10-Q 1 mdso-331201910q.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 March 31, 2019
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)
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value
$0.01
MDSO
The NASDAQ Stock Market LLC
(Title of each class)
(Trading symbol)
(Name of each exchange on which registered)
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 May 3, 2019, the registrant had 62,260,585 shares of common stock outstanding.


MEDIDATA SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 2019
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)

 
March 31,
2019
 
December 31,
2018
 
(Amounts in thousands, except per share data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
109,052

 
$
105,440

Marketable securities
97,060

 
135,105

Accounts receivable, net of allowance for doubtful accounts of $1,959 and $1,999, respectively (1)
177,853

 
170,744

Capitalized contract costs
23,186

 
22,247

Prepaid expenses and other current assets
36,817

 
28,949

Total current assets
443,968

 
462,485

Restricted cash
7,212

 
7,205

Operating lease assets (2)
86,383

 
—

Furniture, fixtures and equipment, net
111,035

 
98,983

Goodwill
215,958

 
216,017

Intangible assets, net
28,276

 
29,546

Deferred tax assets
46,503

 
45,982

Other assets
57,367

 
52,994

Total assets
$
996,702

 
$
913,212

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
8,137

 
$
7,482

Accrued payroll and other compensation
31,823

 
51,270

Accrued expenses and other
46,785

 
37,487

Operating lease liabilities (2)
14,286

 
—

Deferred revenue
71,591

 
74,463

Total current liabilities
172,622

 
170,702

Noncurrent liabilities:
 
 
 
Term loan, net
86,606

 
88,366

Deferred revenue, noncurrent
2,424

 
3,843

Deferred tax liabilities
98

 
99

Operating lease liabilities, noncurrent (2)
96,585

 
—

Other long-term liabilities
1,641

 
18,754

Total noncurrent liabilities
187,354

 
111,062

Total liabilities
359,976

 
281,764

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; 67,434 and 66,103 shares issued; 62,246 and 61,348 shares outstanding, respectively
674

 
661

Additional paid-in capital
596,725

 
574,667

Treasury stock, 5,188 and 4,755 shares, respectively
(181,553
)
 
(152,849
)
Accumulated other comprehensive loss
(4,103
)
 
(4,869
)
Retained earnings
224,983

 
213,838

Total stockholders’ equity
636,726

 
631,448

Total liabilities and stockholders’ equity
$
996,702

 
$
913,212

(1) Unbilled receivables of $48,648 and $38,601, respectively, are included in accounts receivable as of March 31, 2019 and December 31, 2018.
(2) Figures as of March 31, 2019 reflect the Company's January 1, 2019 adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases. 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.

- 3 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
 
(Amounts in thousands, except per share data)
Revenues
 
 
 
Subscription
$
146,875

 
$
126,819

Professional services
26,629

 
22,379

Total revenues
173,504

 
149,198

Cost of revenues (1)(2)
 
 
 
Subscription
26,728

 
20,341

Professional services
19,275

 
15,961

Total cost of revenues
46,003

 
36,302

Gross profit
127,501

 
112,896

Operating costs and expenses
 
 
 
Research and development (1)
46,489

 
37,522

Sales and marketing (1)(2)
43,396

 
36,861

General and administrative (1)
32,634

 
25,187

Total operating costs and expenses
122,519

 
99,570

Operating income
4,982

 
13,326

Interest and other income (expense)
 
 
 
Interest expense
(1,110
)
 
(5,575
)
Interest income
945

 
2,088

Other expense, net
(28
)
 
(96
)
Total interest and other expense, net
(193
)
 
(3,583
)
Income before income taxes
4,789

 
9,743

Income tax benefit
(6,356
)
 
(582
)
Net income
$
11,145

 
$
10,325

Earnings per share
 
 
 
Basic
$
0.19

 
$
0.18

Diluted
$
0.18

 
$
0.17

Weighted average common shares outstanding
 
 
 
Basic
59,693

 
57,055

Diluted
61,755

 
60,098

(1) Stock-based compensation expense included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
2,383

 
$
1,268

Research and development
4,249

 
2,854

Sales and marketing
5,426

 
2,644

General and administrative
7,606

 
6,389

Total stock-based compensation
$
19,664

 
$
13,155

(2) Amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:
Cost of revenues
$
1,364

 
$
1,094

Sales and marketing
506

 
120

Total amortization of intangible assets
$
1,870

 
$
1,214





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 March 31,
 
2019
 
2018
 
(Amounts in thousands)
Net income
$
11,145

 
$
10,325

Other comprehensive income (loss)
 
 
 
Foreign currency translation adjustments
372

 
1,270

Unrealized gain (loss) on marketable securities
532

 
(1,026
)
Other comprehensive income
904

 
244

Income tax related to unrealized gain or loss on marketable securities
(138
)
 
58

Other comprehensive income, net of tax
766

 
302

Comprehensive income, net of tax
$
11,911

 
$
10,627




























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

- 5 -

MEDIDATA SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended March 31,
 
 
2019
 
2018
 
Cash flows from operating activities
(Amounts in thousands)
 
Net income
$
11,145

 
$
10,325

 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Amortization of intangible assets and depreciation
10,529

 
7,813

 
Stock-based compensation
19,664

 
13,155

 
Amortization of operating lease assets (1)
3,025

 
—

 
Amortization of capitalized contract costs
6,583

 
4,919

(2)
Amortization of discounts or premiums on marketable securities
38

 
147

 
Realized loss on available-for-sale marketable securities
27

 
—

 
Deferred income taxes
(659
)
 
