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EX-32.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(B) OR 15D-14(B) - Medidata Solutions, Inc.mdso-12312017xex321.htm
EX-23.1 - CONSENT OF DELOITTE & TOUCHE LLP - Medidata Solutions, Inc.consent123117.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(B) OR 15D-14(B) - Medidata Solutions, Inc.mdso-12312017xex322.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(A) OR 15D-14(A) - Medidata Solutions, Inc.mdso-12312017xex312.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(A) OR 15D-14(A) - Medidata Solutions, Inc.mdso-12312017xex311.htm
EX-21.1 - SUBSIDIARIES OF MEDIDATA SOLUTIONS, INC. - Medidata Solutions, Inc.subsidiariesoftheregistran.htm
EX-10.16 - EXHIBIT 10.16 - Medidata Solutions, Inc.mcaponeseparationagreement.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-K
 _____________________________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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: 001-34387
_____________________________________

mdsologo.jpg

Medidata Solutions, Inc.
(Exact name of registrant as specified in its charter)
 _____________________________________
Delaware
13-4066508
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
350 Hudson Street, 9th Floor
New York, New York
10014

(Address of principal executive offices)
(Zip Code)
(212) 918-1800
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ý Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨ Yes    ý  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  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).    ý  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
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 Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    ý  No
As of June 30, 2017, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $3,445,964,875 based on the closing sale price for the registrant's common stock on the NASDAQ Global Market on that date of $78.20 per share. For purposes of determining this number, all executive officers and directors of the registrant are considered to be affiliates of the registrant, as well as individual shareholders holding more than 10% of the registrant's outstanding common stock. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.
As of February 21, 2018, the registrant had 59,233,261 shares of common stock outstanding.
Documents Incorporated by Reference:
Part III of this Annual Report on Form 10-K incorporates by reference certain information that will be set forth in the registrant's Proxy Statement in connection with the 2018 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2017. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.



MEDIDATA SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
 
 
Page
PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
Item 16.
 
 





- i -


PART I
For purposes of this Annual Report, the terms “Medidata,” “Company,” “we,” “us,” and “our” refer to Medidata Solutions, Inc. and its consolidated subsidiaries. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, and is subject to the “safe harbor” created by those sections. Forward-looking statements reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position, and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management's goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects,” and similar expressions, as well as statements in the future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available as of the date of this Annual Report on Form 10-K and/or management's good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. We caution readers not to place undue reliance upon any such forward-looking statements. We urge you to consider the risks and uncertainties discussed in “Risk Factors” under Item 1A in this Annual Report on Form 10-K in evaluating our forward-looking statements.
Item 1. Business
Company Overview
Medidata is a global life sciences technology provider, dedicated to improving the way clinical research is designed, conducted, and analyzed. Our cloud-based platform of solutions and data analytics enables efficiency and quality throughout clinical development programs by accelerating processes, enhancing decision-making, minimizing operational risk, saving resources, and enabling transformational trial strategies.
Customers can utilize our entire platform or purchase individual solutions or products. We offer our technology on an enterprise or multi-study basis. Customers can also use our solutions on a single-study basis for a limited number of trials or to evaluate them prior to committing to a multi-study arrangement. Subscription and professional services represent approximately 85% and 15% of our business, respectively. Our business model provides us with a recurring revenue stream that we believe delivers greater revenue visibility than perpetual software licensing models.
Our Cloud-Based Technology
The Medidata Clinical Cloud
Medidata's unified platform, pioneering analytics, and clinical technology expertise power the development of new therapies for nearly 1,000 pharmaceutical companies, biotech and medical device firms, academic medical centers and contract research organizations ("CROs") around the world. The Medidata Clinical Cloud connects patients, physicians, and life sciences professionals. Companies on the Medidata platform are individually and collaboratively reinventing the way research is done to create smarter, more precise treatments.
It Starts With Data Capture and Management
The Medidata Clinical Cloud already powers the clinical trials of the future, including numerous master protocols, platform studies, and even trials that use synthetic control patients. It seamlessly captures and integrates the abundance of data streams and biomarker measurements that today's targeted therapies demand, not only from clinics and labs, but also from sensors, apps, images, genomics, and real world evidence ("RWE"). By capturing and integrating such a wide array of study data, the Medidata Clinical Cloud also automates many of the most challenging data management workflows across randomization, supply, coding, and safety. It is now possible for patients to electronically consent, be randomized, and receive their first supply all on their first visit. Medical terms can be coded automatically with natural language processing and machine learning.

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Rich Data Capture Leads to Pioneering Analytics
The Medidata Clinical Cloud is underpinned by the Medidata Enterprise Data Store ("MEDS"). This cross-sponsor data store of de-identified study data contains the scientific and operational data from over 13,000 studies, half a million site and sponsor interactions, and 3.8 million patients, which are aggregated and standardized in a variety of ways to supply data sets. These data sets power analytics and benchmarking visualizations that enable smarter decision making, resulting in reduced patient burden and increased patient enrollment and retention. In addition, predictive analytics and machine learning throughout the Medidata platform drive intelligent processes such as risk-based monitoring ("RBM") and automated genomic clustering. MEDS also addresses the growing challenge of patient scarcity; Medidata's synthetic control arm and synthetic control data solutions enable organizations to leverage historical controls from statistically similar indications and studies to reduce the need to recruit new control patients.
Pioneering Analytics Accelerate Trial Planning and Management
Clinical complexity is increasing the burden of managing and operationalizing clinical studies. Minimizing patient burden in protocol design while optimizing site selection, grants, and payments in trial planning is a critical success factor to trial execution. Medidata's study design optimization, site feasibility, site grants, and payments solutions use historical benchmarks and automation from MEDS to optimize patient burden, site selection, grants, and payments, leading to increased patient recruitment and retention rates.
Medidata also solves many of the biggest challenges in trial management. Medidata's strategic monitoring and clinical trial management system ("CTMS") solutions address regulatory requirements for RBM by combining anomaly detection with intelligent workflows to enable sponsors, CROs, and sites to confidently move away from 100% source document verification. Medidata's master data management means that the majority of the artifacts in an electronic trial master file ("eTMF") can be pre-populated from other sources.
Putting It All Together
The Medidata Clinical Cloud combines:
An intuitive user experience that seamlessly links sponsors, CROs, sites, and patients and is powered by single sign-on;
An integrated set of applications powered by master data management that shares data from one application to another; and
An intelligent enterprise data store that embeds artificial intelligence, machine learning, and pioneering analytics into every part of the platform.
Medidata's Approach
Medidata's solutions are designed to address the underlying requirements of clinical development, not only bringing efficiencies to existing processes, but also transforming the enterprise with enhanced productivity and quality. Our platform focuses on increasing efficiency, reducing redundancies and data entry errors, maximizing visibility, and consolidating workflows. We build our solutions to be interoperable with third-party software and data feeds, creating a collaborative ecosystem that broadens the development enterprise. This increases the value of legacy, installed systems and new technology such as mobile device applications, and simplifies migration from competitive systems.
We believe our solutions provide our customers with the following benefits:
faster trial results;
scalability;
improved data quality and minimization of risk;
enhanced investigator experience;
interoperability to support ecosystem; and
global connectivity across sponsor and investigator sites.
Our Strategy
Our strategy is to enable our customers to bring their new and enhanced medical treatments to the public quickly, efficiently, and safely by providing a platform that uses innovative technology to automate, streamline, support, and enhance clinical development activities. Key elements of our strategy include:
Broaden our footprint with our existing customers. We refer to this footprint, measured by the number of Medidata products used by our customer base, as "density." Our strategy of developing technology solutions across the clinical trial process provides additional avenues for growing our business. We will continue to demonstrate the significant efficiencies that our customer base can achieve by standardizing end-to-end clinical development processes on our platform and by expanding the use of our solutions. We also intend to drive increased usage by facilitating our customers' use in new trials and converting existing single-study customers into multi-study customers.

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Expand usage of existing products. We refer to the level of usage of Medidata products that are already deployed by customers as "intensity." In cases where customers utilize our solutions for only a subset of their clinical trial activities, we seek to drive usage across more trials, therapeutic areas, geographies, and phases.
Launch regular platform enhancements. We will continue to enhance our unified, integrated platform with regular releases, adding new functionality, integrations, and user benefits to our solutions.
Build additional innovative solutions, including new analytics and benchmarks, into our platform. We will continue to build new innovative solutions that further transform the clinical development process, and offer them to new and existing customers. We will continue to develop our analytics and benchmarking capabilities, creating value for our customers by enhancing decision-making.
Expand our global customer base. We are expanding our sales, marketing, and services resources in areas around the globe with significant trial activity. We expect clinical technology adoption to continue to increase, resulting in significant growth in spending on technology solutions. Our view is that clinical development is underinvested in technology, and new technologies will expand opportunities by replacing manual and under-automated activities.
Increase indirect sales partnership initiatives. We will continue to pursue strategic partnerships with CROs and systems integrators to position our software and analytics solutions as the platform of choice for their outsourced clinical trial management services. Our well-established program of support, training, and certification enables partners to cost-effectively implement our solutions and services in sponsor studies as they provide their other services related to pharmaceutical development.
Position the Medidata Clinical Cloud as part of the evolving clinical ecosystem. We are building relationships, supporting technology partnerships and working with other innovative technology and data firms to position Medidata as a key player in the evolving clinical ecosystem. Our partnerships provide immediate benefits to our customers by enabling integrated systems and collaborative governance and future benefits by ensuring that our solutions are embedded in the next generation of innovations.
Communicate the enterprise-level value we create for our customers. Medidata's technology, metrics, and services are designed to drive value creation for our customers by reducing the overall cost of their clinical research and development efforts. We have invested in tools and workforce that measure, document, and communicate that value, and have integrated these resources into our market approach and solution development strategy.

Technology and Support
We have designed our technology to maximize ease of use, flexibility, data visibility, and system scalability to handle high-volume, global trials as well as smaller studies. We deploy our solutions through the use of industry-standard web browsers and mobile devices, service-oriented architectures ("SOA"), three-tiered server architectures, or a web server, a proprietary application server and a database server. End users can access our solutions through any web browser from anywhere in the world without downloading or installing any Medidata-specific software. In addition, our cloud-based solutions feature end-to-end support for Unicode characters, required to deliver multi-lingual studies. We utilize technologies such as firewalls, intrusion detection, and encryption to ensure the privacy and security of our customers' data, with a dedicated Security Information and Event Management ("SIEM") team monitoring our applications 24/7.
We develop our solutions on a broad base of technologies, including Java, Scala, .NET, Ruby, Python, R, SQL Server, BO4, AWS, Chef, and VMWare. By creating consistent data models that can accommodate the broad cloud-based requirements of multiple biopharmaceutical, medical device, and CRO customers, we have been able to avoid customer-specific builds or other customizations to our core product, thereby streamlining development and maintenance. Furthermore, our interfaces are built on fully documented application programming interfaces ("APIs"), which allow us to safely update customers' data in new versions of the system, and to develop additional interfaces to address new market opportunities. By including version control and the ability to dynamically integrate data without system interruption, we are better able to accommodate the industry-specific challenges facing clinical trial teams around protocol amendments and the need for incremental changes to study data collection and cleaning processes during a clinical trial.
Medidata provides world-class delivery services to customers utilizing our products, with state-of-the-art virtualization technologies to optimize the delivery of our cloud-based solutions, manage storage effectively, and maintain quality of service. These virtualization capabilities provide the ability to quickly scale to increased customer usage. Medidata manages a hybrid cloud, operating our solutions on a combination of private data center and public cloud. Advanced monitoring services are provided on a 24/7 basis by trained Medidata staff to ensure that usage is delivered in a consistent manner. Advanced backup and storage frameworks are in place, and regionally-diverse data centers and trained engineering teams are utilized to provide for quick reaction time in the event of a disaster.
We have a dedicated global organization to support our customers and applications worldwide. We offer 24/7 support to our customers' investigator sites through a global array of multi-lingual help desks.

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Professional Services
We offer expert professional services to help life sciences companies realize higher value in their clinical development processes. We strive to gain a deep understanding of our customers' needs and develop a unique, customized vision, leading the way for true business transformation. Our customers vary in their resources, expertise, and preference for deploying their studies on Medidata platform technology, and we offer flexible, tailored services to support each customer's needs.
We partner with customers every step of the way to ensure that their processes are optimized and that they have achieved significant value realization from our platform. Medidata's expertise puts us at the cutting edge of clinical development. Our global influence over the past 20 years has resulted in more than 13,000 studies and over 3.8 million patients on the Medidata platform, making us the top Life Science Development software vendor according to International Data Corporation. Market leaders are leveraging Medidata's professional services people, processes, and technology to transform their businesses.
Our professional services offerings include:
Implementation services. We provide implementation of the Medidata Clinical Cloud with efficient, scalable configuration and implementation support to ensure our customers maximize the value of the platform. Our methodology leverages both the industry-specific expertise of our employees through standardized best practices and the specific capabilities of our platform to simplify, streamline, and expedite the implementation of our solutions.
Sponsor enablement. Our tailored strategies, business solutions, and knowledge transfer enable customers to design, configure, implement, and manage their own studies; we believe this maximizes the benefits of our platform technology by enabling customers to develop the degree of autonomy most aligned with their organizational resources and strategic goals.
Strategic consulting. Our domain and technology expertise provide transformational outcomes for our customers through structured governance, process optimization, tailored strategies, and true business transformation. Our technology, analytics, and benchmarking solutions support a re-engineered development process that may require our customers to implement internal changes. Medidata's experienced domain experts provide consulting services to help organizations shift to new processes and systems, including re-engineering business processes across departments and changing governance models. Our industry and technology experts draw on Medidata's visibility into best practices and data-driven analytics to advise customers.
Partner support. We offer services supporting successful clinical trials at our CRO and systems integration partners, aimed at maximizing the value of the CRO/sponsor/technology collaboration.
E-learning and training. We offer self-administered e-learning courses as well as a variety of additional training services through our training group, known as Medidata Academy, to facilitate the successful adoption of our cloud-based solutions throughout the customer or partner organization.
Ongoing support. We take a best-practice, consultative approach to ensure quality study design, ease of use, and productivity throughout the project life cycle. We have certified experts available to manage our customers' operational needs to ensure they are gaining maximum value from the Medidata platform within their environment. We continually evaluate, adapt, and optimize technology and processes to ensure adoption of our solutions across the enterprise.

Research and Development
We believe that our future success depends on our ability to continue to enhance and broaden our cloud-based solutions to meet the evolving needs of clinical trial sponsors and other entities engaged in clinical trials. Equally important is our ability to innovate, taking advantage of latest technologies and monitoring trends in healthcare. As of December 31, 2017, we had 629 employees in research and development. Our efforts are focused on developing new, complementary software solutions, as well as enhancing our existing solutions. Our research and development department includes a product management team that works with both internal and customer experts to create new features and functionality, a team of software project managers, and a technical documentation team, as well as product engineering and software quality assurance functions. We also have a dedicated team building integration software and APIs on top of our platform.
When developing our technical solutions to manage clinical data, industry regulatory requirements also dictate that substantial documentation be created to demonstrate data integrity in the solutions, and that our systems perform repeatedly, reliably, and in accordance with the system requirements. This process is known in the industry as validation, and our deliverable is a software validation package. Our software development lifecycle practices, which are part of a required quality system, include streamlined methodologies for generating and maintaining validation packages during the software release process. For those products that allow customers to upgrade at their discretion, these methodologies include a validated path for upgrading existing installations and data. The robustness of the validation process and associated validation deliverables enable our customers to upgrade with confidence and stay on current technology. This allows Medidata to minimize the number of legacy releases that require maintenance and support. The majority of our cloud components are upgraded automatically, meaning that Medidata only has a single version of the software to maintain, and customers always access the latest product. For products which are upgraded automatically, customers receive access to a fully tested software product prior to its official release into production as a fully validated product.

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We incurred $138.6 million, $112.6 million, and $92.3 million in research and development expenses for the years ended December 31, 2017, 2016, and 2015, respectively. Research and development expenses comprised 25.4%, 24.3%, and 23.5% of revenue in 2017, 2016, and 2015, respectively.
Sales and Marketing
We market and sell our cloud-based solutions through a direct sales force and through relationships with CROs and other strategic partners. Our marketing efforts focus on increasing awareness, consideration, and preference for our cloud-based solutions and professional services and generating qualified sales leads. As of December 31, 2017, we had 346 employees in sales and marketing.
Our sales force operates globally with a focus on North America, Europe, and Asia. The team is organized by both region and focus area and includes business consultants and sales operations support. Sales through this direct channel currently represent the largest source of our total revenues.
Many sponsors of clinical trials outsource some or all of their clinical research activities as a means of expanding capacity, controlling costs, and focusing on core strengths. Our CRO relationships help position our solutions as the core platform for their outsourced services. Through our Medidata Partner Program, we partner with CROs to deliver our clinical trial technology along with the CRO's monitoring, project management, data management, and other expertise. We train, certify, and support our CRO and other clinical services partners on our solutions, which enables them to quickly and cost-effectively implement our technology in sponsors' studies.
As part of our customer and prospect approach, we measure and communicate the value of adopting our cloud-based solutions and platform in lowering costs, reducing time to market, minimizing risk, and enhancing therapeutic value. Our marketing objectives are to generate qualified sales leads, enhance the global recognition and reputation of our brand and solutions, and establish Medidata as the premier provider of clinical trial solutions. Our principal marketing initiatives target key executives and decision makers within our existing and prospective customer base.
Customers
We are committed to developing long-term, partnering relationships with our customers worldwide and working closely with customers to enable them to make optimal use of our systems for their development portfolios. Our customers include pharmaceutical, biotechnology, medical device and diagnostics companies, institutions (which include academic research centers, government, and other non-profit organizations), CROs, and other entities engaged in conducting and/or sponsoring clinical trials. We work with large global pharmaceutical companies with worldwide footprints and clinical trials in multiple locations, as well as with start-up and mid-sized specialty, biotechnology, pharmaceutical, and medical device and diagnostic companies. We also work with government agencies that conduct or support the conduct of clinical trials.
Our global direct sales organization represents our primary source of sales, with additional sales generated through our CRO relationships. As of December 31, 2017, we had nearly 1,000 customers.
Our five largest customers accounted for 26%, 26%, and 24% of our revenues in 2017, 2016, and 2015, respectively. In 2017, 2016, and 2015, no single customer accounted for 10% or more of our total revenues. At December 31, 2017, no one customer comprised 10% or more of our total accounts receivable. At December 31, 2016, one customer comprised 13% of our accounts receivable.
We sell our solutions and provide services globally. Approximately 23%, 23%, and 24% of our revenues in each of the years ended December 31, 2017, 2016, and 2015, respectively, were derived from international operations. A summary of our domestic and international revenues and long-term assets is set forth in Note 1, “Summary of Significant Accounting Policies—Segment and Geographic Information,” to our consolidated financial statements, which are included in Item 15 of this Annual Report on Form 10-K.
Backlog
At December 31, 2017 and 2016, our total multi-year subscription backlog was $1,036 million and $745 million, respectively.
Total subscription backlog increases with the addition of new customer contracts, customer renewals, and contract modifications. It decreases with the recognition of revenue or contract modifications. The timing and duration of new contracts, renewals, contract modifications, and revenue recognition are variable and are not comparable year to year. Total subscription backlog is typically highest at the beginning of a contract and approaches zero prior to renewal. The level of total backlog is not an indicator of the likelihood of renewal or future revenue of that contract. The amount of total backlog associated with an existing multi-year contract may significantly vary year to year solely based on the status of renewal and have no significant impact on the amount of revenue attributable to that contract in a year-over-year comparison. Additionally, large multi-study deals may include provisions under which the customer contracts for a smaller amount of subscription services as they start the contract and the amount ramps up over the life of the contract; the result is an initial large increase in total subscription backlog that does not equate to a proportional increase in revenue in the subsequent period.
We also calculate a 12-month subscription backlog, which represents the future contract value of outstanding multi-study and single study arrangements, billed and unbilled, to be recognized in the next 12 months, excluding expected intra-year renewals and other adjustments. As of January 1, 2018 and 2017, we had 12-month subscription backlog of approximately $446 million and $343

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million, respectively. We believe that 12-month subscription backlog is more easily reconciled to future revenues to be recognized than total backlog, and therefore is a more valuable metric for evaluation of expected future revenues.
Our presentation of backlog may differ from that of other companies in our industry.
Competition
The market for clinical trial solutions is highly competitive and rapidly evolving. It is subject to changing technology, shifting customer needs, changes in laws and regulations, and frequent introductions of new products and services. We compete with firms such as BioClinica, Inc., IQVIA (formerly Quintiles IMS),Oracle, Parexel Informatics, Veeva Systems, Inc. and other large-scale technology providers that offer a range of products and services that compete with Medidata's solutions. We also compete with a number of vendors offering applications and systems that compete with Medidata in specific areas, such as ERT, CRF Health, Bracket, DataTrak International, Inc., Medrio, Inc., Merge Healthcare (an IBM Company), and OmniComm Systems, Inc.
We compete on the basis of several factors, including the following:
innovation, breadth and depth of solution offerings;
platform capabilities and solution functionality and features, including analytics;
workforce skill set;
scalability and upgrade pathways and support;
speed, performance, and ease of use of our solutions;
product reliability and infrastructure accessibility and security;
regulatory compliance;
breadth and strength of partnerships;
interoperability;
financial stability;
depth of expertise and quality of our global professional services and customer support; and
sales and marketing capabilities, including the ability to create and communicate operational value.
Although some of our competitors and potential competitors may have greater name recognition, longer operating histories, more product offerings, and greater financial, technological, and other resources than we do, we believe that we compete favorably with our competitors on the basis of these factors.
Intellectual Property
Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we protect our intellectual property and proprietary information by requiring our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. We have registered trademarks and service marks in the United States ("U.S.") and abroad, and filed applications for the registration of additional trademarks and service marks. Our principal trademarks are “Medidata,” "Medidata Solutions," "Medidata Clinical Cloud," "Medidata Patient Cloud," "Architecture of Hope," and “Medidata Rave." We also hold several domain names, including the domain names “mdsol.com” and “medidatasolutions.com.” As of December 31, 2017, we hold 33 patents as well as numerous published patent applications outstanding in the U.S. and certain foreign countries.
The legal protections described above afford only limited protection for our technology. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product and service developments, and enhancements to existing products and services are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position.
Government and Other Regulations
Regulation of Clinical Trials and Electronic Systems Used in Clinical Trials
The conduct of clinical trials is subject to regulation and regulatory guidance associated with the approval of new drugs, biological products and medical devices imposed upon the clinical trial process by the U.S. Food and Drug Administration ("FDA"), the Pharmaceuticals and Medical Devices Agency ("PDMA") in Japan, the Medicines and Healthcare Products Regulatory Agency ("MHRA") in the United Kingdom, the European Medicines Agency in EMEA, and other foreign governmental regulatory agencies and international non-governmental organizations, such as the International Conference on Harmonisation ("ICH").
The laws, regulations, and guidance from various countries and regions are often, but not always, harmonized. In those areas that are not yet harmonized, conflicting or even contradictory requirements may exist. Further, the regulatory environment and requirements for clinical trials and drug/biologic/device approvals are undergoing rapid change in the U.S., the European Union ("EU") (including the anticipated implementation of the new Regulation EU No. 536/2014 of the European Parliament and of the Council on clinical trials on medicinal products for human use, and repealing Directive 2001/20/EC) and other areas. We continue to monitor regulatory developments and industry best practices in these areas and make changes and introduce improvements as necessary to remain in compliance.

