10-Q 1 medidata-9302018x10q.htm FORM 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-Q
 _____________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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
_____________________________________
medidatalogocolor2018.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)
 _____________________________________
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨  Yes    ý  No
As of October 26, 2018, the registrant had 61,190,452 shares of common stock outstanding.


MEDIDATA SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2018
TABLE OF CONTENTS
 
 
Page
PART I
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


- 1 -

PART I - FINANCIAL INFORMATION
Item 1.     Financial Statements (Unaudited)

- 2 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 
September 30,
2018
 
December 31,
2017
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
83,496

 
$
237,325

Marketable securities
115,083

 
246,967

Accounts receivable, net of allowance for doubtful accounts of $1,642 and $1,454, respectively
163,180

 
110,685

Prepaid commission expense
18,422

 
12,404

Prepaid expenses and other current assets
27,898

 
33,636

Total current assets
408,079

 
641,017

Restricted cash
5,532

 
5,518

Furniture, fixtures and equipment, net
96,753

 
88,091

Marketable securities – long-term
19,878

 
179,041

Goodwill
215,000

 
47,435

Intangible assets, net
31,429

 
17,587

Deferred income taxes – long-term
43,242

 
35,789

Other assets
47,875

 
46,755

Total assets
$
867,788

 
$
1,061,233

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,661

 
$
5,009

Accrued payroll and other compensation
36,639

 
32,537

Accrued expenses and other
40,195

 
36,041

Deferred revenue
78,464

 
77,375

1.00% convertible senior notes, net
—

 
278,094

Total current liabilities
161,959

 
429,056

Noncurrent liabilities:
 
 
 
Term loan, net
89,512

 
92,841

Deferred revenue, less current portion
2,901

 
5,256

Deferred tax liabilities
98

 
99

Other long-term liabilities
19,332

 
21,371

Total noncurrent liabilities
111,843

 
119,567

Total liabilities
273,802

 
548,623

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; 65,888 and 62,801 shares issued; 61,194 and 58,607 shares outstanding, respectively
659

 
628

Additional paid-in capital
550,446

 
486,147

Treasury stock, 4,694 and 4,194 shares, respectively
(152,216
)
 
(132,705
)
Accumulated other comprehensive loss
(4,422
)
 
(3,377
)
Retained earnings
199,519

 
161,917

Total stockholders’ equity
593,986

 
512,610

Total liabilities and stockholders’ equity
$
867,788

 
$
1,061,233

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

- 3 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Amounts in thousands, except per share data)
 
Revenues
 
 
 
 
 
 
 
 
Subscription
$
137,046

 
$
117,271

(4)
$
394,351

 
$
338,068

(4)
Professional services
26,360

 
21,674

(4)
74,158

 
64,548

(4)
Total revenues
163,406

 
138,945

 
468,509

 
402,616

 
Cost of revenues (1)(2)
 
 
 
 
 
 
 
 
Subscription
24,618

 
17,131

 
66,561

 
51,277

 
Professional services
17,609

 
14,423

 
49,469

 
42,811

 
Total cost of revenues
42,227

 
31,554

 
116,030

 
94,088

 
Gross profit
121,179

 
107,391

 
352,479

 
308,528

 
Operating costs and expenses
 
 
 
 
 
 
 
 
Research and development (1)
40,626

 
36,207

 
118,937

 
102,028

 
Sales and marketing (1)(2)
38,329

 
29,996

(4)
112,296

 
92,701

(4)
General and administrative (1)
28,105

 
23,701

 
80,964

 
70,772

 
Wire transaction recovery (3)
—

 
(4,770
)
 
—

 
(4,770
)
 
Total operating costs and expenses
107,060

 
85,134

 
312,197

 
260,731

 
Operating income
14,119

 
22,257

 
40,282

 
47,797

 
Interest and other income (expense)
 
 
 
 
 
 
 
 
Interest expense
(3,147
)
 
(4,407
)
 
(14,422
)
 
(13,117
)
 
Interest income
2,128

 
1,531

 
6,544

 
4,030

 
Other (expense) income, net
(389
)
 
(7
)
 
7,244

 
(7
)
 
Total interest and other expense, net
(1,408
)
 
(2,883
)
 
(634
)
 
(9,094
)
 
Income before income taxes
12,711

 
19,374

 
39,648

 
38,703

 
Provision for income taxes
2,023

 
6,331

(4)
2,046

 
8,139

(4)
Net income
$
10,688

 
$
13,043

(4)
$
37,602

 
$
30,564

(4)
Earnings per share
 
 
 
 
 
 
 
 
Basic
$
0.18

 
$
0.23

(4)
$
0.65

 
$
0.54

(4)
Diluted
$
0.17

 
$
0.22

(4)
$
0.62

 
$
0.51

(4)
Weighted average common shares outstanding
 
 
 
 
 
 
 
 
Basic
58,680

 
56,654

 
57,734

 
56,389

 
Diluted
61,712

 
60,614

 
61,002

 
59,664

 
(1) Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:
 
Cost of revenues
$
1,918

 
$
1,152

 
$
4,692

 
$
3,567

 
Research and development
2,988

 
3,472

 
9,161

 
9,734

 
Sales and marketing
3,732

 
1,864

 
9,293

 
4,875

 
General and administrative
8,558

 
5,521

 
22,324

 
16,846

 
Total stock-based compensation
$
17,196

 
$
12,009

 
$
45,470

 
$
35,022

 
(2) Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
 
Cost of revenues
$
1,371

 
$
1,094

 
$
3,670

 
$
2,570

 
Sales and marketing
437

 
119

 
788

 
321

 
Total amortization of intangible assets
$
1,808

 
$
1,213

 
$
4,458

 
$
2,891

 
(3) Operating costs and expenses for the three and nine months ended September 30, 2017 include recognition of insurance recovery of amounts associated with the previously recognized 2014 wire transaction loss. For additional details, see Note 2, "Wire Transaction Recovery."
(4) The condensed consolidated statements of operations for the three and nine months ended September 30, 2017 have been recast to reflect the Company's January 1, 2018 full retrospective adoption of ASC 606. For additional details, see Note 1, "Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements."
The accompanying notes are an integral part of the condensed consolidated financial statements.