818

 
Amortization of debt issuance costs
109

 
427

 
Amortization of debt discount
—

 
3,481

 
Provision for doubtful accounts
431

 
373

 
Loss on fixed asset disposal
101

 
96

 
Changes in fair value of contingent consideration
161

 
(72
)
 
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
(7,540
)
 
(23,141
)
 
Capitalized contract costs
(12,054
)
 
(10,619
)
(2)
Prepaid expenses and other current assets
(2,820
)
 
(658
)
 
Other assets
159

 
125

 
Accounts payable
1,361

 
2,600

 
Accrued payroll and other compensation
(24,174
)
 
(13,711
)
 
Accrued expenses and other
7,668

 
(778
)
 
Deferred revenue
(4,291
)
 
9,440

 
Operating lease liabilities (1)
(3,858
)
 
—

 
Other long-term liabilities
479

 
236

 
Net cash provided by operating activities
6,084

 
4,976

 
Cash flows from investing activities
 
 
 
 
Purchases of furniture, fixtures and equipment
(18,188
)
 
(11,147
)
 
Purchase of domain name
(600
)
 
—

 
Purchases of available-for-sale securities
—

 
(57,974
)
 
Proceeds from sale of available-for-sale securities
38,512

 
64,202

 
Net cash provided by (used in) investing activities
19,724

 
(4,919
)
 
Cash flows from financing activities
 
 
 
 
Proceeds from exercise of stock options
2,341

 
2,366

 
Proceeds from employee stock purchase plan
3,408

 
3,121

 
Acquisition of treasury stock
(26,616
)
 
(16,614
)
 
Term loan principal payments
(1,250
)
 
—

 
Payment of acquisition-related earn-outs
(297
)
 
(87
)
 
Payment of credit facility financing costs
—

 
(175
)
 
Net cash used in financing activities
(22,414
)
 
(11,389
)
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
225

 
597

 
Net increase (decrease) in cash, cash equivalents and restricted cash
3,619

 
(10,735
)
 
Cash, cash equivalents and restricted cash – Beginning of period
112,645

 
242,843

 
Cash, cash equivalents and restricted cash – End of period
$
116,264

 
$
232,108

 
 
 
(1) Figures for the three months ended March 31, 2019 reflect the Company's January 1, 2019 adoption of ASU No. 2016-02, Leases. For additional details, see Note 1, "Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements."
 
(2) Change in prior period to conform to current period presentation
 
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)
 
Three Months Ended March 31,
 
2019
 
2018
Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) during the period for:
 
 
 
Interest
$
990

 
$
2,200

Income taxes
$
(1,053
)
 
$
1,099

 
 
 
 
Noncash investing activities:
 
 
 
Furniture, fixtures, and equipment acquired but not yet paid for at period-end
$
6,801

 
$
3,901









































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 March 31, 2019 are the same as those at December 31, 2018, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2019.
Basis of Presentation — The accompanying interim condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018, the condensed consolidated statements of comprehensive income for the three months ended March 31, 2019 and 2018, and the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 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, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2019.
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 March 31, 2019, results of its operations for the three months ended March 31, 2019 and 2018, comprehensive income for the three months ended March 31, 2019 and 2018, and cash flows for the three months ended March 31, 2019 and 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
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 March 31, 2019 and December 31, 2018, unbilled accounts receivable of $48.6 million and $38.6 million, respectively, were included in accounts receivable on the Company's condensed consolidated balance sheets.
Leases — At the inception of an arrangement, the Company evaluates the existence and type of lease; the Company has determined that all of its leases are operating leases, which are recognized as operating lease assets and operating lease liabilities on its condensed consolidated balance sheet as of March 31, 2019 (subsequent to the adoption of Accounting Standards Codification ("ASC") 842, Leases on January 1, 2019). Operating lease assets represent the right to use an underlying asset over the lease term, and operating lease liabilities represent the obligation to make lease payments. Some of the Company's leases contain options to extend or terminate; the Company is reasonably certain that it will not exercise these options and does not consider them in the determination of the lease term.
Leases with an initial term of twelve months or less are not recorded on the balance sheet; the Company recognizes the related expense on a straight-line basis over the lease term. For leases beginning in 2019 and later, the Company accounts for lease components together with nonlease components. Operating lease assets and liabilities are recognized based on the present value of the remaining lease payments as of the commencement date. As the majority of its leases do not provide an implicit interest rate, the Company uses the estimated incremental borrowing rate that would be required to secure a loan from a third-party lender over the relevant term. For further information, see Note 8, “Leases.".
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 February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The Company adopted ASU No. 2016-02 on January 1, 2019 using the additional transition method, which allows prior periods to be presented under previous lease accounting guidance. Refer to Note 8, "Leases," for related disclosures.
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

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

for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. The Company adopted ASU No. 2018-02 on January 1, 2019, and the adoption did not have a material impact on its condensed consolidated financial statements.
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.
2. REVENUES
Disaggregation of Revenue
The following tables provide information about the Company's revenues, disaggregated by geographical market and revenue type, for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
 
Subscription
 
Professional Services
 
Total
 
Subscription
 
Professional Services
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
United States
$
108,836

 
$
17,517

 
$
126,353

 
$
96,165

 
$
15,984

 
$
112,149

Rest of Americas
1,803

 
239

 
2,042

 
1,115

 
376

 
1,491

Total Americas
110,639

 
17,756

 
128,395

 
97,280

 
16,360

 
113,640

 
 
 
 
 
 
 
 
 
 
 
 
Japan
10,897

 
2,473

 
13,370

 
8,112

 
1,794

 
9,906

Rest of Asia Pacific
6,004

 
1,736

 
7,740

 
3,701

 
977

 
4,678

Total Asia Pacific
16,901

 
4,209

 
21,110

 
11,813

 
2,771

 
14,584

 
 
 
 
 
 
 
 
 
 
 
 
Europe, Middle East and Africa
19,335

 
4,664

 
23,999

 
17,726

 
3,248

 
20,974

Total
$
146,875

 
$
26,629

 
$
173,504

 
$
126,819

 
$
22,379

 
$
149,198

 
 
 
 
 
 
 
 
 
 
 
 
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.

