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As filed with the Securities and Exchange Commission on August 1, 2016

Registration No. 333-212236

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MEDPACE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   8731   32-0434904
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

Medpace Holdings, Inc.

5375 Medpace Way

Cincinnati, Ohio 45227

(513) 579-9911

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Dr. August J. Troendle

President and Chief Executive Officer

Jesse J. Geiger

Chief Financial Officer

Medpace Holdings, Inc.

5375 Medpace Way

Cincinnati, Ohio 45227

(513) 579-9911

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Howard A. Sobel, Esq.
Gregory P. Rodgers, Esq.
Latham & Watkins LLP
885 Third Avenue
New York, NY 10022
Telephone: (212) 906-1200
Fax: (212) 751-4864
 

Glenn R. Pollner, Esq.

Gibson, Dunn & Crutcher LLP

200 Park Avenue

New York, NY 10166

Telephone: (212) 351-4000

Fax: (212) 351-4035

 

 

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE.

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

TITLE OF EACH CLASS OF

SECURITIES TO BE REGISTERED

  

AMOUNT

TO BE
REGISTERED(1)

   PROPOSED
MAXIMUM
OFFERING
PRICE PER
SHARE(2)
  

PROPOSED
MAXIMUM
AGGREGATE

OFFERING

PRICE(1)(2)

  

AMOUNT OF

REGISTRATION
FEE(3)

Common Stock, $0.01 par value per share

   8,050,000    $23.00    $185,150,000.00    $18,644.61

 

(1)   Includes 1,050,000 shares of common stock that may be sold if the underwriters’ option to purchase additional shares granted by the Registrant is exercised.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3)   The Registrant previously paid $15,105.00 in connection with a prior filing of this Registration Statement on June 24, 2016.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

SUBJECT TO COMPLETION DATED AUGUST 1, 2016

 

PRELIMINARY PROSPECTUS

7,000,000 Shares

Medpace Holdings, Inc.

Common Stock

Medpace Holdings, Inc. is offering 7,000,000 shares of its common stock. This is our initial public offering, and no public market currently exists for our common stock. We expect the initial public offering price to be between $20.00 and $23.00 per share. We have applied to list our common stock on the NASDAQ Global Select Market under the symbol “MEDP.”

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 20 to read about factors you should consider before purchasing our common stock.

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     PER SHARE      TOTAL  

Public Offering Price

   $                        $                

Underwriting Discounts and Commissions (1)

   $         $     

Proceeds to Medpace Holdings, Inc., before expenses

   $         $     

 

 

(1)    We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”

Our Chief Executive Officer and founder, Dr. August J. Troendle, has indicated an interest to purchase up to $20.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, Dr. Troendle may determine to increase or reduce the amount of his indication of interest, or otherwise elect not to purchase any shares. It is also possible that the number of shares, if any, allocated to Dr. Troendle in the offering may be smaller than the amount of his indication of interest. Any allocation of shares in the offering to Dr. Troendle will be made at our direction. The underwriters will receive the same underwriting discount on any shares purchased by Dr. Troendle as they will on any other shares sold to the public in this offering.

Delivery of the shares of common stock is expected to be made on or about             . We have granted the underwriters an option for a period of 30 days to purchase up to an additional 1,050,000 shares of our common stock. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $                    , and the total proceeds to us, before expenses will be $                    .

Joint Book-Running Managers

 

Jefferies   Credit Suisse
UBS Investment Bank   Wells Fargo Securities

Co-Managers

Baird   William Blair

 

 

Prospectus dated             , 2016.


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TABLE OF CONTENTS

 

 

 

     PAGE  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     20   

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

     46   

USE OF PROCEEDS

     48   

DIVIDEND POLICY

     49   

CAPITALIZATION

     50   

DILUTION

     51   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

     53   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     58   

BUSINESS

     88   

MANAGEMENT

     104   

EXECUTIVE AND DIRECTOR COMPENSATION

     110   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     120   

PRINCIPAL SHAREHOLDERS

     125   

DESCRIPTION OF CAPITAL STOCK

     127   

SHARES ELIGIBLE FOR FUTURE SALE

     132   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     134   

UNDERWRITING

     138   

LEGAL MATTERS

     145   

EXPERTS

     145   

WHERE YOU CAN FIND MORE INFORMATION

     145   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we nor the underwriters (or any of our or their respective affiliates) have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters (or any of our or their respective affiliates) take any responsibility for, and can provide no assurance as

 

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to the reliability of, any other information that others may give you. We and the underwriters (or any of our or their respective affiliates) are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is only accurate as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

TRADEMARKS

We own or have the rights to use various trademarks referred to in this prospectus, including, among others, Medpace and ClinTrak and their respective logos. Solely for convenience, we may refer to trademarks in this prospectus without the TM and ® symbols. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted by law, our rights to our trademarks. Other trademarks appearing in this prospectus are the property of their respective owners.

MARKET AND INDUSTRY INFORMATION

Market data used throughout this prospectus is based on management’s knowledge of the industry and the good faith estimates of management. All of management’s estimates presented herein are based on industry sources, including analyst reports and management’s knowledge. We also relied, to the extent available, upon management’s review of independent industry surveys and publications prepared by a number of sources and other publicly available information. We are responsible for all of the disclosure in this prospectus and while we believe that each of the publications, studies and surveys used throughout this prospectus are prepared by reputable sources, neither we nor the underwriters have independently verified market and industry data from third-party sources.

All of the market data used in this prospectus involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the estimated market position, market opportunity and market size information included in this prospectus is generally reliable, such information, which in part is derived from management’s estimates and beliefs, is inherently uncertain and imprecise and has not been verified by any independent source. Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in our estimates and beliefs and in the estimates prepared by independent parties. See “Cautionary Note Regarding Forward Looking Statements.”

GLOSSARY

We define the terms below that appear throughout this prospectus as follows:

Backlog.” Backlog represents anticipated future net service revenue from net new business awards that have not commenced or are currently in process but not complete.

Large pharmaceutical companies.” Large pharmaceutical companies represent the top 20 pharmaceutical companies by worldwide prescription drug sales in the year ended December 31, 2014 as classified by Evaluate Ltd in EvaluatePharma© World Preview 2015 Outlook to 2020, an industry report.

Mid-sized biopharmaceutical companies.” Mid-sized biopharmaceutical companies represent biopharmaceutical companies with at least $250 million in sales in the year ended December 31, 2014, based on publicly available data and management’s knowledge, that are not classified as a top 20 pharmaceutical company by Evaluate Ltd in EvaluatePharma© World Preview 2015 Outlook to 2020, an industry report.

Net new business awards.” Net new business awards are new business awards net of award modifications and cancellations that had previously been recognized in backlog during the period. New business awards represent the value of anticipated future net service revenue that has been awarded during the period that is recognized in backlog. This value is recognized upon the signing of a contract or receipt of a written pre-contract confirmation from a customer that confirms an agreement in principle on budget and scope. New business awards also include contract amendments, or changes in scope, where the customer has provided written authorization for changes in budget and scope or has approved us to perform additional work as of the measurement date. Awards may not be recognized as

 

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backlog after consideration of a number of factors, including whether (i) the relevant net service revenue is expected only after a pending regulatory hurdle, which might result in cancellation of the study, (ii) the customer funding needed for commencement of the study is not believed to have been secured or (iii) study timelines are uncertain or not well defined. In addition, study amounts that extend beyond a three-year timeline are not included in backlog.

Phase I.” Phase I trials are typically conducted in healthy individuals or, on occasion, in patients, and typically involve 20 to 80 subjects and range from a few months to several years. These trials are designed to establish the basic safety, dose tolerance, absorption, metabolism, distribution and excretion of the clinical product candidate, the side effects associated with increasing doses, and if possible, early evidence of effectiveness. If the trial establishes the basic safety and metabolism of the clinical product candidate, Phase II trials are generally initiated.

Phase II.” Phase II trials are conducted in a limited population of patients with the disease or condition that the clinical product candidate is intended to treat. These trials typically test a few hundred patients and last on average 12 to 18 months. Phase II trials are typically designed to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the clinical product candidate for specific targeted diseases or conditions, and to determine dose tolerance, optimal dosage and dosing schedule. Phase II trials are sometimes divided into two phases: Phase IIa trials typically evaluate the dose response of the clinical product candidate and Phase IIb trials typically evaluate the efficacy of the clinical product candidate at the prescribed doses. If the Phase II trials indicate that the clinical product candidate may be safe and effective, Phase III trials are generally initiated.