- 4 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Amounts in thousands)
 
Net income
$
10,688

 
$
13,043

(1)
$
37,602

 
$
30,564

(1)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
(515
)
 
689

 
(1,199
)
 
1,991

 
Unrealized gain on marketable securities
771

 
133

 
464

 
373

 
Other comprehensive income (loss)
256

 
822

 
(735
)
 
2,364

 
Income tax related to unrealized gain on marketable securities
(188
)
 
(51
)
 
(310
)
 
(143
)
 
Other comprehensive income (loss), net of tax
68

 
771

 
(1,045
)
 
2,221

 
Comprehensive income, net of tax
$
10,756

 
$
13,814

(1)
$
36,557

 
$
32,785

(1)
(1) The condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2017 have been recast to reflect the Company's January 1, 2018 full retrospective adoption of ASC 606. For additional details, see Note 1, "Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements."























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

- 5 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
Cash flows from operating activities
(Amounts in thousands)
 
Net income
$
37,602

 
$
30,564

(1)
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Amortization of intangible assets and depreciation
25,336

 
16,918

 
Stock-based compensation
45,470

 
35,022

 
Amortization of discounts or premiums on marketable securities
79

 
1,131

 
Realized loss on available-for-sale marketable securities
375

 
—

 
Deferred income taxes
(495
)
 
6,035

(1)
Amortization of debt issuance costs
1,071

 
958

 
Amortization of debt discount
8,661

 
9,986

 
Provision for doubtful accounts
1,169

 
806

 
Loss (gain) on fixed asset disposal
399

 
(8
)
 
Gain recognized on step acquisition
(7,648
)
 
—

 
Changes in fair value of contingent consideration
(263
)
 
160

 
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
(53,664
)
 
9,050

 
Prepaid commission expense
(11,208
)
 
(8,157
)
(1)
Prepaid expenses and other current assets
6,113

 
(16,187
)
(1)
Other assets
774

 
596

 
Accounts payable
3,510

 
(3,796
)
 
Accrued payroll and other compensation
1,191

 
(3,155
)
 
Accrued expenses and other
6,394

 
3,539

 
Deferred revenue
(4,275
)
 
7,111

(1)
Other long-term liabilities
(3,344
)
 
1,001

 
Net cash provided by operating activities
57,247

 
91,574

 
Cash flows from investing activities
 
 
 
 
Purchases of furniture, fixtures and equipment
(28,929
)
 
(30,502
)
 
Purchases of available-for-sale securities
(69,214
)
 
(224,291
)
 
Proceeds from sale of available-for-sale securities
360,272

 
220,059

 
Acquisition of businesses, net of cash acquired
(179,063
)
 
(22,941
)
 
Net cash provided by (used in) investing activities
83,066

 
(57,675
)
 
Cash flows from financing activities
 
 
 
 
Proceeds from exercise of stock options
12,169

 
9,675

 
Proceeds from employee stock purchase plan
9,507

 
6,799

 
Acquisition of treasury stock
(19,509
)
 
(16,293
)
 
Term loan principal payments
(3,750
)
 
—

 
Payment of acquisition-related earn-outs
(4,417
)
 
—

 
Payment of credit facility financing costs
(175
)
 
—

 
Repayment of convertible notes
(287,500
)
 
—

 
Net cash (used in) provided by financing activities
(293,675
)
 
181

 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(453
)
 
591

 
Net (decrease) increase in cash, cash equivalents and restricted cash
(153,815
)
 
34,671

 
Cash, cash equivalents and restricted cash – Beginning of period
242,843

 
99,279

 
Cash, cash equivalents and restricted cash – End of period
$
89,028

 
$
133,950

 
(1) The condensed consolidated statement of cash flows for the nine months ended September 30, 2017 has been recast to reflect the Company's January 1, 2018 full retrospective adoption of ASC 606. For additional details, see Note 1, "Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements."


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

- 6 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
5,952

 
$
2,879

Income taxes
$
3,431

 
$
3,891

 
 
 
 
Noncash investing activities:
 
 
 
Furniture, fixtures, and equipment acquired but not yet paid for at period-end
$
5,053

 
$
6,463

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

 
$
5,697


































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

- 7 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


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.
Except to the extent updated or described below, the Company’s significant accounting policies as of September 30, 2018 are the same as those at December 31, 2017, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2018.
Basis of Presentation — The accompanying interim condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, the condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, the condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2018 and 2017, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC for interim financial reporting. Accordingly, certain information and footnote disclosures have been condensed or omitted pursuant to SEC rules that would ordinarily be required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2018.
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments consisting of normal recurring accruals considered necessary to present fairly the Company’s financial position as of September 30, 2018, results of its operations for the three and nine months ended September 30, 2018 and 2017, comprehensive income for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
Accounts Receivable — Accounts receivable are recorded at original invoice amount less an allowance that management believes will be adequate to absorb estimated losses on uncollectible accounts. This 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 September 30, 2018 and December 31, 2017, unbilled accounts receivable of $31.1 million and $12.5 million, respectively, were included in accounts receivable on the Company's condensed consolidated balance sheets.
Revenue Recognition — Revenues are recognized when control of the promised goods or services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The 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 applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:

•
identify the contract with a customer;
•
identify the performance obligations in the contract;
•
determine the transaction price;
•
allocate the transaction price to performance obligations in the contract; and
•
recognize revenue as the performance obligation is satisfied.