- 9 -
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 three months ended March 31, 2019 and 2018 (in thousands):
 
Deferred Revenue
 
2019
 
2018
Balance as of January 1
$
78,306

 
$
82,631

Revenue recognized that was included in deferred revenue at the beginning of the period
(51,444
)
 
(63,720
)
Revenue recognized that was not included in deferred revenue at the beginning of the period
(116,052
)
 
(85,275
)
Increases due to invoicing
155,583

 
155,416

Revenue recognized in excess of billings
10,048

 
2,688

Other
(2,426
)
 
331

Balance as of March 31
$
74,015

 
$
92,071

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 March 31, 2019, 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 $1,042 million as of March 31, 2019. Of this amount, approximately $407 million, $377 million, and $258 million are expected to be recognized in 2019, 2020, and thereafter, respectively.
As of March 31, 2019, 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 $65.5 million and $60.0 million as of March 31, 2019 and December 31, 2018, respectively. The current portion of capitalized contract costs is represented by capitalized contract costs on the Company's consolidated balance sheets; the long-term portion is included in other assets. 
Amortization of capitalized contract costs was $6.6 million and $4.9 million for the three months ended March 31, 2019 and 2018, respectively. There have been no impairment losses related to capitalized contract costs.
3. 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 three months ended March 31, 2019 and 2018, the Company withheld 393,249 shares at an average price of $72.99 and 248,831 shares at an average price of $66.77, 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 three months ended March 31, 2019 and 2018, 40,281 and 42,176 forfeited shares, respectively, were transferred to treasury stock at their par value of $0.01.
Accumulated Other Comprehensive Loss — For the three months ended March 31, 2019 and 2018, reclassifications of items from accumulated other comprehensive loss to net income were insignificant.

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

The following reconciliation presents significant changes in the components of stockholders' equity for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss
 
 
 
 
(amounts in thousands)
 
Common stock
 
Additional paid-in capital
 
Treasury stock
 
Foreign currency translation adjustments
 
Unrealized gains (losses) on marketable securities
 
Retained earnings
 
Total
Balance - January 1, 2019
 
$
661

 
$
574,667

 
$
(152,849
)
 
$
(4,255
)
 
$
(614
)
 
$
213,838

 
$
631,448

Comprehensive income, net
 
—

 
—

 
—

 
372

 
394

 
11,145

 
11,911

Stock-based compensation
 
—

 
19,730

 
—

 
—

 
—

 
—

 
19,730

Issuance of shares under stock-based compensation plans
 
13

 
2,328

 
—

 
—

 
—

 
—

 
2,341

Acquisition of treasury stock in connection with award vesting
 
—

 
—

 
(28,704
)
 
—

 
—

 
—

 
(28,704
)
Balance - March 31, 2019
 
$
674

 
$
596,725

 
$
(181,553
)
 
$
(3,883
)
 
$
(220
)
 
$
224,983

 
$
636,726

 
 
 
 
 
 
 
 
Accumulated other comprehensive loss
 
 
 
 
(amounts in thousands)
 
Common stock
 
Additional paid-in capital
 
Treasury stock
 
Foreign currency translation adjustments
 
Unrealized gains (losses) on marketable securities
 
Retained earnings
 
Total
Balance - January 1, 2018
 
628

 
486,147

 
(132,705
)
 
(2,459
)
 
(918
)
 
161,917

 
512,610

Comprehensive income, net
 
—

 
—

 
—

 
1,270

 
(968
)
 
10,325

 
10,627

Stock-based compensation
 
—

 
13,214

 
—

 
—

 
—

 
—

 
13,214

Issuance of shares under stock-based compensation plans
 
9

 
2,357

 
—

 
—

 
—

 
—

 
2,366

Acquisition of treasury stock in connection with award vesting
 
—

 
—

 
(16,614
)
 
—

 
—

 
—

 
(16,614
)
Balance - March 31, 2018
 
$
637

 
$
501,718

 
$
(149,319
)
 
$
(1,189
)
 
$
(1,886
)
 
$
172,242

 
$
522,203

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 condensed consolidated balance sheets.
The following tables provide the Company’s marketable securities by security type as of March 31, 2019 and December 31, 2018 (in thousands):
 
As of March 31, 2019
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
86,668

 
$
—

 
$
(251
)
 
$
86,417

U.S. government agency debt securities
10,690

 
—

 
(47
)
 
10,643

Total
$
97,358

 
$
—

 
$
(298
)
 
$
97,060

 
As of December 31, 2018
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Commercial paper and corporate bonds
$
125,245

 
$
—

 
$
(747
)
 
$
124,498

U.S. government agency debt securities
10,690

 
—

 
(83
)
 
10,607

Total
$
135,935

 
$
—

 
$
(830
)
 
$
135,105


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

Contractual maturities of the Company’s marketable securities as of March 31, 2019 and December 31, 2018 are summarized as follows (in thousands):
 