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The use of our software products, services, and hosted solutions by customers engaged in clinical trials must be done in a manner that is compliant with a complex array of laws and regulations. Our applications have been designed to allow our customers to deploy such clinical trials as part of a validated, fit-for-purpose system, compliant with applicable laws and regulations.
The use of software during the clinical trial process must adhere to the regulations and regulatory guidance known as Good Clinical Practice ("GCP"), guidance documents, and other various codified practices such as the Consolidated Guidance for Industry from the ICH Regarding Good Clinical Practices for Europe, the Asia Pacific region, and the Americas. The current amendment (ICH E6(R2)) encourages sponsors to implement improved oversight and management of clinical trials, while continuing to ensure protection of human subjects participating in trials and clinical trial data integrity.
In addition to these regulations and guidance documents, the FDA and regulatory authorities from other countries have developed regulations and regulatory guidance concerning electronic records and electronic signatures. In the U.S., this includes Title 21 Code of Federal Register ("CFR") Part 11, Electronic Records; Electronic Signatures, which is further interpreted for clinical trials in a guidance document titled FDA Computerized Systems Used in Clinical Investigations—Guidance for Industry. In general, regulatory guidance stipulates that computerized systems used to capture or manage clinical trial data must meet certain standards for attributability, legibility, contemporaneousness, originality, accuracy, completeness, consistency, and availability, as well as integrity and security. If our customers violate GCP or other regulatory requirements, both parties may run the risk that the violation will result in a regulatory citation, the suspension of the clinical trial, investigator disqualification or debarment, the rejection or withdrawal of a product marketing application, criminal prosecution, or civil penalties. Such risks not only impact our customers, but could also have a material adverse effect on our business, results of operations, or financial condition.
Regulation of Health Information
Government regulation of the use and disclosure of subject (patient) privacy and data protection imposes a number of requirements. In the U.S., regulations issued pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), require certain “covered entities,” including facilities and providers that are involved in clinical trials, to comply with established standards regarding the privacy and security of protected health information, and to use standardized code sets when conducting certain electronic transactions. The regulations also require “business associates” that provide services on behalf of the covered entity to follow the same standards. Although we are not a “covered entity” or a “business associate,” and therefore technically are not subject to HIPAA regulations, many users of our products and services are directly regulated under HIPAA and our products cannot be utilized in a manner that is inconsistent with the users' HIPAA compliance requirements. In addition, to the extent we perform functions or activities on behalf of customers that are directly regulated by such health-related privacy laws, we may be required to comply with a number of the same HIPAA requirements. The breach of such requirements on our part may result in liability to our customers and us. In addition to HIPAA, most states within the U.S. have enacted or are considering their own privacy and data protection laws. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements and we must comply with them as well.

In addition to complying with the privacy laws in the U.S., many foreign governments have data privacy and data protection laws that include additional protections for customer end-user information and for sensitive patient information, including clinical data. Because our services are available to customers in many foreign countries, we must provide our services in a manner that supports our customers' compliance obligations. Foreign government data protection laws and regulations include the EU's Data Protection Directive ("95/46/EC" or the "Directive"), the General Data Protection Regulation ("Regulation (EU) 2016/679" or the "GDPR"), which will supersede the Directive, and European country-specific laws and regulations that implement the Directive or the GDPR, as well as the EU-U.S. Privacy Shield framework.
Employees
As of December 31, 2017, we had a total of 1,680 employees, of which 528 were employed at our headquarters in New York, 770 at other locations in the U.S., 228 in Europe, and 154 in the Asia Pacific region. As of December 31, 2017, we had 217 employees in customer services, support, and delivery, 268 employees in professional services, 629 employees in research and development, 346 employees in sales and marketing, and 220 employees in administration and executive management. We also retain additional outside contractors from time to time to supplement our services and research and development staff on an as-needed basis. As of December 31, 2017, we had 450 independent contractors, the majority of which have been engaged in connection with help desk, customer service, and development functions. None of our employees are covered by a collective bargaining agreement. We consider our relationships with our employees to be good.
Available Information
We were organized as a New York corporation in June 1999 and reincorporated in the State of Delaware in May 2000. Our principal executive offices are located at 350 Hudson Street, 9th Floor, New York, New York 10014, and our telephone number is (212) 918-1800. Our website is located at www.mdsol.com. No information contained on our web site is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as reports relating to our securities filed by others pursuant to Section 16 of such act, are available through the investor relations page of our web site free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). The SEC maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

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Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The risks described below are those which we believe are the material risks we face. Any of the risk factors described below or additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business
Our quarterly and annual operating results fluctuate and may continue to fluctuate in the future, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
Our quarterly and annual revenues and operating results have varied in the past and may vary significantly in the future depending on factors such as:
budgeting cycles of our customers;
the length of our sales cycle;
increased competition;
our ability to develop innovative products;
the timing of new product releases by us or our competitors;
market acceptance of our products;
changes in our and our competitors' pricing policies;
the financial condition of our current and potential customers;
changes in the regulatory environment;
changes in operating expenses and personnel changes;
our ability to hire and retain qualified personnel;
the effect of potential acquisitions and consequent integration;
our ability to realize benefits from strategic partnerships, acquisitions or investments;
equity issuances, including due to the conversion of our outstanding convertible notes or as consideration in acquisitions;
variations in the revenue mix of our services and growth rates of our cloud subscription and professional services support offerings;
changes in our business strategy;
increases in our costs due to inflation; and
general economic factors, including factors relating to disruptions in the world credit and equity markets and the related impact on our customers' access to capital.
Our future growth is dependent on the successful development and introduction of new products and enhancements. There can be no assurance that we will be successful in developing and marketing, on a timely basis, new products or product enhancements, that our new products will adequately address the changing needs of the marketplace or that we will successfully manage the transition from existing technologies. Certain of these products require a higher level of sales and support expertise. The ability of our sales channel to obtain this expertise and to sell the new product offerings effectively could have an adverse impact on our sales and financial results in future periods. Any of these scenarios may result in the loss of or delay in customer acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could have a material adverse effect on our business, financial position, results of operations, and cash flows.
In addition, a significant portion of our operating expenses is relatively fixed and planned expenditures are based in part on expectations regarding future revenues. Accordingly, unexpected revenue shortfalls may decrease our gross margins and could cause significant changes in our operating results from year to year. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decrease.
We derive a significant percentage of our revenues from a concentrated group of customers and the loss of one or more major customers could materially and adversely affect our business, results of operations or financial condition.
Our top five customers accounted for approximately 26%, 26%, and 24% of our revenues in 2017, 2016, and 2015, respectively. In 2017, 2016, and 2015, no single customer accounted for 10% or more of our total revenues. The loss of any of our major customers could have a material adverse effect on our results of operations and financial condition. We may not be able to maintain our customer relationships, and our customers may delay payment under, or fail to renew, their agreements with us, which could adversely affect our business, results of operations or financial condition. Any reduction in the amount of revenues that we derive from these customers, without an offsetting increase in new sales to other customers, could have a material adverse effect on our operating results. A significant change in the liquidity or financial position of our customers could also have a material adverse effect on the collectability of our accounts receivable, our liquidity and our future operating results.

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If our customers cancel their contracts or terminate or delay their clinical trials, we may lose or delay revenues and our business may be harmed.
Certain of our customer contracts are subject to cancellation by our customers at any time with limited notice. Customers engaged in clinical trials may terminate or delay a clinical trial for various reasons, including the failure of the tested product to satisfy safety or efficacy requirements, unexpected or undesired clinical results, decisions to deemphasize a particular product or forgo a particular clinical trial, decisions to downsize clinical development programs, insufficient patient enrollment or investigator recruitment, and production problems resulting in shortages of required clinical supplies. In the case of our cloud-based solutions and services, any termination or delay in the clinical trials would likely result in a consequential delay or termination in those customers' service contracts. We have experienced terminations and delays of our customer service contracts in the past (although no such past terminations have had a significant impact on our results of operations) and we expect to experience additional terminations and delays in the future. The termination of single-study arrangements could result in decreased revenues and the delay of our customers' clinical trials could result in delayed professional services revenues, which could materially harm our business.
As our focus turns to selling additional cloud-based solutions and services to enterprise customers, our sales cycle may become more time-consuming and expensive and less predictable, and implementation challenges may arise, any of which could harm our business and operating results.
Our future success depends in part on our ability to sell additional cloud-based solutions and services to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors. If our efforts to sell new solutions and expanded services to our existing customers are not successful, our growth prospects may suffer.
As we target more of our platform sales efforts at larger enterprise customers, we may face greater costs, longer sales cycles, and less predictability in our sales pipeline. The customer's decision to use our solutions and services may be an enterprise-wide decision and, if so, these types of sales would require us to provide prospective customers with greater levels of education regarding the use and benefits of our cloud-based solutions and services, as well as education regarding privacy and data protection laws. As a result of these factors, these sales opportunities may require us to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting our sales and professional services resources to a small number of large transactions.
Because we recognize revenue from subscriptions for our services over the term of the subscription, downturns or upturns in new business may not be immediately reflected in our operating results.
We generally recognize revenue from customers ratably over the terms of their subscription agreements, which generally range from one to five years. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services, and potential changes in our attrition rate, may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
If our security is breached, our business could be disrupted, our operating results could be harmed, and customers could be deterred from using our products and services.
Our business relies on the secure electronic transmission, storage, and hosting of sensitive information, including clinical data, financial information, and other sensitive information relating to our customers, company, and workforce. We anticipate collecting more such information directly from patients as part of our Patient Cloud and mHealth initiatives, including via mobile devices and related systems provided by third parties. As a result, we face some risk of a deliberate or unintentional incident involving unauthorized access to our computer systems (including, among other methods, cyber attacks or social engineering) that could result in misappropriation or loss of assets or sensitive information, data corruption, or other disruption of business operations. In light of this risk, we have devoted significant resources to protecting and maintaining the confidentiality of our information, including implementing security and privacy programs and controls, training our workforce, and implementing new technology. We have no guarantee that these programs and controls will be adequate to prevent all possible security threats. We believe that any compromise of our electronic systems, including the unauthorized access, use, or disclosure of sensitive information or a significant disruption of our computing assets and networks, would adversely affect our reputation and our ability to fulfill contractual obligations, would require us to devote significant financial and other resources to mitigate such problems, and could increase our future cyber security costs. Moreover, unauthorized access, use, or disclosure of such sensitive information could result in contractual or other liability. In addition, any real or perceived compromise of our security or disclosure of sensitive information may result in lost revenues by deterring customers from using or purchasing our products and services in the future or prompting them to use competing service providers.
Any failure by us to properly protect customer data, including any personal health information we possess or are deemed to possess in connection with the conduct of clinical trials, could subject us to significant liability.
Our customers use our solutions to collect, manage, and report information in connection with the conduct of clinical trials. This information may be considered our customers' proprietary information and/or personal health information of the clinical trial participants

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or patients. In addition, our Patient Cloud and mHealth initiatives are anticipated to result in our collecting more data (which may or may not be personal health information) directly from patients, including via mobile devices and related systems provided by third parties. Regulation related to the use and disclosure of personal health information continues to expand in scope and complexity. Increased focus on individuals' rights related to their personal information, including personal health information, could lead to an increase in existing and future legislative or regulatory initiatives giving direct legal remedies to individuals, including rights to damages, against entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in identifying or applying a common law theory of liability. Since we receive and process our customers' proprietary information and/or personal information of clinical trial participants from customers utilizing our hosted solutions, there is a risk that we could be liable if there were a breach of an obligation to a protected person under contract, standard of practice or regulatory requirement. If we fail to properly protect our customers' data or personal information that is in our possession or deemed to be in our possession, we could be subjected to significant liability and our reputation could be harmed.
We rely upon two internal hosting facilities and third party cloud computing services to deliver our solutions to our customers and any disruption of or interference with our hosting systems, operations, or third party cloud computing services would harm our business and results of operations.
Substantially all of the computer hardware necessary to deliver our solutions is located at our internal hosting facilities in Houston, Texas and Frankfurt, Germany. In addition to our dedicated hosting facilities, we utilize third-party cloud computing services from vendors such as Amazon Web Services ("AWS") to help us efficiently scale our cloud-based solutions. Because we cannot easily switch our AWS-serviced operations to another cloud provider, any disruption of or interference with our use of AWS would impact our operations, and our business would be adversely impacted. Our systems and operations or those of AWS could suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war, and similar events. The occurrence of a natural disaster, an act of terrorism or other unanticipated problems at our or AWS's hosting facilities could result in lengthy interruptions in our service. Although we and AWS maintain backup facilities and disaster recovery services in the event of a system failure, these may be insufficient or fail. Any system failure, including network, software, or hardware failure, that causes an interruption in our Houston or Frankfurt data centers or our use of AWS or that causes a decrease in responsiveness of our cloud-based solutions could damage our reputation and cause us to lose customers, which would harm our business and results of operations. Our business may be harmed if our customers and potential customers believe our service is unreliable.
Data protection laws and regulations may limit the use of our platform and give rise to operational interruption, liabilities and reputational harm, which could have a materially adverse impact on our business.
Our customers can use our platform to collect, process and transfer personal information globally, including sensitive personal information such as clinical information. As regulatory focus on privacy issues continues to increase and worldwide laws and regulations concerning the handling of personal information expand and become more complex, potential risks related to data collection and use for our customers and for our business will intensify. For example, the EU and the U.S. formally entered into a new framework in July 2016 that provides a mechanism for companies to transfer data from EU member states to the U.S. This new framework, called the Privacy Shield, is intended to address shortcoming identified by the Court of Justice of the EU in the previous EU-U.S. Safe Harbor Framework, which the Court of Justice invalidated in October 2015. The Privacy Shield and other data transfer mechanisms are likely to be reviewed by the European course, which may lead to uncertainty about the legal basis for data transfers to the U.S. or interruption of such transfers. In the event such court decisions block the transfers to or from a particular jurisdiction and in the event that no other transfer mechanisms, such as the model clauses, are legally adequate, this could give rise to operational interruption in the performance of our services for customers and internal processing of employee information, regulatory liabilities and/or reputational harm. In addition, U.S. and foreign governments have enacted or are considering enacting legislation or regulations, or may in the future interpret existing legislation or regulations, in a manner that could significantly impact our ability and the ability of our customers and data partners to collect, augment, use, transfer and share personal and other information that is integral to certain services we provide. These developments in Europe and elsewhere could harm our business, financial condition and results of operations, including reducing demand for our platform or limiting its use, increasing our operating costs, and slowing or preventing the closing of sales transactions.
Regulators globally are also imposing greater compliance obligations and monetary fines for privacy violations. For example, in 2016 the EU adopted a new law governing data practices and privacy called the GDPR, which becomes effective in May 2018. The law creates a range of new compliance obligations, significantly increases financial penalties for non-compliance, and extends the scope of the EU data protection law to all companies processing data of EU residents, regardless of the company's location. The GDPR and other privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements with respect to our customers' use of our platform. We have incurred - and may continue to incur - significant expense to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. In addition, the future enactment of more restrictive laws, rules or regulations, such as those requiring data localization, and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our business and noncompliance could result in regulatory penalties, significant legal liability and harm to our reputation.

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Defects or errors in our cloud-based solutions that significantly impact our customers could harm our reputation, result in significant cost to us and impair our ability to market our solutions.
The software applications underlying our cloud-based solutions and services, including Medidata Rave, are inherently complex and may contain defects or errors, some of which may be material. Errors may result from our own technology or from the interface of our cloud-based solutions with legacy systems and data, which we did not develop. The risk of errors is particularly significant when a new product is first introduced or when new versions or enhancements of existing products are released. The likelihood of errors is increased as a result of our commitment to the frequent release of new products and enhancements of existing products.
We have, from time to time, found defects in our solutions. Although these past defects have not resulted in any litigation against us to date, we have invested significant capital, technical, managerial, and other resources to investigate and correct these past defects and we have needed to divert these resources from other development efforts. In addition, material performance problems or defects in our solutions may arise in the future. Material defects in our cloud-based solutions could result in a reduction in sales, delay in market acceptance of our solutions or credits or refunds to our customers. In addition, such defects may lead to the loss of existing customers and difficulty in attracting new customers, diversion of development resources or harm to our reputation.
Correction of defects or errors could prove to be impossible or impractical. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability may be substantial and could adversely affect our operating results.
If we are not able to reliably meet our data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and customer contracts may be terminated.
As part of our current business model, we store and manage hundreds of terabytes of data for our customers, resulting in substantial information technology infrastructure and ongoing technological challenges, which we expect to continue to increase over time. If we do not reliably meet these data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed, leading to reduced revenues and increased expenses. The services we provide to customers are subject to service level agreements and, in the event that we fail to meet guaranteed service or performance levels, we could be subject to issuance of customer credits or termination of these customer contracts. If the cost of meeting these data storage and management requirements increases, our results of operations could be harmed.
We are subject to risks associated with our strategic investments. Other-than-temporary impairments in the value of our investments could negatively impact our financial results.
We invest in early-to-late stage companies for strategic reasons to support key business initiatives, and may not realize a return on our strategic investments or realize benefits from such strategic business relationships. If any of the third parties with which we enter a strategic relationship fails to perform as expected, breaches or terminates their agreement with us, or becomes engaged in a dispute with us, our reputation could be adversely affected and our business could be harmed. These companies also generate net losses and the market for their products, services or technologies may be slow to develop, and, therefore, are dependent on the availability of later rounds of financing from banks or investors on favorable terms to continue their operations. The financial success of our investment in any company is typically dependent on a liquidity event, just as a public offering, acquisition or other favorable market event reflecting appreciation to the cost of our initial investment. The capital markets for public offerings and acquisitions are dynamic and the likelihood of liquidity events for the companies we have invested in could significantly worsen. Further, valuations of privately held companies are inherently complex due to the lack of readily available market data. If we determine that any of our investments in such companies have experienced a decline in value, we may be required to record an impairment, which could negatively impact our financial results. All of our investments are subject to a risk of partial or total loss of investment capital.
We may expand our business through new acquisitions in the future. Any such acquisitions could disrupt our business, harm our financial condition and dilute current stockholders' ownership interests in our company.
We intend to pursue potential acquisitions of and investments in businesses, technologies, or products complementary to our business and periodically engage in discussions regarding such possible acquisitions. For example, we acquired Fast Track Systems, Inc. ("Fast Track") in March 2008; Clinical Force Limited ("Clinical Force") in July 2011; Patient Profiles, LLC ("Patient Profiles") in October 2014; Intelemage, LLC ("Intelemage") in April 2016; CHITA Inc. ("CHITA") in February 2017; and Mytrus, Incorporated ("Mytrus") in April 2017.
We may encounter difficulties in identifying and acquiring complementary products, technologies, or businesses, and in the case of executed acquisitions, may encounter numerous risks, including some or all of the following:
substantial cash expenditures;
incurrence of costs, debt, and contingent liabilities, some of which we may not identify at the time of acquisition or which may ultimately be greater than we anticipate;
difficulties in integrating and assimilating the operations, products, and personnel of the acquired companies;
diversion of management's attention away from other business concerns;
risk associated with entering markets in which we have limited or no direct experience;

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potential loss of key employees, customers, and strategic alliances from either our current business or the target company's business;
delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses; and
failure to achieve anticipated business development benefits due to an inadequate evaluation of acquisitions or investments.
An acquisition may not result in short-term or long-term benefits to us. The failure to execute acquisitions or investments successfully or otherwise adequately address these risks could materially harm our business and financial results. We may incorrectly judge the value or worth of an acquired company or business. In addition, our future success will depend in part on our ability to manage the growth anticipated with these acquisitions.
Furthermore, the development or expansion of our business or any acquired business or companies may require a substantial capital investment by us. We may not have these necessary funds or they might not be available to us on acceptable terms or at all. We may also seek to raise funds for an acquisition by issuing equity securities or convertible debt, as a result of which our existing stockholders may be diluted or the market price of our stock may be adversely affected.
Supporting our existing and growing customer base could strain our personnel resources and infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.
We continue to experience significant growth in our business, operations and personnel, which has placed a strain on our management, administrative, operational and financial infrastructure. Our success will depend in part upon the ability of our senior management to manage our projected growth effectively. To do so, we must continue to increase the productivity of our existing employees and to hire, train and manage new employees as needed. To manage the expected domestic and international growth of our operations and personnel, we will need to continue to improve our operational financial and management controls, our reporting systems and procedures, and our utilization of real estate. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.
We regularly update or replace our various software systems. If the implementations of these new applications are delayed, or if we encounter unforeseen problems with our new systems or in migrating away from our existing applications and systems, our operations and our ability to manage our business could be negatively impacted.
Our revenues derived from international operations are subject to risks that could have an adverse effect on our results of operations.
We intend to continue our strategic expansion into new geographic areas and expect that international customers will continue to account for a substantial percentage of our revenues. International operations are subject to inherent risks. These risks include:
the economic conditions in these various foreign countries and their trading partners, including conditions resulting from disruptions in the world credit and equity markets;
political instability;
longer payment cycles;
greater difficulty in accounts receivable collection and enforcement of agreements;
requirements to comply with foreign laws;
data privacy laws and regulations which restrict the collection by our customers, processing or transfer into the U.S. of customer personal information or that require customer information to be collected or processed in a designated territory;
changes in regulatory requirements;
risk of non-compliance with the U.S. Foreign Corrupt Practices Act ("FCPA") or similar regulations in other jurisdictions;
fewer legal protections for intellectual property and contract rights;
tariffs or other trade barriers;
difficulties in managing foreign operations;
unavailability of staff with needed skills;
exposure to interest rate fluctuations;
transportation delays;
potentially adverse tax consequences; and
exposure to foreign currency exchange risk associated with transactions entered into in currencies other than the U.S. dollar.
Our failure to successfully mitigate these risks could have a material adverse effect on our business, results of operations and financial condition. In addition, we are continuing to execute on our growth initiatives in Asia, where our strategy is to broaden adoption of our application services, especially in China and South Korea. We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates and international political, regulatory and economic developments, all of which can have a significant influence on our operating results. Some of our international sales are made in local currencies, which could fluctuate against the dollar. Accordingly, our operating results could be adversely affected by unfavorable foreign currency fluctuations.