For further information, see Note 3, “Revenues,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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.
Subscription services are transferred to customers over time. The Company uses the passage of time as its measurement method, as control of the services is simultaneously transferred to and used by the customer throughout the contractual term. As a

- 8 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

result, revenue for subscription services is recognized ratably over the term of the agreement, which is generally aligned with the dates during which the customer has access to the Company’s cloud-based applications.
Fees for subscription services are generally invoiced in advance installments and typically have payment terms of net 30 or net 45 days.
Professional Services
The Company also makes available a range of professional services, including implementation, enablement, training, and strategic consulting. Professional services do not result in significant alterations to the underlying solutions. Professional services engagements involving implementation and training tend to be shorter term in nature (expected durations of less than one year), while enablement and consulting type engagements are longer in term (expected durations of one to five years).
Professional services are transferred to customers over time. For fixed price arrangements, the Company measures its progress in transferring services to a customer using a proportional performance method. The proportional performance method is reflective of the variable rates at which services are transferred to the customer, and results in recognition of revenue that is consistent with the services provided to date. For time and materials contracts, the Company recognizes revenue as services are rendered.
Fees for professional services are generally invoiced either in milestone installments based on work performed or, for time and materials based arrangements, as services are rendered, and typically have payment terms of net 30 or net 45 days.
Performance Obligations
The Company enters into contracts that contain multiple distinct performance obligations, combining a cloud-based technology subscription with various professional services.
The Company has determined that its subscriptions and professional services are distinct performance obligations because both can be and are sold by the Company on a standalone basis, and because other vendors sell similar technologies and services on a standalone basis.
For each performance obligation identified, the Company estimates the standalone selling price, which represents the price at which the Company would sell the good or service separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price, taking into account available information such as market conditions, review of historical pricing data, and internal pricing guidelines related to the performance obligations. The Company then allocates the transaction price among those obligations based on the estimation of standalone selling price. Transaction prices for the Company's contracts may include both fixed and variable consideration, but do not contain significant financing components or noncash consideration.
Cost to Obtain and Fulfill a Contract

The Company capitalizes commission expenses paid to internal sales personnel that are incremental to obtaining and renewing customer contracts. Costs related to nonrenewable contracts are deferred and amortized on a straight-line basis over the duration of the contractual term. Costs related to initial signing and renewals of renewable contracts are deferred and amortized on a straight-line basis over a period equal to twice the term of the contract or renewal, which the Company deems to be the expected period of benefit for these costs. In developing this estimate, the Company considered its historical renewal rates and customer and revenue retention rates, as well as technology development life cycles and other industry factors. The Company defers these costs in prepaid commission expense, net of any long term portion included in other noncurrent assets in the Company's condensed consolidated balance sheets. These costs are periodically reviewed for impairment.
Income Taxes — The Company’s interim period provision for income taxes is computed by using an estimate of the annual effective tax rate, adjusted for discrete items taken into account in the relevant period, if any. Each quarter, the annual effective income tax rate is recomputed and if there are material changes in the estimate, a cumulative adjustment is made.
Recently Adopted Accounting Pronouncements — In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which supersedes the existing accounting standards for revenue recognition in Accounting Standards Codification ("ASC") 605, and 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 Company adopted ASU No. 2014-09 on January 1, 2018, using the full retrospective method. Refer to Note 3, "Revenues," for related disclosures.

- 9 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


The following tables summarize the impact of adoption of ASC 606 on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2017 (in thousands, except per share data):
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
As Reported Under ASC 605
 
Impact of ASC 606 Adoption
 
As Adjusted
 
As Reported Under ASC 605
 
Impact of ASC 606 Adoption
 
As Adjusted
Revenues
 
 
 
 
 
 
 
 
 
 
 
Subscription
$
118,411

 
$
(1,140
)
 
$
117,271

 
$
339,772

 
$
(1,704
)
 
$
338,068

Professional services
21,669

 
5

 
21,674

 
64,543

 
5

 
64,548

Total revenues
140,080

 
(1,135
)
 
138,945

 
404,315

 
(1,699
)
 
402,616

 
 
 
 
 
 
 
 
 
 
 
 
Operating costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
31,428

 
(1,432
)
 
29,996

 
94,321

 
(1,620
)
 
92,701

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
21,960

 
297

 
22,257

 
47,876

 
(79
)
 
47,797

 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
6,233

 
98

 
6,331

 
8,170

 
(31
)
 
8,139

 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
12,844

 
$
199

 
$
13,043

 
$
30,612

 
$
(48
)
 
$
30,564

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.23

 
$
—

 
$
0.23

 
$
0.54

 
$
—

 
$
0.54

Diluted
$
0.21

 
$
0.01

 
$
0.22

 
$
0.51

 
$
—

 
$
0.51


The adoption has no cash flow impact.
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 adopted ASU No. 2016-01 on January 1, 2018, and the adoption did not have a material impact on its condensed consolidated financial statements.
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 adopted ASU No. 2016-15 on January 1, 2018, and the adoption did not have a material impact on its condensed consolidated financial statements.
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 adopted ASU No. 2017-01 on January 1, 2018, and the adoption had no impact on its condensed 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 effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company adopted ASU No. 2017-09 on January 1, 2018, and the adoption did not have a material impact on its condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018, and the adoption did not have a material impact on its consolidated financial statements.