As of March 31, 2019
 
As of December 31, 2018
 
Cost
 
Estimated
Fair
Value
 
Cost
 
Estimated
Fair
Value
Due in one year or less
$
97,358

 
$
97,060

 
$
135,935

 
$
135,105

Due in one to five years
—

 
—

 
—

 
—

Total
$
97,358

 
$
97,060

 
$
135,935

 
$
135,105

At March 31, 2019, the Company had $0.3 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 March 31, 2019 are temporary in nature. Accordingly, the Company did not consider its investments in marketable securities to be other-than-temporarily impaired as of March 31, 2019.
The following table provides the fair market value and gross unrealized losses of the Company's marketable securities with unrealized losses, aggregated by security type, as of March 31, 2019 and December 31, 2018 (in thousands):
 
 
 
 
 
 
 
 
 
In Loss Position for More than 12 Months
 
As of March 31, 2019
 
As of December 31, 2018
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Commercial paper and corporate bonds
$
86,416

 
$
(251
)
 
$
124,498

 
$
(747
)
U.S. government agency debt securities
10,643

 
(47
)
 
10,607

 
(83
)
Total
$
97,059

 
$
(298
)
 
$
135,105

 
$
(830
)
During the three months ended March 31, 2019 and 2018, the Company recorded an insignificant amount of net realized gains and losses from the sale of marketable securities.
Other Investments
The Company holds shares of Series D Preferred Stock of Syapse Inc. 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 March 31, 2019 and December 31, 2018. The Company periodically evaluates this investment to determine if impairment charges are required; no impairment charges were recognized during the three months ended March 31, 2019 or 2018.

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

5. FAIR VALUE
The following table summarizes, as of March 31, 2019 and December 31, 2018, 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, 2018 (in thousands):
 
As of March 31, 2019
 
As of December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
108,292

 
$
—

 
$
—

 
$
108,292

 
$
103,859

 
$
—

 
$
—

 
$
103,859

Money market funds
760

 
—

 
—

 
760

 
1,581

 
—

 
—

 
1,581

Total cash and cash equivalents
109,052

 
—

 
—

 
109,052

 
105,440

 
—

 
—

 
105,440

Commercial paper and corporate bonds
—

 
86,416

 
—

 
86,416

 
—

 
124,498

 
—

 
124,498

U.S. government agency debt securities
—

 
10,644

 
—

 
10,644

 
—

 
10,607

 
—

 
10,607

Total marketable securities
—

 
97,060

 
—

 
97,060

 
—

 
135,105

 
—

 
135,105

Total financial assets measured at fair value on a recurring basis
$
109,052

 
$
97,060

 
$
—

 
$
206,112

 
$
105,440

 
$
135,105

 
$
—

 
$
240,545

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration – short-term
$
—

 
$
—

 
$
974

 
$
974

 
$
—

 
$
—

 
$
1,110

 
$
1,110

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

 
$
—

 
$
974

 
$
974

 
$
—

 
$
—

 
$
1,110

 
$
1,110

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 three months ended March 31, 2019 and 2018, there were no transfers of financial assets between Level 1 and Level 2.
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%. Contingent consideration is recorded in accrued expenses and other 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 contingent consideration liabilities during the three months ended March 31, 2019 (in thousands):
Balance as of January 1, 2019
$
1,110

Amounts earned by sellers
(297
)
Fair value adjustment (included in general and administrative expenses)
161

Balance as of March 31, 2019
$
974

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.

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

6. GOODWILL AND INTANGIBLE ASSETS
The change in the carrying amount of goodwill during the three months ended March 31, 2019 was as follows (in thousands):
Balance as of January 1, 2019
$
216,017

Purchase price adjustment - SHYFT Analytics, Inc.
(149
)
Foreign currency translation adjustments
90

Balance as of March 31, 2019
$
215,958

Total intangible assets are summarized as follows (in thousands):
 
As of March 31, 2019
 
As of December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technology
$
31,384

 
$
(15,243
)
 
$
16,141

 
$
31,358

 
$
(13,852
)
 
$
17,506

Customer relationships
9,175

 
(3,711
)
 
5,464

 
9,167

 
(3,404
)
 
5,763

Trade name
5,400

 
(280
)
 
5,120

 
5,400

 
(190
)
 
5,210

Non-competition agreements
1,460

 
(509
)
 
951

 
1,460

 
(393
)
 
1,067

Domain name (1)
600

 
—

 
600

 
—

 
—

 
—

Total
$
48,019

 
$
(19,743
)
 
$
28,276

 
$
47,385

 
$
(17,839
)
 
$
29,546

(1) During the three months ended March 31, 2019, the Company purchased the domain name medidata.com, which is considered to have an indefinite life.
Future amortization of intangible assets is expected to be as follows (in thousands):
Remainder of 2019
$
5,603

2020
6,730

2021
6,249

2022
3,465

2023
1,849

Thereafter
3,780

Total
$
27,676

7. DEBT
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 March 31, 2019 and December 31, 2018 (in thousands):

March 31, 2019

December 31, 2018
Term Loans
$
93,750


$
95,000

Less: unamortized debt issuance costs
(1,616
)

(1,725
)
Net carrying amount (1)
$
92,134


$
93,275

(1) Of the total carrying amount of the Term Loans, short-term maturities of $5.5 million and $4.9 million were included in accrued expenses and other on the Company's condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, respectively.