Phase III.” Phase III trials evaluate the clinical product candidate in significantly larger and more diverse patient populations than Phase I and II trials and are conducted at multiple, geographically dispersed sites. On average, this phase lasts from one to three years. Depending on the size and complexity, Phase III CRO contracts may include multiple sequential trials. During this phase, the clinical product candidate’s overall benefit/risk ratio and the basis for product approval are established. If the clinical product candidate successfully completes Phase III, then the sponsor may submit a New Drug Application, or NDA, or Biologics License Application for approval by the United States Food and Drug Administration, or FDA, or a similar marketing authorization application for approval by non-U.S. regulatory agencies.

Phase IV.” Phase IV or “post-approval” trials are intended to monitor the drug’s long-term risks and benefits, to analyze different dosage levels, to evaluate different safety and efficacy parameters in target populations or to substantiate marketing claims. Phase IV trials typically enroll thousands of patients and last from six months to several years. The FDA may require Phase IV testing and surveillance programs to monitor the effect of approved drugs which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of post-marketing programs.

Small biopharmaceutical companies.” Small biopharmaceutical companies represent biopharmaceutical companies that have less than $250 million in sales in the year ended December 31, 2014, based on publicly available data and management’s knowledge.

NON-GAAP FINANCIAL MEASURES

Certain financial measures presented in this prospectus, such as EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow, are not recognized under generally accepted accounting principles in the United States of America, or U.S. GAAP. Management uses EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow or comparable metrics:

 

  n   as a measurement used in evaluating our operating performance on a consistent basis;

 

  n   as a consideration to assess incentive compensation for our employees;

 

  n   for planning purposes, including the preparation of our internal annual operating budget; and

 

  n   to evaluate the performance and effectiveness of our operational strategies.

We believe that EBITDA and Adjusted EBITDA are useful to provide additional information to investors about certain material non-cash and non-recurring items. While we believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors, because not all companies use identical calculations, this presentation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies and should not be considered as an alternative to performance measures derived in

 

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accordance with U.S. GAAP. EBITDA is calculated as net income (loss) attributable to Medpace Holdings, Inc. before income tax expense, interest expense, net, depreciation and amortization with Adjusted EBITDA being further adjusted for unusual and other items. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

We utilize Free Cash Flow as a measure of profitability and an assessment of our ability to generate cash. Free Cash Flow is a commonly utilized metric that companies provide to investors, although the calculation of Free Cash Flow may not be comparable to other similarly titled metrics of other companies and should not be considered as an alternative to cash flow measures derived in accordance with U.S. GAAP. We define Free Cash Flow as net cash provided by operating activities, less capital expenditures and the principal portion of payments related to campus leases classified for accounting purposes as deemed landlord liabilities.

Adjusted Net Income measures our operating performance by adjusting net income (loss) attributable to Medpace Holdings, Inc. to include cash expenditures related to rental payments on leases classified for accounting purposes as deemed landlord liabilities, and exclude amortization expense, certain stock based compensation award non-cash expenses, certain litigation expenses, deferred financing fees and certain other non-recurring items. Management uses this measure to evaluate our core operating results as it excludes certain items whose fluctuations from period-to-period do not necessarily correspond to changes in the core operations of the business, but includes certain items such as depreciation, interest expense and tax expense, which are otherwise excluded from Adjusted EBITDA. We believe the presentation of Adjusted Net Income enhances our investors’ overall understanding of the financial performance and cash flow of our business. You should not consider Adjusted Net Income as an alternative to net income (loss) attributable to Medpace Holdings Inc., determined in accordance with U.S. GAAP, as an indicator of operating performance.

EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have important limitations as analytical tools and you should not consider them in isolation, or as a substitute for, analysis of our results as reported under U.S. GAAP. See the consolidated financial statements included elsewhere in this prospectus for our U.S. GAAP results. Additionally, for reconciliations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow to our closest reported U.S. GAAP measures and a further discussion of these metrics, see “Prospectus Summary—Summary Historical Consolidated Financial and Other Data” and “Selected Historical Consolidated Financial and Other Data.”

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the risks of investing in our common stock discussed under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus, before making an investment decision.

As used in this prospectus, unless the context otherwise requires, references to “Medpace,” “the Company,” “our company,” “we,” “us,” and “our” refer to Medpace Holdings, Inc., its consolidated subsidiaries and its predecessor entities.

Throughout this prospectus, we present financial information for two periods, Predecessor and Successor, which relate to the period preceding the consummation of the Transaction (as defined below) on April 1, 2014 and the period succeeding the consummation of the Transaction, respectively. References to the “Successor nine month period ended December 31, 2014” refer to the period from April 1, 2014 to December 31, 2014 and references to the “Predecessor three month period ended March 31, 2014” refer to the period from January 1, 2014 to March 31, 2014.

Overview

We are one of the world’s leading clinical contract research organizations, or CROs, by revenue, solely focused on providing scientifically-driven outsourced clinical development services to the biotechnology, pharmaceutical and medical device industries. Our mission is to accelerate the global development of safe and effective medical therapeutics. We differentiate ourselves from our competitors by our disciplined operating model centered on providing full-service Phase I-IV clinical development services and our therapeutic expertise. We believe this combination results in timely and cost-effective delivery of clinical development services for our customers. We believe that we are a partner of choice for small and mid-sized biopharmaceutical companies based on our ability to consistently utilize our full-service, disciplined operating model to deliver timely and high-quality results for our customers. Accordingly, we believe we are well positioned to continue to expand our market share and sustain margins in the growing $23 billion overall Phase I-IV CRO market.

We were founded in 1992 by Dr. August J. Troendle, an industry pioneer, as a Phase II-IV-focused CRO with a strong, scientifically-driven and disciplined operating model, and we continue today as a founder-led enterprise with Dr. Troendle retaining a significant ownership stake in Medpace. Throughout our 24-year history, we have grown almost exclusively organically, with our core founding members having been integrally involved in developing and instilling our differentiated culture and operating philosophy across our company. We focus on conducting clinical trials across all major therapeutic areas, with particular strength in Cardiology, Metabolic Disease, Oncology, Endocrinology, Central Nervous System, or CNS, Anti-Viral and Anti-Infective, or AVAI, as well as therapeutic expertise in Medical Devices. Our global platform includes approximately 2,300 employees across 35 countries, providing our customers with broad access to diverse markets and patient populations as well as local regulatory expertise and market knowledge.

Our singular focus on executing our disciplined, full-service operating model is a core tenet of our differentiated approach. Our operating model entails partnering with our customers from the beginning of the clinical trial process and holistically navigating all subsequent components of the process. This approach differs from other leading CROs that provide functional or partial outsourcing services as a core component of their business. We believe our full-service approach allows us to deliver timely and high-quality results for our customers. By clearly communicating and aligning our expectations with those of our customers at the beginning of an engagement, we develop a trusted relationship where our customers typically grant us greater control over the clinical trial process. This results in greater accountability on our part and, we believe, more

 



 

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consistent delivery of our services. We believe our partnering approach, coupled with our full-service, scientifically-driven model, ensures efficient and high-quality trial execution, limits changes in the scope of trials and enables timely completion of trials.

We focus on providing clinical development solutions primarily to companies that recognize the benefits of utilizing our full-service outsourcing model. We believe our model is particularly attractive to small and mid-sized biopharmaceutical companies, which seek specialized capabilities and infrastructure required for complex and global clinical trials, including therapeutic expertise, insightful protocol design, project feasibility assessment and timely and high-quality trial execution. We expect that outsourced development expenditures for small and mid-sized biopharmaceutical companies will continue to outpace outsourced development expenditures for the broader biopharmaceutical market. We believe we can expand our market share with this customer segment given our continued strategic focus and the attractiveness of our model to these companies. Furthermore, as the clinical development and regulatory processes grow increasingly more global and complex, we believe large pharmaceutical companies will increasingly recognize the benefits of our disciplined, full-service operating model. For the Successor year ended December 31, 2015, we generated 55.7%, 29.3% and 15.0% of our net service revenue from small biopharmaceutical companies, mid-sized biopharmaceutical companies and large pharmaceutical companies, respectively.