- 10 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Recently Issued Accounting Pronouncements — There have been no changes in the expected dates of adoption or estimated effects on the Company's consolidated financial statements of recently issued accounting pronouncements from those disclosed in the Company’s Annual Report on Form 10-K, except as described below.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaces previous lease guidance in its entirety with ASC 842 and 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. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Originally, entities were required to adopt ASU No. 2016-02 using a modified retrospective method; however, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an additional choice of transition method. Under ASU No. 2018-11, entities have the option of recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. The Company will adopt the new leasing standard on January 1, 2019, using the additional transition method. The Company estimates that the hypothetical balance sheet impact of recognizing lease assets and lease liabilities on its condensed consolidated balance sheets for its facility operating leases would be approximately 10% of total assets and 25% of total liabilities as of September 30, 2018, based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. The final quantitative impact of the adoption of the new lease guidance is subject to change from these estimates, pending the completion of the Company's implementation in the first quarter of 2019.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits companies to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the U.S. Tax Cuts and Jobs Act enacted in December 2017 to retained earnings. ASU No. 2018-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. The Company will adopt ASU No. 2018-02 on January 1, 2019, and does not expect the adoption to have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, which modifies certain disclosure requirements of ASC 820, some prospectively and some retrospectively. ASU No. 2018-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods. The Company will adopt ASU No. 2018-13 on January 1, 2020, and the adoption is not expected to have a material impact on its fair value disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs incurred to develop or obtain internal-use software. ASU No. 2018-15 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. The new guidance is required to be applied either retrospectively or prospectively to all implementation costs after the date of adoption. The Company will adopt ASU No. 2018-15 no later than January 1, 2020, and does not expect the adoption to have a material impact on its condensed 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 recognized the probable recovery of the originally recorded $4.8 million loss as a credit to its operating costs and expenses for the three and nine months ended September 30, 2017. Federal filed a Notice of Appeal with the United States Court of Appeals for the Second Circuit ("the Court") on August 11, 2017. On July 6, 2018, the Court affirmed the Company's judgment against Federal, awarding the Company a total of $5.9 million, which includes interest. The Company received the full amount of the judgment in September 2018 and recognized the $1.1 million in interest income in its condensed consolidated statements of operations for the three and nine months ended September 30, 2018.


- 11 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. REVENUES
Disaggregation of Revenue
The following tables provide information about the Company's revenues, disaggregated by geographical market and revenue type, for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
2018
 
2017
 
Subscription
 
Professional Services
 
Total
 
Subscription
 
Professional Services
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
United States
$
103,152

 
$
17,519

 
$
120,671

 
$
89,426

 
$
15,718

 
$
105,144

Rest of Americas
1,779

 
452

 
2,231

 
147

 
270

 
417

Total Americas
104,931

 
17,971

 
122,902

 
89,573

 
15,988

 
105,561

 
 
 
 
 
 
 
 
 
 
 
 
Japan
7,784

 
1,961

 
9,745

 
7,975

 
1,395

 
9,370

Rest of Asia Pacific
4,707

 
1,779

 
6,486

 
2,954

 
825

 
3,779

Total Asia Pacific
12,491

 
3,740

 
16,231

 
10,929

 
2,220

 
13,149

 
 
 
 
 
 
 
 
 
 
 
 
Europe, Middle East and Africa
19,624

 
4,649

 
24,273

 
16,769

 
3,466

 
20,235

Total
$
137,046

 
$
26,360

 
$
163,406

 
$
117,271

 
$
21,674

 
$
138,945

 
Nine Months Ended September 30,
 
2018
 
2017
 
Subscription
 
Professional Services
 
Total
 
Subscription
 
Professional Services
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
United States
$
298,963

 
$
52,029

 
$
350,992

 
$
259,190

 
$
46,334

 
$
305,524

Rest of Americas
3,777

 
933

 
4,710

 
234

 
491

 
725

Total Americas
302,740

 
52,962

 
355,702

 
259,424

 
46,825

 
306,249

 
 
 
 
 
 
 
 
 
 
 
 
Japan
23,561

 
5,016

 
28,577

 
22,251

 
4,424

 
26,675

Rest of Asia Pacific
12,283

 
4,160

 
16,443

 
7,906

 
3,122

 
11,028

Total Asia Pacific
35,844

 
9,176

 
45,020

 
30,157

 
7,546

 
37,703

 
 
 
 
 
 
 
 
 
 
 
 
Europe, Middle East and Africa
55,767

 
12,020

 
67,787

 
48,487

 
10,177

 
58,664

Total
$
394,351

 
$
74,158

 
$
468,509

 
$
338,068

 
$
64,548

 
$
402,616


The above tables present revenues according to the region in which they were generated, separately displaying those individual countries that, in any of the periods presented, constituted 5% or more or of total revenues. All of the Company's performance obligations are transferred to customers over time; as a result, no disaggregation of revenues by timing of revenue recognition is provided.

- 12 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Contract Balances
The following table provides information about changes in the Company's deferred revenue balances during the nine months ended September 30, 2018 and 2017 (in thousands):
 
Deferred Revenue
 
2018
 
2017
Balance as of January 1
$
82,631

 
$
75,850

Revenue recognized that was included in deferred revenue at the beginning of the period
(74,067
)
 
(67,762
)
Revenue recognized that was not included in deferred revenue at the beginning of the period
(393,719
)
 
