of the Proposed Acquisitions, which are subject to change, include expenditures related to:  
support of commercialization efforts related to our current and future products, including support of our direct sales force and field support resources both in the United States and abroad;
the continued advancement of research and development efforts;
acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
repurchases of our outstanding common stock or Convertible Senior Notes;
potential strategic acquisitions and investments; and
repayments of our lease obligation.
In December 2014, we issued Convertible Senior Notes in the aggregate principleprincipal 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 SeptemberJune 30, 2016.2017. 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 SeptemberJune 30, 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. 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.

As of September 30, 2016,2017, we have $5.1$4.7 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 Convertible Senior Notes under our share repurchase program. During the nine months ended September 30, 2016, we used $19.6Approximately $35.0 million to repurchase our outstanding sharesremains under the share repurchase program as of June 30, 2017.

In July 2017, we entered into the Triage Purchase Agreement and $4.5BNP Purchase Agreement for the Triage Business and the BNP Business, respectively. To obtain financing for the acquisition of the Triage Business, the Company also entered into a commitment letter (the “Commitment Letter”) with certain initial lenders and other parties. The Commitment Letter provides that, in connection with the transactions contemplated by the Triage Purchase Agreement and subject to the conditions set forth in the Commitment Letter, the initial lenders will provide to the Company a $245.0 million senior secured term loan facility (the “Term Loan”) and a $25.0 million revolving credit facility (the “Revolving Credit Facility,” and together with the Term Loan, the “Financing”). The Company intends to repurchase $5.2 millionuse, along with cash on hand, the proceeds of the Term Loan and a portion of the Revolving Credit Facility to pay the consideration for the Triage Business and associated fees and costs for the Proposed Acquisitions. The Proposed Acquisitions and the Commitment Letter are described in principal amountmore detail in Note 12: Subsequent Events of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

The Financing will be guaranteed by certain subsidiaries of the Company and will be secured by liens on certain assets of the Company and of the guarantors. Incurrence of the additional indebtedness in the Financing could have certain consequences, including the following:
the portion of our outstanding Convertible Senior Notes.

We received $2.4 million and $2.8 million during the year ended December 31, 2015 and nine months ended September 30, 2016, respectively, pursuantcash flow from operating activities that is dedicated to the Billpayment of interest and Melinda Gates Foundation grant agreement, which was restricted principal on such indebtedness will reduce the funds available to us for working capital, capital expenditures, research and development and other uses and may limit our ability to engage in acts that may be in our long-term best interests;
our ability to obtain financing for other purposes, if needed, would be impacted;
as this indebtedness will be at variable rates of interest, we are vulnerable to use until expenditures contemplatedhigher interest expense in the grant were incurredevent of increases in market interest rates;
the agreements relating to the Financing will contain financial and restrictive covenants that may significantly limit our operations or committed. We recorded this restricted cash asour ability to engage in certain transactions and our failure to comply with such restrictions may result in acceleration of the debt and a current asset ascross default to other debt which we anticipated making expenditurescould be unable to repay when due; and
to the extent that our assets and those of our subsidiaries secure the Financing, such assets are at risk and our flexibility with respect to such assets will be limited and if we default under the grant within one year. AsFinancing agreements, the lenders could take possession of September 30, 2016, there was no restricted cash.

and foreclose on the pledged collateral securing the indebtedness.
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:

our ability to successfully realize revenue growth from our new technologies and create innovative products in our markets;
our outstanding debt and covenant restrictions;
leveraging our operating expenses to realize operating profits as we grow revenue;
competing technological and market developments; and
the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.