We believe that our model, focused on full-service delivery, and our attractive customer mix have resulted in robust levels of historical revenue growth, Adjusted EBITDA margins and strong Free Cash Flow. For the Successor year ended December 31, 2015, we generated total net service revenue of $320.1 million and Adjusted EBITDA of $101.2 million, representing net service revenue and Adjusted EBITDA compound annual growth rates, or CAGRs, of 21.7% and 26.2%, respectively, since 2012. Our net (loss) income for the Successor year ended December 31, 2015, the Successor nine month period ended December 31, 2014, the Predecessor three month period ended March 31, 2014 and the Predecessor year ended December 31, 2013 was $(8.7) million, $(14.3) million, $(1.2) million and $24.8 million, respectively, partially as a result of non-cash amortization expense associated with identified intangible assets acquired as part of the Transaction. Over the last 15 years, we have maintained average Adjusted EBITDA margins of approximately 34%, while significantly scaling our business organically and expanding globally. Additionally, we have consistently demonstrated an ability to convert Adjusted EBITDA into Free Cash Flow. Our annual Free Cash Flow conversion, defined as Free Cash Flow divided by Adjusted EBITDA, has averaged 81.7% since 2012. Net cash provided by operating activities for the Successor year ended December 31, 2015, the Successor nine month period ended December 31, 2014, the Predecessor three month period ended March 31, 2014 and the Predecessor year ended December 31, 2013 was $84.1 million, $62.5 million, $12.8 million and $98.1 million, respectively. For a reconciliation of Adjusted EBITDA, a non-GAAP measure, to net (loss) income, and for a reconciliation of Free Cash Flow, also a non-GAAP measure, to net cash provided by operating activities, see “—Summary Historical Consolidated Financial and Other Data.” Additionally, as of June 30, 2016 and December 31, 2015, we had total long-term debt, net of $364.0 million and $377.9 million outstanding, respectively. We intend to use the net proceeds of this offering to repay a portion of this indebtedness. See “Use of Proceeds.”

Our Market

CRO Market Size

We estimate, based on industry sources, including analyst reports and management’s knowledge, that total global biopharmaceutical clinical development expenditures were approximately $100 billion in 2014. We further estimate, based on these industry sources, that the portion of these expenditures attributable to Phase I-IV clinical development services was $44 billion, of which we estimate $23 billion was outsourced. In addition, based on these industry sources, we estimate the CRO market will experience a CAGR of approximately 6% from 2014 through 2019, growing to approximately $31 billion in 2019, as a result of increasing biopharmaceutical clinical development expenditures combined with increased outsourcing penetration.

 



 

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CRO Market Trends

Increasing Development Expenditures. We estimate that biopharmaceutical development expenditures will grow from approximately $100 billion in 2014 to approximately $114 billion in 2019, representing a CAGR of approximately 3%. We believe that the growth in development expenditures is primarily attributed to the heightened pace of biopharmaceutical innovation, pressure on companies to replenish pipelines with new therapies, the favorable regulatory environment and the significant amount of capital raised by biotechnology and pharmaceutical companies during the last several years. In line with the significant capital raised by biotechnology and pharmaceutical companies, based upon financial data available from FactSet Research Systems Inc., a provider of financial information, as of September 30, 2015, the companies comprising the NASDAQ Biotechnology Index, or NBI, had approximately $109.3 billion in cash available to support ongoing clinical development. This figure represents a 24.7% increase above the cash balance of approximately $87.6 billion held by the companies comprising the NBI as of December 31, 2014, and a 111.5% increase above the cash balance of approximately $51.7 billion held by companies comprising the NBI as of December 31, 2010.

Increasing Outsourcing Penetration. Outsourcing penetration is the percentage of biopharmaceutical clinical development costs that are outsourced to CROs. We estimate, based on industry sources, including analyst reports and management’s knowledge, that approximately 52% of Phase I-IV clinical development expenditures were outsourced in 2014. Driven by increased clinical trial complexity, the need for regulatory and therapeutic expertise and global access to patient populations, we expect outsourcing penetration will reach approximately 62% in 2019.

Pressures Facing Biopharmaceutical Industry. The biopharmaceutical industry continues to experience significant challenges, including regulatory and pricing pressures resulting from healthcare reform, intensifying generic competition, pipeline failures and the need for continued innovation. In order to combat these challenges and maintain revenue growth and operating margins, biopharmaceutical companies increasingly seek clinical expertise and seek to outsource clinical services to CROs to accelerate clinical development and maximize commercialization success.

Increasing Clinical Trial Complexity. Clinical trial design and structure have become increasingly complex based on regulatory agency sophistication, more complicated protocols and a growing focus by biopharmaceutical companies on developing new cutting-edge drug therapies. This growing complexity brings new challenges in study feasibility, site selection, patient recruitment and retention.

Small and Mid-Sized Biopharmaceutical Segment

We believe small and mid-sized biopharmaceutical companies are important to the continued growth of the CRO industry. These companies are primary centers of innovation, developing new, cutting-edge therapies for niche or previously untreatable diseases, which frequently require sophisticated clinical trials. These companies have limited ability to conduct global clinical trials independently, and as a result, they typically seek a strategic partner that can provide the therapeutic experience and infrastructure required to deliver timely completion of complex, global clinical trials. We estimate, based on industry sources, including analyst reports and management’s knowledge, that outsourced development expenditures for these companies will grow at a CAGR of 10% from 2014 to 2019, outpacing the estimated overall biopharmaceutical market CAGR of 6%. In 2014, we estimate, based on industry sources, including analyst reports and management’s knowledge, that small and mid-sized biopharmaceutical companies outsourced approximately 69% of their development expenditures, representing an estimated addressable CRO market of approximately $7 billion, which we estimate, based on these same sources, will increase to approximately 76%, representing an estimated addressable CRO market of approximately $11 billion in 2019.

 



 

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Our Competitive Strengths

We believe we are well positioned to capitalize on positive trends in the CRO industry based on our key competitive strengths set forth below:

Disciplined and Integrated Full-Service Model. Since our founding in 1992, we have focused on building and executing our disciplined, full-service operating model to provide clinical development services to the biotechnology and pharmaceutical industries. At the center of our differentiated operating model is our full-service focused, end-to-end approach to delivering clinical development services. We partner with customers from the beginning of the clinical trial process and holistically navigate all subsequent components of the process. While many CROs engage in functional or partial outsourcing services as a significant component of their business model, we take a disciplined approach and do not typically provide such piecemeal services. We have developed and consistently utilize effective standard operating procedures, or SOPs, that we believe result in high-quality and timely clinical development outcomes for our customers. Additionally, our operating model utilizes our proprietary ClinTrak clinical trial management software, or ClinTrak, which is customized and streamlined to our SOPs. We believe that a full-service approach delivers greater efficiency, better quality and, ultimately, higher value for our customers.

High-Science Approach with Deep Therapeutic Expertise. Our therapeutic expertise encompasses areas that are among the largest, most complex and fastest growing in pharmaceutical development, including Oncology, Cardiology, Metabolic Disease, Endocrinology, CNS and AVAI, as well as Medical Devices. Our core therapeutic expertise covers the therapeutic areas where a majority of all drugs are currently in development, as identified by Citeline Pharma R&D Annual Review 2016, an industry publication. Collectively, these areas constituted 81.6% of our backlog as of June 30, 2016. We leverage the insights of our senior leaders who have specific therapeutic expertise to employ a high-science approach to our projects. In clinical trial execution, our therapeutic leads are embedded into every aspect of the process from start to finish. Our scientific and medical staff is fundamental to delivering high-quality trial execution and enabling timely completion of complex processes.

Attractive and Diversified Customer Base. We have a strong track record of serving our core customer base of small and mid-sized biopharmaceutical companies, which we believe represents an attractive growth opportunity. We believe outsourced development expenditures in our core customer base will outpace the growth of the broader biopharmaceutical market. While we estimate, based on industry sources, including analyst reports and management’s knowledge, that the overall biopharmaceutical market will grow its outsourced development expenditures for Phase I-IV clinical development and laboratory services at a 6% CAGR from 2014 to 2019, we expect the small and mid-sized biopharmaceutical outsourced development expenditures will grow at a 10% CAGR during this period.

In addition, we have a highly diversified customer base comprising many of the largest global biopharmaceutical companies, as well as high-growth small and mid-sized biopharmaceutical companies. For the Successor year ended December 31, 2015, we generated 55.7%, 29.3% and 15.0% of our net service revenue from small biopharmaceutical companies, mid-sized biopharmaceutical companies and large pharmaceutical companies, respectively. For the Successor six months ended June 30, 2016 and the Successor year ended December 31, 2015, our largest customer accounted for 6.3% and 6.9% of our net service revenue, respectively, and our top 10 customers represented 38.2% and 39.9% of our net service revenue, respectively.