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

The following table sets forth total interest expense recognized related to the Credit Facility for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Contractual interest expense on Term Loans
$
854

 
$
748

Amortization of debt issuance costs
109

 
108

Unused commitment fee on Revolver
147

 
200

Total
$
1,110

 
$
1,056

 
 
 
 
Contractual interest rate on Term Loans
3.624
%
 
3.229
%
Commitment fee rate on undrawn Revolver
0.150
%
 
0.200
%
As of March 31, 2019 the remaining term of the Credit Facility is approximately 45 months. The Company was in compliance with all financial covenants related to the Credit Facility as of March 31, 2019.
1.00% Convertible Senior Notes
The Company's 1.00% convertible senior notes (the "Notes") were issued in August 2013 and settled on August 1, 2018. Interest expense related to the Notes for the three months ended March 31, 2018 was $4.5 million, consisting of contractual interest expense of $0.7 million, amortization of debt issuance costs of $0.3 million, and amortization of debt discount of $3.5 million.

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

8. LEASES
The Company leases office and data center space under operating lease agreements with remaining lease terms extending through 2031.
During the three months ended March 31, 2019 and 2018, the Company recognized operating lease costs of $4.8 million and $3.9 million, respectively; for the three months ended March 31, 2019, operating lease costs include $0.2 million of short-term lease costs.
Supplemental cash flow information related to leases for the three months ended March 31, 2019 was as follows (in thousands):
 
Three months ended March 31,
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Cash paid for operating leases
$
(3,858
)
 
 
Noncash activities:
 
Right-of-use assets obtained in exchange for new operating lease liabilities (1)
$
—

(1) No new operating leases were entered into during the three months ended March 31, 2019; all new operating lease liabilities recorded during the period are the result of the Company's January 1, 2019 adoption of ASC 842.
As of March 31, 2019, the weighted-average remaining lease term for operating lease liabilities was approximately 7.4 years and the weighted-average discount rate was approximately 3.59%.
Maturities of operating lease liabilities are as follows (in thousands):
Remainder of 2019
$
13,316

2020
19,391

2021
19,118

2022
18,792

2023
18,072

Thereafter
38,667

Total lease payments
127,356

Less imputed interest
(16,485
)
Total present value of operating lease liabilities
$
110,871


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

9. STOCK-BASED COMPENSATION
For the three months ended March 31, 2019 and 2018, the components of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Stock options
$
471

 
$
572

Restricted stock awards and units
12,739

 
7,867

Performance-based restricted stock units
4,735

 
3,227

Employee stock purchase plan
1,785

 
1,548

Total stock-based compensation (1)
$
19,730

 
$
13,214

(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 following table summarizes the status of the Company's stock options as of March 31, 2019, and changes during the three 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, 2019
1,088

 

$19.17

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
(57
)
 
41.15

 
 
 
 
Forfeited
—

 
—

 
 
 
 
Expired
(1
)
 
13.99

 
 
 
 
Outstanding at March 31, 2019
1,030

 

$17.96

 
2.60
 

$57,037

Exercisable at March 31, 2019
919

 

$12.82

 
1.95
 

$55,553

Vested and expected to vest at March 31, 2019
1,025

 

$17.71

 
2.58
 

$56,992

No stock options were granted during the three months ended March 31, 2019 and 2018. The total intrinsic value of stock options exercised during the three months ended March 31, 2019 and 2018 was $1.9 million and $7.6 million, respectively.
As of March 31, 2019, there was $2.5 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 2.08 years.
Restricted Stock Awards and Units
The following table summarizes the status of the Company’s nonvested time-based RSAs and RSUs as of March 31, 2019, and changes during the three months then ended (in thousands, except per share data):
 
Number of
Shares
 
Weighted-
Average
Grant-Date
Fair Value
Nonvested at January 1, 2019
1,936

 

$61.45

Granted
909

 
71.42

Vested
(516
)
 
52.83

Forfeited
(44
)
 
60.55

Nonvested at March 31, 2019
2,285

 

$67.38

The total fair value of RSAs and RSUs vested during the three months ended March 31, 2019 and 2018 was $38.2 million and $31.6 million, respectively.

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

As of March 31, 2019, there was $136.3 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 2.79 years.
Performance-Based Restricted Stock Units
During the three months March 31, 2019, the Company granted: (1) 155 thousand PBRSUs ("2019 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, 2021, 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) 155 thousand PBRSUs ("2019 Revenue PBRSUs") with performance conditions based on the compound annual growth rate of revenue over the three-year period ending December 31, 2021, vesting in full in three years with the number of shares ultimately earned ranging from zero to 250% of the target number of shares.
During the three months March 31, 2018, the Company granted: (1) 116 thousand PBRSUs ("2018 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, 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) 117 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. The Company also granted an immaterial number of other 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 months ended March 31, 2019 and 2018 was estimated as of the date of grant using a Monte Carlo valuation model with the following weighted average assumptions:
 
Three Months Ended March 31,
 
2019
 
2018
Expected volatility - Medidata
35
%
 
37
%
Expected volatility - comparison index
44
%
 
42
%
Expected life
2.88 years

 
2.86 years

Risk-free interest rate
2.47
%
 
2.36
%
Dividend yield
—

 
—

The following table summarizes the status of the Company’s PBRSUs based upon expected performance as of March 31, 2019, and changes during the three months then ended (in thousands, except per share data):
 
Net Income
 
TSR
 
Revenue
 
Other
 
Total Number of Shares
 
Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2019
210

 
793

 
—

 
23

 
1,026

 
$
70.80

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

 
155

 
155

 
—

 
310

 
88.56

Adjustment related to expected performance
—

 
6

 
—

 
—

 
6

 
104.54

Vested
—

 
(370
)
 
—

 
—

 
(370
)
 
47.11

Forfeited
—

 
—

 
—

 
—

 
—

 
77.64

Nonvested at March 31, 2019
210

 
584

 
155

 
23

 
972

 
$
85.69

The total fair value of PBRSUs vested during the three months ended March 31, 2019 and 2018 was $26.6 million and $8.1 million, respectively.
As of March 31, 2019, there was $44.6 million in unrecognized compensation cost related to all nonvested PBRSUs. This cost is expected to be recognized over a weighted-average remaining period of 1.94 years.