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The United Kingdom's vote to exit from the European Union could negatively impact us.
On June 23, 2016, in a referendum vote commonly referred to as "Brexit," a majority of British voters voted to exit the EU. In March 2017, the United Kingdom ("U.K.") government officially triggered the process to formally initiate negotiations for the terms of separation from the EU. As a result, the British government has begun negotiating the terms of the U.K.'s future relationship with the EU. The effects of Brexit will depend on any agreements the U.K. makes to retain access to the EU markets either during a transitional period or more permanently. Without access to the single EU market, it may be more challenging and costly to provide our services in Europe. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which EU laws to replace and replicate. If there are changes to U.K. immigration policy as a result of Brexit, this could affect our employees and their ability to move freely between the EU member states for work-related matters.
Our inability to attract and retain highly skilled employees could adversely affect our business.
To execute our growth plan, we must attract and retain highly qualified employees. We do not have employment agreements with any of our executive officers, key management, development or operations personnel and they could terminate their employment with us at any time. The loss of one or more of our key employees or groups could seriously harm our business. In the technology industry, there is substantial and continuous competition for engineers with high levels of expertise in designing, developing and managing software and Internet-related services, as well as competition for sales executives, data scientists and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time experienced, and expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. These difficulties may be amplified by evolving restrictions on immigration, travel or availability of visas for skilled technology workers. If we fail to attract new employees or fail to retain and motivate our current employees, our business and future growth prospects could be adversely affected.
We rely in part on third parties for our help desk support and technology partnerships, and our business may suffer if these relationships do not continue.
We currently outsource our help desk support functions, which involve important direct interactions with users of our products. In the event that our vendor becomes unable or unwilling to provide these services to us, we are not equipped to provide the necessary range of help desk support and service functions to our customers. We also work with third-party software companies to allow our cloud-based platform to interface with their products. If we are unable to develop and maintain effective relationships with appropriate technology partners, or if such companies adopt more restrictive policies with respect to, or impose unfavorable terms and conditions on, access to their products, we may not be able to continue to provide our customers with certain platform infrastructure, which could reduce our sales and adversely affect our business, operating results and financial condition.
We rely on third-party SaaS vendors in connection with numerous critical functions of our business, which presents risks that, if realized, could adversely affect our business operations and financial results.
We currently rely on third-party SaaS vendors in connection with many critical functions of our business, including enterprise resource planning services, customer relationship management services, enterprise cloud applications for human resources, and electronic communication services. Further, some of our cloud-based solutions are hosted by AWS. If any of these services fail or become unavailable due to extended outages or interruptions, or the security of our data stored with the vendors is compromised, or our own access to our data stored with the vendors is restricted or terminated, or the cloud-based services we use are no longer available on commercially reasonable terms or prices, our revenue could be reduced, our reputation could be damaged, expenses could increase, our ability to manage our finances, sales opportunities and workforce could be interrupted and our processes for delivering services and supporting our customers could be impaired until equivalent services are identified, obtained and implemented, all of which could adversely affect our business.
We have been, and may continue to be, subject to claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party. Any such claims may require us to incur significant costs, to enter into royalty or licensing agreements, or to develop or license substitute technology.
We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party. For example, in December 2011 we settled a lawsuit filed against us by Datasci LLC. In addition, in January 2016, we settled a separate lawsuit filed against us by DataTrak International, Inc. ("DataTrak") after its patent was held invalid in November 2015.
We cannot assure you that our cloud-based solutions and the technologies used in our product offerings do not infringe upon patents held by others or that they will not so infringe in the future. Any future claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses, we could encounter delays in product introductions if we attempt to design around the technology at issue or attempt to find another provider of suitable alternative technology to permit us to continue offering the applicable solution. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us or against our customers or other third parties that we

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are required or otherwise agree to indemnify may have a material adverse effect on our business, results of operations or financial condition.
We may be unable to adequately enforce or defend our ownership and use of our intellectual property and other proprietary rights.
Our success is heavily dependent upon our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license and access agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. The steps we take to protect these rights may not be adequate to prevent misappropriation of our technology by third parties, or may not be adequate under the laws of some foreign countries, which may not protect our intellectual property rights to the same extent as do the laws of the U.S.
Our attempts to protect our intellectual property may be challenged by others or invalidated through administrative process or litigation, and agreement terms that address non-competition are difficult to enforce in many jurisdictions and may not be enforceable in any particular case. In addition, there remains the possibility that others will “reverse engineer” our products in order to introduce competing products, or that others will develop competing technology independently.
If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. The failure to adequately protect our intellectual property and other proprietary rights may have a material adverse effect on our business, results of operations or financial condition.
Our cloud-based solutions and services utilize open source software, and any failure to comply with the terms of one or more of these open source licenses could adversely affect our business.
Our cloud-based solutions utilize software covered by open source licenses. Open source software is typically freely accessible, usable and modifiable, and is used by our development team in an effort to reduce development costs and speed up the development process. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user's software to disclose publicly part or all of the source code to the user's software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on unfavorable terms or at no cost. This can subject previously proprietary software to open source license terms. While we monitor the use of all open source software in our products, processes and technology and try to ensure that no open source software is used in such a way as to require us to disclose or make available the source code to the related product or solution, such use could inadvertently occur. This could harm our intellectual property position and have a material adverse effect on our business.
We could incur substantial costs resulting from product liability claims relating to our products or services or our customers' use of our products or services.
Any failure or errors in a customer's clinical trial caused or allegedly caused by our products or services could result in a claim for substantial damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are generally entitled to indemnification under our customer contracts against claims brought against us by third parties arising out of our customers' use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, may divert our resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, a court may not enforce our indemnification right if the customer challenges it or the customer may not be able to fund any amounts for indemnification owed to us. In addition, our existing insurance coverage may not continue to be available on reasonable terms or may not be available in amounts sufficient to cover one or more large claims, or the insurer may disclaim coverage as to any future claim.
Current and future litigation against us, which may arise in the ordinary course of our business, could be costly and time consuming to defend.
We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes and employment claims made by our current or former employees. From time to time, third parties have asserted and may in the future assert intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their technology. For example, in March 2011, we were named in a complaint for patent infringement filed by DataTrak, and in January 2016 we settled the lawsuit after DataTrak's patent was held invalid in November 2015. Litigation may result in substantial costs and may divert management's attention and resources, which may seriously harm our business, overall financial condition and operating results. Insurance may not cover such claims, may not be sufficient for one or more such claims, and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, negatively affecting our business, results of operations, and financial condition.
Our contracts with the U.S. government are subject to termination rights and other risks that could adversely affect us.
Because our U.S. government contracts and subcontracts are generally subject to procurement laws and regulations, we may not receive all of the future revenues we anticipate receiving under those contracts and subcontracts in the expected periods. Some of our

14


government contracts are governed by the Federal Acquisition Regulation ("FAR"), which includes uniform policies and procedures for acquiring goods and services by the U.S. government. The FAR also contains guidelines and regulations for managing a contract after an award, including conditions under which contracts may be terminated, in whole or in part, at the government's convenience. These regulations also subject us to financial audits and other reviews by the government of our costs, performance, accounting and general business practices relating to our government contracts, which may result in adjustment of our contract-related costs and fees. Any such future procurement actions by government customers are subject to risks and uncertainties, which could affect the allocation, timing, schedule, and scope of our government contracts and subcontracts.
Contract research organization partners generate a significant portion of our sales.
We face ongoing business risks due to our partial reliance on our CRO partners to generate sales. We rely on our CRO partners for a significant portion of our revenue. These partners have considerable discretion in electing whether to utilize our solutions for their outsourced clinical trial management services. Should our relationships with our CRO partners or the effectiveness of our CRO partners decline, we face the risk of declining demand for our services, which would affect our revenue and results of operations. In addition, any disruptions of our CRO partners' operations, such as a decline in their sales or competitive position, could have an adverse impact on our business.
Unanticipated changes in our effective tax rate and additional tax liabilities may impact our financial results.
We are subject to income tax in the U.S. and various jurisdictions outside of the U.S. Our effective tax rate could fluctuate due to changes in the mix of earnings and losses in countries with differing statutory tax rates. Our tax expense could also be impacted by changes in non-deductible expenses, changes in excess tax benefits on stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes and effects from acquisitions.
We are open to tax examinations in multiple jurisdictions. While we regularly evaluate new information that may change our judgment resulting in recognition, derecognition or change in measurement of a tax position taken, there can be no assurance that the final determination of any examinations will not have an adverse effect on our operating results and financial position.
Our tax provision could also be impacted by changes in accounting principles and/or changes in U.S. federal and state or international tax laws applicable to corporate multinationals such as the U.S. Tax Cuts and Jobs Act (the "Tax Act") enacted on December 22, 2017, with fundamental law changes also currently being considered by many other countries. Furthermore, changes in taxing jurisdictions' administrative interpretations, decisions, policies and positions could also impact our tax provision. Additionally, in October 2015, the Organisation for Economic Co-Operation and Development released final guidance covering various topics, including transfer pricing, country-by-country reporting and definitional changes to permanent establishment which would ultimately impact our tax liabilities.
We may also be subject to additional liabilities for non-income based taxes due to changes in U.S. federal, state or international tax laws, changes in taxing jurisdictions' administrative interpretations, decisions, policies, and positions, results of tax examinations, settlements or judicial decisions, changes in accounting principles, changes to our business operations, including acquisitions, as well as the evaluation of new information that results in a change to a tax position taken in a prior period.
Risks Related to Our Industry
We face significant competition, which could cause us to lose business or achieve lower margins.
The market for our clinical trial solutions is intensely competitive and characterized by rapidly changing technologies, evolving industry standards and frequent new product and service introductions and enhancements that may render existing products and services obsolete. Accordingly, our market share and margins are subject to sudden declines. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources and greater name recognition than we do. These competitors may respond more quickly than we can to new and emerging technologies and changing customer and regulatory requirements, or devote greater resources to the development, promotion and sale of their solutions. New competitors may enter our market in the future, as barriers to entry are relatively low in our industry. Increased competition may result in pricing pressures, which could negatively impact our sales, gross margins or market share. In addition, current and potential competitors have established, and may in the future establish, relationships with vendors of complementary products, technologies or services to increase the penetration of their products in the marketplace. Even if our products and services are more effective than the products or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our cloud-based solutions and services. Our failure to compete effectively could materially adversely affect our business, financial condition or results of operations.
We depend entirely on the clinical trial market, and a downturn in this market could cause our revenues to decrease.
Our business depends entirely on the clinical trials conducted or sponsored by pharmaceutical, biotechnology and medical device companies, CROs, and other entities. Our revenues may decline as a result of conditions affecting these industries, including general economic downturns, increased consolidation, decreased competition or fewer products under development. Other developments that may affect these industries and harm our operating results include product liability claims, changes in government regulation, changes in governmental price controls or third-party reimbursement practices and changes in medical practices. Disruptions in the world credit

15


and equity markets may also result in a global downturn in spending on research and development and clinical trials and may impact our customers' access to capital and their ability to pay for our solutions. Any decrease in research and development expenditures or in the size, scope or frequency of clinical trials could materially adversely affect our business, results of operations or financial condition.
Extensive governmental regulation of the clinical trial process and our products and services could require significant compliance costs and have a material adverse effect on the demand for our solutions.
The clinical trial process is subject to extensive and strict regulation by the U.S. FDA and other regulatory authorities worldwide. Our cloud-based solutions and services are also subject to state, federal, and foreign regulations. Demand for our solutions is largely a function of such government regulation, which is subject to change at any time. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the demand for our solutions. Proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Similarly, the requirements in the U.S., the EU, the Asia Pacific region, and elsewhere to create a detailed registry of all clinical trials could have an impact on customers' willingness to perform certain clinical studies. In addition, the uncertainty surrounding the possible adoption and impact on healthcare of any GCP reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved.
Modifying our cloud-based solutions and services to comply with changes in regulations or regulatory guidance could require us to incur substantial costs. Further, changing regulatory requirements may render our solutions obsolete or make new products or services more costly or time consuming than we currently anticipate. Failure by us, our customers, or our competitors to comply with applicable regulations could result in increased regulatory scrutiny and enforcement. If our solutions fail to comply with government regulations or guidelines, we could incur significant liability or be forced to cease offering our applicable products or services. If our solutions fail to allow our customers to comply with applicable regulations or guidelines, customers may be unwilling to use our solutions and any such non-compliance could result in the termination of or additional costs arising from contracts with our customers.
Consolidation among our customers could cause us to lose customers, decrease the market for our products and result in a reduction of our revenues.
Our customer base could decline because of industry consolidation, and we may not be able to expand sales of our products and services to new customers. Consolidation in the pharmaceutical, biotechnology and medical device industries, and among CROs has accelerated in recent years, and this trend may continue. In addition, new companies or organizations that result from such consolidation may decide that our products and services are no longer needed because of their own internal processes or the use of alternative systems. As these entities consolidate, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Also, if consolidation of larger current customers occurs, the combined organization may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined organization's revenues to continue to achieve growth.
Risks Related to Our Common Stock and Our Debt
The price of our common stock may fluctuate significantly, and investors could see their investments decline in value.
Shares of our common stock were sold in our initial public offering ("IPO") in June 2009 at a price of $7.00 per share (on a post-split basis), and our common stock has subsequently traded as high as $85.92 and as low as $6.68 from our IPO through December 31, 2017. However, an active, liquid, and orderly market for our common stock on The NASDAQ Stock Market or otherwise may not be sustained, which could depress the trading price of our common stock. The trading price of our common stock may be subject to wide fluctuations in response to various factors, some of which are beyond our control, including:
our quarterly or annual earnings or those of other companies in our industry;
announcements by us or our competitors of significant contracts or acquisitions;
changes in accounting standards, policies, guidance, interpretations or principles;
forward-looking guidance to industry and financial analysts related to future revenue and earnings;
disruptions in our service due to computer hardware, software, network or data center problems;
general economic and stock market conditions, including disruptions in the world credit and equity markets;
the failure of securities analysts to cover our common stock or changes in financial estimates and other metrics and modeling used by analysts in their research reports about our business;
future issuances of our common stock, whether in connection with an acquisition, a capital raising transaction or upon conversion of some or all of our outstanding convertible senior notes; and
the other factors described in these “Risk Factors.”
In recent years, the stock market in general, and the market for technology-related companies in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little to do with our performance, and these fluctuations could materially reduce our stock price.

16


In the past, some companies, including companies in our industry, have had volatile market prices for their securities and have had securities class action suits filed against them. The filing of a lawsuit against us, regardless of the outcome, could have a material adverse effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of our management's attention and resources.
Our actual operating results may differ significantly from guidance provided by our management.
From time to time, we release guidance in our earnings releases, earnings conference calls, or otherwise, regarding our future performance that represent our management's estimates as of the date of release. This guidance, which includes forward-looking statements, is based on projections prepared by our management. Our guidance is not prepared with a view toward compliance with published accounting and reporting guidelines, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the projections and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.
Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of the suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by analysts.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from our guidance and the variations may be material. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on any such guidance. Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances discussed therein could result in the actual operating results being different from our guidance, and such differences may be adverse and material.
Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may consider to be in their best interests, which could negatively affect our stock price.
Provisions of Delaware law and our fifth amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests.
Our fifth amended and restated certificate of incorporation authorizes us to issue up to 5,000,000 shares of preferred stock in one or more different series with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us, and could effectively be used as an anti-takeover device. Currently there are no shares of our preferred stock issued or outstanding.
Our bylaws provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and require that special meetings of stockholders be called only by our chairman of the board, chief executive officer, president or the board pursuant to a resolution adopted by a majority of the board.
The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.
As a public company, we may incur significant administrative workload and expenses in connection with new and changing compliance requirements.
As a public company with common stock listed on The NASDAQ Stock Market, we must comply with various laws, regulations and requirements. New laws and regulations, as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and rules adopted by the SEC and by The NASDAQ Stock Market, may result in increased general and administrative expenses and a diversion of management's time and attention as we respond to new requirements.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on

17


your investment in our common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Shares of our common stock may depreciate in value or may not appreciate in value.
Our ability to generate the significant amount of cash needed to service our debt obligations or to obtain additional financing depends on many factors beyond our control.

As of December 31, 2017, we had $100 million of aggregate principal amount of our Term Loan and $400 million of aggregate principal amount of Revolving Commitments available under our Credit Facility (defined in Note 9, "Debt," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K), and $287.5 million aggregate principal amount of 1.00% convertible senior notes due August 1, 2018 ("Notes") outstanding. We have aggregate indebtedness of approximately $387.5 million that we have incurred in connection with the issuance of the Notes and under our Credit Facility. We may borrow amounts in the future and use the proceeds from any future borrowing for general corporate purposes, future acquisitions, expansion of our business or repurchases of our outstanding shares of common stock. In addition, holders of the Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.

Our ability to make scheduled payments of the principal of, or to pay interest on or to refinance our future indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. Refer to Note 9, "Debt," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for further information regarding our Notes and Credit Facility.
Restrictive covenants in the credit agreement governing our senior secured first lien credit facility may restrict our ability to pursue our business strategies.
The credit agreement governing our Credit Facility imposes restrictions on us, including restrictions on our ability to incur additional indebtedness, grant liens on assets, engage in certain fundamental corporate changes, sell or otherwise dispose of assets, make certain investments and acquisitions, or pay dividends, and requires us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. In addition, the indenture governing the Notes contains covenants that may adversely affect our ability to incur certain liens. If we breach any of the covenants and do not obtain a waiver from the lenders, then, subject to the applicable cure periods, our outstanding indebtedness could be declared immediately due and payable. Further, following an event of default under our Credit Facility, the lenders will have the right to proceed against the collateral granted to them to secure that debt. If the debt under our Credit Facility were to be accelerated, it may have a material adverse effect on our liquidity and financial position and, further, we may not have sufficient funds to repay in full such indebtedness that may become due as a result of that acceleration.
Conversion of the Notes may affect the price of our common stock.
Upon conversion of the Notes, we intend to make cash payments in the principal amount of the converted Notes and issue shares of common stock in consideration for the amounts payable in excess of the principal amount of the Notes. Any sales in the public market of shares of common stock issued upon conversion of the Notes could decrease the trading price of our common stock.
The conversion provisions of the Notes require us to deliver cash and common stock upon conversion at maturity and could dilute the ownership interests of stockholders.
Because we intend to issue shares of common stock in consideration for the amounts payable in excess of the principal amount of the Notes upon any conversion of the Notes at maturity, our basic earnings per share will decrease to the extent we issue shares upon conversion because such underlying shares would be included in the basic earnings per share calculation and the conversion would result in dilution to our stockholders. Any new issuance of equity securities, including the issuance of shares upon the conversion of the Notes, would dilute the interests of our then-existing stockholders, including holders who receive shares upon conversion of the Notes.
Item 1B. Unresolved Staff Comments
Not applicable.

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Item 2. Properties
Our corporate headquarters and other material leased real property and data center space as of December 31, 2017 are shown in the following table. We do not own any real property.
Location
 
Use
 
Size
 
Expiration of Lease
New York, New York
 
Corporate headquarters
 
137,535 square feet
 
April 2024
Iselin, New Jersey
 
Office space
 
50,648 square feet
 
June 2026
Hammersmith, United Kingdom
 
Office space
 
29,106 square feet
 
February 2027
Seoul, South Korea
 
Office space
 
25,112 square feet
 
March 2022
San Francisco, California
 
Office space
 
14,015 square feet
 
February 2023
Tokyo, Japan
 
Office space
 
12,338 square feet
 
October 2023
Houston, Texas
 
Data center and office space
 
11,367 square feet
 
December 2020
Frankfurt, Germany
 
Data center
 
 471 square feet
 
February 2019
We believe these facilities and additional or alternative space available to us will be adequate to meet our needs for the foreseeable future.
Item 3. Legal Proceedings
See Note 15, “Commitments and Contingencies—Legal Matters,” to the consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for a description of current legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.

19


PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Market Information
Our common stock has been traded on The NASDAQ Global Market under the symbol “MDSO” since the completion of our IPO in June 2009. Before then, there was no public market for our common stock.
The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported by The NASDAQ Global Market:
 
2017
 
2016
 
High
 
Low
 
High
 
Low
Fourth Quarter
$
81.88

 
$
63.33

 
$
57.85

 
$
46.10

Third Quarter
85.92

 
70.38

 
56.76

 
46.11

Second Quarter
81.65

 
56.65

 
48.58

 
37.36

First Quarter
58.77

 
47.77

 
49.39

 
30.22

Holders
On February 21, 2018, we had approximately 65 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include the many additional beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
Dividends
Since the completion of our IPO in June 2009, we have not declared or paid any cash dividends on our capital stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant. The terms of the credit agreement governing our Credit Facility (discussed in Note 9, "Debt," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K) restrict our ability to pay cash dividends and make stock repurchases, if, after giving effect thereto, the consolidated total net leverage ratio (total funded indebtedness, less unrestricted domestic cash and cash equivalents not to exceed $150 million, to EBITDA) exceeds 1.00 to 1.00 or there is an existing default under the credit agreement.
Securities Authorized for Issuance under Equity Compensation Plans
Refer to Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," under Part III of this Annual Report on Form 10-K for information on where to find information regarding the securities authorized for issuance under our equity compensation plans.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
From time to time, we grant nonvested restricted stock awards or performance-based restricted stock units to our employees pursuant to the terms of our 2017 Long-Term Incentive Plan ("2017 Plan") and formerly pursuant to the terms of our Second Amended and Restated 2009 Long-Term Incentive Plan ("2009 Plan"). Under the provisions of the 2017 Plan and 2009 Plan, unless otherwise elected, participants fulfill their income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting, we determine the number of vested shares to be withheld by dividing the participant's income tax withholding obligation by the closing price of our common stock and withhold the resulting number of vested shares.

20


A summary of our repurchases of shares of our common stock for the three months ended December 31, 2017 is as follows: 
 
Total Number
of Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum
Number of
Shares that
May Yet be
Purchased
under the  Plans
or Programs
October 1 – October 31, 2017
25,399

 
$
79.24

 

 

November 1 – November 30, 2017
920

 
71.63

 

 

December 1 – December 31, 2017
1,879

 
67.35

 

 

Total
28,198

 
$
78.20

 

 

(1) Represents the number of shares acquired as payment by employees of applicable statutory minimum withholding taxes owed upon vesting of restricted stock awards, restricted stock units, or performance-based restricted stock units granted under the 2017 and 2009 Plan.

Stock Performance Graph
The following graph sets forth the total cumulative stockholder return on our common stock for the last five fiscal years as compared to the NASDAQ Composite Index and the NASDAQ Computer Index over the same period. This graph assumes a $100 investment in our common stock at $19.59, which was the adjusted closing market price per share on December 31, 2012. The comparison in the graphs below are based upon historical stock performance and not indicative of, nor intended to forecast, future performance of our common stock. 
chart-5b3bda566525524a86b.jpg


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Item 6. Selected Financial Data
Our selected consolidated financial information presented for each of the years ended December 31, 2017, 2016, and 2015 and as of December 31, 2017 and 2016 was derived from our audited consolidated financial statements, which are included in Item 15 of this Annual Report on Form 10-K. Our selected financial information presented for each of the years ended December 31, 2014 and 2013 and as of December 31, 2015, 2014, and 2013 was derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K.
The information contained in this table should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Operations Data
 
Year ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
 
 
Subscription
$
459,528

 
$
394,269

 
$
336,195

 
$
280,041

 
$
227,921

Professional services
86,004

 
69,112

 
56,311

 
55,030

 
48,928

Total revenues
545,532

 
463,381

 
392,506

 
335,071

 
276,849

Costs of revenues:
 
 
 
 
 
 
 
 
 
Subscription
69,235

 
62,136

 
47,795

 
45,576

 
37,053

Professional services
57,558

 
50,473

 
41,993

 
39,344

 
32,856

Total cost of revenues
126,793

 
112,609

 
89,788

 
84,920

 
69,909

Gross profit
418,739

 
350,772

 
302,718

 
250,151

 
206,940

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Research and development
138,564

 
112,595

 
92,319

 
71,757

 
51,202

Sales and marketing
126,273

 
109,290

 
103,153

 
83,435

 
66,337

General and administrative
94,324

 
78,678

 
78,014

 
69,111

 
65,513

Wire transaction (recovery) loss (1)
(4,770
)
 

 

 
5,784

 

Total operating costs and expenses
354,391

 
300,563

 
273,486

 
230,087

 
183,052

Operating income
64,348

 
50,209

 
29,232

 
20,064

 
23,888

Interest and other expense, net
(12,121
)
 
(12,895
)
 
(13,457
)
 
(13,550
)
 
(5,506
)
Income before income taxes
52,227

 
37,314

 
15,775

 
6,514

 
18,382

Provision for income taxes
7,847

 
8,331

 
2,608

 
422

 
1,721

Net income
$
44,380

 
$
28,983

 
$
13,167

 
$
6,092

 
$
16,661

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.79

 
$
0.52

 
$
0.25

 
$
0.12

 
$
0.33

Diluted
$
0.74

 
$
0.51

 
$
0.23

 
$
0.11

 
$
0.31

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
56,473

 
55,492

 
53,717

 
52,561

 
51,060

Diluted
59,765

 
57,249

 
56,540

 
55,247

 
54,118


22


Stock-based compensation expense and depreciation and amortization of intangible assets included in cost of revenues and operating costs and expenses are as follows: 
 
Year ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands)
Stock-based compensation expense
 
 
 
 
 
 
 
 
 
Cost of revenues
$
4,873

 
$
4,425

 
$
5,040

 
$
4,313

 
$
3,149

Research and development
13,314

 
9,223

 
7,907

 
4,085

 
2,397

Sales and marketing
6,833

 
7,074

 
9,171

 
7,450

 
8,859

General and administrative
22,793

 
20,436

 
26,869

 
22,105

 
21,738

Total stock-based compensation
$
47,813

 
$
41,158

 
$
48,987

 
$
37,953

 
$
36,143

Depreciation
 
 
 
 
 
 
 
 
 
Cost of revenues
$
10,149

 
$
6,341

 
$
5,585

 
$
5,275

 
$
3,975

Research and development
4,801

 
3,637

 
2,188

 
2,302

 
1,289

Sales and marketing
2,967

 
2,213

 
1,440

 
849

 
339

General and administrative
2,031

 
1,861

 
973

 
1,381

 
529

Total depreciation
19,948

 
14,052

 
10,186

 
9,807

 
6,132

Amortization of intangible assets
 
 
 
 
 
 
 
 
 
Cost of revenues
3,664

 
1,021

 
517

 
499

 
589

Sales and marketing
441

 
276

 
119

 
129

 
215

Total amortization of intangible assets
4,105

 
1,297

 
636

 
628

 
804

Total depreciation and amortization of intangible assets
$
24,053

 
$
15,349

 
$
10,822

 
$
10,435

 
$
6,936

Consolidated Balance Sheet Data
 
December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(in thousands)
Cash and cash equivalents (3)
$
237,325

 
$
93,519

 
$
49,562

 
$
39,517

 
$
22,328

Total marketable securities (2)
426,008

 
421,703

 
429,167

 
417,126

 
413,997

Total current assets
637,616

 
518,780

 
383,201

 
357,852

 
304,545

Restricted cash (4)
5,518

 
5,760

 
5,755

 
5,118

 
5,344

Total assets
1,046,114

 
817,885

 
684,180

 
617,639

 
567,497

Total deferred revenue
82,690

 
77,614

 
78,575

 
64,264

 
54,058

Total capital lease obligations

 

 

 
46

 
80

Total long-term debt (2)(3)
92,841

 
263,401

 
249,487

 
236,308

 
223,849

Stockholders' equity (2)(5)
497,432

 
401,990

 
284,156

 
264,699

 
225,813


(1)
Operating costs and expenses for the year ended December 31, 2017 include the probable insurance recovery of amounts associated with an international wire transfer fraud committed against us, recognized during the year ended December 31, 2014. See Note 2, "Wire Transaction Recovery," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for more information.
(2)
In August 2013, we issued $287.5 million of 1.00% convertible senior notes which will mature on August 1, 2018 unless earlier repurchased or converted. In accounting for the issuance, we bifurcated the notes into liability and equity components. As of December 31, 2017, the liability portion is recorded, net of discount and unamortized debt issuance costs, in short-term liabilities on our consolidated balance sheets. As of December 31, 2016, 2015, 2014, and 2013 the liability was recorded as long-term. Proceeds from this issuance have been invested into high quality marketable securities. See Note 9, "Debt," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for further information.
(3)
In December 2017, we entered into a credit agreement consisting of revolving commitments with a maximum borrowing limit of $400.0 million and term loans in an aggregate principal amount of $100.0 million. Each of the term loans and the revolving commitments is scheduled to mature on December 21, 2022. The long-term debt balance as of December 31, 2017 in the accompanying balance sheets is presented net of unamortized deferred financing costs. See Note 9, "Debt," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for further information.
(4)
Our restricted cash represents deposits made to fully collateralize certain standby letters of credit in connection with office lease arrangements.