Partner of Choice for Biopharmaceutical Customers. Based on our extensive operating history and therapeutic experience, we believe that we have established a reputation as a partner of choice to our core customer segment of small and mid-sized biopharmaceutical companies. Acting as incubators of pharmaceutical development, small and mid-sized biopharmaceutical companies are responsible for a number of innovative drug candidates currently being developed to address unmet medical needs. These biopharmaceutical customers, sometimes new to the clinical development process, seek to partner with us based on our differentiated approach and expertise to execute trials in a timely and efficient manner. We believe we are viewed as a strategic and trusted partner by these customers given our full-service approach, disciplined

 



 

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operating model and significant therapeutic expertise. As a result, our customers often grant us significant autonomy in executing clinical trials for their most valued assets.

Global Platform with Scalable Infrastructure. We believe that we are one of the leading CROs with the scale and therapeutic expertise necessary to effectively conduct global clinical trials. We began our disciplined international expansion in 2004 and have since increased the breadth and depth of our international footprint significantly, with approximately 45% of our clinical operations employees located outside of North America as of June 30, 2016. We now offer our services through a highly skilled staff of approximately 2,300 employees across 35 countries as of June 30, 2016.

Strong Financial Performance. We have a proven track record of strong organic growth and achieved significant revenue and Adjusted EBITDA growth and robust Free Cash Flow over the past several years. For the Successor year ended December 31, 2015, we achieved net service revenue of $320.1 million and Adjusted EBITDA of $101.2 million, which represent a CAGR of 21.7% and 26.2%, respectively, since 2012. Our net (loss) income for the Successor year ended December 31, 2015, the Successor nine month period ended December 31, 2014, the Predecessor three month period ended March 31, 2014 and the Predecessor year ended December 31, 2013 was $(8.7) million, $(14.3) million, $(1.2) million and $24.8 million, respectively, partially as a result of non-cash amortization expense associated with identified intangible assets acquired as part of the Transaction. For the Successor year ended December 31, 2015, our Adjusted EBITDA margin was 31.6%. Additionally, we have consistently demonstrated an ability to convert Adjusted EBITDA into Free Cash Flow. Our annual Free Cash Flow conversion, defined as Free Cash Flow divided by Adjusted EBITDA, has averaged 81.7% since 2012. Net cash provided by operating activities for the Successor year ended December 31, 2015, the Successor nine month period ended December 31, 2014, the Predecessor three month period ended March 31, 2014 and the Predecessor year ended December 31, 2013 was $84.1 million, $62.5 million, $12.8 million and $98.1 million, respectively. For a reconciliation of Adjusted EBITDA, a non-GAAP measure, to net (loss) income, and for a reconciliation of Free Cash Flow, also a non-GAAP measure, to net cash provided by operating activities, see “—Summary Historical Consolidated Financial and Other Data.” Additionally, as of June 30, 2016 and December 31, 2015, we had total long-term debt, net of $364.0 million and $377.9 million outstanding, respectively. We intend to use the net proceeds of this offering to repay a portion of this indebtedness. See “Use of Proceeds.”

Highly Regarded, Experienced and Committed Management Team. We are led by a dedicated and experienced senior management team with significant industry experience and knowledge focused on clinical development. We were founded in 1992 by Dr. August J. Troendle, an industry pioneer, and we continue today as a founder-led enterprise with Dr. Troendle retaining a significant ownership stake in Medpace. Our management team has been responsible for developing our scientifically-driven, disciplined operating model, building our global platform and realizing our significant organic growth in revenue and earnings. Our senior management team has an average tenure with Medpace of 12 years, including four senior managers with over 20 years with us, and brings a healthy balance of significant experience with Medpace, regulators and other companies in the industry, including public companies.

Our Growth Strategy

Key elements of our growth strategy include:

Continued Focus on Organic Growth. Our strong organic growth has been the result of consistently reinvesting our positive cash flow to support our therapeutic capabilities, service offerings and global expansion. As a founder-led enterprise, we intend to continue to emphasize preserving our unique culture and operating philosophy as we grow our scientific capabilities and clinical trial expertise by further investing in human capital. In addition to leveraging our operating model, we intend to continue to selectively hire employees to strengthen and expand our expertise in high-growth therapeutic areas, including Oncology, CNS and AVAI. We methodically look to hire employees early in their careers and thoroughly train them to excel in our disciplined operating model, while instilling within them our corporate culture and philosophy. We apply this same training and standardization globally in order to maintain consistency and minimize inefficiencies in our operations.

 



 

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Continue to Sustain Industry-Leading Margins. Over the last 15 years, we have maintained average Adjusted EBITDA margins of approximately 34%. We intend to continue to maintain industry-leading margins (compared to our public competitors) while growing organically. We believe the key to sustaining margins is through the execution of our disciplined operating philosophy and full-service business model. Furthermore, we intend to continue to develop our centralized operations at our corporate headquarters in order to maintain standardization and consistency across our global operations.

Leverage Our Experience and Reputation in the Attractive, High-Growth Clinical Development Market. Our customers value the knowledge and therapeutic expertise we have developed from a long history of successfully executing clinical trials. As the regulatory landscape adapts to greater clinical trial complexity, we believe that biopharmaceutical companies will increasingly engage CROs with the requisite global resources as well as therapeutic and regulatory expertise to assume full responsibility of the clinical trial process. Based on our successful execution of clinical trials across many therapeutic areas in multiple countries, as well as our focus on closely partnering with our customers through all aspects of the clinical trial process, we believe we have developed a strong reputation in the industry as a leading CRO. We believe that this reputation positions us to continue capturing additional share of the attractive, high-growth clinical development market as the industry increasingly recognizes the benefits of our operating model.

Deepen Existing and Develop New Relationships with Our Core Customer Segment. We look to continue to deepen our long-standing relationships with existing customers through new engagements and expand our relationships with new small and mid-sized biopharmaceutical customers. As a strategic partner of choice, we clearly communicate and align our expectations with our customers at the beginning of an engagement to develop a close working relationship that is built on trust. We believe this trust, supported by our high-quality execution and frequent dialogue with our customers’ key decision makers, positions us to be awarded additional business in existing and new therapies, allowing us to grow alongside our customers and leading to an increasingly significant, and growing, contribution from repeat business. While our successes to date have built a substantial customer base, we believe that there is opportunity for continued growth and penetration in our core customer segment. We place our therapeutic leads alongside our sales team to actively participate in the procurement of new customers whose portfolios align with our therapeutic expertise, which we believe further differentiates us from our competitors.

Pursue Selective and Complementary Bolt-On Acquisitions. We intend to augment our organic growth with targeted acquisitions to expand our current capabilities and service offerings that are complementary to our full-service model. Our acquisition strategy is driven by our comprehensive commitment to serve customer needs. While we are continuously assessing the market for attractive opportunities, we do so selectively with a focus on targeting opportunities to acquire and integrate complementary and strategic, non-transformative acquisitions within the CRO sector in order to strengthen our competitive position and provide enhanced value to our customers.

Position Ourselves to Increase Our Presence Among Large Pharmaceutical Companies as These Customers Adopt and Appreciate the Full-Service Approach. Given the growing pressures large pharmaceutical companies are facing, these companies seek solutions beyond simply outsourcing clinical development. These companies are increasingly seeking strategic partnerships that provide more holistic clinical development services and also the expertise that CRO partners offer. We have witnessed a noticeable shift by large pharmaceutical companies away from lower-value, functional outsourcing service providers toward full-service CROs. Given our differentiated operating model, we believe larger pharmaceutical companies will be increasingly appreciative of our proven approach to clinical development and expertise, and we intend to actively market the strength and depth of our services to these companies.

 



 

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Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenues during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other regulatory requirements for up to five years that are otherwise applicable generally to public companies. These provisions include, among other matters:

 

  n   exemption from the auditor attestation requirement on the effectiveness of our system of internal control over financial reporting;

 

  n   exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

  n   exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

  n   an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

  n   reduced disclosure about executive compensation arrangements.

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new and revised accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of that extended transition period and, as a result, we plan to comply with new and revised accounting standards on the relevant dates on which adoption of those standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new and revised accounting standards is irrevocable.

We will remain an emerging growth company for five years unless, prior to that time, we (i) have more than $1.0 billion in annual revenues, (ii) have a market value for our common stock held by non-affiliates of more than $700 million as of the last day of our second fiscal quarter of the fiscal year when a determination is made whether we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or (iii) issue more than $1.0 billion of non-convertible debt over a three-year period.

We have elected to take advantage of some of the reduced disclosure obligations listed above in this prospectus, and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may cause a less active trading market for our common stock and more volatility in our stock price.