(333,891
)
Increases due to invoicing
446,477

 
410,083

Revenue recognized in excess of billings
18,632

 
255

Other
1,412

 
(1,349
)
Balance as of September 30
$
81,365

 
$
83,186

Aside from the accounts receivable presented on its condensed consolidated balance sheets, the Company did not have any material contract assets for any of the periods presented.
Transaction Price Allocated to the Remaining Performance Obligations
As of September 30, 2018, the Company has unsatisfied performance obligations associated with subscription services that extend through 2030. The total multi-year transaction price allocated to unsatisfied subscription performance obligations is approximately $979 million as of September 30, 2018. Of this amount, approximately $136 million, $413 million, and $430 million are expected to be recognized in 2018, 2019, and thereafter, respectively.
As of September 30, 2018, the total transaction price allocated to unsatisfied professional services performance obligations is immaterial.
Costs to Obtain and Fulfill a Contract with a Customer
Sales commissions earned are considered incremental and recoverable costs of obtaining a contract with a customer and therefore are capitalized as contract costs. Capitalized contract costs were $48.1 million and $36.9 million as of September 30, 2018 and December 31, 2017, respectively. Amortization of capitalized contract costs was $5.5 million and $6.0 million for the three months ended September 30, 2018 and 2017, respectively, and $14.9 million and $18.1 million for the nine months ended September 30, 2018 and 2017, respectively. There have been no impairment losses related to capitalized contract costs.
4. STOCKHOLDERS' EQUITY
Common Stock — Common 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.
Treasury Stock — From time to time, the Company grants nonvested restricted stock awards ("RSAs"), restricted stock units ("RSUs"), and performance-based restricted stock units ("PBRSUs") to its employees pursuant to the terms of its Amended and Restated 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 obligation by having shares withheld at the time of vesting. On the date of vesting, the Company divides the participant's income tax withholding 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.
During the nine months ended September 30, 2018 and 2017, the Company withheld 286,884 shares at an average price of $68.01 and 280,622 shares at an average price of $58.06, respectively, in connection with the vesting of equity awards.
Nonvested restricted stock awards forfeited by plan participants are transferred to the Company's treasury stock at par. During the nine months ended September 30, 2018 and 2017, 213,752 and 193,489 forfeited shares, respectively, were transferred to treasury stock at their par value of $0.01.
5. 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 condensed consolidated balance sheets.

- 13 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables provide the Company’s marketable securities by security type as of September 30, 2018 and December 31, 2017 (in thousands):
 
As of September 30, 2018
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
125,295

 
$
—

 
$
(910
)
 
$
124,385

U.S. government agency debt securities
10,690

 
—

 
(114
)
 
10,576

Total
$
135,985

 
$
—

 
$
(1,024
)
 
$
134,961

 
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

Contractual maturities of the Company’s marketable securities as of September 30, 2018 and December 31, 2017 are summarized as follows (in thousands):
 
As of September 30, 2018
 
As of December 31, 2017
 
Cost
 
Estimated
Fair
Value
 
Cost
 
Estimated
Fair
Value
Due in one year or less
$
115,895

 
$
115,083

 
$
247,495

 
$
246,967

Due in one to five years
20,090

 
19,878

 
180,002

 
179,041

Total
$
135,985

 
$
134,961

 
$
427,497

 
$
426,008

At September 30, 2018, the Company had $1.0 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 September 30, 2018 are temporary in nature. Accordingly, the Company did not consider its investments in marketable securities to be other-than-temporarily impaired as of September 30, 2018.
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 September 30, 2018 and December 31, 2017 (in thousands):
 
In Loss Position for Less than 12 Months
 
As of September 30, 2018
 
As of December 31, 2017
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
45,178

 
$
(408
)
 
$
295,224

 
$
(1,137
)
U.S. government agency debt securities
6,118

 
(72
)
 
18,431

 
(86
)
Total
$
51,296

 
$
(480
)
 
$
313,655

 
$
(1,223
)

- 14 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 
In Loss Position for More than 12 Months
 
As of September 30, 2018
 
As of December 31, 2017
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
79,207

 
$
(502
)
 
$
95,923

 
$
(197
)
U.S. government agency debt securities
4,458

 
(42
)
 
16,430

 
(69
)
Total
$
83,665

 
$
(544
)
 
$
112,353

 
$
(266
)
During the three and nine months ended September 30, 2018, the Company recorded $0.4 million of net realized losses from the sale of marketable securities, as a result of significant sales in the period to generate cash to settle its 1.00% convertible senior notes. During the three and nine months ended September 30, 2017, the Company recorded an insignificant amount of net realized gains from the sale of marketable securities.
Other Investments
The Company holds shares of Series D Preferred Stock of Syapse Inc. ("Syapse") purchased in a private placement. This investment does not have a readily determinable fair value and is carried at original cost in other assets on the Company's condensed consolidated balance sheets. This investment had a carrying value of $3.0 million as of September 30, 2018 and December 31, 2017. The Company periodically evaluates this investment to determine if impairment charges are required; no impairment charges were recognized during the three and nine months ended September 30, 2018.
As of December 31, 2017, the Company held shares of Series Seed Preferred Stock and Series B Preferred Stock of SHYFT Analytics, Inc. ("SHYFT"), purchased in private placements. These investments did not have a readily determinable fair value and were carried at original cost of $5.1 million in other assets on the Company's condensed consolidated balance sheets. In June 2018, the Company acquired SHYFT and realized a gain on step acquisition of $7.6 million based upon the implied fair value of its previous holdings relative to the enterprise value for the transaction. This gain is included in other income, net on the Company's condensed consolidated statement of operations for the nine months ended September 30, 2018. Refer to Note 7, "Acquisitions," for further discussion of the Company's acquisition of SHYFT.
6. FAIR VALUE
The following table summarizes, as of September 30, 2018 and December 31, 2017, the Company's financial assets and liabilities that are measured at fair value on a recurring basis, according to the fair value hierarchy described in the significant accounting policies included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (in thousands):
 