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

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 March 31,
 
2019
 
2018
Expected volatility
34
%
 
37
%
Expected life
1.54 years

 
1.69 years

Risk-free interest rate
2.39
%
 
1.10
%
Dividend yield
—

 
—

No shares were purchased under the ESPP during the three months ended March 31, 2019 and 2018.
As of March 31, 2019, there was $10.1 million in unrecognized compensation cost related to ESPP shares. This cost is expected to be recognized over a weighted-average remaining period of 1.42 years.
Modifications
Aggregate incremental expense associated with modifications to stock options, RSAs and PBRSUs in connection with separation agreements during the three months ended March 31, 2019 and 2018 was $0.1 million and $0.2 million, respectively.
10. 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.
In August 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 months ended March 31, 2018, 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.

- 19 -
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 months ended March 31, 2019 and 2018 is shown in the following table (in thousands, except per share data):
 
Three Months Ended March 31,
 
2019
 
2018
Numerator
 
 
 
Net income
$
11,145

 
$
10,325

Denominator
 
 
 
Denominator for basic earnings per share:
 
 
 
Weighted average common shares outstanding
59,693

 
57,055

Denominator for diluted earnings per share:
 
 
 
Dilutive potential common shares:
 
 
 
Stock options
775

 
922

Restricted stock awards and units
676

 
743

Performance-based restricted stock units
558

 
494

Employee stock purchase plan
53

 
250

Convertible senior notes
—

 
634

Weighted average common shares outstanding with assumed conversion
61,755

 
60,098

Basic earnings per share
$
0.19

 
$
0.18

Diluted earnings per share
$
0.18

 
$
0.17

Anti-dilutive common stock equivalents excluded from the calculation of diluted earnings per share for the three months ended March 31, 2019 and 2018 are presented in the following table (in thousands, except per share data):
 
Three Months Ended March 31,
 
2019
 
2018
Stock options
81

 
94

Restricted stock awards and units
28

 
263

Performance-based restricted stock units
84

 
54

Employee stock purchase plan
581

 
188

Total
774

 
599


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

11. INCOME TAXES
Unrecognized Tax Benefits
The Company's unrecognized tax benefits were approximately $6.4 million as of March 31, 2019, and were unchanged from December 31, 2018.
12. COMMITMENTS AND CONTINGENCIES
Legal Matters — The 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 sum of 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.

- 21 -

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). 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 at the time 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. Important factors that could cause such differences include, but are not limited to the factors discussed under the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the Securities and Exchange Commission ("SEC") on March 1, 2019.
The following is a discussion and analysis of our financial condition and results of operations and should be read together with our condensed consolidated financial statements and related notes to condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes to audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Overview
Our unified platform, pioneering analytics, and clinical technology expertise power the development and commercialization of new therapies for over one thousand pharmaceutical companies, biotech and medical device firms, academic medical centers, and contract research organizations around the world. The Medidata 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.
First Quarter 2019 Highlights
•
Total revenues increased 16% compared with the first quarter of 2018.
•
Subscription revenues increased 16% compared with the first quarter of 2018.
•
Professional services revenues increased 19% compared with the first quarter of 2018.
•
Operating income decreased 63% compared with the first quarter of 2018.
•
Net income increased 8% compared with the first quarter of 2018.

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Results of Operations
Revenues
Revenues for the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
Revenues:
(amounts in thousands except percentages)
Subscription
$
146,875

 
$
126,819

 
15.8
%
Percentage of total revenues
84.7
%
 
85.0
%
 
 
Professional services
26,629

 
22,379

 
19.0
%
Percentage of total revenues
15.3
%
 
15.0
%
 
 
Total revenues
$
173,504

 
$
149,198

 
16.3
%
Year-over-year growth in subscription revenues was driven by sales growth among existing customers, both in the form of additional product subscriptions (which we refer to as "density") and increased usage under existing subscriptions (which we refer to as "intensity"), as well as new customer wins. Our electronic data capture, mobile heath, and payments solutions were strong contributors. As of March 31, 2019, we had remaining subscription backlog of $410 million, representing the future contract value of outstanding arrangements, billed and unbilled, to be recognized during the remainder of 2019, excluding renewals. This reflects an increase of 15% compared with remaining backlog of $356 million at March 31, 2018. As of March 31, 2019, our total multi-year subscription backlog was approximately $1.1 billion.
Year-over-year growth in professional services revenues reflects demand from new and existing customers for platform implementation, ongoing support services, and partner and sponsor enablement.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2019 and 2018 was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
Cost of revenues:
(amounts in thousands except percentages)
Subscription
$
26,728

 
$
20,341

 
31.4
%
Percentage of total revenues
15.4
%
 
13.6
%
 
 
Professional services
19,275

 
15,961

 
20.8
%
Percentage of total revenues
11.1
%
 
10.7
%
 
 
Total cost of revenues
$
46,003

 
$
36,302

 
26.7
%
Percentage of total revenues
26.5
%
 
24.3
%
 
 
 
 
 
 
 
 
Gross profit
$
127,501

 
$
112,896

 
 