Cash Flow Summary
 Nine months ended September 30,
 2016 2015
Net cash (used for) provided by operating activities:$(4,806) $20,252
Net cash used for investing activities:(12,921) (12,003)
Net cash used for financing activities:(20,374) (26,563)
Effect of exchange rates on cash(7) (21)
Net decrease in cash and cash equivalents$(38,108) $(18,335)
 Six months ended June 30,
 2017 2016
Net cash provided by (used for) operating activities:$24,007
 $(2,456)
Net cash used for investing activities:(22,725) (10,518)
Net cash provided by (used for) financing activities:4,247
 (22,920)
Effect of exchange rates on cash11
 (10)
Net increase (decrease) in cash and cash equivalents$5,540
 $(35,904)
Cash provided by operating activities was $24.0 million during the six months ended June 30, 2017. The major contributors to operating cash flows during the six months ended June 30, 2017 were a net income of $2.4 million, a net working capital contribution of $3.4 million and the add back of non-cash items of $18.4 million associated with depreciation, amortization and stock-based compensation. For the six months ended June 30, 2016, cash used by operating activities was $4.8 million during the nine months ended September 30, 2016.$2.5 million. The major contributionscontributors to the use of cash during the ninesix months ended SeptemberJune 30, 2016 were a net loss of $11.9$11.3 million, a change in deferred tax assets and liabilities of $7.4$7.2 million and a net working capital use of $9.7$0.6 million. Offsetting this use of cash was the add back of non-cash items of $27.7 million associated with depreciation, amortization and stock-based compensation. For the nine months ended September 30, 2015, operating activities generated cash of $20.3 million. The add back of non-cash items was $27.5$19.4 million related to depreciation, amortization and stock based compensation. Working capital also had a cash contribution of $3.6 million. Offsetting these cash generating activities was a net loss of $5.7 million and a change in deferred tax assets and liabilities of $6.4 million.
Our investing activities used $12.9$22.7 million during the ninesix months ended SeptemberJune 30, 2016. We2017 primarily for the acquisition of the InflammaDry and AdenoPlus diagnostic businesses from RPS, as more fully described in Note 11 in the Notes to the Consolidated Financial Statements for approximately $14.0 million. Additionally, we used $8.1 million on production equipment, building improvements, Sofia and Solana instruments available for lease and intangible assets. Our investing activities used $10.5 million during the six months ended June 30, 2016, with $5.1 million of net cash used for the acquisition of Immutopics, as more fully described in Note 11 in the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report. OurInc. In addition, we used cash for investing activities also used $7.9 million during the nine months ended September 30, 2016 primarily forassociated with the acquisition of production equipment, building improvements and Sofia and Solana instruments available for lease and building improvements. For the nine months ended September 30, 2015, we spent $12.0 million on the acquisition of production equipment, Sofia instruments available for lease and building improvements.lease.
We are currently planning approximately $4.5$8.7 million in capital expenditures for the remainder of 2016.2017. 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 the cash on our balance sheet.
Cash provided by financing activities was $4.2 million during the six months ended June 30, 2017 and was primarily related to proceeds from the issuance of common stock of $5.3 million, partially offset by repurchases of common stock of $0.5 million and payments on acquisition-related contingencies of $0.5 million. Cash used by financing activities was $20.4$22.9 million during the ninesix months ended SeptemberJune 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. Cash used by financing activities was $26.6 million during the nine months ended September 30, 2015 due to $27.2 million used for repurchases of common stock primarily related to our share repurchase program. 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$2.1 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.seasons.

Off-Balance Sheet Arrangements
At SeptemberJune 30, 20162017 and December 31, 2015,2016, 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 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 areis 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, we evaluate ourmanagement evaluates its estimates, including those related to customer programs and incentives, bad debts, inventories, intangible assets, software development costs,income taxes, stock-based compensation, restructuring, contingencies and litigation, contingent consideration, the fair value of the debt component of the convertible debt instruments, and income taxes.litigation. 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, 2015.2016.
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, 2016. If we had borrowings under the credit facility, the interest rate would have been 1.78% as of September 30, 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%.rate. 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’sOur current investment policy with respect to our cash and cash equivalents focuses on maintaining acceptable levels of interest rate risk and liquidity. Although the Company continually evaluates thewe periodically evaluate our placement of investments, as of

September June 30, 2016,2017, our cash and cash equivalents were placed in funds held in government money market account,accounts and commercial paper or overnight funds that we believe are highly liquid and not subject to material market fluctuation risk.paper.
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 certain 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 SeptemberJune 30, 20162017 at a reasonable assurance level 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 SeptemberJune 30, 20162017 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
ThereExcept as described below, there has been no material change in our risk factors as previously disclosed in our Quarterly Report on Form 10-Q for the period ended March 31, 2017 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2016. For a detailed description of our risk factors, refer to Part II, Item 1A, “Risk Factors”Factors,” of our Quarterly Report on Form 10-Q for the period ended March 31, 2017 and Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
The Proposed Acquisitions of Alere’s Triage® and BNP businesses are subject to uncertainties and may present certain risks to Quidel’s business and operations.
Our ability to successfully consummate the Proposed Acquisitions is subject to conditions and uncertainties, including, among others: (i) the consummation of the transactions contemplated by the merger agreement by and among third parties Alere and Abbott, (ii) no law or judgment (whether temporary, preliminary or permanent) shall have been promulgated, entered, enforced, enacted or issued by any governmental authority, including a court, that remains in effect and that prohibits, enjoins or makes illegal the consummation of the acquisitions, and (iii) other customary closing conditions. Alere is divesting the businesses proposed to be acquired by us in connection with review by the FTC and the EC of the proposed merger between Abbott and Alere, which remains subject to FTC and EC approvals and other regulatory approvals. The Proposed Acquisitions are also subject to approval by the FTC and the EC and other regulatory approvals.
We entered into the Commitment Letter to fund the acquisition of the Triage Business (the “Triage Acquisition”). The Commitment Letter provides for a $245.0 million senior secured term loan facility and a $25.0 million revolving credit facility and is subject to various conditions set forth in the Commitment Letter, including: consummation of the Triage Acquisition; the negotiation and execution of definitive documentation consistent with the Commitment Letter; the delivery of certain financial information; the absence of a material adverse effect on the Triage Business; the accuracy of specified representations and warranties of Alere and Abbott in the Triage Acquisition agreement and specified representations and warranties of the Company to be set forth in the definitive loan documents. If we cannot satisfy these conditions or the conditions of the credit markets deteriorate, our ability to fund the Triage Acquisition on acceptable terms would be materially and adversely impacted.
If the Proposed Acquisitions are not consummated because we or third parties fail to satisfy the various conditions described above, or otherwise, in a timely manner or at all, our ongoing business may be adversely affected, including as follows:
we would likely experience negative reactions from the financial markets, including decreases in the market price of our common stock;
we may experience negative reactions from employees, suppliers or customers, which may in turn affect our ongoing business;
we may be subject to legal proceedings related to the proposed transactions or the failure to complete the proposed transactions; and
we will nonetheless remain liable for costs and expenses that we have incurred related to the proposed acquisitions, which costs and expenses are significant and continuing costs and expenses are also expected to be significant.