23


(5)
During the third quarter of 2016, we early adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting, a portion of which requires excess tax benefits and tax deficiencies on equity awards, which were formerly recognized in additional paid-in capital, to be recognized in the income statement when the awards vest or are settled; adoption of this portion of ASU No. 2016-09 resulted in a $50.6 million cumulative-effect adjustment to opening retained earnings as of January 1, 2016.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our financial condition and results of operations. You should read this discussion and analysis together with our consolidated financial statements and accompanying notes to consolidated financial statements included in Item 15 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates, and projections about our business and operations. Our actual results may differ from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those described in “Risk Factors” under Item 1A and elsewhere in this Annual Report on Form 10-K.
Overview
Our unified platform, pioneering analytics, and clinical technology expertise power the development of new therapies for one thousand pharmaceutical companies, biotech and medical device firms, academic medical centers, and contract research organizations around the world. The Medidata Clinical Cloud connects patients, physicians, and life sciences professionals, and companies on the Medidata platform are individually and collaboratively reinventing the way research is done to create smarter, more precise treatments.
Highlights
2017
Total revenue increased 18% to $545.5 million, compared with $463.4 million in 2016.
Operating income was $64.3 million, up 28% compared with $50.2 million in 2016.
Net income was $44.4 million, or $0.74 per diluted share, up 53% compared with $29.0 million, or $0.51 per diluted share, in 2016.
12-month subscription backlog grew to a record $446 million as of December 31, 2017, up 30% compared with $343 million at the end of 2016.
Total multi-year subscription backlog grew to $1,036 million as of December 31, 2017, up 39% compared with $745 million at the end of 2016.
2016
Total revenue increased 18.1% to $463.4 million, compared with $392.5 million in 2015.
Professional services increased 22.7% to $69.1 million.
Operating income was $50.2 million, up 72% compared with $29.2 million in 2015.
Net income was $29.0 million, or $0.51 per diluted share, up 120% compared with $13.2 million, or $0.23 per diluted share, in 2015.
12-month subscription backlog grew to $343 million as of December 31, 2016, up 16% compared with $296 million at the end of 2015.
Total multi-year subscription backlog grew to $745 million as of December 31, 2016, up 34% compared with $555 million at the end of 2015.

Results of Operations
Revenues
Our revenues are derived from subscription and professional services.

24


Our subscription revenues consist of customer fees for the value and utilization of our cloud-based solutions. Subscriptions to our solutions are provided through multi-study arrangements, which allow customers to manage up to a predetermined number of clinical trials for a term generally ranging from one to five years, and single-study arrangements that allow customers to use our solutions for an individual study and/or to evaluate our products prior to committing to multi-study arrangements. Many of our customers have migrated from single-study arrangements to multi-study arrangements, which represent the majority of our subscription revenues. We recognize revenues from subscriptions ratably over the terms of these arrangements. A majority of our subscription revenues in each period are generated from arrangements initiated during prior periods. Consequently, an increase or decrease in new subscription arrangements in a particular period may not significantly affect our results of operations in that period.
Professional services revenue is derived from the provision of services that help life sciences companies realize higher value in their clinical development processes. Our professional services provide our customers with reliable, repeatable, and cost-effective implementation and training in the use of our cloud-based solutions. We also offer consulting services to advise customers on ways to optimize their clinical development process from trial concept to conclusion.
Revenues for 2017, 2016, and 2015 were as follows:
 
2017
 
Change
 
2016
 
Change
 
2015
Revenues:
(amounts in thousands except percentages)
Subscription
$
459,528

 
16.6
%
 
$
394,269

 
17.3
%
 
$
336,195

Percentage of total revenues
84.2
%
 
 
 
85.1
%
 
 
 
85.7
%
Professional services
86,004

 
24.4
%
 
69,112

 
22.7
%
 
56,311

Percentage of total revenues
15.8
%
 
 
 
14.9
%
 
 
 
14.3
%
Total revenues
$
545,532

 
17.7
%
 
$
463,381

 
18.1
%
 
$
392,506

In 2017 and 2016, year-over-year growth in subscription revenues was largely the result of expanding business with current customers, both in the form of additional product subscriptions, which we call "density", and increased usage under existing subscriptions, which we call "intensity, with a strong contribution from our electronic data capture and risk-based monitoring solutions. Our data analytics and mobile health solutions also contributed greatly, particularly in 2017. Our revenue retention rate was over 99% in both 2017 and 2016; we ended 2017 with nearly 1,000 customers, compared with 849 customers at the end of 2016. At the end of 2017 and 2016, we had 12-month subscription backlog of approximately $446 million and $343 million, respectively, representing the future contract value of outstanding arrangements, billed and unbilled, to be recognized in 2018 and 2017, respectively.
Year-over-year growth in professional services revenues in 2017 and 2016 resulted from strong demand from new and existing customers implementing our platform, data analytics, and strategic services.
Cost of Revenues
Cost of revenues consists primarily of costs related to delivering, maintaining, and supporting our cloud-based solutions and delivering our professional services and support. These costs include salaries, benefits, bonuses, and stock-based compensation for our data center and professional services staff, as well as costs of third-party consultants. Cost of revenues also includes expenses associated with our data center, including networking and related depreciation expense, as well as outside service provider costs, amortization expense associated with acquired and developed technology, and general overhead. We allocate general overhead, such as applicable shared rent and utilities, to cost of revenues based on relative headcount. The costs associated with providing professional services are recognized as such costs are incurred. Over the long term, we believe that cost of revenues as a percentage of total revenues will decrease.

25


Cost of revenues for 2017, 2016, and 2015 was as follows:
 
2017
 
Change
 
2016
 
Change
 
2015
Cost of revenues:
(amounts in thousands except percentages)
Subscription
$
69,235

 
11.4
%
 
$
62,136

 
30.0
%
 
$
47,795

Percentage of total revenues
12.7
%
 
 
 
13.4
%
 
 
 
12.2
%
Professional services
57,558

 
14.0
%
 
50,473

 
20.2
%
 
41,993

Percentage of total revenues
10.5
%
 
 
 
10.9
%
 
 
 
10.7
%
Total cost of revenues
$
126,793

 
12.6
%
 
$
112,609

 
25.4
%
 
$
89,788

Percentage of total revenues
23.2
%
 
 
 
24.3
%
 
 
 
22.9
%
 
 
 
 
 
 
 
 
 
 
Gross profit
$
418,739

 
19.4
%
 
$
350,772

 
15.9
%
 
$
302,718

Gross margin
76.8
%
 
 
 
75.7
%
 
 
 
77.1
%
 
 
 
 
 
 
 
 
 
 
Subscription margin
84.9
%
 
 
 
84.2
%
 
 
 
85.8
%
Professional services margin
33.1
%
 
 
 
27.0
%
 
 
 
25.4
%
In 2017, the year-over-year growth in cost of subscription revenues was primarily driven by an increase in depreciation and amortization of $6.1 million, associated with internally developed and recently acquired technology assets. In 2016, the year-over-year growth in cost of subscription revenues was primarily due to higher third-party cloud hosting costs resulting from increased platform activity and increased expenses associated with other software-related contracts with outside vendors, as well as investments in hosting infrastructure at our Europe data center. In both periods, personnel-related costs contributed to the growth in cost of subscription revenues, as a result of headcount increases to support our business growth.
The year-over-year growth in cost of professional services revenues in 2017 and 2016 was predominantly due to increases in personnel-related costs associated with our headcount additions in response to increased customer demand and expanding skill requirements for professional services. Increased consulting costs were also a contributing factor in both periods.
In 2017, overall gross margin rose to 76.8%, driven by a higher subscription margin as workforce and infrastructure investments began to deliver value and scale. Gross margin decreased to 75.7% in 2016 from 77.1% in 2015 as a result of the aforementioned investments in support of our platform, as well as a greater mix of lower-margin professional services revenue due to strong professional services growth.
Operating Costs and Expenses
Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation, as well as the cost of certain third-party service providers and allocated overhead. We have focused our research and development efforts on expanding the functionality and ease of use of our cloud-based solutions. We expect research and development costs to increase in the future as we intend to release new features and functionality designed to maximize the efficiency and effectiveness of the clinical development process for our customers. Over the long term, we believe that research and development expenses as a percentage of total revenues will decrease.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, and stock-based compensation, as well as commissions, travel costs, marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses, and allocated overhead. Our sales and marketing expenses have increased primarily due to our ongoing investments in customer engagement and acquisition and other activities to build brand awareness. We expect sales and marketing expenses to continue to increase in absolute terms. Over the long term, we believe that sales and marketing expenses as a percentage of total revenues will decrease.
General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance, and human resources departments, including salaries, benefits, bonuses, and stock-based compensation, as well as professional fees, insurance premiums, allocated overhead, and other corporate expenses. On an ongoing basis, we expect general and administrative expenses to increase modestly in absolute terms due to continued investment in our infrastructure to support our continued growth. We expect that general and administrative expenses as a percentage of total revenues will decrease marginally in the future.

26


Operating costs and expenses for 2017, 2016, and 2015 were as follows:
 
2017
 
Change
 
2016
 
Change
 
2015
Operating costs and expenses:
(amounts in thousands except percentages)
Research and development
$
138,564

 
23.1
 %
 
$
112,595

 
22.0
%
 
$
92,319

Percentage of total revenues
25.4
 %
 
 
 
24.3
%
 
 
 
23.5
%
Sales and marketing
126,273

 
15.5
 %
 
109,290

 
5.9
%
 
103,153

Percentage of total revenues
23.2
 %
 
 
 
23.6
%
 
 
 
26.3
%
General and administrative
94,324

 
19.9
 %
 
78,678

 
0.9
%
 
78,014

Percentage of total revenues
17.3
 %
 
 
 
17.0
%
 
 
 
19.9
%
Wire Transaction Recovery
(4,770
)
 
(100.0
)%
 

 
%
 

Percentage of total revenues
(0.9
)%
 
 
 
%
 
 
 
%
Total operating costs and expenses
$
354,391

 
17.9
 %
 
$
300,563

 
9.9
%
 
$
273,486

Percentage of total revenues
65.0
 %
 
 
 
64.9
%
 
 
 
69.7
%
 
 
 
 
 
 
 
 
 
 
Operating income
$
64,348

 
28.2
 %
 
$
50,209

 
71.8
%
 
$
29,232

Operating margin
11.8
 %
 
 
 
10.8
%
 
 
 
7.4
%
The growth in research and development expenses in 2017 and 2016 was primarily due to personnel-related costs associated with headcount and skill set investments in support of our growth; headcount grew 31% in 2017 and 14% in 2016, with an increasing focus on the hiring of highly skilled engineering talent. Research and development expenses for both 2017 and 2016 were also impacted by our increased use of specialized consultants and outside experts to enhance the value of our platform. In both periods, the aforementioned people cost increases were partially offset by capitalization of internal-use software development costs associated with our Medidata Clinical Cloud platform.
The growth in sales and marketing expenses in 2017 and 2016 was largely driven by personnel-related costs associated with headcount increases to expand our global sales organization and partner team. Sales and marketing headcount increased 12% in 2017 and 8% in 2016. Increased expenses for the year ended December 31, 2016 were partially offset by the $1.4 million cumulative benefit recognized as a result of the enactment of the New Jersey Business Employment Incentive Program ("NJ BEIP") in the first quarter of 2016.
The growth in general and administrative expenses in 2017 and 2016 was largely driven by personnel-related costs associated with headcount increases of 6% in 2017 and 27% in 2016 to support our business growth. In 2016, this increase was almost fully offset by a 24% decrease in stock-based compensation expense as a result of certain material equity awards becoming fully vested during the fourth quarter of 2015 and first quarter of 2016. General and administrative expenses for 2017 were impacted by increased legal and professional fees associated with litigation matters and recent acquisitions, while legal and professional fees in 2016 were lower following the resolution of our litigation with DataTrak International, Inc. early in January 2016.
In the first quarter of 2016, the state of New Jersey enacted legislation that allows companies to recognize grants associated with the NJ BEIP, which incentivizes businesses to locate and expand jobs in New Jersey. We applied the benefits of these grants against the underlying salary expense related to our employees in research and development, sales and marketing, and general and administrative functions in New Jersey, reducing total operating expenses by $3.0 million for 2016. The NJ BEIP is not expected to have a material impact on future periods. In the third quarter of 2016, we received and signed an incentive proposal under New York State's Empire State Development ("ESD") Excelsior Jobs Program ("Excelsior") that provides for $17.0 million of credits over a ten-year period beginning in 2016. The benefits of all Excelsior credits are applied against underlying salary expense and reduced total operating expenses by $1.5 million for 2016.
Our total operating costs and expenses for 2017 include the probable insurance recovery of $4.8 million associated with the previously recognized 2014 wire transaction loss. For further information, see Note 2, "Wire Transaction Recovery," to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
Interest and Other Expense:
Interest and other expense for 2017, 2016, and 2015 was as follows:
 
2017
 
Change
 
2016
 
Change
 
2015
 
(amounts in thousands except percentages)
Interest and other expense
$
(12,121
)
 
(6.0
)%
 
$
(12,895
)
 
(4.2
)%
 
$
(13,457
)
Interest and other expense is driven largely by cash and non-cash interest expense on the 1.00% convertible senior notes that we issued in August 2013. For further information, see Note 9, “Debt,” to our consolidated financial statements included in Item 15 of

27


this Annual Report on Form 10-K. For all periods presented, debt interest expense was partially offset by interest income from our marketable securities portfolio.
Income taxes
We are subject to income tax in the U.S. and foreign jurisdictions in which we conduct business. See Note 14, “Income Taxes,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for more information regarding our income taxes.
Income taxes for 2017, 2016, and 2015 were as follows:
 
2017
 
 
 
2016
 
 
 
2015
 
(amounts in thousands except percentages)
Provision for income taxes
$
7,847

 
 
 
$
8,331

 
 
 
$
2,608

Effective tax rate
15.0
%
 
 
 
22.3
%
 
 
 
16.5
%
We had an effective tax rate of 15.0% for 2017 compared with 22.3% for 2016 and 16.5% for 2015. In 2017, our effective tax rate was lower than the U.S. statutory rate of 35% primarily due to the tax benefit of research and development tax credits generated during the year, excess tax benefits of stock-based compensation, and the intra-entity transfer of assets (which, due to the early adoption of Accounting Standards Update ("ASU") No. 2016-16, required us to recognize the income tax consequences at the time of transfer), partially offset by the impact of the enactment of the U.S. Tax Cuts and Jobs Act ("the "Tax Act"). In 2016, our effective tax rate was lower than the U.S. statutory rate of 35% as a result of the tax benefit of research and development tax credits generated during the year, change in unrecognized tax benefits on research and development tax credit carryovers resulting from the conclusion of an Internal Revenue Service ("IRS") tax examination, share-based compensation inclusive of excess tax benefits recognized due to early adoption of ASU No. 2016-09, tax rate differentials on the mix of foreign jurisdictional earnings, and losses incurred by a foreign subsidiary related to our non-U.S. operations for which we have not realized a related tax benefit. In 2015, our effective tax rate was lower than the U.S. statutory rate of 35% primarily due to the tax benefit of research and development tax credits, the domestic production activities deduction, net of tax reserves, and share-based compensation. Research and development tax credits and the tax impact of stock-based compensation will likely continue to affect future periods' effective tax rates as we continue to develop and enhance our products and grow domestically and internationally.
Liquidity and Capital Resources
We believe that our cash flows from operations, cash and cash equivalents, and highly liquid marketable securities will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for the foreseeable future. Our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we may complete. The following table presents selected financial information related to our liquidity and capital resources as of and for the years ended December 31, 2017, 2016, and 2015 (in thousands):
 
2017
 
2016
 
2015
 
Cash, cash equivalents, and marketable securities
$
663,333

 
$
515,222

 
$
478,729

 
Furniture, fixtures and equipment, net
$
88,091

 
$
58,461

 
$
51,043

 
1.00% convertible senior notes, net (1)
$
278,094

 
$
263,401

 
$
249,487

 
Term loan, net (including current maturities)
$
97,841

 
$

 
$

 
 
 
 
 
 
 
 
Cash provided by operating activities
$
121,746

 
$
88,769

 
$
88,594

 
Cash used in investing activities
$
(78,030
)
 
$
(41,407
)
(2)
$
(36,707
)
(2)
Net cash provided by (used in) financing activities
$
99,089

 
$
(3,311
)
 
$
(40,995
)
 
 
(1) As of December 31, 2017, our 1.00% convertible senior notes, which mature in August 2018, are recorded as current liabilities on our consolidated balance sheet; as of December 31, 2016 and 2015, they were recorded as noncurrent liabilities.
(2) As a result of our early adoption of ASU. No. 2016-18 during the first quarter of 2017, cash used in investing activities for the years ended December 31, 2016 and 2015 have been adjusted to exclude increase or decrease in restricted cash.
Cash, Cash Equivalents, and Marketable Securities
We manage our cash equivalents and marketable securities as a single investment portfolio that is intended to be available to meet our current cash requirements. Cash equivalents substantially consist of investments in money market funds. Marketable securities, which we classify as available-for-sale securities, primarily consist of high quality commercial paper, corporate bonds, and U.S. government debt obligations.

28


For 2017, cash provided by operating activities of $121.7 million was driven by strong customer collections, which were 28% higher than in the prior year, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $78.0 million consisted primarily of cash payments for capital expenditures of $44.6 million, aggregate payments of $22.9 million in aggregate to acquire CHITA and Mytrus, purchase of $4.1 million in cost method investments, and net purchases of marketable securities of $6.3 million. Cash provided by financing activities of $99.1 million consisted of $98.0 million in net proceeds from the term loan portion of our credit facility and equity plan proceeds of $19.6 million, partially offset by the acquisition of $18.5 million of treasury stock in connection with equity plan participant tax withholdings upon vesting.
    
For 2016, cash provided by operating activities of $88.8 million was driven by strong customer collections, which were 15% higher than in the prior year, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $41.4 million consisted primarily of cash payments for capital expenditures of $25.7 million, a net payment of $17.2 million to acquire Intelemage, and $4.0 million cost method investment, partially offset by net sales of marketable securities of $5.4 million. Cash used in financing activities of $3.3 million resulted predominantly from the acquisition of $15.6 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by
equity plan proceeds of $12.4 million.

For 2015, cash provided by operating activities of $88.6 million was driven by strong customer collections, which were 20% higher than in the prior year, partially offset by operating expenditures and cash interest expense on our 1.00% convertible senior notes. Cash used in investing activities of $36.7 million consisted primarily of cash payments for capital expenditures of $19.0 million and net purchases of marketable securities of $17.7 million. Cash used in financing activities of $41.0 million resulted predominantly from the acquisition of $53.6 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, partially offset by equity plan proceeds of $12.7 million.
Capital Assets
We acquired $47.8 million in capital assets during 2017, predominantly related to our new office spaces in Seoul, South Korea and Hammersmith, UK, continued enhancements to our existing infrastructure and facilities, and capitalization of software development costs. Our actual cash payments for capital expenditures during 2017 were $44.6 million. We expect to spend approximately $40 million on capital expenditures during 2018.
Debt
In August 2013, we issued $287.5 million of 1.00% convertible senior notes which will mature on August 1, 2018 unless earlier repurchased or converted. Upon conversion, we will deliver to the holders of the Notes either cash, shares of our common stock, or a combination thereof, at our election. If converted, we intend to settle the principal amount of the Notes in cash and any excess conversion value beyond the principal amount in shares of our common stock, cash, or a combination thereof. As of December 31, 2017 the Notes are classified as current liabilities on our consolidated balance sheet.
In December 2017, we entered into a credit agreement that provides us with a senior secured first lien credit facility in an aggregate principal amount of $500.0 million, consisting of (a) term loans in an aggregate principal amount of $100.0 million and (b) revolving commitments in an aggregate principal amount of $400.0 million. The credit facility is scheduled to mature on December 21, 2022, with the term loans payable in quarterly installments.
We intend to use the net proceeds from our debt for working capital and other general corporate purposes, including possible acquisitions of, or investments in, businesses, technologies, or products complementary to our business. For further information, see Note 9, “Debt,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
Critical Accounting Estimates
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about certain items and future events. We consider the following estimates and assumptions to be critical to an understanding of our financial statements because they inherently involve levels of subjectivity and judgment and may have a material impact on our financial condition or results of operations. Also see Note 1, “Summary of Significant Accounting Policies,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K, which discusses our significant accounting policies.
Revenue Recognition
We typically sell our technology in multiple-element arrangements that combine a subscription to our cloud-based platform with various professional services. Our professional services are typically sold together with subscriptions as a component of a single-study or multi-study arrangement.
To qualify as a separate unit of accounting, a delivered item must have value to the customer on a standalone basis. The significant deliverables under our multiple-element arrangements are subscription and professional services.

29


We have determined that our various cloud-based solutions have standalone value and consider them separate units of accounting. In determining whether each of our solutions has standalone value, we considered factors including the availability of similar solutions from other vendors, our fee structure based on inclusion and exclusion of the solution, and our marketing and delivery of the solution. The service components of our subscriptions, including license, delivery, and support are combined and accounted for as a separate unit of accounting. We use estimated selling price ("ESP") to determine the selling price for our subscriptions when sold in multiple-element arrangements, as we are unable to establish vendor-specific objective evidence ("VSOE") for these subscriptions, and third-party evidence ("TPE") is not a practical alternative due to differences in features and functionality as compared with other companies' offerings. To determine ESP for subscription services, we utilize an internal pricing tool that provides price quotes for all potential new subscription configurations. We employ a team of pricing specialists and have established procedures to monitor compliance and evaluate pricing data on a periodic basis. This evaluation includes the judgmental review of historical pricing data, market conditions consideration, and the review of pricing strategies and practices. Any necessary pricing modification made to the pricing tool is supported by the result of such evaluation. Changes in the methods or assumptions used in determining ESP could have a material effect on our future results of operations.
We have determined that our professional services have standalone value because those services are sold separately by other vendors. As historical analysis of our standalone sales of these services indicates a sufficiently narrow price range, we have established VSOE for professional services.
We allocate the arrangement consideration among subscription and professional services deliverables based on their relative fair values.
Stock-Based Compensation
For all equity grants, we recognize compensation cost under the straight-line method, net of estimated forfeitures. Forfeiture assumptions used in amortizing stock-based compensation expense are management estimates based on an analysis of historical data. Refer to Note 11, “Stock-Based Compensation,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K for more information about our equity plans and the types of equity compensation we grant to employees.
Performance-based restricted stock units ("PBRSUs") comprise a significant portion of our stock-based compensation expense. The fair value of each PBRSU whose vesting is based upon the achievement of a market condition is based upon the results of a Monte Carlo valuation model, which requires the use of estimates, including:
the expected volatility of our stock price and, in some cases when the market condition compares the performance of our stock with a stock market index, the expected volatility of that index;
the expected term; and
risk free interest rates.
For PBRSUs with market conditions, we determine volatility based upon the closing price of our publicly-traded stock and the closing price of the relevant index as applicable. The risk-free interest rate is based on the U.S. Treasury yield curve with a maturity tied to the expected term of the PBRSU. We have not paid and do not expect to pay dividends on our common stock. Thus, no expected dividend yield is factored into our Monte Carlo model.
The use of different assumptions in the Monte Carlo valuation models would result in different amounts of stock-based compensation expense. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted.
The fair value of each PBRSU whose vesting is dependent on the satisfaction of a performance condition is measured as if the PBRSU was vested and issued on the grant date, and adjusted each period for management's expectations of performance relative to the associated goals. Compensation expense is recognized only when management believes it is probable that the condition will be achieved. Although the total compensation expense recognized for these PBRSUs will ultimately equal the grant date fair value per share multiplied by the number of shares for which the performance condition has been satisfied, changes in management's performance expectations can cause significant fluctuations in timing of expense over the life of the PBRSUs.
Allowance for Doubtful Accounts
Accounts receivable are recorded at original invoice amount less an allowance that we believe will be adequate to absorb estimated losses on uncollectible accounts. The allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience. Changes in the financial health of a particular customer, industry, or the economy as a whole could result in actual receivable losses that are materially different from the estimated reserve.