Gross margin
73.5
%
 
75.7
%
 
 
 
 
 
 
 
 
Subscription margin
81.8
%
 
84.0
%
 
 
Professional services margin
27.6
%
 
28.7
%
 
 
Year-over-year growth in cost of subscription revenues was largely driven by an increase in personnel costs of $2.4 million, associated with a 13% year-over-year headcount increase in connection with overall business growth and the acquisition of SHYFT Analytics, Inc. ("SHYFT") in the second quarter of 2018, as well as an increase in depreciation and amortization of $2.0 million, associated with additional internally developed and acquired technology assets and purchased hosting equipment. Cost of subscription revenues was also impacted by an increase of $1.2 million in consultant and professional fees.
Year-over-year growth in cost of professional services was driven by increased personnel costs associated with a 32% year-over-year headcount increase to support strong customer demand and expanding skill set requirements for professional services, and in connection with our acquisition of SHYFT.

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Overall gross margin decreased to 73.5% for the three months ended March 31, 2019 compared with 75.7% for the three months ended March 31, 2018, driven predominantly by a lower subscription margin reflecting the aforementioned infrastructure and workforce investments, including the acquisition of SHYFT, an earlier-stage business that has yet to develop economies of scale.
Operating Costs and Expenses
Operating costs and expenses for the three months ended March 31, 2019 and 2018 were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
Operating costs and expenses:
(amounts in thousands except percentages)
Research and development
$
46,489

 
$
37,522

 
23.9
 %
Percentage of total revenues
26.8
%
 
25.2
%
 
 
Sales and marketing
43,396

 
36,861

 
17.7
 %
Percentage of total revenues
25.0
%
 
24.7
%
 
 
General and administrative
32,634

 
25,187

 
29.6
 %
Percentage of total revenues
18.8
%
 
16.9
%
 
 
Total operating costs and expenses
$
122,519

 
$
99,570

 
23.0
 %
Percentage of total revenues
70.6
%
 
66.8
%
 
 
 
 
 
 
 
 
Operating income
$
4,982

 
$
13,326

 
(62.6
)%
Operating margin
2.9
%
 
8.9
%
 
 
The year-over-year growth in research and development expenses was primarily driven by an increase in personnel costs of $8.2 million, resulting from a 22% year-over-year headcount increase in connection with the continued hiring of skilled engineering talent and our acquisition of SHYFT. Research and development expenses were also impacted by higher third-party software costs and increased use of specialized consultants and outside experts to enhance the value of our platform.
The year-over-year growth in sales and marketing expenses was predominantly driven by an increase in personnel costs of $7.1 million, resulting from a 15% year-over-year headcount increase in connection with our acquisition and the expansion of our global sales organization, partially offset by decreased travel costs and professional fees.
The year-over-year growth in general and administrative expenses was primarily driven by an increase in personnel costs of $3.6 million resulting from a 4% year-over-year headcount increase, mainly at the upper management level. Expenses were also impacted by an increase in legal, professional, and consultant fees of $1.7 million, and by higher rent and depreciation expenses.
Interest and Other Expense
Interest and other expense for the three months ended March 31, 2019 and 2018 was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
 
(amounts in thousands)
Interest and other income (expense)
 
 
 
 
 
Interest expense

($1,110
)
 

($5,575
)
 
 
Interest income
945

 
2,088

 
 
Other expense, net
(28
)
 
(96
)
 
 
Total interest and other expense, net

($193
)
 

($3,583
)
 
(94.6
)%
The year-over-year decrease in total interest and other expense for the three months ended March 31, 2019 was primarily driven by a decrease in interest expense of $4.5 million as a result of the settlement of our 1.00% convertible senior notes on August 1, 2018, partially offset by decreased interest income on our available-for sale marketable securities.

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Income Taxes
Income tax benefit for the three months ended March 31, 2019 and 2018 was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(amounts in thousands)
Income tax benefit

($6,356
)
 

($582
)
The difference between our effective tax rate and the U.S. statutory rate is primarily due to the relative mix of pre-tax income subject to tax in various jurisdictions, state taxes, share-based compensation, and U.S. tax credits and incentives. The benefits from U.S. credits and incentives will likely continue to have a favorable impact on our overall effective tax rate in the future. Stock-based compensation will also continue to have an impact on our effective tax rate which may or may not be favorable.
Our quarterly tax provision and quarterly estimate of the annual effective tax rate are subject to significant variation due to several factors, including variability in accuracy of predictions of pre-tax book and taxable income or loss, the mix of jurisdictions to which they relate, and changes in tax law in the jurisdictions in which we conduct business.
Critical Accounting Estimates
Our condensed consolidated 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. These estimates inherently involve levels of subjectivity and judgment, and changes in these estimates may have a material impact on our financial condition or results of operations. Accordingly, actual results could differ from those estimates. Our critical accounting estimates as of March 31, 2019 are the same as those at December 31, 2018, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Also see Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which discusses our significant accounting policies.
Effects of Recently Issued Accounting Pronouncements on Current and Future Trends
Refer to Note 1, "Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. No other recently issued accounting pronouncements have had or are expected to have a material impact on our current or future trends.
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 March 31, 2019 and December 31, 2018, and for the three months ended March 31, 2019 and 2018 (in thousands):
 
March 31,
2019
 
December 31,
2018
Cash, cash equivalents, and marketable securities
$
206,112

 
$
240,545

Furniture, fixtures and equipment, net
111,035

 
98,983

Term loan, net (including current maturities)
92,134

 
93,275

 
 
 
 