In addition, the consummation of the Proposed Acquisitions may present additional risks, including, among other things, as follows:
we may be unable to retain the distributors, suppliers, customers and employees of the Triage Business and the BNP Business;
management's attention and other Company resources may be focused on the Proposed Acquisitions instead of on day-to-day management activities, including pursuing other opportunities beneficial to the Company;
we may be unable to integrate successfully or efficiently our businesses and workforces with those of the acquired businesses and any or all of the anticipated synergies or process improvements of the Proposed Acquisitions may not be realized;
we will incur substantial additional indebtedness as a result of the Financing anticipated to be obtained to fund the Proposed Acquisitions;
we may not be able to successfully or efficiently manage our foreign expansion, and the acquired businesses will increase our exposure or risks related to foreign markets;
the agreements relating to the acquisition Financing will contain restrictive covenants that could significantly impact our ability to operate our business and failure to satisfy such covenants could result in acceleration of such indebtedness and cross-defaults on other indebtedness;
the indebtedness that we will incur as a result of the acquisition Financing will be guaranteed by certain of our subsidiaries and will be secured by liens on certain of our assets and those of the guarantors;
the indebtedness will require us to use cash to pay the principal of and interest on our indebtedness, thereby reducing the amount of cash available for other purposes, and may limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, stock repurchases or other general corporate and other purposes;
we may be subject to claims, litigation, other legal proceedings and liabilities in connection with the businesses and assets to be acquired in the Proposed Acquisitions, some of which may not be covered in full, if at all, by the indemnification provisions provided for in the Proposed Acquisition agreements, and even if indemnified, may be disruptive to our business;
we may incur substantial unexpected acquisition-related costs;
we may be unable to attract and retain management personnel and other key employees;
we may not be able to receive required regulatory approvals or clearances relating to the acquired businesses or in connection with the transactions, or may lose previously received regulatory approvals or clearances; and
completion of the Proposed Acquisitions may trigger assignment or other provisions in certain commercial contracts to which Alere is a party, such that counterparties may potentially have the right to terminate the contracts.
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 SeptemberJune 30, 2016.2017.
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)
July 4, 2016 - July 31, 2016 —
 $—
 —
 $35,006,981
August 1, 2016 - August 28, 2016 676
 21.59
 —
 35,006,981
August 29, 2016 - October 2, 2016 91
 21.07
 —
 35,006,981
Total 767
 $21.53
 —
 $35,006,981
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)
April 3, 2017 - April 30, 2017 —
 $—
 —
 $35,006,981
May 1, 2017 - May 28, 2017 2,041
 24.77
 —
 35,006,981
May 29, 2017 - July 2, 2017 —
 —
 —
 35,006,981
Total 2,041
 $24.77
 —
 $35,006,981
(1) We repurchased 767withheld 2,041 shares of common stock from employees in connection with payment of minimum tax withholding obligations relating to the lapse of restrictions on certain RSUs during the three months ended SeptemberJune 30, 2016.2017.

(2) On January 25, 2016, we announced that the Company's Board of Directors authorized an amendment to the Company's previously announced stock repurchase program to (i) replenish the amount available for repurchase under the program back to the previously authorized repurchase amount of $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 $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 shown in this table.
ITEM 3.    Defaults Upon Senior Securities
None.
ITEM 4.    Mine Safety Disclosures
Not applicable.
ITEM 5.    Other Information
None.

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 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 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.)
10.1Triage Purchase Agreement (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on July 17, 2017.)
10.2BNP Purchase Agreement (Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K filed on July 17, 2017.)
10.3Commitment Letter dated July 15, 2017 by and among the Company, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as the Initial Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated (or any of its designated affiliates) and JPMorgan, as the Lead Arrangers. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K filed on July 17, 2017.)
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.

** Furnished herewith.

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: OctoberJuly 27, 20162017QUIDEL 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)

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 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 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.)
10.1Triage Purchase Agreement (Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on July 17, 2017.)
10.2BNP Purchase Agreement (Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K filed on July 17, 2017.)
10.3Commitment Letter dated July 15, 2017 by and among the Company, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as the Initial Lenders, and Merrill Lynch, Pierce, Fenner & Smith Incorporated (or any of its designated affiliates) and JPMorgan, as the Lead Arrangers. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K filed on July 17, 2017.)
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.
** Furnished herewith.




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