Risks Associated with Our Business

Investing in our common stock involves a number of risks, including the following:

 

  n   The potential loss, delay or non-renewal of our contracts, or the non-payment by our customers for services that we have performed, could adversely affect our results.

 

  n   Our backlog may not convert to net service revenue at our historical conversion rates.

 

  n   Our operating results have historically fluctuated between fiscal quarters and years and may continue to fluctuate in the future, which may adversely affect the market price of our stock after this offering.

 

  n   Our operating margins could decrease due to increased pricing pressure or other pressures.

 



 

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  n   If we fail to perform our services in accordance with contractual requirements, government regulations and ethical considerations, we could be subject to significant costs or liability and our reputation could be adversely affected.

 

  n   Outsourcing trends in the biopharmaceutical industry and changes in aggregate expenditures and R&D budgets could adversely affect our operating results and growth rate.

 

  n   We face intense competition in many areas of our business and, if we do not compete effectively, our business may be harmed.

 

  n   Our indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations and may otherwise restrict our activities.

 

  n   Cinven (defined below) and Dr. August J. Troendle, our Chief Executive Officer and founder, will collectively own a substantial majority of our outstanding common stock after this offering, and they will have control over decisions that require the approval of shareholders, which could limit your ability to influence the outcome of matters submitted to shareholders for a vote. In addition, their interests may be different from or conflict with yours.

 

  n   Upon the listing of our shares on the NASDAQ Global Select Market, or NASDAQ, we will be a “controlled company” within the meaning of the NASDAQ rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

These and other risks are more fully described in the section entitled “Risk Factors” below, which you should carefully read and consider before making a decision to invest in our common stock. If any of these risks actually occur, our business, financial condition, results of operations, cash flows or reputation would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline, and you could lose all or part of your investment.

The Transaction

In April 2014, investment funds managed by Cinven Capital Management (V) General Partner Limited, or Cinven, a private equity firm, acquired 100% of the outstanding shares of Medpace IntermediateCo, Inc., or Medpace IntermediateCo, for an aggregate purchase price of $921.3 million. In connection with the acquisition, certain employees of the Company, through Medpace Investors, LLC, or MPI, agreed to contribute shares held in Medpace IntermediateCo in exchange for a percentage stake in Medpace Holdings, Inc. We refer to these transactions, collectively, as the “Transaction.” Immediately following the Transaction, Cinven and MPI owned approximately 75% and 25%, respectively, of Medpace Holdings, Inc. For an overview of our ownership structure following this offering, see “—Our Structure.”

Prior to the Transaction, CCMP Capital, or CCMP, a private equity firm, held 80% of our equity interests and the noncontrolling interests were held by certain current and former members of management, along with former members of the board of directors of Medpace, Inc., our wholly owned subsidiary.

Our Private Equity Sponsor

The Cinven group is a leading private equity firm, founded in 1977, with offices in Guernsey, London, Frankfurt, Paris, Madrid, Milan, Luxembourg, Hong Kong and New York. The group focuses on investments across six core sectors: Healthcare, Financial Services, Business Services, Consumer, Industrials and Technology and Media and Telecommunications. Its funds acquire high-quality companies and work with them to help them grow and develop. The Cinven group is a responsible investor, seeking to build long-term value through sustainable growth in the portfolio companies of its funds with consideration for their employees, suppliers, local communities, the environment and society. Since 1977, the Cinven group has completed transactions valued at in excess of 85 billion.

Upon the completion of this offering, Cinven will own approximately 58.0% of the outstanding shares of our common stock (or 56.5% if the underwriters exercise their option to purchase additional shares in full).

 



 

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Accordingly, Cinven will be able to exert a significant degree of influence or actual control over our management and affairs. See “Risk Factors—Risks Relating to Our Common Stock and This Offering—Cinven and our Chief Executive Officer and founder will collectively control a substantial majority of our outstanding common stock following this offering and their interests may be different from or conflict with those of our other shareholders” and “Principal Shareholders.”

Our Structure

The diagram below reflects a simplified overview of our organizational structure following this offering (including the application of the net proceeds therefrom):

 

LOGO

 

(1)    In conjunction with the Transaction, we entered into a new credit agreement, which provided for a $530.0 million term loan, or the Senior Secured Term Loan Facility, and a $60.0 million revolving credit facility, or the Senior Secured Revolving Credit Facility, and, together with the Senior Secured Term Loan Facility, the Senior Secured Credit Facilities. As of June 30, 2016, as described under “Use of Proceeds,” on an as adjusted basis after giving effect to this offering and the use of proceeds therefrom, we would have had approximately $225.7 million of outstanding indebtedness under our Senior Secured Term Loan Facility and no borrowings outstanding under our Senior Secured Revolving Credit Facility. For additional information about our Senior Secured Credit Facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

 



 

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Corporate Information

We are a Delaware corporation and were incorporated on February 18, 2014. Our principal executive offices are located at 5375 Medpace Way, Cincinnati, Ohio 45227, and our telephone number is (513) 579-9911. Our corporate website address is www.medpace.com. Our website and the information contained in, or that can be accessed through, our website is not deemed to be incorporated by reference in, and is not considered part of, this prospectus. You should not rely on any such information in making your decision whether to purchase our common stock.

 



 

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THE OFFERING

 

Common stock offered by us

7,000,000 shares.

 

Option to purchase additional shares of common stock

The underwriters have the option to purchase up to an additional 1,050,000 shares of common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Common stock to be outstanding after this offering

39,642,113 shares (40,692,113 shares if the underwriters’ exercise their option to purchase additional shares in full).

 

Use of proceeds

We estimate that the net proceeds to us from our sale of 7,000,000 shares of common stock in this offering will be approximately $138.3 million, assuming an initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering. We intend to use the net proceeds of this offering to repay $138.3 million in aggregate principal amount of outstanding borrowings under our Senior Secured Term Loan Facility. In the event that the underwriters exercise their option to purchase additional shares, we intend to use the net proceeds from the sale of such shares to repay additional borrowings outstanding under our Senior Secured Term Loan Facility. See “Use of Proceeds.”

 

Dividend policy

We have no current plans to pay any cash dividends on our common stock in the foreseeable future; however, we may change this policy in the future. See “Dividend Policy.”

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 20 of this prospectus for a discussion of factors you should consider carefully before investing in our common stock.

 

Listing

We have applied to list our common stock on NASDAQ under the symbol “MEDP.”

Except as otherwise indicated in this prospectus, the number of shares of common stock to be outstanding after this offering is based on 32,642,113 shares outstanding as of June 30, 2016 and excludes:

 

  n   1,779,637 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2016 at a weighted average exercise price of $15.48 per share; and

 

  n   an additional 6,000,000 shares of common stock reserved for future issuance under our 2016 Incentive Award Plan, or the Plan, including pursuant to equity awards to be granted in connection with this offering, as described in “Executive and Director Compensation—Narrative to Summary Compensation Table—Offering Grants to Employees under the 2016 Incentive Award Plan.”

Unless otherwise indicated, all information in this prospectus:

 

  n   assumes the initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus);

 

  n   assumes no exercise of the underwriters’ option to purchase additional shares of our common stock;

 



 

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  n   assumes the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will be in effect prior to the consummation of this offering; and

 

  n   with respect to the Successor periods presented, reflects a 1-for-1.35 reverse stock split of our common stock, which we effectuated on July 25, 2016.

Our Chief Executive Officer and founder, Dr. August J. Troendle, has indicated an interest to purchase up to $20.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, Dr. Troendle may determine to increase or reduce the amount of his indication of interest, or otherwise elect not to purchase any shares. It is also possible that the number of shares, if any, allocated to Dr. Troendle in the offering may be smaller than the amount of his indication of interest. Any allocation of shares in the offering to Dr. Troendle will be made at our direction. The underwriters will receive the same underwriting discount on any shares purchased by Dr. Troendle as they will on any other shares sold to the public in this offering.

 

 



 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our summary consolidated financial and other data for the periods ending on and as of the dates indicated. We derived the consolidated statements of operations data for the years ended December 31, 2013 (Predecessor) and December 31, 2015 (Successor) from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. We derived the consolidated statements of operations data for the Predecessor three month period ended March 31, 2014 and the Successor nine month period ended December 31, 2014 from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. We derived the condensed consolidated statements of operations data for the Successor six months ended June 30, 2015 and June 30, 2016 and the condensed consolidated balance sheet data as of June 30, 2016 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial information set forth below on the same basis as our audited consolidated financial statements and have included all adjustments, consisting of only normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods.