30


Software Development Costs
Costs incurred in the development and implementation of internal-use software are capitalized during the application development stage. Upgrades and enhancements to existing internal-use software are capitalized only if it is probable that those expenditures will result in additional functionality. Costs that do not meet these criteria are expensed as incurred. Once put into service, capitalized costs are depreciated on a straight-line basis over an estimated useful life of three to five years. We exercise judgment in determining when the application development stage begins and ends, applying the definition of additional functionality, determining which types of personnel costs and professional fees to capitalize, estimating the useful life of software assets, and evaluating capitalized costs for potential impairment.
Income Taxes
Our income tax expenses, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. The objectives for accounting for income taxes, as prescribed by the relevant accounting guidance, are to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The assumptions about future tax consequences require significant judgment and variations in the actual outcome of these consequences could materially impact our results of operations.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Determination of valuation allowances, if any, recorded against deferred tax assets requires significant judgment and use of assumptions, such as estimates of future taxable income. The Tax Act was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law including changes to the taxation of foreign earnings and the ability to utilize foreign tax credits. As we continue to interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, we have determined that it is more likely than not that our deferred tax asset related to foreign tax credits will not be realized, resulting in the establishment of a valuation allowance of $3.2 million as of December 31, 2017. As of December 31, 2016, there was no valuation allowances recorded against our deferred tax assets.
Effect of Recently Issued Accounting Pronouncements on Current and Future Trends
Refer to Note 1, “Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements,” to our consolidated financial statements, which are included in Item 15 of this Annual Report on Form 10-K. No other recently issued accounting pronouncements have had or are expected to have a material impact on our current or future trends.
Contractual Obligations, Commitments and Contingencies
The following table of our material contractual obligations as of December 31, 2017 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated (in thousands):
 
Payments Due by Period
 
Total
 
2018
 
2019 - 2020
 
2021- 2022
 
2023 and later
Contractual Obligations:
 
 
 
 
 
 
 
 
 
1.00% convertible senior notes
$
287,500

 
$
287,500

 
$

 
$

 
$

Interest payments on convertible senior notes
1,685

 
1,685

 

 

 

Operating lease obligations
110,842

 
15,055

 
33,005

 
32,023

 
30,759

Term loan
100,000

 
5,000

 
12,500

 
82,500

 

Interest payments on term loan
19,484

 
3,192

 
7,973

 
8,319

 

Unused fees on revolving commitments
3,272

 
792

 
1,240

 
1,240

 

Contingent consideration
6,005

 
3,993

 
2,012

 

 

Total
$
528,788

 
$
317,217

 
$
56,730

 
$
124,082

 
$
30,759

Convertible Senior Notes
In August 2013, we issued at par value $287.5 million of 1.00% convertible senior notes, as described above. Interest is payable semi-annually in arrears on August 1 and February 1 of each year. The Notes mature on August 1, 2018 unless repurchased or converted in accordance with their terms prior to such date.

31


Credit Facility
In December 2017, we entered into a credit facility consisting of term loans in an aggregate principal amount of $100.0 million and revolving commitments in an aggregate principal amount of $400.0 million. Each of the term loans and the revolving commitments is scheduled to mature on December 21, 2022, with the term loans payable in quarterly installments.
Operating and Lease Obligations
We lease office space under noncancelable operating lease agreements. For further information, see Note 10, “Lease Commitments,” to our consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
Letters of Credit
We had several outstanding standby letters of credit totaling $5.5 million at both December 31, 2017 and 2016, which were fully collateralized with our restricted cash.
Tax Uncertainties
The relevant accounting guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of the technical merits of the position. We recognize tax liabilities based on estimates of whether additional taxes and interest will be due. We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. As of December 31, 2017, we had approximately $4.1 million of gross unrecognized tax benefits. At this time, we are unable to make a reasonably reliable estimate of the cash settlement amount or the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligations table.
Legal Matters
For discussion of legal matters, refer to Note 15, “Commitments and Contingencies—Legal Matters,” to the consolidated financial statements included in Item 15 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(A)(4)(ii) of Regulation S-K, promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. Aside from entering into operating leases, which primarily relate to office space, we do not engage in off-balance sheet financing arrangements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $237.3 million at December 31, 2017. Our cash equivalents are invested principally in money market funds. We also had investments in marketable securities, which we classify as available-for-sale securities, totaling $426.0 million at December 31, 2017. Substantially all of our marketable securities are fixed income securities, which primarily consist of high quality commercial paper and corporate bonds. Due to the short duration, laddered maturities, and high credit ratings of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.
Exchange Rate Sensitivity
Our non-U.S. operating subsidiaries are located in the United Kingdom, Japan, South Korea, Singapore, China, and Germany. The functional currencies for these subsidiaries are the respective local currencies. We have exposure to exchange rate movements that are captured in translation adjustments for these subsidiaries. Such cumulative adjustments are recorded in accumulated other comprehensive income (loss). The estimated potential translation loss for 2017 resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $2.7 million.

32


We bill our customers primarily in U.S. dollars. The majority of our foreign currency billings are billed from Medidata Solutions, Inc., a U.S. entity, and are mainly denominated in Euros, British pounds sterling, Australian dollars, and Canadian dollars. Our foreign currency denominated costs and expenses are mainly incurred by our non-U.S. operating subsidiaries. Accordingly, future changes in currency exchange rates will impact our future operating results. The following table includes the percentage of our revenues and expenses denominated in foreign currencies:
 
2017
 
2016
 
2015
Revenues
4.3
%
 
4.9
%
 
5.0
%
Costs and expenses
19.5
%
 
17.4
%
 
12.7
%
Total losses arising from transactions denominated in foreign currencies amounted to $0.6 million in 2017, $0.1 million in 2016, and $0.6 million in 2015.
Impact of Inflation
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations.

33


Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data are listed under Part IV, Item 15, in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2017, an evaluation was performed with the participation of our Disclosure Committee and our management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based upon such evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of December 31, 2017.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In making the assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017, our management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our assessment, we determined that our internal control over financial reporting was effective based on those criteria as of December 31, 2017.
Deloitte & Touche LLP, our independent registered public accounting firm, has performed an audit of the effectiveness of our internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO. This audit is required to be performed in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our independent auditors were given unrestricted access to all financial records and related data. The attestation reporting on the effectiveness of our internal control over financial reporting as of December 31, 2017 issued by our independent registered public accounting firm is included at the end of Item 9A in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

34



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Medidata Solutions, Inc.
New York, New York

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Medidata Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2017 of the Company and our report dated February 28, 2018 expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Deloitte & Touche LLP
New York, New York
February 28, 2018

35


Item 9B. Other Information
Not applicable.

36


PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017 in connection with our 2018 Annual Meeting of Stockholders.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017 in connection with our 2018 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017 in connection with our 2018 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017 in connection with our 2018 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017 in connection with our 2018 Annual Meeting of Stockholders. 

37


PART IV
Item 15. Exhibits and Financial Statement Schedule
(a) We have filed the following documents as part of this Form 10-K:
1. Consolidated Financial Statements
2. Financial Statement Schedule
All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto.
3. Exhibits
The information required by this Item 15 is set forth on the exhibit index that follows the signature page of this report.



38


Item 16. Form 10-K Summary
None.

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
 
MEDIDATA SOLUTIONS, INC.
 
 
By:
 
/S/    TAREK A. SHERIF        
 
 
Tarek A. Sherif
Chairman and Chief Executive Officer
Date: February 28, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
 
Signature
  
Title
 
Date
 
 
 
 
 
/S/    TAREK A. SHERIF 
 
Chairman, Chief Executive Officer
(Principal Executive Officer) and
Director
 
February 28, 2018
Tarek A. Sherif
  
 
 
 
 
/S/    ROUVEN BERGMANN 
 
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
 
February 28, 2018
Rouven Bergmann
  
 
 
 
 
 
 
/S/    GLEN M. DE VRIES 
 
President and Director
 
February 28, 2018
Glen M. de Vries
  
 
 
 
 
/S/    CARLOS DOMINGUEZ     
 
Director
 
February 28, 2018
Carlos Dominguez
  
 
 
 
 
/S/    NEIL M. KURTZ, M. D.  
 
Director
 
February 28, 2018
Neil M. Kurtz, M.D.
  
 
 
 
 
/S/    GEORGE W. MCCULLOCH
 
Director
 
February 28, 2018
George W. McCulloch
  
 
 
 
 
/S/    LEE A. SHAPIRO  
 
Director
 
February 28, 2018
Lee A. Shapiro
  
 
 
 
 
/S/    ROBERT B. TAYLOR  
 
Director
 
February 28, 2018
Robert B. Taylor
  
 

39


EXHIBIT INDEX
 
 
 
 
Incorporated by Reference
Exhibit No.
 
Description
 
Form
 
File No.
 
Date Filed
3.1
 
 
10-Q
 
001-34387
 
8/7/14
3.2
 
 
8-K
 
001-34387
 
6/7/16
3.3
 
 
8-K
 
001-34387
 
2/16/16
4.1
 
 
S-1/A
 
333-156935
 
6/3/09
4.2
 
 
8-K
 
001-34387
 
8/12/13
4.3
 
 
8-K
 
001-34387
 
8/12/13
10.1
 
 
S-1/A
 
333-156935
 
6/3/09
10.2†
 
 
S-1/A
 
333-156935
 
5/15/09
10.3†
 
 
S-1/A
 
333-156935
 
5/15/09
10.4†
 
 
8-K
 
001-34387
 
5/2/13
10.5†
 
 
S-1/A
 
333-156935
 
6/3/09
10.6†
 
 
S-1/A
 
333-156935
 
6/3/09
10.7†
 
 
10-Q
 
001-34387
 
5/3/13
10.8†
 
 
10-Q
 
001-34387
 
5/9/16
10.9†
 
 
DEF 14A
 
001-34387
 
4/21/16
10.10†
 
 
8-K
 
001-34387
 
7/8/14
10.11†
 
 
8-K
 
001-34387
 
8/15/16
10.12
 
 
S-1/A
 
333-156935
 
3/23/09
10.13
 
 
8-K
 
001-34387
 
10/23/12
10.14
 
 
10-K
 
001-34387
 
2/24/14
10.15
 
 
10-K
 
001-34387
 
2/24/14
10.16†*
 
 
 
 
 
 
 
10.17†*
 
 
10-Q
 
001-34387
 
5/8/2017
10.18†
 
 
S-8
 
333-218349
 
5/30/2017
10.19†
 
 
10-Q
 
001-34387
 
8/1/2017
10.20†

 
 
10-Q
 
001-34387
 
11/3/2017
10.21
 
 
8-K
 
001-34387
 
12/28/2017
21.1*
 
 
 
 
 
 
 
23.1*
 
 
 
 
 
 
 
31.1*
 
 
 
 
 
 
 
31.2*
 
 
 
 
 
 
 
32.1**
 
 
 
 
 
 
 
32.2**
 
 
 
 
 
 
 
101.INS*
 
XBRL Instance Document
 
 
 
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
101.PRE*
 
XBRL Taxonomy Presentation Linkbase Document
 
 
 
 
 
 
*
 
Filed herewith.
**
 
Furnished herewith.
 
Indicates a management contract or any compensatory plan, contract or arrangement.



40


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Medidata Solutions, Inc.
New York, New York

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Medidata Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with the accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2018 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



Deloitte & Touche LLP
New York, New York
February 28, 2018

We have served as the Company’s auditor since 2004.

F-1


MEDIDATA SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
 
December 31,
 
2017
 
2016
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
237,325

 
$
93,519

Marketable securities
246,967

 
281,285

Accounts receivable, net of allowance for doubtful accounts of $1,454 and $1,041, respectively
110,685

 
115,216

Prepaid commission expense
5,352

 
1,842

Prepaid expenses and other current assets
37,287

 
20,382

Deferred income taxes

 
6,536

Total current assets
637,616

 
518,780

Restricted cash
5,518

 
5,760

Furniture, fixtures and equipment, net
88,091

 
58,461

Marketable securities, long-term
179,041

 
140,418

Goodwill
47,435

 
30,780

Intangible assets, net
17,587

 
5,090

Deferred income taxes, long-term
40,847

 
40,415

Other assets
29,979

 
18,181

Total assets
$
1,046,114

 
$
817,885

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,009

 
$
6,202

Accrued payroll and other compensation
32,537

 
29,260

Accrued expenses and other
36,041

 
20,958

Deferred revenue
77,434

 
75,911

1.00% convertible senior notes, net
278,094

 

Total current liabilities
429,115

 
132,331

Noncurrent liabilities:
 
 
 
1.00% convertible senior notes, net

 
263,401

Term loan, net
92,841

 

Deferred revenue, less current portion
5,256

 
1,703

Deferred tax liabilities
99

 
322

Other long-term liabilities
21,371

 
18,138

Total noncurrent liabilities
119,567

 
283,564

Total liabilities
548,682

 
415,895

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, par value $0.01 per share; 5,000 shares authorized, none issued and outstanding

 

Common stock, par value $0.01 per share; 200,000 shares authorized; 62,801 and 61,393 shares issued; 58,607 and 57,733 shares outstanding, respectively
628

 
614

Additional paid-in capital
486,147

 
418,497

Treasury stock, 4,194 and 3,660 shares, respectively
(132,705
)
 
(114,204
)
Accumulated other comprehensive loss
(3,377
)
 
(5,276
)
Retained earnings
146,739

 
102,359

Total stockholders' equity
497,432

 
401,990

Total liabilities and stockholders' equity
$
1,046,114

 
$
817,885


The accompanying notes are an integral part of the consolidated financial statements.

F-2


MEDIDATA SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
Year ended December 31,
 
2017
 
2016
 
2015
 
(Amounts in thousands, except per share data)
Revenues
 
 
 
 
 
Subscription
$
459,528

 
$
394,269

 
$
336,195

Professional services
86,004

 
69,112

 
56,311

Total revenues
545,532

 
463,381

 
392,506

Cost of revenues (1)(2)
 
 
 
 
 
Subscription
69,235

 
62,136

 
47,795

Professional services
57,558

 
50,473

 
41,993

Total cost of revenues
126,793

 
112,609

 
89,788

Gross profit
418,739

 
350,772

 
302,718

Operating costs and expenses
 
 
 
 
 
Research and development (1)
138,564

 
112,595

 
92,319

Sales and marketing (1)(2)
126,273

 
109,290

 
103,153

General and administrative (1)
94,324

 
78,678

 
78,014

Wire transaction recovery (3)
(4,770
)
 

 

Total operating costs and expenses
354,391

 
300,563

 
273,486

Operating income
64,348

 
50,209

 
29,232

Interest and other income (expense)
 
 
 
 
 
Interest expense
(17,765
)
 
(17,288
)
 
(16,192
)
Interest income
5,717

 
4,382

 
2,799

Other (expense) income, net
(73
)
 
11

 
(64
)
Total interest and other expense, net
(12,121
)
 
(12,895
)
 
(13,457
)
Income before income taxes
52,227

 
37,314

 
15,775

Provision for income taxes
7,847

 
8,331

 
2,608

Net income
$
44,380

 
$
28,983

 
$
13,167

Earnings per share
 
 
 
 
 
Basic

$0.79

 

$0.52

 

$0.25

Diluted

$0.74

 

$0.51

 

$0.23

Weighted-average common shares outstanding
 
 
 
 
 
Basic
56,473

 
55,492

 
53,717

Diluted
59,765

 
57,249

 
56,540

(1)
Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
4,873

 
$
4,425

 
$
5,040

Research and development
13,314

 
9,223

 
7,907

Sales and marketing
6,833

 
7,074

 
9,171

General and administrative
22,793

 
20,436

 
26,869

Total stock-based compensation
$
47,813

 
$
41,158

 
$
48,987

(2)
Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
3,664

 
$
1,021

 
$
517

Sales and marketing
441

 
276

 
119

Total amortization of intangible assets
$
4,105

 
$
1,297

 
$
636

(3)
Operating costs and expenses for the year ended December 31, 2017 include the probable insurance recovery of amounts associated with the previously reported 2014 wire transaction loss. For additional details, see Note 2, "Wire Transaction Recovery."


The accompanying notes are an integral part of the consolidated financial statements.

F-3


MEDIDATA SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Year ended December 31,
 
2017
 
2016
 
2015
 
(Amounts in thousands)
Net income
$
44,380

 
$
28,983

 
$
13,167

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments
2,270

 
(2,324
)
 
(938
)
Unrealized (loss) gain on marketable securities
(601
)
 
728

 
(896
)
Other comprehensive income (loss)
1,669

 
(1,596
)
 
(1,834
)
Income tax related to unrealized gain or loss on marketable securities
230

 
(276
)
 
342

Other comprehensive income (loss), net of tax
1,899

 
(1,872
)
 
(1,492
)
Comprehensive income, net of tax
$
46,279

 
$
27,111

 
$
11,675












































The accompanying notes are an integral part of the consolidated financial statements.

F-4


MEDIDATA SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Accumulated Other
Comprehensive Loss
 
Retained Earnings
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
(Amounts in thousands)
Balance—January 1, 2015
56,301

 
$
563

 
$
301,465

 
1,888

 
$
(45,049
)
 
$
(1,912
)
 
$
9,632

 
$
264,699

Net income

 

 

 

 

 

 
13,167

 
13,167

Other comprehensive loss, net of tax

 

 

 

 

 
(1,492
)
 

 
(1,492
)
Total comprehensive income

 

 

 

 

 
(1,492
)
 
13,167

 
11,675

Stock options exercised
454

 
4

 
6,682

 

 

 

 

 
6,686

Tax benefit associated with equity awards

 

 
1,622

 

 

 

 

 
1,622

Stock-based compensation

 

 
48,987

 

 

 

 

 
48,987

Nonvested restricted stock awards granted
704

 
7

 
(7
)
 

 

 

 

 

Acquisition of treasury stock

 

 

 
1,127

 
(55,756
)
 

 

 
(55,756
)
Nonvested restricted stock awards forfeited

 

 
1

 
129

 
(1
)
 

 

 

Vesting of performance-based restricted stock units
1,832

 
18

 
(18
)
 

 

 

 

 

Issuance of employee stock purchase plan shares
164

 
2

 
6,241

 

 

 

 

 
6,243

Balance—December 31, 2015
59,455

 
594

 
364,973

 
3,144

 
(100,806
)
 
(3,404
)
 
22,799

 
284,156

Opening retained earnings adjustment for cumulative effect of adoption of ASU No. 2016-09

 

 

 

 

 

 
50,577

 
50,577

Adjusted balance—January 1, 2016
59,455

 
594

 
364,973

 
3,144

 
(100,806
)

(3,404
)
 
73,376

 
334,733

Net income

 

 

 

 

 

 
28,983

 
28,983

Other comprehensive loss, net of tax

 

 

 

 

 
(1,872
)
 

 
(1,872
)
Total comprehensive income

 

 

 

 

 
(1,872
)
 
28,983

 
27,111

Stock options exercised
279

 
3

 
5,492

 

 

 

 

 
5,495

Stock-based compensation

 

 
41,194

 

 

 

 

 
41,194

Nonvested restricted stock awards granted
1,183

 
12

 
(12
)
 

 

 

 

 

Acquisition of treasury stock

 

 

 
360

 
(13,396
)
 

 

 
(13,396
)
Nonvested restricted stock awards forfeited

 

 
2

 
156

 
(2
)
 

 

 

Vesting of restricted stock units and performance-based restricted stock units
302

 
3

 
(3
)
 

 

 

 

 

Issuance of employee stock purchase plan shares
174

 
2

 
6,851

 

 

 

 

 
6,853

Balance—December 31, 2016
61,393

 
614

 
418,497

 
3,660

 
(114,204
)
 
(5,276
)
 
102,359

 
401,990

Net income

 

 

 

 

 

 
44,380

 
44,380

Other comprehensive income, net of tax

 

 

 

 

 
1,899

 

 
1,899

Total comprehensive income

 

 

 

 

 
1,899

 
44,380

 
46,279

Stock options exercised
310

 
3

 
10,204

 

 

 

 

 
10,207

Stock-based compensation

 

 
48,182

 

 

 

 

 
48,182

Nonvested restricted stock awards granted
780

 
8

 
(8
)
 

 

 

 

 

Acquisition of treasury stock

 

 

 
309

 
(18,499
)
 

 

 
(18,499
)
Nonvested restricted stock awards forfeited

 

 
2

 
225

 
(2
)
 

 

 

Vesting of restricted stock units and performance-based restricted stock units
95

 
1

 
(1
)
 

 

 

 

 

Issuance of employee stock purchase plan shares
223

 
2

 
9,271

 

 

 

 

 
9,273

Balance—December 31, 2017
62,801

 
$
628

 
$
486,147

 
4,194

 
$
(132,705
)
 
$
(3,377
)
 
$
146,739

 
$
497,432

The accompanying notes are an integral part of the consolidated financial statements.

F-5


MEDIDATA SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Year ended December 31,
 
 
2017
 
2016
 
2015
 
Cash flows from operating activities:
(Amounts in thousands)
 
Net income
$
44,380

 
$
28,983

 
$
13,167

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
24,053

 
15,349

 
10,822

 
Stock-based compensation
47,813

 
41,158

 
48,987

 
Amortization of discounts or premiums on marketable securities
1,438

 
2,757

 
4,754

 
Deferred income taxes
3,296

 
5,895

 
(3,209
)
 
Amortization of debt issuance costs
1,291

 
1,278

 
1,278

 
Amortization of debt discount
13,415

 
12,636

 
11,902

 
Provision for doubtful accounts
1,089

 
1,116

 
597

 
Loss on fixed asset disposal
72

 
3

 

 
Changes in fair value of contingent consideration
319

 

 

 
Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts receivable
4,043

 
(25,172
)
 
(34,513
)
 
Prepaid commission expense
(7,094
)
 
(2,108
)
 
439

 
Prepaid expenses and other current assets
(17,986
)
 
185

 
(9,058
)
 
Other assets
(1,270
)
 
(8,735
)
 
2,715

 
Accounts payable
(3,014
)
 
2,825

 
(502
)
 
Accrued payroll and other compensation
2,089

 
7,343

 
6,014

 
Accrued expenses and other
1,751

 
14,220

 
712

 
Deferred revenue
4,851

 
(1,050
)
 
28,617

 
Other long-term liabilities
1,210

 
(7,914
)
 
5,872

 
Net cash provided by operating activities
121,746

 
88,769

 
88,594

 
Cash flows from investing activities:
 
 
 
 
 
 
Purchase of furniture, fixtures and equipment
(44,621
)
 
(25,656
)
 
(19,017
)
 
Purchase of available-for-sale securities
(303,641
)
 
(266,361
)
 
(264,113
)
 
Proceeds from sale of available-for-sale securities
297,297

 
271,796

 
246,423

 
Acquisition of businesses, net of cash acquired
(22,941
)
 
(17,186
)
 

 
Purchase of cost method investments
(4,124
)
 
(4,000
)
 

 
Net cash used in investing activities
(78,030
)
 
(41,407
)
(1)
(36,707
)
(1)
Cash flows from financing activities:
 
 
 
 
 
 
Proceeds from exercise of stock options
10,207

 
5,495

 
6,686

 
Proceeds from employee stock purchase plan
9,378

 
6,864

 
6,009

 
Acquisition of treasury stock
(18,499
)
 
(15,570
)
 
(53,582
)
 
Repayment of notes payable

 
(100
)
 
(62
)
 
Repayment of obligations under capital leases

 

 
(46
)
 
Borrowings under term loan facility
100,000

 

 

 
Payments of credit facility financing costs
(1,997
)
 

 

 
Net cash provided by (used in) financing activities
99,089

 
(3,311
)
 
(40,995
)
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
759

 
(244
)
 
(56
)
 
Net increase in cash, cash equivalents and restricted cash
143,564

 
43,807

 
10,836

 
Cash, cash equivalents and restricted cash – Beginning of period
99,279

 
55,472

(1)
44,636

(1)
Cash, cash equivalents and restricted cash – End of period
$
242,843

 
$
99,279

(1)
$
55,472

(1)
(1) As a result of the Company's early adoption of ASU No. 2016-18 during the first quarter of 2017, the consolidated statement of cash flows for the years ended December 31, 2016 and 2015 have been adjusted to include restricted cash in beginning- and end-of-period cash.