As of September 30, 2018
 
As of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
82,591

 
$
—

 
$
—

 
$
82,591

 
$
237,149

 
$
—

 
$
—

 
$
237,149

Money market funds
905

 
—

 
—

 
905

 
176

 
—

 
—

 
176

Total cash and cash equivalents
83,496

 
—

 
—

 
83,496

 
237,325

 
—

 
—

 
237,325

Commercial paper and corporate bonds
—

 
124,385

 
—

 
124,385

 
—

 
391,147

 
—

 
391,147

U.S. government agency debt securities
—

 
10,576

 
—

 
10,576

 
—

 
34,861

 
—

 
34,861

Total marketable securities
—

 
134,961

 
—

 
134,961

 
—

 
426,008

 
—

 
426,008

Total financial assets measured at fair value on a recurring basis
$
83,496

 
$
134,961

 
$
—

 
$
218,457

 
$
237,325

 
$
426,008

 
$
—

 
$
663,333

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration – short-term
$
—

 
$
—

 
$
1,332

 
$
1,332

 
$
—

 
$
—

 
$
3,993

 
$
3,993

Contingent consideration – long-term
—

 
—

 
—

 
—

 
—

 
—

 
2,012

 
2,012

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

 
$
—

 
$
1,332

 
$
1,332

 
$
—

 
$
—

 
$
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; therefore, 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 the nine months ended September 30, 2018 and 2017, there were no transfers of financial assets between Level 1 and Level 2.

- 15 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Contingent consideration liabilities associated with earn-out payments related to the Company's February 2017 acquisition of CHITA Inc. ("CHITA") 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 portions of contingent consideration related to the achievement of a technical milestone have been estimated using situation-based modeling, which considers the probability-weighted present value of the expected payout amount. The fair value of portions of contingent consideration related to achievement of revenue targets have been estimated using a Monte Carlo simulation to simulate future performance of the acquired business under a risk-neutral framework; significant inputs to the simulation include a risk-adjusted discount rate of 10.2% and revenue volatility of 8.0%. Short-term and long-term portions of contingent consideration are recorded in accrued expenses and other and other long-term liabilities, respectively, on the Company's condensed consolidated balance sheets.
The following table provides a summary of changes in fair value of the Company's Level 3 financial liabilities during the nine months ended September 30, 2018 (in thousands):
Balance as of January 1, 2018
$
6,005

Amounts earned by sellers
(4,410
)
Fair value adjustment (included in general and administrative expenses)
(263
)
Balance as of September 30, 2018
$
1,332

The carrying amounts of all other current financial assets and current financial liabilities reflected in the condensed consolidated balance sheets approximate fair value due to their short-term nature.
7. ACQUISITIONS
Nine Months Ended September 30, 2018
On June 20, 2018, the Company acquired all outstanding equity interests in SHYFT, a Waltham, Massachusetts provider of cloud data analytics for life sciences. With this acquisition, the Company expands its offerings to include commercial and real-world data analytics solutions that are designed specifically for the pharmaceutical and biotech industries.
The total purchase price of $196.5 million was composed of cash consideration of $183.8 million and the Company's previous investment in SHYFT, which had a fair value of $12.7 million as of the acquisition date. (Refer to Note 5, "Investments — Other Investments" for further information on the initial investment and gain recognized on step acquisition.)
In connection with this acquisition, the Company acquired $4.7 million in cash and cash equivalents and assumed $1.9 million in net tangible liabilities. As of June 30, 2018, the allocation of the remaining purchase price was incomplete, and the Company recorded a provisional purchase price allocation based on observation of industry trends. During the three months ended September 30, 2018, valuation and useful life determination for the acquired intangible assets were completed, resulting in a final purchase price allocation consisting of $18.3 million in intangible assets, a deferred tax asset of $7.3 million, and $168.1 million of goodwill as of September 30, 2018. This transaction generates significant goodwill due to the sizable skilled workforce acquired and the considerable buyer-specific synergies expected.
Intangible assets acquired were as follows (in millions):
 
Acquisition Date Fair Value
 
Weighted-Average Useful Life
Developed technology
$
7.0

 
5 years
Customer relationships
4.7

 
6 years
Trade name
5.4

 
15 years
Non-competition agreements
1.2

 
3 years
Total
$
18.3

 

The Company's consolidated results of operations for the three and nine months ended September 30, 2018 include the revenues and expenses of SHYFT since the date of acquisition. The Company does not consider this acquisition to be significant to its results of operations; as such, pro forma revenue and earnings information has not been provided.
Nine Months Ended September 30, 2017
The Company acquired all outstanding equity interests in CHITA and Mytrus, Incorporated ("Mytrus") on February 17, 2017 and April 18, 2017, respectively, adding regulated document and standard operating procedure ("SOP") management, electronic trial master file ("eTMF"), and eConsent capabilities to its platform. Aggregate purchase consideration of $28.9 million consisted of upfront consideration of $23.2 million and contingent consideration (associated with CHITA) initially valued at $5.7 million.

- 16 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8. GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill during the nine months ended September 30, 2018 was as follows (in thousands):
Balance as of January 1, 2018
$
47,435

Additions related to acquisition - SHYFT
168,132

Final purchase price adjustment - Mytrus
(422
)
Foreign currency translation adjustments
(145
)
Balance as of September 30, 2018
$
215,000

Total intangible assets are summarized as follows (in thousands):
 
As of September 30, 2018
 
As of December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technology
$
31,388

 
$
(12,505
)
 
$
18,883

 
$
24,436

 
$
(8,883
)
 
$
15,553

Customer relationships
9,176

 
(3,112
)
 
6,064

 
4,489

 
(2,595
)
 
1,894

Trade name
5,400

 
(100
)
 
5,300

 
—

 
—

 
—

Non-competition agreements
1,460

 
(278
)
 
1,182

 
260

 
(120
)
 
140

Total
$
47,424

 
$
(15,995
)
 
$
31,429

 
$
29,185

 
$
(11,598
)
 