The accompanying consolidated statements of operations, cash flows and shareholders’ equity are presented for two periods, Predecessor and Successor, which relate to the period preceding the Transaction and the period succeeding the Transaction, respectively. The Company refers to the operations of Medpace Holdings, Inc. and subsidiaries for both the Predecessor period and Successor period.

The results for any interim period are not necessarily indicative of the results that may be expected for a full year. Additionally, our historical results are not necessarily indicative of future results. You should read the information set forth below together with “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

 

 

    SUCCESSOR     PREDECESSOR  
(In thousands, except per share data)   SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1,

2014
THROUGH
DECEMBER 31,
2014
    THREE MONTH
PERIOD FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

Consolidated Statements of Operations Data:

             

Service revenue, net

  $ 180,433      $ 152,782      $ 320,101      $ 219,791      $ 70,250      $ 244,270   

Reimbursed out-of-pocket revenue

    25,107        18,105        38,958        28,708        7,679        28,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    205,540        170,887        359,059        248,499        77,929        272,890   

Operating expenses:

             

Direct costs, excluding depreciation and amortization

    96,215        77,725        163,707        117,550        38,759        119,779   

Reimbursed out-of-pocket expenses

    25,107        18,105        38,958        28,708        7,679        28,620   

Selling, general and administrative

    28,333        23,448        56,998        29,465        10,203        35,109   

Acquisition and integration

                         9,297        12,420          

Impairment of goodwill

                  9,313                        

Depreciation

    3,566        3,110        6,379        4,610        1,832        6,665   

Amortization

    25,336        34,243        63,142        56,422        5,199        23,854   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    178,557        156,631        338,497        246,052        76,092        214,027   

 

 

 



 

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    SUCCESSOR     PREDECESSOR  
(In thousands, except per share data)   SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1,

2014
THROUGH
DECEMBER 31,
2014
    THREE MONTH
PERIOD FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 
 

Income from operations

    26,983        14,256        20,562        2,447        1,837        58,863   

Other (expense) income, net:

             

Miscellaneous (expense) income, net

    (941     (978     (1,133     (301     1,213        (1,718

Interest expense, net

    (11,894     (13,975     (27,259     (23,185     (3,272     (18,000
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (12,835     (14,953     (28,392     (23,486     (2,059     (19,718
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    14,148        (697     (7,830     (21,039     (222     39,145   

Income tax provision (benefit)

    5,738        (733     843        (6,703     1,014        14,301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 8,410      $ 36      $ (8,673   $ (14,336   $ (1,236   $ 24,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common shareholders:

             

Basic

  $ 0.26      $ 0.00      $ (0.28   $ (0.46   $ (0.05   $ 0.99   

Diluted

  $ 0.26      $ 0.00      $ (0.28   $ (0.46   $ (0.05   $ 0.95   

Weighted average common shares outstanding:

             

Basic

    32,631        31,527        31,346        30,869        25,047        25,204   

Diluted

    32,631        31,591        31,346        30,869        25,047        26,150   

Unaudited Pro Forma Data:

             

Pro forma as adjusted net income (loss) per common share (1):

             

Basic

  $ 0.26        $ (0.12        

Diluted

  $ 0.26        $ (0.12        

Pro forma as adjusted weighted average number of common shares outstanding (1):

             

Basic

    39,631          38,346           

Diluted

    39,631          38,346           
 

Cash Flow Data:

             

Net cash provided by operating activities

  $ 19,982      $ 26,271      $ 84,117      $ 62,539      $ 12,807      $ 98,142   

Net cash used in investing activities

    (5,653     (2,658     (6,432     (907,640     (827     (4,472

Net cash (used in) provided by financing activities

    (15,678     (65,702     (116,489     900,171        (17,968     (95,851

 

 

 



 

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    SUCCESSOR     PREDECESSOR  
(In thousands)   SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1,
2014
THROUGH
DECEMBER 31,
2014
    THREE MONTH
PERIOD FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

Other Financial Data:

             

EBITDA (2)

  $ 54,944      $ 50,631      $ 88,950      $ 63,178      $ 10,081      $ 87,664   

Adjusted EBITDA (2)

    56,427        48,385        101,216        70,450        21,710        85,409   

Adjusted net income (2)

    26,271        21,147        40,445        26,685        9,715        41,407   

Free Cash Flow (2)

    13,545        23,030        76,360        57,030        11,552        93,581   

Backlog (at period end) (3)

    465,738        400,627        429,659        394,023        386,047        359,341   

Net new business awards (4)

    218,113        162,638        359,538        231,918        97,220        291,577  
           

 

 

 

(In thousands)    AS OF
JUNE 30,
2016
    AS ADJUSTED
AS OF

JUNE 30,
2016 (5)
 

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 13,674      $ 13,674   

Restricted cash

     3,366        3,366   

Accounts receivable and unbilled, net

     90,048        90,048   

Working capital

     (22,260     (24,121

Total assets

     994,863        993,002   

Total long-term debt, net

     364,033        225,744   

Total liabilities

     572,227        433,938   

Total shareholders’ equity

     422,636        559,064   

Total liabilities and shareholders’ equity

     994,863        993,002   

 

 

(1)   We present certain information on a pro forma as adjusted basis to give pro forma effect to the sale by us of 7,000,000 shares of our common stock in this offering (assuming no exercise of the underwriters’ option to purchase additional shares) at an assumed initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus) after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering and the application of the net proceeds to be received by us from this offering to repay $138.3 million in aggregate principal amount of outstanding borrowings under our Senior Secured Term Loan Facility as described in “Use of Proceeds.”

Pro forma as adjusted net income (loss) reflects (i) the decrease in interest expense, net resulting from the repayment of $138.3 million in aggregate principal amount of outstanding borrowings under our Senior Secured Term Loan Facility with the net proceeds from this offering, as described in “Use of Proceeds,” and (ii) increases in income tax expense due to higher income before income taxes resulting from a decrease in interest expense, net as a result of the repayment of $138.3 million in aggregate principal amount of outstanding borrowings under our Senior Secured Term Loan Facility as described in (i) above as if each of these events had occurred on January 1, 2015. Pro forma as adjusted basic net income (loss) per common share consists of pro forma as adjusted net income (loss) divided by the pro forma as adjusted basic weighted average number of common shares outstanding. Pro forma as adjusted diluted net income (loss) per common share consists of pro forma as adjusted net income (loss) divided by the pro forma as adjusted diluted weighted average number of common shares outstanding.

 



 

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The table below provides a summary of net income (loss) used in the calculation of basic and diluted net income (loss) per common share on a pro forma as adjusted basis for the periods presented (in thousands):

 

 

 

     SIX MONTHS
ENDED
JUNE 30,
2016
    YEAR ENDED
DECEMBER 31,
2015
 

Net income (loss)

   $ 8,410      $ (8,673

Reduction of interest expense

     3,321        6,660   

Tax effect of the above adjustments

     (1,295     (2,597
  

 

 

   

 

 

 

Pro forma as adjusted net income (loss)

   $ 10,436      $ (4,610
  

 

 

   

 

 

 

 

 

Pro forma as adjusted weighted average number of common shares outstanding used in the calculation of pro forma as adjusted basic and diluted net income (loss) per common share gives effect to the sale by us of 7,000,000 shares of our common stock in this offering (assuming no exercise of the underwriters’ option to purchase additional shares) as if this event had occurred on January 1, 2015.

The table below provides a summary of the weighted average number of common shares outstanding used in the calculation of basic and diluted net income (loss) per common share on a pro forma as adjusted basis:

 

 

 

     SIX MONTHS
ENDED

JUNE 30,
2016
     YEAR ENDED
DECEMBER 31,
2015
 

Weighted average common shares outstanding—basic

     32,631         31,346   

Common shares sold in this offering

     7,000         7,000   
  

 

 

    

 

 

 

Pro forma as adjusted weighted average common share outstanding—basic

     39,631         38,346   

Incremental shares from the assumed exercise of outstanding stock options

     —           —     
  

 

 

    

 

 

 

Pro forma as adjusted weighted average common shares outstanding—diluted

     39,631         38,346   
  

 

 

    

 

 

 

 

 

(2)   We prepare our financial statements in conformity with U.S. GAAP. To supplement this information, we also use the following non-GAAP financial measures in this prospectus: EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow. EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are measures used by management to assess operating performance. EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are not presented in accordance with U.S. GAAP, are not measures of financial condition or profitability and should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP or net cash provided by operating activities determined in accordance with U.S. GAAP, as applicable, or any other performance measure derived in accordance with U.S. GAAP and should not be construed as an inference that our future results will be unaffected by unusual non-recurring items. Management uses EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow or comparable metrics:

 

  n   as a measurement used in evaluating our operating performance on a consistent basis;

 

  n   as a consideration to assess incentive compensation for our employees;

 

  n   for planning purposes, including the preparation of our internal annual operating budget; and

 

  n   to evaluate the performance and effectiveness of our operational strategies.