The accompanying notes are an integral part of the consolidated financial statements.

F-6



MEDIDATA SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
Year ended December 31,
 
 
2017
 
2016
 
2015
 
Supplemental disclosures of cash flow information:
(Amounts in thousands)
 
Cash paid during the period for:
 
 
 
 
 
 
Interest
$
2,879

 
$
2,882

 
$
2,878

 
Income taxes
$
4,417

 
$
2,074

 
$
1,289

 
Noncash activities:
 
 
 
 
 
 
Furniture, fixtures and equipment acquired but not yet paid for at period end
$
4,356

 
$
1,152

 
$
4,716

 
Contingent consideration associated with acquisition of business, at fair value
$
5,697

 
$

 
$

 



































The accompanying notes are an integral part of the consolidated financial statements.

F-7


MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Medidata Solutions, Inc., together with its consolidated subsidiaries, (collectively, the “Company”) is the leading global provider of cloud-based solutions for clinical research in life sciences, offering platform technology that transforms clinical development and increases the value of its customers' research investments. The Company was organized as a New York corporation in June 1999 and reincorporated as a Delaware corporation in May 2000.
Basis of PresentationThe accompanying consolidated financial statements include the accounts of the Company prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission ("SEC"). All intercompany balances and transactions have been eliminated in consolidation.
For purposes of these consolidated financial statements, the years ended December 31, 2017, 2016, and 2015 are referred to as 2017, 2016, and 2015, respectively.
Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Revenue RecognitionThe Company derives its revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers utilizing the Company's cloud-based solutions; and (2) professional services, such as training, implementation, consulting, interface creation, trial configuration, data testing, reporting, procedure documentation, and other customer-specific services. The Company recognizes revenues when all of the following conditions are satisfied:
persuasive evidence of an arrangement exists;
service has been delivered to the customer;
amount of the fees to be paid by the customer is fixed or determinable; and
collection of the fees is reasonably assured or probable.
Subscription
The Company derives its subscription revenues from multi-study and single-study arrangements that grant the customer the right to utilize its cloud-based solutions for a specified term. Multi-study arrangements grant the customer the right to manage a predetermined number of clinical trials simultaneously for a term typically ranging from one to five years. Single-study arrangements allow customers to use the Company's solutions on a per trial basis.
Revenues from subscription arrangements are recognized ratably over the term of the arrangement, beginning with the commencement of the arrangement term, which is generally aligned with the date the Company's cloud-based solutions are made available to the customer. The term of the arrangement includes optional renewal periods, if such renewal periods are likely to be exercised.
Professional Services
The Company also makes available a range of professional services, including implementation, training, and strategic consulting. Professional services do not result in significant alterations to the underlying solutions. Revenues are recognized using a proportional performance method or as services are rendered.
Professional services revenues include any reimbursements for out-of-pocket expenses incurred. The Company included $1.0 million, $1.0 million, and $0.7 million of reimbursable out-of-pocket expenses in professional services revenues in the years ended 2017, 2016, and 2015, respectively.
Multiple-Element Arrangements
The Company enters into multiple-element arrangements that combine a cloud-based technology subscription with various professional services.
To qualify as a separate unit of accounting, a delivered item must have value to the customer on a standalone basis. The significant deliverables under the Company's multiple-element arrangements are subscription and professional services.
The Company has determined that its various cloud-based solutions have standalone value and considers them separate units of accounting. In determining whether each of its solutions has standalone value, the Company considered factors

F-8

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

including the availability of similar solutions from other vendors, its fee structure based on inclusion and exclusion of the solution, and its marketing and delivery of the solution. The service components of the Company's subscriptions, including license, delivery, and support are combined and accounted for as a separate unit of accounting. The Company uses estimated selling price ("ESP") to determine the selling price for its subscriptions when sold in multiple-element arrangements, as the Company is unable to establish vendor-specific objective evidence ("VSOE") for these subscriptions and third-party evidence ("TPE") is not a practical alternative due to differences in features and functionality as compared with other companies' offerings. To determine ESP for subscription services, the Company utilizes an internal pricing tool that provides price quotes for all potential new subscription configurations. The Company employs a team of pricing specialists and has established procedures to monitor compliance and evaluate pricing data on a periodic basis. This evaluation includes the review of actual historical pricing data, market conditions consideration, and the review of pricing strategies and practices. Any necessary pricing modification made to the pricing tool is supported by the result of such evaluation.
The Company has determined that its professional services have standalone value because those services are sold separately by other vendors. As historical analysis of standalone sales of these services indicates a sufficiently narrow price range, the Company has established VSOE for its professional services.
The Company allocates the arrangement consideration among subscription and professional services deliverables based on their relative fair values.
Revenues for deliverables under subscriptions are recognized ratably over the term of the arrangement, beginning with the commencement of the arrangement term, which is generally aligned with the date the Company's cloud-based solutions are made available to the customer, assuming all other revenue recognition criteria are met. Revenues for deliverables under professional services are recognized using a proportional performance method or as services are rendered.
Deferred Revenue
Deferred revenue consists of billings or payments received in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Amounts that have been invoiced are initially recorded in accounts receivable and deferred revenue. The Company invoices its customers in accordance with the terms of the underlying contract, usually in installments in advance of the related service period. Accordingly, the deferred revenue balance does not represent the total contract value of outstanding arrangements. Payment terms are typically net 30 or 45 days, but in some cases longer. Deferred revenue that is expected to be recognized during the subsequent 12-month period is recorded as current deferred revenue and the remaining portion as noncurrent deferred revenue.
In some instances, a customer elects to renew its subscription arrangement prior to the original termination date of the arrangement. The renewed subscription agreement provides support for in-process clinical trials, and includes the right to use the Company's cloud-based solutions for initial clinical studies. As such, the unrecognized portion of the deferred revenue associated with the original arrangement is aggregated with the consideration received upon renewal and recognized as revenue over the renewed term of the subscription arrangement. This can affect timing and result in reclassification between current and noncurrent deferred revenue.
Cost of RevenuesCost of revenues primarily consists of costs related to delivering, maintaining, and supporting the Company's cloud-based platform and delivering professional services and support. These costs include salaries, benefits, bonuses, and stock-based compensation for the Company's data center and professional services staff, as well as costs of third-party consultants. Cost of revenues also includes costs associated with the Company's data center, including networking and related depreciation expense, as well as outside service provider costs, amortization expense associated with acquired and developed technology, and general overhead. The Company allocates general overhead, such as applicable shared rent and utilities, to cost of revenues based on relative headcount.
Software Development CostsCosts incurred in the development and implementation of internal-use software are capitalized during the application development stage. Upgrades and enhancements to existing internal-use software are capitalized only if it is probable that those expenditures will result in additional functionality and future economic benefit. The Company capitalized $19.0 million and $3.3 million of internal-use software development and implementation costs in 2017 and 2016, respectively. Capitalized software development costs are included in furniture, fixtures, and equipment on the Company's consolidated balance sheets; the resulting assets are initially included in construction in progress and are transferred to computer software upon release or go-live, at which time they are deemed to have been put into service and are depreciated on a straight-line basis over an estimated useful life of three to five years.
Stock-Based CompensationThe fair value of each nonvested restricted stock award ("RSA") or restricted stock unit ("RSU") is measured as if the RSA or RSU was vested and issued on the grant date. The related compensation expense is recognized, net of estimated forfeitures, on a straight-line basis over the vesting period.
The fair value of each performance-based restricted stock unit ("PBRSU") whose vesting is dependent on the achievement of a market condition is estimated based upon the results of a Monte Carlo valuation model as of the grant date in accordance with accounting guidance. Compensation expense related to PBRSUs with a market condition is recognized, net of estimated

F-9

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

forfeitures, on a straight-line basis over the vesting period. The fair value of each PBRSU whose vesting is dependent on the satisfaction of a performance condition is measured as if the PBRSU was vested and issued on the grant date and adjusted in each reporting period for expected performance relative to the associated goals. Compensation expense related to PBRSUs with a performance condition is recognized when it is probable that the condition will be achieved, net of estimated forfeitures, on a straight-line basis over the vesting period. The compensation expense ultimately recognized will equal the grant date fair value per share multiplied by the number of shares for which the performance condition has been satisfied.
The fair value of each employee stock purchase plan ("ESPP") share is estimated using the Black-Scholes pricing model. The Company uses stock price volatility of its publicly-traded stock as a basis for determining expected volatility. Management believes this is the best estimate of the expected volatility over the weighted-average expected life of the ESPP shares. The expected life of each ESPP share is equivalent to the time between the beginning of the offering period and the end of the related purchase period. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the beginning of the offering period with a maturity tied to the expected life of the ESPP share. No dividends are expected to be declared by the Company at this time. Compensation expense for ESPP shares is recognized, net of estimated forfeitures, on a straight-line basis over their term.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes pricing model. The Company uses stock price volatility of its publicly-traded stock as a basis for determining the expected volatility. Through the end of 2017, as the Company did not yet have sufficient historical exercise data with regard to its current option granting program, which is focused on new hires in key senior positions, to provide a reasonable basis upon which to estimate expected life, the Company used the simplified method permitted for plain-vanilla options under SEC Staff Accounting Bulletin ("SAB") 14. As of January 2018, the Company estimates expected life based on an analysis of historical exercise data. The risk-free interest rate is based on the United States ("U.S.") Treasury yield curve in effect at the time of the option grant with a maturity tied to the expected life of the options. No dividends are expected to be declared by the Company at this time. Compensation expense for stock options is recognized, net of estimated forfeitures, on a straight-line basis over the vesting period.
Income TaxesThe Company's income tax expenses, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. The objective for accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the financial statements. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The assumptions about future tax consequences require significant judgment and variations in the actual outcome of these consequences could materially impact the Company's results of operations.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Cash and Cash EquivalentsThe Company considers all money market accounts and other highly liquid investments purchased with original maturities of three months or less to be cash and cash equivalents. The fair value of cash and cash equivalents approximates the amounts shown on the consolidated financial statements.
Marketable SecuritiesThe Company classifies its fixed income marketable securities as available-for-sale based on its intentions with regard to these instruments. Accordingly, marketable securities are reported at fair value, with all unrealized holding gains and losses reflected in stockholders' equity. If it is determined that an investment has an other-than-temporary decline in fair value, the Company recognizes the investment loss in other income (expense), net, in the consolidated statements of operations. The Company periodically evaluates its investments to determine if impairment charges are required.
Accounts ReceivableAccounts receivable are recorded at original invoice amount less an allowance that management believes will be adequate to absorb estimated losses on uncollectible accounts. The allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience. Accounts receivable are written off when deemed uncollectible. Unbilled receivables consist of revenue recognized in excess of billings, substantially all of which is expected to be billed and collected within one year. As of December 31, 2017 and 2016, unbilled accounts receivable of $12.5 million and $14.1 million, respectively, were included in accounts receivable on the Company's consolidated balance sheets. In general, there is a direct relationship between the Company's accounts receivable balance and its transaction volume.
Prepaid Commission ExpenseFor arrangements where revenue is recognized over the relevant contract period, the Company capitalizes related sales commissions that have been paid and recognizes these expenses over the period the related revenue is recognized. Commissions are generally payable to the Company's sales representatives 25% at the time of booking and 75% at the time of invoicing. If a customer terminates a contract, the Company recaptures the related unearned commissions. The Company expensed commissions of $13.2 million, $14.2 million, and $13.7 million in 2017, 2016, and 2015 respectively, which are included within sales and marketing expense in the consolidated statements of operations. Prepaid

F-10

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

commissions that will be recognized during the subsequent 12-month period are recorded as current prepaid commissions and the remaining portion included in other noncurrent assets.
Restricted CashRestricted cash represents deposits made to fully collateralize certain standby letters of credit issued in connection with office lease arrangements.
Furniture, Fixtures and EquipmentFurniture, fixtures and equipment consist of furniture, computers, other office equipment, purchased and developed software for internal use, leasehold improvements, and construction in progress recorded at cost. Depreciation is computed using a straight-line method over five years for furniture and fixtures, and over three to five years for computer equipment and software. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or their estimated useful lives. Improvements are capitalized while expenditures for repairs and maintenance are charged to expense as incurred. Construction in progress is not amortized into depreciation expense until it is placed into service.
Goodwill and Intangible AssetsThe Company has generated goodwill and certain intangible assets from various acquisitions. Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations.
The Company evaluates its goodwill for impairment using a two-step process that is performed at least annually on October 1 of each year, or whenever events or circumstances indicate that impairment may have occurred. (The relevant accounting guidance also provides for an optional step zero that permits an entity to assess qualitative factors as a means of determining whether it is necessary to perform the two-step goodwill impairment test described below, but the Company does not currently utilize this option.)
The first step is a comparison of the fair value of the Company's single reporting unit with its carrying amount, including goodwill. If the fair value the reporting unit exceeds its carrying value, goodwill is not considered to be impaired and the second step is unnecessary.
If the carrying value of the reporting unit exceeds its fair value, a second test is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. The implied value of goodwill is determined as of the test date by performing a purchase price allocation, as if the reporting unit had just been acquired, using currently estimated fair values of the individual assets and liabilities of the reporting unit, together with an estimate of the fair value of the reporting unit taken as a whole. The estimate of the fair value of the reporting unit is based upon information available regarding the Company's market capitalization, prices of similar groups of assets, or other valuation techniques including present value techniques based upon estimates of future cash flow. If the carrying amount of the goodwill is greater than its implied value, an impairment loss is recognized for the difference.
The Company determined that there was no impairment of goodwill for the years ended December 31, 2017, 2016, and 2015, and did not recognize any impairments of goodwill in prior years.
Acquired intangible assets are recorded at cost, derived from allocation of the purchase price of the acquired business to the intangible assets obtained, less accumulated amortization. Amortization of acquired technology is computed using the straight-line method over its expected useful lives, which range from four to five years. Amortization of customer relationships and non-competition agreements is computed using the straight-line method over their expected useful lives, which range from three to six years.
Impairment of Long-Lived AssetsLong-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may be impaired. The Company subjects long-lived assets to a test of recoverability based on undiscounted cash flows expected to be generated by such assets while utilized by the Company and cash flows expected from disposition of such assets. If the assets are impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds their fair value. The Company determined that there was no impairment of long-lived assets for the years ended December 31, 2017, 2016, and 2015, and did not recognize any impairments of long-lived assets in prior years.
Convertible NotesThe Company separately accounts for the debt and conversion option components of its convertible senior notes, which permit cash settlement, in a manner that reflects the Company's nonconvertible borrowing rate at the time of issuance. The principal amount of the convertible senior notes is recorded as a liability. The value of the conversion option, net of equity issue costs, is recorded in stockholders' equity, and the offsetting debt discount is amortized to interest expense using the effective interest method over the term of the convertible senior notes. Debt issuance costs have been capitalized, are presented as a reduction of the carrying amount of the convertible senior notes, and are amortized to interest expense over the term on a straight-line basis, which approximates the effective interest method. Refer to Note 9, "Debt," for further information.
Treasury StockShares of the Company's common stock that are repurchased are recorded as treasury stock at cost and included as a component of stockholders' equity. Refer to Note 3, "Stockholders' Equity," for further information.

F-11

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Foreign Currency TranslationThe reporting currency for the Company is the U.S. dollar. The functional currencies of the Company's subsidiaries in the United Kingdom, Japan, Korea, Singapore, China, and Germany are the British pound sterling, Japanese yen, South Korean won, Singapore dollar, Chinese yuan, and Euro, respectively. Accordingly, the assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts of the Company's foreign subsidiaries are translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a component of other comprehensive income (loss) as a separate component of stockholders' equity. Gains and losses arising from transactions denominated in foreign currencies are recorded directly to the statement of operations.
Fair Value of Financial InstrumentsThe carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments. Fair values of marketable securities are based on unadjusted quoted market prices or pricing models using current market data that are observable either directly or indirectly. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
The Company uses a three-level framework for measuring the fair value of its financial assets and liabilities that gives highest priority to Level 1 and lowest priority to Level 3 inputs, described as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including:
quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets that are not active;
inputs other than quoted prices that are observable for the asset or liability; and
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specified (contractual) term, the Level 2 inputs must be observable for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the fair value measurement for the asset or liability.
Concentration of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and accounts receivable. The Company has policies that limit the amount of credit exposure to any one issuer. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential losses, but does not require collateral or other security to support customers' receivables. The Company's credit risk is further mitigated because its customer base is diversified both geographically and by industry sector.
In 2017, 2016, and 2015, no single customer generated more than 10% of the Company's total revenues. At December 31, 2017, no single customer accounted for greater than 10% of accounts receivable. At December 31, 2016, one customer comprised 13% of accounts receivable.
The majority of the Company's cash, cash equivalents, and restricted cash are deposited with major U.S. financial institutions and, at times, balances with any one financial institution may be in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits. In addition, as of December 31, 2017 and 2016 approximately $3.7 million and $2.1 million, respectively, in cash and cash equivalents was deposited with foreign financial institutions and therefore not protected by FDIC insurance.
IndemnificationsThe Company indemnifies its customers against claims that cloud-based solutions or services made available by the Company infringe upon a copyright, patent, or the proprietary rights of others. In the event of a claim, the Company agrees to obtain the rights for continued use of the solutions for the customer, to replace or modify the solutions or services to avoid such claim, or to provide a credit to the customer for the unused portion of the subscription. A liability may be recognized if information prior to the issuance of the consolidated financial statements indicates that it is probable that a liability has been incurred at the balance sheet date and the amount of the loss can be reasonably estimated. No such liabilities were recorded as of December 31, 2017 and 2016.

F-12

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Segment and Geographic InformationThe Company operates as a single segment, as the chief operating decision maker reviews financial information that is presented on a consolidated basis, accompanied by information about revenue by geographic region. The Company recorded revenues in the following geographic areas in 2017, 2016, and 2015 (in thousands):
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
United States
$
413,231

 
$
358,815

 
$
297,735

Japan
36,089

 
32,049

 
31,595

Other
96,212

 
72,517

 
63,176

Total
$
545,532

 
$
463,381

 
$
392,506

Revenues by geographic area are presented based upon the country in which revenues were generated. No individual country other than the U.S. and Japan represented 5% or more of net revenues for any of the periods presented.
The following table summarizes long-term assets by geographic area as of December 31, 2017, 2016, and 2015 (in thousands):
 
2017
 
2016
 
2015
Long-term assets:
 
 
 
 
 
United States
$
382,809

 
$
285,420

 
$
289,399

United Kingdom
15,594

 
9,932

 
7,753

Japan
3,298

 
3,445

 
3,795

Korea
3,562

 
204

 
32

Germany
3,000

 

 

China
199

 
91

 

Singapore
36

 
13

 

Total
$
408,498

 
$
299,105

 
$
300,979

The Company had no long-term assets in countries other than those listed above as of December 31, 2017, 2016, and 2015.
Recently Adopted Accounting PronouncementsIn November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that all deferred tax assets and liabilities be classified as noncurrent in the consolidated balance sheets. ASU No. 2015-17 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, and may be applied either prospectively or retrospectively to all periods presented. The Company adopted ASU No. 2015-17 prospectively on January 1, 2017, and the adoption did not have a material impact on its consolidated financial statements, aside from a balance sheet reclassification from short-term to long-term deferred income taxes.    
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory when those transfers occur. ASU No. 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The Company early adopted ASU No. 2016-16 on January 1, 2017, and the early adoption had no impact on its consolidated financial statements; however, in the fourth quarter of 2017, the Company had an intra-entity asset transfer that generated a benefit to income taxes. Refer to Note 14, "Income Taxes," for details.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires entities to include restricted cash in cash and cash equivalents when reconciling beginning-of-period and end-of-period cash in the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company early adopted ASU No. 2016-18 retrospectively on January 1, 2017 and the adoption did not have a material impact on its consolidated financial statements, aside from changes in presentation.

F-13

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Recently Issued Accounting PronouncementsASU No. 2014-09, Revenue from Contracts with Customers, which creates Accounting Standards Codification ("ASC") 606 and supersedes the existing accounting standards for revenue recognition in ASC 605, provides principles for recognizing revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 also creates a new subtopic under ASC 340, Other Assets and Deferred Costs, which discusses the deferral of incremental costs of obtaining a contract with a customer, including the period of amortization of such costs. The guidance permits two methods of adoption: (1) full retrospective method, under which the new guidance is applied to each prior reporting period presented; and (2) modified retrospective method, under which the cumulative effect of adoption of the new guidance is applied as an adjustment to the opening balance of retained earnings at the date of initial application. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The Company will adopt the new guidance on January 1, 2018 using the full retrospective method.
In the fourth quarter of 2017, the Company completed its review of contracts and evaluation of incremental costs of obtaining contracts under the new guidance. The Company has concluded that the most significant change associated with the adoption of new standard is the up-front estimation of amounts associated with contracts containing variable consideration; this variable consideration, which is present in a few of the Company's larger contracts, was recognized as revenue later under ASC 605 because of the requirement for amounts to be "fixed or determinable." In addition, under the new standards, the Company will capitalize sales compensation paid to internal sales personnel when such costs are incremental to obtaining a contract. Costs related to non-renewable contracts will be deferred and amortized on a straight-line basis over the duration of the contractual term. Costs related to renewable contracts will be deferred and amortized on a straight-line basis over a period equal to twice the contractual term, which the Company considers to be the expected period of benefit for these costs. In developing this estimate, the Company considered its historical renewal rates and customer retention rates, as well as technology development life cycles and other industry factors.
The following table presents the anticipated effects of adoption of the new guidance in ASC 606 on the affected line items of the Company's consolidated statements of operations for the years ended December 31, 2017 and 2016 (in thousands, except per share amounts):
 
Year ended December 31, 2017
 
Year ended December 31, 2016
 
As Reported Under ASC 605
 
Anticipated Under ASC 606
 
Change
 
As Reported Under ASC 605
 
Anticipated Under ASC 606
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
Subscription
$
459,528

 
$
457,824

 
$
(1,704
)
 
$
394,269

 
$
388,997

 
$
(5,272
)
Professional services
86,004

 
86,381

 
377

 
69,112

 
69,496

 
384

Total revenues
545,532

 
544,205

 
(1,327
)
 
463,381

 
458,493

 
(4,888
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
126,273

 
124,138

 
(2,135
)
 
109,290

 
105,925

 
(3,365
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
64,348

 
65,156

 
808

 
50,209

 
48,686

 
(1,523
)
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
7,847

 
5,459

 
(2,388
)
(1)
8,331

 
7,782

 
(549
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
44,380

 
$
47,576

 
$
3,196

 
$
28,983

 
$
28,009

 
$
(974
)
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.79

 
$
0.84

 
$
0.05

 
$
0.52

 
$
0.50

 
$
(0.02
)
Diluted
$
0.74

 
$
0.80

 
$
0.06

 
$
0.51

 
$
0.49

 
$
(0.02
)
(1) The change in provision for income taxes is largely the result of the revaluation of the Company's deferred tax assets and liabilities to reflect the lower statutory tax rate enacted on December 22, 2017 as part of the U.S. Tax Cuts and Jobs Act.