$
17,587

Future amortization of intangible assets is expected to be as follows (in thousands):
Remainder of 2018
$
1,883

2019
7,473

2020
6,730

2021
6,249

2022
3,465

2023
1,849

Thereafter
3,780

Total
$
31,429


- 17 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

9. DEBT
1.00% Convertible Senior Notes
The Company's 1.00% convertible senior notes (the "Notes"), issued in August 2013 and settled on August 1, 2018, consisted of the following components as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Equity component, net of equity issue costs
$
—

 
$
60,222

Liability component:
 
 
 
Principal
—

 
287,500

Less: unamortized debt discount
—

 
(8,661
)
Less: unamortized debt issuance costs
—

 
(745
)
Net carrying amount
$
—

 
$
278,094

The Notes matured on August 1, 2018, and the Company received notices of conversion for substantially all of the outstanding Notes prior to the maturity date. The Company settled the $287.5 million principal amount of the Notes in cash and the conversion premium in shares of its common stock. The Company issued 1.4 million shares of common stock in settlement of the premium, determined by a calculation based on the volume-weighted average price of the Company's common stock over the 40 trading-day observation period beginning on and including June 1, 2018, as specified in the indenture governing the Notes.
The following table sets forth total interest expense recognized related to the Notes for the three and nine months ended September 30, 2018 and 2017 (in thousands except percentages):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense
$
210

 
$
718

 
$
1,648

 
$
2,156

Amortization of debt issuance costs
106

 
319

 
745

 
958

Amortization of debt discount
1,646

 
3,379

 
8,661

 
9,986

Total
$
1,962

 
$
4,416

 
$
11,054

 
$
13,100

 
 
 
 
 
 
 
 
Effective interest rate
6.5
%
 
6.5
%
 
6.5
%
 
6.5
%
Credit Facility
The Company's credit facility agreement (the "Credit Facility"), entered into in December 2017, consists of revolving commitments with a maximum borrowing amount of $400.0 million (the "Revolver"), currently undrawn, and term loans (the "Term Loans") in an aggregate principal amount of $100.0 million. The repayment terms of the Term Loans provide for monthly interest payments and quarterly principal payments, with a maturity date of December 2022.
The Credit Facility consisted of the following components as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30, 2018
 
December 31, 2017
Term Loans
$
96,250

 
$
100,000

Less: unamortized debt issuance costs
(1,833
)
 
(2,159
)
Net carrying amount (1)
$
94,417

 
$
97,841

(1) Of the total carrying amount of the Term Loans, short-term maturities of $4.9 million and $5.0 million were included in accrued expenses and other on the Company's condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively.

- 18 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of September 30, 2018, the contractual interest rate on the Term Loans was 3.605%, and there was a 0.200% commitment fee on the undrawn Revolver. The following table sets forth total interest expense recognized related to the Credit Facility for the three and nine months ended September 30, 2018 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
Contractual interest expense on Term Loans
$
874

 
$
2,433

Amortization of debt issuance costs
109

 
326

Unused commitment fee on Revolver
200

 
609

Total
$
1,183

 
$
3,368

As of September 30, 2018 the remaining term of the Credit Facility is approximately 51 months. The Company was in compliance with all financial covenants related to the Credit Facility as of September 30, 2018.
10. STOCK-BASED COMPENSATION
For the three and nine months ended September 30, 2018 and 2017, the components of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock options
$
494

 
$
735

 
$
1,588

 
$
2,590

Restricted stock awards and units
11,621

 
7,786

 
28,512

 
22,474

Performance-based restricted stock units
4,017

 
2,414

 
11,176

 
7,116

Employee stock purchase plan
1,176

 
1,236

 
4,436

 
3,133

Total stock-based compensation (1)
$
17,308

 
$
12,171

 
$
45,712

 
$
35,313

(1) Total stock-based compensation is presented in this table on a gross basis, consistent with the additional paid-in capital impact recorded in stockholders' equity. On the Company's condensed consolidated statements of operations and condensed consolidated statements of cash flows, stock-based compensation is presented net of foreign exchange impact and capitalization of eligible software development-related costs.
Stock Options
The fair value of each stock option granted during the three and nine months ended September 30, 2018 and 2017 was estimated on the date of grant using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Expected volatility
—
%
 
—
%
 
42
%
 
44
%
Expected life
N/A

 
N/A

 
4.78 years

 
6.00 years

Risk-free interest rate
—
%
 
—
%
 
2.82
%
 
2.07
%
Dividend yield
—

 
—

 
—

 
—


- 19 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the status of the Company's stock options as of September 30, 2018, and changes during the nine months 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, 2018
1,511

 

$22.72

 
 
 
 
Granted
35

 
72.27

 
 
 
 
Exercised
(369
)
 
33.01

 
 
 
 
Forfeited
(34
)
 
45.55

 
 
 
 
Expired
—

 
—

 
 
 
 
Outstanding at September 30, 2018
1,143

 

$20.24

 
3.40
 

$60,784

Exercisable at September 30, 2018
990

 

$14.27

 
2.64
 

$58,437

Vested and expected to vest at September 30, 2018
1,133

 

$19.86

 
3.36
 

$60,664

No stock options were granted during the three months ended September 30, 2018 and 2017. The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2018 and 2017 was $28.93 and $25.37, respectively. The total intrinsic value of stock options exercised during the three months ended September 30, 2018 and 2017 was $4.2 million and $0.7 million, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2018 and 2017 was $15.6 million and $8.7 million, respectively.
As of September 30, 2018, there was $3.4 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 2.33 years.
Restricted Stock Awards and Units
The following table summarizes the status of the Company’s nonvested time-based RSAs and RSUs as of September 30, 2018, and changes during the nine months then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested at January 1, 2018
1,754

 