We believe that the inclusion of EBITDA and Adjusted EBITDA in this prospectus is useful to provide additional information to investors about certain material non-cash and non-recurring items. While we believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors, because not all companies use identical calculations, this presentation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies and should not be considered as an alternative to performance measures derived in accordance with U.S. GAAP. EBITDA is calculated as net income (loss) attributable to Medpace Holdings, Inc. before income tax expense, interest expense, net, depreciation and amortization with Adjusted EBITDA being further adjusted for unusual and other items reflected in the reconciliation table below. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by usual or non-recurring items.

 



 

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EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation, or as a substitute for, analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 

  n   they do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

  n   they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

  n   they do not reflect changes in, or cash requirements for, our working capital needs;

 

  n   although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect the cash requirements for such replacements;

 

  n   they do not reflect our income tax expense or the cash requirements to pay our taxes;

 

  n   Adjusted EBITDA does not reflect the non-cash component of certain stock based awards related to fair value adjustments and unusual non-recurring stock awards;

 

  n   Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, as discussed in our presentation of Adjusted EBITDA and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus; and

 

  n   other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only supplementally.

We utilize Free Cash Flow as a measure of profitability and an assessment of our ability to generate cash. Free Cash Flow is a commonly utilized metric that companies provide to investors, although the calculation of Free Cash Flow may not be comparable to other similarly titled metrics of other companies and should not be considered as an alternative to cash flow measures derived in accordance with U.S. GAAP. We define Free Cash Flow as net cash provided by operating activities, less capital expenditures and the principal portion of payments related to campus leases classified for accounting purposes as deemed landlord liabilities.

Adjusted Net Income measures our operating performance by adjusting net income (loss) attributable to Medpace Holdings, Inc. to include cash expenditures related to rental payments on leases classified for accounting purposes as deemed landlord liabilities, and exclude amortization expense, certain stock based compensation award non-cash expenses, certain litigation expenses, deferred financing fees and certain other non-recurring items. Management uses this measure to evaluate our core operating results as it excludes certain items whose fluctuations from period-to-period do not necessarily correspond to changes in the core operations of the business, but includes certain items such as depreciation, interest expense and tax expense, which are otherwise excluded from Adjusted EBITDA. We believe the presentation of Adjusted Net Income enhances our investors’ overall understanding of the financial performance and cash flow of our business. You should not consider Adjusted Net Income as an alternative to net income (loss) attributable to Medpace Holdings, Inc., determined in accordance with U.S. GAAP, as an indicator of operating performance.

 



 

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See the consolidated financial statements included elsewhere in this prospectus for our U.S. GAAP results. Set forth below are the reconciliations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow to our closest reported U.S. GAAP measures.

 

 

 

    SUCCESSOR     PREDECESSOR  
(In thousands)   SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,

2015
    NINE MONTH
PERIOD FROM
APRIL 1, 2014
THROUGH
DECEMBER 31,
2014
    THREE
MONTH
PERIOD
FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

EBITDA and Adjusted EBITDA:

             

Net income (loss) as reported

  $ 8,410      $ 36      $ (8,673   $ (14,336   $ (1,236   $ 24,844   

Interest expense, net

    11,894        13,975        27,259        23,185        3,272        18,000   

Income tax provision (benefit)

    5,738        (733     843        (6,703     1,014        14,301   

Depreciation

    3,566        3,110        6,379        4,610        1,832        6,665   

Amortization

    25,336        34,243        63,142        56,422        5,199        23,854   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    54,944        50,631        88,950        63,178        10,081        87,664   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock compensation expense: liability awards mark-to-market and CEO award (a)

    2,576        (12     9,780                        

Private equity transaction related cost (b)

                         9,297        12,420          

Corporate campus lease payments (c)

    (1,860     (1,860     (3,720     (2,773     (918     (3,635

Litigation matters (d)

           (374     (3,107     748        127        1,380   

Impairment of goodwill

                  9,313                        

Other transaction expenses (f)

    767                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 56,427      $ 48,385      $ 101,216      $ 70,450      $ 21,710      $ 85,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income:

             

Net income (loss) as reported

  $ 8,410      $ 36      $ (8,673   $ (14,336   $ (1,236   $ 24,844   

Amortization

    25,336        34,243        63,142        56,422        5,199        23,854   

Stock compensation expense: liability awards mark-to-market and CEO award (a)

    2,576        (12     9,780                        

Private equity transaction related cost (b)

                         9,297        12,420          

Corporate campus lease payments—principal portion (c)

    (744     (576     (1,292     (1,284     (165       

Litigation matters (d)

           (374     (3,107     748        127        1,380   

Impairment of goodwill

                  9,313                        

Deferred financing fees (e)

    1,345        1,328        2,687        2,064        371        1,918   

Other transaction expenses (f)

    767                                      

Income tax effect of adjustments (39.0%)

    (11,419     (13,498     (31,405     (26,226     (7,001     (10,589
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 26,271      $ 21,147      $ 40,445      $ 26,685      $ 9,715      $ 41,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow:

             

Cash flow provided by operating activities

  $ 19,982      $ 26,271      $ 84,117      $ 62,539      $ 12,807      $ 98,142   

Less: Capital expenditures

    (5,693     (2,665     (6,465     (4,225     (1,090     (4,561

Less: Corporate campus lease payments—principal portion (c)

    (744     (576     (1,292     (1,284     (165       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

  $ 13,545      $ 23,030      $ 76,360      $ 57,030      $ 11,552      $ 93,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (a)   Consists of period end mark-to-market fair value adjustments associated with liability classified awards and the impact of a one-time stock based compensation award to our Chief Executive Officer and founder. Future stock based awards activity is expected to be classified as equity for accounting purposes and will not be subject to period ending fair value adjustments.

 

  (b)   Represents attorney fees, advisory fees and other professional service fees incurred in connection with the Transaction.

 



 

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  (c)   Represents cash rental payments on two corporate headquarter buildings that are accounted for as deemed assets and subject to depreciation expense over the life of the lease. Payments made for these leases are accounted for with a principal portion and an interest portion, consistent with deemed landlord liability accounting. For purposes of Free Cash Flow, the interest portion of these payments is included in net cash provided by operating activities in our statement of cash flows. The principal portion is reflected as a financing activity in our statement of cash flows. These adjustments for purposes of arriving at Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have the effect of presenting these leases consistently with all other office lease rentals that we have globally.

 

  (d)   Represents non-recurring costs and recovery related to a customer bad debt and non-recurring expenses related to the settlement of an employment related matter.

 

  (e)   Represents amortization of the discount and issuance costs deferred on the consolidated balance sheet associated with the issuance of the Senior Secured Credit Facility.

 

  (f)   Represents advisory costs and other fees related to this offering.

 

(3)    Backlog represents anticipated future net service revenue from net new business awards that have not commenced or are currently in process but not complete. However, because the contracts included in our backlog are generally terminable without cause, we do not believe that our backlog as of any date is necessarily a meaningful predictor of future results.

 

(4)    Net new business awards are new business awards net of award modifications and cancellations that had previously been recognized in backlog during the period. New business awards represent the value of anticipated future net service revenue that has been awarded during the period that is recognized in backlog. This value is recognized upon the signing of a contract or receipt of a written pre-contract confirmation from a customer that confirms an agreement in principle on budget and scope. New business awards also include contract amendments, or changes in scope, where the customer has provided written authorization for changes in budget and scope or has approved us to perform additional work as of the measurement date. Awards may not be recognized as backlog after consideration of a number of factors, including whether (i) the relevant net service revenue is expected only after a pending regulatory hurdle, which might result in cancellation of the study, (ii) the customer funding needed for commencement of the study is not believed to have been secured or (iii) study timelines are uncertain or not well defined. In addition, study amounts that extend beyond a three-year timeline are not included in backlog. The number and amount of new business awards can vary significantly from period to period, and an award’s contractual duration can range from several months to several years based on customer and project specifications.

 

(5)    On an as adjusted basis to give effect to our issuance and sale of 7,000,000 shares of our common stock in this offering at the initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering and the application of the net proceeds to be received by us from this offering as described under “Use of Proceeds.”