F-14

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

The following table presents the anticipated effects of adoption of the new guidance in ASC 606 on the affected line items of the Company's consolidated balance sheets as of December 31, 2017 and 2016 (in thousands):
 
December 31, 2017
 
December 31, 2016
 
As Reported Under ASC 605
 
Anticipated Under ASC 606
 
Change
 
As Reported Under ASC 605
 
Anticipated Under ASC 606
 
Change
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Prepaid commission expense
5,352

 
12,404

 
7,052

 
1,842

 
4,355

 
2,513

Prepaid expenses and other current assets
37,287

 
33,636

 
(3,651
)
 
20,382

 
19,058

 
(1,324
)
Noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Deferred income taxes, long-term
40,847

 
35,789

 
(5,058
)
 
40,415

 
32,968

 
(7,447
)
Other assets
29,979

 
46,755

 
16,776

 
18,181

 
34,656

 
16,475

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deferred revenue
77,434

 
77,374

 
(60
)
 
75,911

 
74,147

 
(1,764
)
The adoption of the new guidance in ASC 606 will also result in certain additional revenue disclosures in the Company's future filings. Adoption has no impact on the Company's cash flows.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU No. 2016-01 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The Company will adopt ASU No. 2016-01 on January 1, 2018, and the adoption is not expected to have a material impact on the its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaces previous lease guidance in its entirety with ASC 842. The new guidance requires lessees to recognize lease assets and lease liabilities for those arrangements classified as operating leases under previous guidance, with the exception of leases with a term of twelve months or less. The new guidance also adds quantitative and qualitative disclosure requirements around leasing activities. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. The Company will adopt ASU No. 2016-02 on January 1, 2019; the Company is presently evaluating and quantifying the full impact of the adoption on its consolidated financial statements, but in general expects that the impact to its consolidated balance sheets will be material.
In August 2016, the FASB issued ASU No. 2016-15, Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses the diversity in practice around presentation of certain cash receipts and payments in the statement of cash flows. ASU No. 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company does not expect the adoption to have a material impact on its consolidated financial statements and may consider early adoption, which is permitted in any interim or annual period.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, which provides a more specific definition of a business than was afforded under previous guidance. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU No. 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company will adopt ASU No. 2017-01 on January 1, 2018, and does not expect the adoption to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 (determination of implied fair value of goodwill) from the goodwill impairment test. Under the new guidance, an entity must perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if any, with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU No. 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted for goodwill impairment testing dates after January 1, 2017. The Company will adopt ASU No. 2017-04 on January 1, 2020, and does not expect the adoption to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, which clarifies when a change in the terms or conditions of a share-based payment award should be accounted for as a modification. ASU No. 2017-09 is

F-15

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company will adopt ASU No. 2017-09 on January 1, 2018, and the adoption is not expected to have a material impact on its consolidated financial statements.
2. WIRE TRANSACTION RECOVERY
In September 2014, the Company was the victim of a crime involving the transfer of $4.8 million to an overseas account. As a result, the Company recorded charges of $4.9 million and $0.9 million to its operating costs and expenses in the third and fourth quarters of 2014, respectively, for the loss and related investigation costs incurred. The Company filed an insurance claim for its loss, and its insurer, Federal Insurance Co. ("Federal") denied coverage. The Company commenced legal action, alleging that Federal had wrongly denied coverage. On July 21, 2017, the United States District Court for the Southern District of New York granted the Company's motion for summary judgment, and denied Federal's motion. In light of this ruling, the Company's operating costs and expenses for the year ended December 31, 2017 include recognition of the amount that is probable to be recovered, up to the amount of the originally recorded $4.8 million loss. Any potential recovery amounts that are in excess of the amount of the loss, such as interest, have not been recognized.
3. STOCKHOLDERS' EQUITY
Common StockCommon stockholders are entitled to one vote for each share of common stock held. Common stockholders may receive dividends if and when the board of directors determines, at its sole discretion. The terms of the credit agreement governing the Company's Credit Facility (as defined in Note 9, "Debt") restrict the Company's ability to pay cash dividends and make stock repurchases, if, after giving effect thereto, the consolidated total net leverage ratio (total funded indebtedness, less unrestricted domestic cash and cash equivalents not to exceed $150 million, to EBITDA) exceeds 1.00 to 1.00 or there is an existing default under the credit agreement.
Treasury StockFrom time to time, the Company grants nonvested RSAs, RSUs, and PBRSUs to its employees pursuant to the terms of its 2017 Long-Term Incentive Plan ("2017 Plan") and formerly pursuant to the terms of its Second Amended and Restated 2009 Long-Term Incentive Plan ("2009 Plan"). Under the provisions of the 2017 Plan and 2009 Plan, unless otherwise elected, participants fulfill their related income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting, the Company divides the participant's income tax obligation in dollars by the closing price of its common stock and withholds the resulting number of vested shares. The shares withheld are then transferred to the Company's treasury stock at cost.
In 2017 and 2016, the Company withheld 308,820 shares at an average price of $59.90 and 359,733 shares at an average price of $37.24, respectively, in connection with the vesting of its RSAs, RSUs, and PBRSUs.
Nonvested restricted stock awards forfeited by plan participants are transferred to the Company's treasury stock at par. During 2017 and 2016, 224,933 and 155,984 forfeited shares, respectively, were transferred to treasury stock at their par value of $0.01.
4. INVESTMENTS
Marketable Securities
Marketable securities, which the Company classifies as available-for-sale securities, primarily consist of high quality commercial paper, corporate bonds, and U.S. government debt obligations. Marketable securities with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term; otherwise, they are classified as long-term on the consolidated balance sheet.

F-16

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

The following tables provide the Company's marketable securities by security type as of December 31, 2017 and 2016 (in thousands):
 
As of December 31, 2017
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
392,481

 
$

 
$
(1,334
)
 
$
391,147

U.S. government agency debt securities
35,016

 

 
(155
)
 
34,861

Total
$
427,497

 
$

 
$
(1,489
)
 
$
426,008

 
As of December 31, 2016
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
389,459

 
$
4

 
$
(827
)
 
$
388,636

U.S. government agency debt securities
33,132

 

 
(65
)
 
33,067

Total
$
422,591

 
$
4

 
$
(892
)
 
$
421,703

Contractual maturities of the Company's marketable securities as of December 31, 2017 and 2016 are summarized as follows (in thousands):
 
As of December 31, 2017
 
As of December 31, 2016
 
Cost      
 
Estimated Fair Value
 
Cost      
 
Estimated Fair Value
Due in one year or less
$
247,495

 
$
246,967

 
$
281,591

 
$
281,285

Due in one to five years
180,002

 
179,041

 
141,000

 
140,418

Total
$
427,497

 
$
426,008

 
$
422,591

 
$
421,703

At December 31, 2017, the Company had $1.5 million of gross unrealized losses primarily due to a decrease in the fair value of certain corporate bonds.
The Company regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Investments that are impaired are those that are considered to have losses that are other-than-temporary. Factors considered in determining whether a loss is temporary include:
the length of time and extent to which fair value has been lower than the cost basis;
the financial condition, credit quality and near-term prospects of the investee; and
whether it is more likely than not that the Company will be required to sell the security prior to recovery.
As the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company has determined that the gross unrealized losses on such investments at December 31, 2017 are temporary in nature. Accordingly, the Company did not consider its investments in marketable securities to be other-than-temporarily impaired as of December 31, 2017.

F-17

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

The following tables provide the fair market value and gross unrealized losses of the Company's marketable securities with unrealized losses, aggregated by security type, as of December 31, 2017 and 2016 (in thousands):
 
In Loss Position for Less than 12 Months
 
As of December 31, 2017
 
As of December 31, 2016
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
295,224

 
$
(1,137
)
 
$
299,708

 
$
(771
)
U.S. government agency debt securities
18,431

 
(86
)
 
28,273

 
(59
)
Total
$
313,655

 
$
(1,223
)
 
$
327,981

 
$
(830
)

 
In Loss Position for More than 12 Months
 
As of December 31, 2017
 
As of December 31, 2016
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
95,923

 
$
(197
)
 
$
68,158

 
$
(56
)
U.S. government agency debt securities
16,430

 
(69
)
 
4,794

 
(6
)
Total
$
112,353

 
$
(266
)
 
$
72,952

 
$
(62
)
During 2017, 2016, and 2015, the Company recorded an insignificant amount of net realized gains and losses from the sale of marketable securities.
Cost Method Investments
In October 2017, the Company purchased shares of Series D Preferred Stock of Syapse Inc. ("Syapse") via a private placement. This investment is accounted for under the cost method and is included in other assets on the Company's consolidated balance sheet as of December 31, 2017 at its purchase price of $3.0 million.
In November 2017, the Company purchased shares of Series Seed Preferred Stock of SHYFT Analytics, Inc. ("SHYFT") via a private placement. This investment is accounted for under the cost method and is included in other assets on the Company's consolidated balance sheet as of December 31, 2017 at its purchase price of $1.1 million. The Company also holds previously purchased shares of Series B Preferred Stock of SHYFT, which are included in other assets on the Company's consolidated balance sheet as of December 31, 2017 at their carrying value of $4.0 million.

F-18

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5. FAIR VALUE
As of December 31, 2017 and 2016, the Company's financial assets and liabilities that are measured at fair value on a recurring basis as described in Note 1, "Summary of Significant Accounting Policies," are summarized as follows (in thousands):
 
As of December 31, 2017
 
As of December 31, 2016
 
Fair Value Measurement Using
 
Fair Value Measurement Using
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
237,149

 
$

 
$

 
$
237,149

 
$
93,384

 
$

 
$

 
$
93,384

Money market funds
176

 

 

 
176

 
135

 

 

 
135

Total cash and cash equivalents
237,325

 

 

 
237,325

 
93,519

 

 

 
93,519

Commercial paper and corporate bonds

 
391,147

 

 
391,147

 

 
388,636

 

 
388,636

U.S. government agency debt securities

 
34,861

 

 
34,861

 

 
33,067

 

 
33,067

Total marketable securities

 
426,008

 

 
426,008

 

 
421,703

 

 
421,703

Total financial assets measured at fair value on a recurring basis
$
237,325

 
$
426,008

 
$

 
$
663,333

 
$
93,519

 
$
421,703

 
$

 
$
515,222

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration — short-term
$

 
$

 
$
3,993

 
$
3,993

 
$

 
$

 
$

 
$

Contingent consideration — long-term

 

 
2,012

 
2,012

 

 

 

 

Total financial liabilities measured at fair value on a recurring basis
$

 
$

 
$
6,005

 
$
6,005

 
$

 
$

 
$

 
$

Investments in commercial paper, corporate bonds, and U.S. government agency debt securities have been classified as Level 2 as they are valued using quoted prices in less active markets or other directly or indirectly observable inputs. Fair values of corporate bonds and U.S. government agency debt securities were derived from a consensus or weighted-average price based on input of market prices from multiple sources at each reporting period. With regard to commercial paper, all of the securities had high credit ratings and one year or less to maturity; fair value was derived from accretion of purchase price to face value over the term of maturity or quoted market prices for similar instruments if available. During 2017 and 2016, there were no transfers of financial assets between Level 1 and Level 2.
Contingent consideration liabilities associated with acquisition-related earn-out payments are classified as Level 3 in the fair value hierarchy because they rely significantly on inputs that are unobservable in the market. The fair value of short-term contingent consideration, which is related to the achievement of a technical milestone, has been estimated using situation-based modeling, which considers the probability-weighted present value of the expected payout amount. The fair value of long-term contingent consideration, which is related to the achievement of revenue targets, has been estimated using a Monte Carlo model to simulate future performance of the acquired business under a risk-neutral framework; significant assumptions include a risk-adjusted discount rate of 10.2% and revenue volatility of 8.0%. Short-term and long-term contingent consideration are recorded in accrued expenses and other and other long-term liabilities, respectively, on the Company's consolidated balance sheet as of December 31, 2017.
The following table provides a summary of changes in fair value of the Company's Level 3 financial liabilities during the year ended December 31, 2017 (in thousands):
Balance as of January 1, 2017
$

Contingent consideration — acquisition
5,697

Due to sellers
(11
)
Fair value adjustments (included in general and administrative expenses)
319

Balance as of December 31, 2017
$
6,005

The carrying amounts of all other current financial assets and current financial liabilities reflected in the consolidated balance sheets approximate fair value due to their short-term nature.


F-19

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6. ACQUISITIONS
The Company acquired all outstanding equity interests in CHITA Inc. ("CHITA") and Mytrus, Incorporated ("Mytrus") on February 17, 2017 and April 18, 2017, respectively.
CHITA provides regulated content management for the life sciences industry. Mytrus provides cloud-based software for electronic informed consent ("eConsent"), which replaces paper patient consent forms. Through these acquisitions, the Company adds regulated document and standard operating procedure ("SOP") management, electronic trial master file ("eTMF"), and eConsent capabilities to its platform.
Aggregate purchase price of $28.9 million consisted of upfront consideration of $23.2 million and contingent consideration (associated with CHITA) initially valued at $5.7 million. In connection with these acquisitions, the Company recognized $16.6 million in finite-lived intangible assets, deferred tax liabilities of $2.9 million, and $2.1 million in other net tangible liabilities, resulting in the recognition of $16.3 million in goodwill.
The Company does not consider these acquisitions, individually or in the aggregate, to be significant to its financial condition or results of operations; its consolidated results of operations for the year ended December 31, 2017 include the revenues and expenses of CHITA and Mytrus since their respective acquisition dates.
On April 1, 2016, the Company acquired all outstanding membership interests in Intelemage, LLC ("Intelemage"), a medical image sharing and workflow management company. The Company paid cash consideration of $17.2 million and acquired $0.8 million in net tangible liabilities and $5.2 million in intangible assets, resulting in recognition of $12.8 million in goodwill.
Intangible assets acquired during the two years ended December 31, 2017 were as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
Acquisition-Date
Fair Value
 
Weighted-Average Useful Life
 
Acquisition-Date
Fair Value
 
Weighted-Average Useful Life
Developed technology
$
15,602

 
5 years
 
$
3,750

 
4 years
Customer relationships
890

 
6 years
 
1,472

 
6 years
Non-competition agreements
110

 
3.5 years
 
N/A

 
N/A
Total
$
16,602

 
 
 
$
5,222

 
 
7. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the two years ended December 31, 2017 were as follows (in thousands):
Balance as of January 1, 2016
$
18,797

Additions related to acquisition
12,753

Foreign currency translation adjustments
(770
)
Balance as of December 31, 2016
30,780

Additions related to acquisitions
16,296

Foreign currency translation adjustments
359

Balance as of December 31, 2017
$
47,435

Total intangible assets are summarized as follows (in thousands):
 
As of December 31, 2017
 
As of December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technology
$
24,436

 
$
(8,883
)
 
$
15,553

 
$
8,714

 
$
(5,098
)
 
$
3,616

Customer relationships
4,489

 
(2,595
)
 
1,894

 
3,566

 
(2,176
)
 
1,390

Non-competition agreements
260

 
(120
)
 
140

 
150

 
(66
)
 
84

Total
$
29,185

 
$
(11,598
)
 
$
17,587

 
$
12,430

 
$
(7,340
)
 
$
5,090


F-20

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Future amortization of intangible assets is expected to be as follows (in thousands):
Year ending December 31,
 
2018
$
4,788

2019
4,530

2020
3,787

2021
3,517

2022
921

Thereafter
44

Total
$
17,587

8. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following (in thousands):
 
December 31,
 
2017
 
2016
Computer hardware and office equipment
$
52,937

 
$
38,669

Computer software
27,350

 
8,525

Leasehold improvements
53,712

 
45,649

Furniture and fixtures
12,242

 
10,616

Construction in progress
4,447

 
1,204

Total furniture, fixtures and equipment
150,688

 
104,663

Less: accumulated depreciation and amortization
(62,597
)
 
(46,202
)
Furniture, fixtures and equipment, net
$
88,091

 
$
58,461

Total depreciation expense was $19.9 million, $14.1 million, and $10.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. Assets included in construction in progress as of December 31, 2017 and 2016 primarily relate to capitalized software development and implementation costs associated with in-progress projects, as well as continued improvements to the Company's infrastructure and facilities. Capitalized costs associated with construction in progress are not amortized into depreciation expense until the related assets are put into service.
9. DEBT
1.00% Convertible Senior Notes
In August 2013, the Company issued at par value $287.5 million of 1.00% convertible senior notes (the "Notes"). Interest is payable semi-annually in arrears on August 1 and February 1 of each year. The Notes mature on August 1, 2018 unless repurchased or converted in accordance with their terms prior to such date. The Company may not redeem the Notes prior to their maturity date. The Notes are the Company's senior unsecured obligations and are governed by an indenture dated August 12, 2013 between the Company, as issuer, and Wells Fargo Bank, National Association, as trustee.
Holders may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2018 only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on such trading day; or
upon the occurrence of certain corporate events described in the indenture governing the Notes.
On or after February 1, 2018 until close of business on the business day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. If the Company undergoes a fundamental change as defined in the indenture governing the Notes, holders may require the Company to repurchase for cash all of their

F-21

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest. As of February 28, 2018, approximately 15% of the outstanding Notes have been presented for conversion.
The initial conversion rate is 17.2286 shares of the Company's common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $58.05 per share of common stock. The conversion rate is subject to adjustment upon occurrence of certain events, including, but not limited to, the issuance of stock dividends or payment of cash dividends on the Company's common stock (unless the holders of the Notes participate at the same time and under the same terms as the holders of common stock), or execution of a share split or share combination. Upon conversion, holders of the Notes will not receive any separate cash payment representing accrued and unpaid interest, unless conversion occurs after close of business on a regular record date and prior to the related interest payment date.
Upon conversion of the Notes, the Company has elected to pay cash for the principal amount of the notes and to deliver shares of common stock for any amounts in excess of principal.
The Notes consisted of the following components as of December 31, 2017 and 2016 (in thousands):
 
December 31,
 
2017
 
2016
Equity component, net of equity issue costs
$
60,222

 
$
60,222

Liability component:
 
 
 
Principal
287,500

 
287,500

Less: unamortized debt discount
(8,661
)
 
(22,076
)
Less: unamortized debt issuance costs
(745
)
 
(2,023
)
Net carrying amount
$
278,094

 
$
263,401

As of December 31, 2017 and 2016, the estimated fair value of the Notes was $336.4 million and $314.4 million, respectively. The Company considers this disclosure to be a Level 2 measurement because it is based upon a recent modeled bid-price quote for the Notes, reflecting activity in a less than active market. Based on the closing price of the Company's common stock as of December 31, 2017 of $63.37, which is higher than the Notes' initial conversion price of $58.05, the if-converted value of the Notes exceeded their face value by $26.4 million.
As of December 31, 2017, the remaining life of the Notes is approximately 7 months, and the Notes are classified as current liabilities on the Company's consolidated balance sheets.
The following table sets forth total interest expense recognized related to the Notes for the years ended December 31, 2017 and 2016 (in thousands except percentages):
 
2017
 
2016
Contractual interest expense
$
2,875

 
$
2,875

Amortization of debt issuance costs
1,278

 
1,278

Amortization of debt discount
13,415

 
12,636

Total
$
17,568

 
$
16,789

 
 
 
 
Effective interest rate
6.5
%
 
6.5
%
Credit Facility
On December 21, 2017, the Company entered into a credit agreement (the "Credit Agreement") with several lenders (the "Lenders"), and with HSBC Bank USA, N.A. (the "Administrative Agent") as administrative agent and letter of credit issuer. Pursuant to the Credit Agreement, the Lenders provide the Company with a senior secured first lien credit facility (the "Credit Facility") in an aggregate principal amount of $500.0 million, consisting of (a) term loans in an aggregate principal amount of $100.0 million (the "Term Loans") and (b) revolving commitments in an aggregate principal amount of $400.0 million (the "Revolving Commitments"). Up to $10.0 million of the Revolving Commitments may be used to obtain letters of credit. Each of the Term Loans and the Revolving Commitments is scheduled to mature on December 21, 2022, with the principal amount of the Term Loans payable in quarterly installments. The Credit Agreement provides that, subject to certain agreements, the Company may request the establishment of one or more additional term loan facilities and/or increases to the Revolving Commitments in an aggregate principal amount not to exceed $100.0 million.

F-22

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Interest rates for borrowing under the Credit Facility are dependent on the Company's total net leverage ratio (total funded indebtedness, less unrestricted domestic cash and cash equivalents not to exceed $150.0 million, to EBITDA) and are based, at the Company's election, on whether the borrowing is a base rate loan or a Eurodollar loan.
Base rate loans will bear interest at a rate per annum equal to the sum of:
1.the greatest of:
a.
the Administrative Agent's prime rate
b.
the federal funds effective rate published by the Federal Reserve Bank of New York plus 0.5%
c.
an adjusted London Interbank Offered ("LIBO") rate for a one-month interested period plus 1.0%
d.
1.0%; and
2.an applicable margin from 0.125% to 0.750% depending on the Company's total net leverage ratio.
Eurodollar loans will bear interest at an adjusted LIBO rate plus an applicable margin ranging from 1.125% to 1.750%, depending on the Company's total net leverage ratio.
Commitment fees on the unused portion of the Revolving Commitments accrue at an annual rate ranging from 0.150% to 0.250% depending upon the Company's total net leverage ratio.

F-23

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

The initial interest margins on base rate and Eurodollar loans are 0.375% and 1.375%, respectively, and the initial commitment fee is 0.200%. After the Company delivers its first periodic compliance certificate to the administrative agent, rates will be determined as follows:
Total Net Leverage Ratio
Base Rate Margin - Term Loans and Revolving Commitments
Eurodollar Margin - Term Loans and Revolving Commitments
Commitment Fee Rate
Greater than or equal to 3.00 : 1.00
0.750%
1.750%
0.250%
Greater than or equal to 2.25 : 1.00 but less than 3.00 : 1.00
0.500%
1.500%
0.225%
Greater than or equal to 1.50 : 1.00 but less than 2.25 : 1.00
0.375%
1.375%
0.200%
Greater than or equal to 0.75 : 1.00 but less than 1.50 : 1.00
0.250%
1.250%
0.175%
Less than 0.75 : 1.00
0.125%
1.125%
0.150%
The Credit Agreement contains representations, warranties, and affirmative and negative covenants, including financial covenants, that are customary in similar financings. The negative covenants restrict or limit the ability of the Company to, among other things, incur indebtedness, create liens on assets, engage in certain fundamental corporate changes, sell or otherwise dispose of assets, make certain investments or acquisitions, enter into hedging agreements, and pay dividends.
The financial covenants require:
1.an interest coverage ratio of 3.50 to 1.00 or greater; and
2.a total net leverage ratio of:    
a.
not greater than 3.50 to 1.00 through 2019    
b.
not greater than 3.25 to 1.00 in 2020; and
c.
not greater than 3.00 to 1.00 thereafter.
In connection with the Credit Facility, the Company incurred $2.2 million in debt issuance costs, which are recorded as a reduction of the carrying amount of the debt and are to be amortized over the life of the Credit Facility.
The Credit Facility consisted of the following components as of December 31, 2017 (in thousands):
 
December 31,
 
2017
Term Loans
$
100,000

Less: unamortized debt issuance costs
(2,159
)
Net carrying amount
$
97,841


Interest expense related to the Credit Facility for the year ended December 31, 2017 was immaterial. Of the net carrying amount of the Term Loans, $5.0 million (related to principal payments due in 2018) is included in accrued expenses and other on the Company's consolidated balance sheet as of December 31, 2017.

As of December 31, 2017 the remaining term of the Credit Facility is approximately 60 months.