$48.45

Granted
1,024

 
72.84

Vested
(597
)
 
47.52

Forfeited
(215
)
 
51.35

Nonvested at September 30, 2018
1,966

 

$61.12

The total fair value of RSAs and RSUs vested during the three months ended September 30, 2018 and 2017 was $3.5 million and $9.0 million, respectively. The total fair value of RSAs and RSUs vested during the nine months ended September 30, 2018 and 2017 was $40.8 million and $40.0 million, respectively.
As of September 30, 2018, there was $97.1 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 2.47 years.
Performance-Based Restricted Stock Units
During the three months ended September 30, 2018, the Company granted 3 thousand PBRSUs with performance conditions based on achievement of certain individual and team objectives.
During the three months ended September 30, 2017, the Company granted 46 thousand PBRSUs with performance conditions based on achievement of certain individual and team objectives.
During the nine months ended September 30, 2018, the Company granted: (1) 122 thousand PBRSUs ("2018 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, 2020, 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) 122 thousand PBRSUs ("2018 Net Income PBRSUs") with performance conditions based on the compound annual growth rate of net income over the three-year period ending December 31, 2020, vesting in full in three years with the number of shares ultimately earned ranging from zero to 200% of the target number of shares; and (3) 5 thousand PBRSUs with performance conditions based on achievement of certain individual and team objectives.

- 20 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

During the nine months ended September 30, 2017, the Company granted: (1) 132 thousand PBRSUs ("2017 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, 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; and (3) 46 thousand PBRSUs with performance conditions based on achievement of certain individual and team objectives.
The fair value of PBRSUs with market conditions granted during the three and nine months ended September 30, 2018 and 2017 was estimated as of the date of grant using a Monte Carlo valuation model with the following weighted average assumptions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Expected volatility - Medidata
—
%
 
—
%
 
37
%
 
42
%
Expected volatility - comparison index
—
%
 
—
%
 
42
%
 
43
%
Expected life
N/A

 
N/A

 
2.85 years

 
2.85 years

Risk-free interest rate
—
%
 
—
%
 
2.37
%
 
1.40
%
Dividend yield
—

 
—

 
—

 
—

The following table summarizes the status of the Company’s PBRSUs based upon expected performance as of September 30, 2018, and changes during the nine months 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, 2018
110

 
613

 
13

 
736

 
$
62.96

Granted (based on performance at 100% of targeted levels)
122

 
122

 
5

 
249

 
85.88

Adjustment related to expected performance
—

 
160

 
8

 
168

 
76.81

Vested
—

 
(120
)
 
(1
)
 
(121
)
 
70.00

Forfeited
—

 
—

 
(1
)
 
(1
)
 
77.64

Nonvested at September 30, 2018
232

 
775

 
24

 
1,031

 
$
69.91

The total fair value of PBRSUs vested during the three months ended September 30, 2018 and 2017 was $0.1 million and $0.1 million, respectively. The total fair value of PBRSUs vested during the nine months ended September 30, 2018 and 2017 was $8.2 million and $5.2 million, respectively.
As of September 30, 2018, there was $26.4 million in unrecognized compensation cost related to all nonvested PBRSUs. This cost is expected to be recognized over a weighted-average remaining period of 1.47 years.
Employee Stock Purchase Plan
The fair value of shares granted under the Company's employee stock purchase plan ("ESPP") was estimated using a Black-Scholes pricing model with the following weighted-average assumptions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Expected volatility
33
%
 
39
%
 
35
%
 
39
%
Expected life
1.33 years

 
1.44 years

 
1.53 years

 
1.47 years

Risk-free interest rate
2.05
%
 
0.72
%
 
1.52
%
 
0.65
%
Dividend yield
—

 
—

 
—

 
—

During the nine months ended September 30, 2018, 150 thousand shares were purchased under the ESPP at an average price of $43.04. During the nine months ended September 30, 2017, 103 thousand shares were purchased under the ESPP at an average price of $40.50.
As of September 30, 2018, there was $8.1 million in unrecognized compensation cost related to ESPP shares. This cost is expected to be recognized over a weighted-average remaining period of 1.57 years.

- 21 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Modifications
Aggregate incremental expense associated with modifications to stock options, RSAs and PBRSUs in connection with separation agreements during the three months ended September 30, 2018 and 2017 was $0.2 million and none, respectively. Incremental expense during the nine months ended September 30, 2018 and 2017 was $0.6 million and $0.1 million, respectively.
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the balances of each component of accumulated other comprehensive loss during the nine months ended September 30, 2018 are as follows (in thousands):
 
Foreign currency translation adjustments
 
Unrealized gains (losses) on marketable securities
 
Total
Balance as of January 1, 2018
$
(2,459
)
 
$
(918
)
 
$
(3,377
)
Other comprehensive loss
(1,199
)
 
154

 
(1,045
)
Balance as of September 30, 2018
$
(3,658
)
 
$
(764
)
 
$
(4,422
)
For the nine months ended September 30, 2018 and 2017, reclassifications of items from accumulated other comprehensive loss to net income were ($0.4) million and insignificant, respectively, related to realized (losses) and gains on sales of marketable securities. For further information, see Note 5, "Investments."
12. 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.
On August 1, 2018, the Company settled the principal amount of the Notes in cash and issued shares of common stock to settle the conversion premium. For the three and nine months ended September 30, 2017, and for the portion of the three and nine months ended September 30, 2018 that precedes the settlement date, the dilutive effect of the Notes is reflected in diluted earnings per share using the treasury stock method, which considers the number of shares that would have been required to settle the premium above principal at the average stock price for the period. Refer to Note 9, "Debt" for further information on the settlement of the Notes.

- 22 -
MEDIDATA SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 is shown in the following table (in thousands, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
Numerator