 
Three Months Ended March 31,
 
2019
 
2018
Cash provided by operating activities
$
6,084

 
$
4,976

Cash provided by (used in) investing activities
19,724

 
(4,919
)
Cash used in financing activities
(22,414
)
 
(11,389
)

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Cash, Cash Equivalents, and Marketable Securities
For the three months ended March 31, 2019, cash provided by operating activities of $6.1 million was driven by customer collections, partially offset by operating expenditures and cash interest expense on our term loan. Cash provided by investing activities of $19.7 million consisted of sales and maturities of marketable securities of $38.5 million, partially offset by payments for capital expenditures of $18.2 million and domain name of $0.6 million. Cash used in financing activities of $22.4 million resulted primarily from the acquisition of $26.6 million of treasury stock in connection with equity plan participant tax withholdings upon vesting, $1.3 million in term loan principal payments, and $0.3 million in earn-out payments related to the 2017 acquisition of CHITA Inc., partially offset by equity plan proceeds of $5.7 million.
For the three months ended March 31, 2018, cash provided by operating activities of $5.0 million was driven by customer collections, partially offset by operating expenditures and cash interest expense on our then-outstanding 1.00% convertible senior notes. Cash used in investing activities of $4.9 million consisted of capital expenditures of $11.1 million partially offset by net sales of marketable securities of $6.2 million. Cash used in financing activities of $11.4 million resulted primarily from the acquisition of $16.6 million of treasury stock in connection with equity plan participant tax withholdings upon vesting and $0.2 million in payments of credit facility financing costs, partially offset by equity plan proceeds of $5.5 million.
Capital Assets
We acquired $21.0 million in capital assets during the three months ended March 31, 2019, predominantly related to continued enhancements to our existing infrastructure and facilities and capitalization of software development costs. On a cash basis, our capital expenditures during the three months ended March 31, 2019 were $18.2 million and included payments for previously accrued assets. We expect to acquire approximately $40 million in additional capital assets during the remainder of 2019.
Debt
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 7, “Debt,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Contractual Obligations, Commitments and Contingencies
There was no material change in our contractual obligations during the first three months of 2019.
Legal Matters
For a discussion of legal matters, refer to Note 12, "Commitments and Contingencies — Legal Matters," to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 3.     Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We had unrestricted cash and cash equivalents totaling $109.1 million at March 31, 2019. 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 $97.1 million at March 31, 2019. 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.
Our exposure to interest rate risk mainly relates to current and future borrowings under our credit facility. Based on the $93.8 million of term loan principal outstanding under our credit facility as of March 31, 2019, the estimated potential impact of a hypothetical 1% increase in interest rate would amount to $0.2 million for the three months ended March 31, 2019.
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 the three months ended March 31, 2019 resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $4.1 million.

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We bill our customers primarily in U.S. dollars. The majority of our foreign billings are billed from Medidata Solutions, Inc., a U.S. entity. Foreign currency billings are mainly denominated in Euros, British pounds sterling, Chinese yuan, 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. For the three months ended March 31, 2019, 6.1% of our revenues and 15.2% of our expenses were denominated in foreign currencies. Total loss arising from transactions denominated in foreign currencies amounted to $0.1 million for the three months ended March 31, 2019.
Impact of Inflation
We do not believe that inflation has had a material impact on our business, financial condition, or results of operations.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2019, 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 March 31, 2019.
Changes in Internal Control over Financial Reporting
During the first quarter of 2019, we implemented a new Enterprise Resource Planning system ("ERP"). As a result of this implementation, we modified certain existing internal controls as well as implemented new controls and procedures related to the new ERP. We continued to evaluate the design and operating effectiveness of these internal controls during the first quarter of 2019.
Except with respect to the implementation of the ERP, there were no changes in the our internal controls over financial reporting that occurred during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


- 27 -

PART II - OTHER INFORMATION
Item 1.    Legal Proceedings
See Note 12, “Commitments and Contingencies – Legal Matters,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of current legal proceedings.
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 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 are those that we believe are the material risks we face. There have been no material changes in our risk factors since our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Any of those disclosed risk factors 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.
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
From time to time, we grant nonvested restricted stock awards, restricted stock units, or performance-based restricted stock units to our employees pursuant to the terms of our Amended and Restated 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 related income tax withholding obligation by having shares withheld at the time of vesting. On the date of vesting, we divide the participant's income tax withholding obligation in dollars by the closing price of our common stock and withhold the resulting number of vested shares.
A summary of our repurchases of shares of our common stock for the three months ended March 31, 2019 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
January 1 – January 31, 2019
9,287

 
$
66.23

 
—

 
—

February 1 – February 28, 2019
381,170

 
$
73.13

 
—

 
—

March 1 – March 31, 2019
2,792

 
$
76.25

 
—

 
—

Total
393,249

 
$
72.99

 
—

 
—

(1) Represents the number of shares acquired as payment by employees of applicable statutory withholding taxes owed upon vesting of restricted stock awards, restricted stock units, or performance-based restricted stock units granted under the 2017 Plan and 2009 Plan.
Item 3.    Defaults upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.     Other Information
None.

- 28 -

Item 6.    Exhibits
Exhibit No.
Description
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 Extension Presentation Linkbase Document
*
Filed herewith.
**
Furnished herewith.
†
Indicates a management contract or any compensatory plan, contract, or arrangement.


- 29 -

Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
MEDIDATA SOLUTIONS, INC.
 
 
 
 
By:
/s/ ROUVEN BERGMANN
 
 
Rouven Bergmann
Chief Financial Officer (Principal Financial and Principal Accounting Officer)
Date: May 10, 2019

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