F-24

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


Maturities under the Credit Facility for the next five years are as follows (in thousands):
Year ending December 31,
Term Loan
2018
$
5,000

2019
5,000

2020
7,500

2021
10,000

2022
72,500

Total
$
100,000


10. LEASE COMMITMENTS
The Company leases office and data center space and certain equipment under noncancelable operating lease agreements which provide for total future minimum annual lease payments as follows (in thousands):
Years ending December 31,
 
2018
$
15,055

2019
16,543

2020
16,462

2021
16,227

2022
15,796

Thereafter
30,759

Total minimum lease payments
$
110,842

Rent expense was approximately $15.7 million in 2017, $14.1 million in 2016, and $12.7 million in 2015. The Company had several outstanding standby letters of credit issued in connection with office leases, totaling $5.5 million at both December 31, 2017 and 2016, which were fully collateralized with restricted cash.
11. STOCK-BASED COMPENSATION
In 2000, the Company adopted the 2000 Stock Option Plan (the “2000 Plan”). Options granted under the 2000 Plan were incentive stock options and nonqualified stock options. The majority of the options vested 25% on the first anniversary of the grant date and monthly over the next three years, expiring after ten years. Stock options were issued with an exercise price equal to the market price on the date of the grant. The Company will not grant any additional stock options under the 2000 Plan.
In May 2009, the Company adopted the 2009 Plan which became effective upon the completion of its initial public offering in June 2009. Under this plan, the Company granted a variety of equity-based incentive awards including incentive stock options, nonqualified stock options, nonvested RSAs, nonvested RSUs, and PBRSUs. Stock options were issued with an exercise price equal to the current market price on the date of the grant, generally vest 25% on the first anniversary of the grant date and monthly over the next three years, and expire after ten years. Nonvested RSAs are not eligible for disposition but entitle the holder to all rights of a holder of common stock, including dividends and voting rights. Nonvested RSAs and their associated dividends are subject to forfeiture under certain circumstances. The company will not grant any additional equity awards under the 2009 Plan.
In May 2017, the Company adopted the 2017 Plan, a comprehensive incentive plan under which the Company can grant equity-based incentive awards to employees, directors, consultants, and advisors, including stock options, nonvested RSAs and RSUs, PBRSUs, and other awards. The number of shares initially reserved for issuance under the 2017 plan is 1.2 million plus the number of shares subject to outstanding awards under the 2009 plan that are forfeited, settled in cash, or otherwise terminated without issuance after the effective date of the 2017 Plan.
The Company's Second Amended and Restated 2014 Employee Stock Purchase Plan (the "ESPP") allows eligible employees to purchase shares of the Company's common stock at a discount though payroll deductions, and consists of overlapping 24-month offering periods with four six-month purchase periods in each offering period. Employees purchase shares at the lesser of (1) 85% of the fair market value (“FMV”) per share on the first day of the offering period, or (2) 85% of the FMV per share at the end of the relevant purchase period. The ESPP contains a reset provision that automatically cancels the current offering period and enrolls participants in a new offering period in the event that FMV per share at the end of a six-month purchase period is lower than the FMV per share at the first day of the related offering period. The ESPP is a compensatory plan because it provides participants with terms that are more favorable than those offered to other holders of the Company's

F-25

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

common stock. Accordingly, the cost of the plan is recorded as stock-based compensation expense. A total of 0.8 million shares of common stock is reserved for issuance under the ESPP as of December 31, 2017.
For the three years ended December 31, 2017, the components of stock-based compensation expense were as follows (in thousands):
 
2017
 
2016
 
2015
Stock options
$
3,332

 
$
3,913

 
$
4,941

Restricted stock awards and units
31,423

 
24,815

 
18,935

Performance-based restricted stock units
8,854

 
9,073

 
21,065

Employee stock purchase plan
4,574

 
3,393

 
4,046

Total stock-based compensation (1)
$
48,183

 
$
41,194

 
$
48,987

(1) Total stock-based compensation is presented in this table on a gross basis, consistent with the additional paid-in capital impact displayed on the Company's consolidated statements of stockholders' equity. On the Company's consolidated statements of operations and consolidated statements of cash flows, stock-based compensation is presented net of foreign exchange impact and capitalization of eligible software development-related costs.
The total tax benefit related to stock-based compensation expense was $18.2 million, $17.8 million, and $17.5 million for 2017, 2016, and 2015, respectively. As a result of the 2016 adoption of ASU No. 2016-09, the tax benefit amounts for 2017 and 2016 include the impact of excess tax benefits; the disclosed amount for 2015 has not been adjusted.
Stock Options
The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions:
 
2017
 
2016
 
2015
Expected volatility
43
%
 
44
%
 
43
%
Expected life
6 years

 
6 years

 
6 years

Risk-free interest rate
2.09
%
 
1.42
%
 
1.68
%
Dividend yield

 

 

The following table summarizes the status of the Company's stock options as of December 31, 2017, and changes during the year then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2017
1,793

 

$23.39

 
 
 
 
Granted
105

 
61.33

 
 
 
 
Exercised
(310
)
 
32.93

 
 
 
 
Forfeited
(70
)
 
48.97

 
 
 
 
Expired
(7
)
 
58.92

 
 
 
 
Outstanding at December 31, 2017
1,511

 

$22.72

 
4.21
 

$61,734

Exercisable at December 31, 2017
1,281

 

$17.61

 
3.45
 

$58,603

Vested and expected to vest at December 31, 2017
1,484

 

$22.13

 
4.12
 

$61,416

The weighted-average grant-date fair value of stock options granted during 2017, 2016, and 2015 was $27.22, $18.59, and $20.96, respectively. The total intrinsic value of stock options exercised during 2017, 2016, and 2015 was $10.0 million, $8.3 million, and $15.7 million, respectively. As of December 31, 2017, there was $4.6 million in unrecognized compensation cost related to all non-vested stock options granted. This cost is expected to be recognized over a weighted-average remaining period of 2.42 years.

F-26

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Restricted Stock Awards and Units
The following table summarizes the status of the Company's time-based nonvested RSAs and RSUs as of December 31, 2017, and changes during the year then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested at January 1, 2017
1,850

 

$40.89

Granted
786

 
58.19

Vested
(655
)
 
40.34

Forfeited
(227
)
 
43.98

Nonvested at December 31, 2017
1,754

 

$48.45

The total fair value of RSAs and RSUs vested during 2017, 2016, and 2015 was $40.1 million, $21.3 million, and $31.1 million, respectively. As of December 31, 2017, there was $58.6 million in unrecognized compensation cost related to all nonvested RSAs and RSUs granted. This cost is expected to be recognized over a weighted-average remaining period of 2.38 years.
Performance-Based Restricted Stock Units
During 2017, the Company granted: (1) 132 thousand PBRSUs ("2017 TSR PBRSUs") with market conditions based on the Company's total stockholder return ("TSR") relative to that of the Russell 2000 Index over the three-year period ending December 31, 2019, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares; (2) 132 thousand PBRSUs ("2017 Net Income PBRSUs") with performance conditions based on the compound annual growth rate of net income over the three-year period ending December 31, 2019, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares. The Company also granted 48 thousand PBRSUs with performance conditions based on achievement of certain individual and team objectives.
During 2016, the Company granted 223 thousand PBRSUs ("2016 TSR PBRSUs") with market conditions based on the Company's TSR relative to that of the Russell 2000 Index over the three-year period ending December 31, 2018, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares. The Company also granted an insignificant number of other PBRSUs with performance conditions based on achievement of certain individual and team objectives.
During 2015, the Company granted 242 thousand PBRSUs ("2015 TSR PBRSUs") with market conditions based on the Company's TSR relative to that of the Russell 2000 index over the one-, two-, and three-year periods ending December 31, 2015, 2016, and 2017, respectively, vesting in equal parts over three years with the number of PBRSUs ultimately earned ranging from zero to 200% of the target number of shares.


F-27

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

The fair value of PBRSUs with market conditions were estimated as of the date of grant using a Monte Carlo valuation model with the following weighted-average assumptions:
 
2017 TSR
PBRSUs
 
2016 TSR
PBRSUs
 
2015 TSR
PBRSUs
Expected volatility - Medidata
42
%
 
48
%
 
46
%
Expected volatility - comparison index
43
%
 
43
%
 
41
%
Risk-free interest rate
1.40
%
 
0.91
%
 
0.99
%
Expected life
2.85 years

 
2.84 years

 
2.88 years

Dividend yield

 

 

The following table summarizes the status of the Company's PBRSUs based upon expected performance as of December 31, 2017, and changes during the year then ended (in thousands, except per share data):
 
Net Income
 
TSR
 
Other
 
Total Number of Shares
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested at January 1, 2017

 
390

 
2

 
392

 

$57.05

Granted (based on performance at 100% of targeted levels)
132

 
132

 
48

 
312

 
72.44

Adjustment related to expected performance

 
288

 
(35
)
 
253

 
61.82

Vested

 
(92
)
 
(2
)
 
(94
)
 
66.88

Forfeited
(22
)
 
(105
)
 

 
(127
)
 
62.83

Nonvested at December 31, 2017
110

 
613

 
13

 
736

 

$62.96

The total fair value of PBRSUs vested during 2017, 2016, and 2015 was $5.2 million, $10.1 million, and $89.7 million, respectively. As of December 31, 2017, there was $15.7 million in unrecognized compensation cost related to all nonvested PBRSUs. This cost is expected to be recognized over a weighted-average remaining period of 1.53 years.
Employee Stock Purchase Plan
The fair value of ESPP shares was estimated using the Black-Scholes pricing model with the following weighted-average assumptions:
 
2017
 
2016
 
2015
Expected volatility
39
%
 
42
%
 
52
%
Expected life
1.49 years

 
1.44 years

 
1.38 years

Risk-free interest rate
0.67
%
 
0.52
%
 
0.31
%
Dividend yield

 

 

During 2017, 222 thousand shares of common stock were purchased under the ESPP at a weighted-average price of $41.68. During 2016, 174 thousand shares of common stock were purchased under the ESPP at a weighted-average price of $39.28. During 2015, 164 thousand shares of common stock were purchased under the ESPP at a weighted-average price of $38.30. As of December 31, 2017, there was $3.0 million in unrecognized compensation cost related to ESPP shares. This cost is expected to be recognized over a weighted-average remaining period of 0.96 years.
Modifications
Aggregate incremental expense associated with modifications to stock options, RSAs, RSUs, and PBRSUs in connection with executive separation agreements during 2017, 2016, and 2015 was $1.6 million, $0.5 million, and $1.3 million, respectively.


F-28

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the balances of each component of accumulated other comprehensive loss during the two years ended December 31, 2017 are as follows (in thousands):
 
Foreign currency translation adjustments
 
Unrealized gains (losses) on available-for-sale securities
 
Total
Balance as of January 1, 2016
$
(2,405
)
 
$
(999
)
 
$
(3,404
)
Other comprehensive (loss) income
(2,324
)
 
452

 
(1,872
)
Balance as of December 31, 2016
$
(4,729
)
 
$
(547
)
 
$
(5,276
)
Other comprehensive income (loss)
2,270

 
(371
)
 
1,899

Balance as of December 31, 2017
$
(2,459
)
 
$
(918
)
 
$
(3,377
)
For the years ended December 31, 2017 and 2016 reclassifications of items from accumulated other comprehensive income (loss) to net income were insignificant.

F-29

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

13. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding during the period. The holders of unvested RSAs do not have nonforfeitable rights to dividends or dividend equivalents and therefore, such vested awards do not qualify as participating securities and are excluded from the basic earnings per share calculation. Diluted earnings per share includes the determinants of basic net income per share and, in addition, gives effect to the potential dilution that would occur if securities or other contracts to issue common stock are exercised, vested or converted into common stock, unless they are anti-dilutive. As the Company intends to settle the principal amount of the Notes (see Note 9, "Debt") in cash upon conversion, their dilutive effect, if any, will be reflected in diluted earnings per share using the treasury stock method, which considers the number of shares that would be required to settle any premium above principal at the average stock price for the period. During the years ended December 31, 2016, and 2015, the average price of the Company's stock was below the conversion price of the Notes; as a result the Notes were not dilutive for these periods.
A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per share for the three years ended December 31, 2017 is shown in the following table (in thousands, except per share data):
 
2017
 
2016
 
2015
Numerator
 
 
 
 
 
Net income
$
44,380

 
$
28,983

 
$
13,167

Denominator
 
 
 
 
 
Denominator for basic earnings per share:
 
 
 
 
 
Weighted-average common shares outstanding
56,473

 
55,492

 
53,717

Denominator for diluted earnings per share:
 
 
 
 
 
Dilutive potential common shares:
 
 
 
 
 
Stock options
997

 
967

 
888

Restricted stock awards and units
929

 
646

 
483

Performance-based restricted stock units
498

 
144

 
1,452

Employee stock purchase plan
152

 

 

Convertible senior notes
716

 

 

Weighted-average common shares outstanding with assumed conversion
59,765

 
57,249

 
56,540

Basic earnings per share

$0.79

 

$0.52

 

$0.25

Diluted earnings per share

$0.74

 

$0.51

 

$0.23

Antidilutive common stock equivalents excluded from the calculation of dilutive earnings per share for the three years ended December 31, 2017 are shown in the following table (in thousands):
 
2017
 
2016
 
2015
Stock options
74

 
586

 
481

Restricted stock awards and units
17

 
41

 
7

Performance-based restricted stock units
5

 
1

 
3

Employee stock purchase plan
189

 
266

 
184

Total
285

 
894

 
675


F-30

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

14. INCOME TAXES
For financial reporting purposes, income before income taxes included the following components (in thousands):
 
2017
 
2016
 
2015
U.S. income
$
49,715

 
$
43,281

 
$
15,410

Non-U.S. income (loss)
2,512

 
(5,967
)
 
365

Income before income taxes
$
52,227

 
$
37,314

 
$
15,775

The components of income tax expense are as follows (in thousands):
 
2017
 
2016
 
2015
Current expense:
 
 
 
 
 
U.S. federal and state
$
1,429

 
$
444

 
$
4,329

Foreign
3,122

 
1,992

 
1,488

Current expense
4,551

 
2,436

 
5,817

Deferred expense (benefit):
 
 
 
 
 
U.S. federal and state
6,866

 
6,154

 
(3,403
)
Foreign
(334
)
 
(259
)
 
194

Valuation allowance
(3,236
)
 

 

Deferred expense (benefit)
3,296

 
5,895

 
(3,209
)
Total income tax expense
$
7,847

 
$
8,331

 
$
2,608

A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
 
2017
 
2016
 
2015
Tax computed at U.S. federal statutory rate
35.0
%
 
35.0
%
 
35.0
%
Increase (decrease) in income taxes resulting from:
 
 
 
 
 
State tax expense, net of federal benefit
2.8
%
 
3.0
%
 
1.1
%
U.S. credits and incentives
(12.4
%)
 
(24.0
%)
 
(30.7
%)
Foreign earnings
4.1
%
 
10.2
%
 
3.7
%
Stock-based compensation
(9.9
%)
 
(4.8
%)
 
5.7
%
U.S. Tax Cuts and Jobs Act
7.7
%
 
%
 
%
Intra-entity asset transfer
(17.2
%)
 
%
 
%
Other
4.9
%
 
2.9
%
 
1.7
%
Effective tax rate
15.0
 %
 
22.3
 %
 
16.5
 %
The U.S. Tax Cuts and Jobs Act, (the "Tax Act") was enacted on December 22, 2017, and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made a reasonable estimate of the effects and recorded provisional amounts in its financial statements for taxes on deemed repatriation of foreign earnings as of December 31, 2017. As the Company continues to interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, the Company may make adjustments to the provisional amounts, which may materially impact its provision for income taxes and effective tax rate in the period in which adjustments are made. The accounting for the effects of the Tax Act will be completed in 2018.
Provisional amounts for the following income tax effects of the Tax Act have been recorded as of December 31, 2017 and are subject to change during 2018:
One-time transition tax— The Tax Act requires the Company to pay U.S. income taxes on deemed repatriation of foreign earnings as of December 31, 2017. The Company has recorded a provisional amount for its one-time transitional tax liability and income tax expense of $1.8 million based on initial estimates; further analysis is required to conclude on the final liability due under the provision.
Valuation allowance— The Company has determined that it is more likely than not that its deferred tax asset related to foreign income tax credits will not be realized, resulting in the establishment of a valuation allowance and a corresponding increase in income tax expense of $3.2 million for the year ended December 31, 2017. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward

F-31

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

periods available under the applicable tax law. The Company's judgment regarding future recoverability may change due to many factors, including future guidance and subsequent evaluation of the impact of the Tax Act. Should there be a change in the ability to recover deferred tax assets, the Company's income tax provision would increase or decrease in the period in which the assessment is changed.
Deferred income taxes— Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company recorded a provisional $1.1 million benefit for its U.S. deferred income taxes as of December 31, 2017 to reflect the reduction in the U.S. statutory tax rate from 35% to 21% resulting from the Tax Act.
As of December 31, 2017 and 2016, the components of deferred tax assets (liabilities) are as follows (in thousands):
 
December 31,
 
2017
 
2016
Assets:
 
 
 
Net operating loss carryforwards
$
4,066

 
$
11,956

Alternative minimum tax credit
770

 
686

Stock-based compensation
11,629

 
15,180

Federal and state research and development tax credits
27,120

 
21,986

Foreign tax credit
3,809

 
2,753

Deferred rent
4,138

 
6,779

Wire transaction loss/recovery
57

 
1,916

Capitalized research and development
8,604

 

Other
3,191

 
3,979

Gross deferred tax assets
63,384

 
65,235

Liabilities:
 
 
 
Depreciable and amortizable assets
(12,658
)
 
(9,815
)
Convertible notes
(2,155
)
 
(8,448
)
Accrued bonus
(4,128
)
 

Other
(459
)
 
(343
)
Gross deferred tax liabilities
(19,400
)
 
(18,606
)
Less: valuation allowance
(3,236
)
 

Net deferred tax assets
$
40,748

 
$
46,629

Net current deferred tax assets
$

 
$
6,536

Net long-term deferred tax assets
40,847

 
40,415

Net long-term deferred tax liabilities
(99
)
 
(322
)
Net deferred tax assets
$
40,748

 
$
46,629

As of December 31, 2017 and 2016, the Company had approximately $14.3 million and $31.4 million of federal net operating loss carryforwards ("NOLs") available to offset future taxable income expiring from 2024 through 2037. The total amount of state and local NOLs in aggregate was $17.1 million and $16.2 million as of December 31, 2017 and 2016, respectively, which will begin to expire in 2024. Certain NOLs are subject to limitations under Section 382 of the Internal Revenue Code.

F-32

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

The Company has recorded unrecognized tax benefits in other long-term liabilities on its consolidated balance sheets. The aggregate changes in the balance of the Company's gross unrecognized tax benefits for the three years ended December 31, 2017 are as follows (in thousands):
 
2017
 
2016
 
2015
Gross unrecognized tax benefits as of beginning of period
$
2,935

 
$
8,069

 
$
4,992

Increases based on tax positions related to the current year
1,247

 
922

 
1,678

Increases related to tax positions from prior fiscal years

 
65

 
1,444

Reductions related to tax positions from prior fiscal years
(40
)
 
(1,906
)
 

Settlements with tax authority

 
(4,215
)
 
(45
)
Total gross unrecognized tax benefits as of end of period
$
4,142

 
$
2,935

 
$
8,069

If recognized, unrecognized tax benefits would have a net impact of approximately $4.0 million on the effective tax rate. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. Recognized interest and penalties were immaterial in 2017 and $0.1 million and $0.3 million for 2016, and 2015, respectively. The Company has determined its unrecognized tax benefits, including similar items in open tax years, based on historical experience with taxing authorities and other associated information and analysis.
The Company regularly reevaluates its tax positions and the associated interest and penalties, if applicable, resulting from audits of federal, state, and foreign income tax filings, as well as changes in tax law (including regulations, administrative pronouncements, and judicial precedents), that would reduce the technical merits of the positions to below more likely than not. The Company believes that its accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law, and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. The Company applies a variety of methodologies in making these estimates and assumptions.
The Company is open to audit in various jurisdictions for tax returns related to years after 2010. The Company has recorded changes in the liability for unrecognized tax benefits for current and prior year tax positions related to both ongoing and concluded income tax audits in various jurisdictions.
For 2017 and 2016, the Company has not provided for deferred taxes on investments in its foreign subsidiaries as there is no excess of financial reporting basis over tax basis with regard to these subsidiaries. If financial reporting basis exceeds tax basis in the future and the Company does not intend to permanently reinvest the earnings of its foreign subsidiaries, deferred taxes will be provided.
15. COMMITMENTS AND CONTINGENCIES
401(k) PlanThe Company has a pre-tax savings and profit sharing plan (the “401(k) Plan”) under Section 401(k) of the Internal Revenue Code for substantially all employees. As of 2017, the Company provides a 50% match of the first 6% of eligible compensation contributed each period by the employees. The maximum match by the Company is therefore 3% of eligible compensation. The Company incurred expense of $4.5 million, $2.3 million, and $2.2 million relating to matching contributions in 2017, 2016, and 2015, respectively.
Legal MattersThe Company is subject to legal proceedings and claims that arise in the ordinary course of business and records an estimated liability for these matters when an adverse outcome is considered to be probable and can be reasonably estimated. Although the outcome of the litigation cannot be predicted with certainty and some lawsuits, claims, or proceedings may be disposed of unfavorably to the Company, which could materially and adversely affect its financial condition or results of operations, the Company does not believe that it is currently a party to any material legal proceedings.
Contractual Warranties—The Company typically provides contractual warranties to its customers covering its solutions and services. To date, any refunds provided to customers have been immaterial.
Change in Control Agreements—The Company has change in control agreements with its chief executive officer and certain other executive officers. These agreements provide for payments to be made to such officers upon involuntary termination of their employment by the Company without cause or by such officers for good reason as defined in the agreements, within a period of 2 years following a change in control. The agreements provide that, upon a qualifying termination event, such officers will be entitled to (a) a severance payment equal to the officer's base salary and target bonus amount (except that such payment for the Company's chief executive officer and president would be two times such sum); (b) continuation of health benefits for one year (except that such continuation for the Company's chief executive officer and president would be for two years); and (c) immediate vesting of remaining unvested equity awards, unless otherwise specified in the equity award agreements.

F-33

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

Wire Transaction Claim In September 2014, the Company discovered that it had been the victim of a crime involving the fraudulently induced transfer of $4.8 million. The Company filed an insurance claim for its loss, and its insurer, Federal Insurance Co. ("Federal"), denied coverage. The Company commenced legal action, alleging that Federal had wrongly denied coverage. On July 21, 2017, the United States District Court for the Southern District of New York granted the Company's motion for summary judgment, and denied Federal's motion. Federal filed a Notice of Appeal with the United States Court of Appeals for the Second Circuit on August 11, 2017. That appeal is pending. For additional details, see Note 2, "Wire Transaction Recovery."
16. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The following table presents the Company's unaudited selected quarterly financial data for 2017 and 2016 (in thousands, except for per share amounts):
For the fiscal year 2017:
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
 
 
 
 
 
 
 
Total revenues
$
126,821

 
$
137,414

 
$
140,080

 
$
141,217

Gross profit
96,207

 
105,494

 
108,526

 
108,512

Operating income
12,173

 
13,743

 
21,960

 
16,472

Net income
9,518

 
8,250

 
12,844

 
13,768

Earnings per share:
 
 
 
 
 
 
 
Basic

$0.17

 

$0.15

 

$0.23

 

$0.24

Diluted

$0.16

 

$0.14

 

$0.21

 

$0.23

 
 
 
 
 
 
 
 
For the fiscal year 2016:
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Total revenues
$
104,238

 
$
114,610

 
$
120,061

 
$
124,472

Gross profit
79,570

 
85,553

 
90,833

 
94,816

Operating income
6,638

 
11,146

 
14,927

 
17,498

Net income
4,575

 
6,210

 
7,358

 
10,840

Earnings per share:
 
 
 
 
 
 
 
Basic

$0.08

 

$0.11

 

$0.13

 

$0.19

Diluted

$0.08

 

$0.11

 

$0.13

 

$0.19


F-34

MEDIDATA SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


Schedule II—Valuation and Qualifying Accounts
The allowance for doubtful accounts as of December 31, 2017 and 2016 was $1.5 million and $1.0 million, respectively. The table below details the activity in the account for the three years ended December 31, 2017 (in thousands):
 
2017
 
2016
 
2015
Balance at beginning of period
$
1,041

 
$
1,992

 
$
1,517

Charged to costs and expenses
1,089

 
1,116

 
597

Deductions
(676
)
 
(2,067
)
 
(122
)
Balance at end of period
$
1,454

 
$
1,041

 
$
1,992


F-35