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below together with the other information included in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to purchase our common stock. The occurrence of any of the following risks may materially and adversely affect our business, financial condition, results of operations and future prospects. In such an event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Relating to Our Business

The potential loss, delay or non-renewal of our contracts, or the non-payment by our customers for services that we have performed, could adversely affect our results.

We experience termination, cancellation and non-renewals of contracts by our customers in the ordinary course of business, and the number and dollar value of cancellations can vary significantly from year to year.

The time between when a clinical trial is awarded and when it goes to contract is typically several months, and prior to a new business award going to contract, our customers can cancel the award without notice. Moreover, once an award goes to contract, most of our customers for clinical trial services can terminate our contracts without cause upon 30 days’ notice. For example, our average quarterly cancellation rates as a percentage of the beginning of the period backlog were 4.2% and 2.7% for the Successor six months ended June 30, 2016 and June 30, 2015, respectively, and 3.2% for the Successor year ended December 31, 2015, 3.3% for the Successor nine month period ended December 2014, 2.5% for the Predecessor three month period ended March 2014 and 3.7% for the Predecessor year ended December 2013. Our customers may delay, terminate or reduce the scope of our contracts for a variety of reasons beyond our control, including, but not limited to:

 

  n   decisions to forego or terminate a particular clinical trial;

 

  n   lack of available financing, budgetary limits or changing priorities;

 

  n   actions by regulatory authorities;

 

  n   changes in law;

 

  n   production problems resulting in shortages of the drug being tested;

 

  n   failure of the drug being tested to satisfy safety requirements or efficacy criteria;

 

  n   unexpected or undesired clinical results;

 

  n   insufficient investigator recruitment or patient enrollment in a trial;

 

  n   decisions to downsize product development portfolios;

 

  n   dissatisfaction with our performance, including the quality of data provided and our ability to meet agreed upon schedules;

 

  n   shift of business to another CRO or internal resources;

 

  n   product withdrawal following market launch; or

 

  n   shut down of our customers’ manufacturing facilities.

As a result, contract terminations, delays and modifications are a regular part of our business. In the event of termination, our contracts often provide for payment to us of fees for services provided up to the point of termination and for close-out activities for winding down the clinical trial, and reimbursement of all non-cancellable expenses. These payments may not be sufficient for us to maintain our profit margins, and termination or non-renewal may result in lower resource utilization rates, including with respect to personnel who we are not able to place on another customer engagement. Historically, cancellations and delays have negatively impacted our operating results.

Clinical trials can be costly and for the Successor year ended December 31, 2015, 55.7% and 29.3% of our net service revenue was derived from small biopharmaceutical companies and mid-sized biopharmaceutical companies, respectively, which may have limited access to capital. In addition, we provide services to our customers before they pay us for some of our services. There is a risk that we may initiate a clinical trial for a customer, and the customer subsequently becomes unwilling or unable to fund the completion of the trial. In such a situation, notwithstanding

 

20


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the customer’s ability or willingness to pay for or otherwise facilitate the completion of the trial, we may be legally or ethically bound to complete or wind down the trial at our own expense.

Because the contracts included in our backlog are generally terminable without cause, we do not believe that our backlog as of any date is necessarily a meaningful predictor of future results. In addition, we may not realize the full benefits of our backlog of contractually committed services if our customers cancel, delay or reduce their commitments under our contracts with them. Thus, the loss or delay of a large contract or the loss or delay of multiple contracts could adversely affect our net service revenue and profitability. In addition, the terminability of our contracts puts increased pressure on our quality control efforts, since not only can our contracts be terminated by customers as a result of poor performance, but any such termination may also affect our ability to obtain future contracts from the customer involved and others.

Our backlog may not convert to net service revenue at our historical conversion rates.

Backlog represents anticipated future net service revenue from net new business awards that have not commenced or are currently in process but not complete. Reported backlog will fluctuate based on new business awards, changes in scope to existing contracts, cancellations, revenue recognition on existing contracts and foreign exchange adjustments from non-U.S. dollar denominated backlog. Our backlog as of June 30, 2016 and June 30, 2015 was approximately $465.7 and $400.6 million, respectively. Included within backlog as of June 30, 2016 is approximately $170.1 million to $175.1 million that we expect to convert to net service revenue in 2016, with the remainder expected to convert to net service revenue in years after 2016. Once work begins on a project, net service revenue is recognized over the duration of the project. Projects may be terminated or delayed by the customer or delayed by regulatory authorities for reasons beyond our control. To the extent projects are delayed, the timing of our net service revenue could be adversely affected. Moreover, in the event that a customer cancels a contract, we often would be entitled to receive payment for services provided up to the point of cancellation and for close-out activities for winding down the clinical trial, and reimbursement of all non-cancellable expenses. Typically, however, we have no contractual right to the full amount of the future net service revenue reflected in our backlog in the event of a contract cancellation or subsequent changes in scope that reduce the value of the contract. The duration of the projects included in our backlog, and the related net service revenue recognition, generally range from a few months to several years. Our backlog may not be indicative of our future net service revenue, and we may not realize all of the anticipated future net service revenue reflected in our backlog. A number of factors may affect the realization of our net service revenue from backlog, including:

 

  n   the size, complexity and duration of the projects;

 

  n   the cancellation or delay of projects; and

 

  n   changes in the scope of work during the course of a project.

Fluctuations in our reported backlog levels also result from the fact that we may receive a small number of relatively large projects in any given reporting period that may be included in our backlog. Because of these large projects, our backlog in that reporting period may reach levels that may not be sustained in subsequent reporting periods. Additionally, although an increase in backlog will generally result in an increase in net service revenue over time, an increase in backlog at a particular point in time does not necessarily correspond directly to an increase in net service revenue during any particular period, or at all. The extent to which contracts in backlog will result in net service revenue depends on many factors, including, but not limited to, delivery against project schedules, scope changes, contract terminations and the nature, duration and complexity of the contracts, and can vary significantly over time.

As we increasingly compete for and enter into large contracts that are more global in nature, there can be no assurance about the rate at which our backlog will convert into net service revenue. A decrease in this conversion rate would mean that the rate of net service revenue recognized on contracts may be slower than what we have experienced in the past, which could impact our net service revenue and results of operations on a quarterly and annual basis. The revenue recognition on larger, more global projects could be slower than on smaller, less global projects for a variety of reasons, including, but not limited to, an extended period of negotiation between the time the project is awarded to us and the actual execution of the contract, as well as an increased timeframe for obtaining the necessary regulatory approvals. Additionally, delayed projects will remain in backlog and will not generate revenue at the rate originally expected. Thus, the relationship of backlog to realized revenues is indirect and may vary significantly over time.

 

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Additionally, there has been a recent slowdown in funding in the biotechnology industry. If small and mid-sized biopharmaceutical companies become less able to access capital in the future, we may see a decrease in backlog conversion to net service revenue and net new business awards due to project delays or cancellations. These companies have contributed materially to our historical net service revenue. If they cannot commit the same or a greater level of capital to our services going forward, our results of operations may suffer.

Our operating results have historically fluctuated between fiscal quarters and years and may continue to fluctuate in the future, which may adversely affect the market price of our stock after this offering.

Our operating results have fluctuated in previous quarters and years and may continue to vary significantly from quarter to quarter and year to year and are influenced by a variety of factors, such as:

 

  n   timing of contract amendments for changes in scope that could affect the value of a contract and potentially impact the amount of net new business awards and net service revenue from quarter to quarter;

 

  n   commencement, completion, execution, postponement or termination of large contracts;

 

  n   contract terms for the billing and recognition of revenue milestones;

 

  n   progress of ongoing contracts and retention of customers;

 

  n   timing of and charges associated with completion of acquisitions and other events;

 

  n   changes in the mix of services delivered, both in terms of geography and type of services;

 

  n   customer disputes or other issues that may impact the revenue we are able to recognize or the collectability of our related accounts receivable; and

 

  n   exchange rate fluctuations.

Our operating results for any particular quarter or year are not necessarily a meaningful indicator of future results and fluctuations in our quarterly or yearly operating results could negatively affect the market price and liquidity of shares of our common stock.

Our operating margins could decrease due to increased pricing pressure or other pressures.

Historically, we have been able to generate the operating margins that we do because of our disciplined, full-service operating model. However, we operate in a highly competitive environment, and, if we experience increased levels of competitive pricing pressure, our operating margins may decrease. In addition, we may adapt our operating model to achieve greater levels of growth or in response to investor demands. Such a change could result in lower operating margins.

If we fail to perform our services in accordance with contractual requirements, government regulations and ethical considerations, we could be subject to significant costs or liability and our reputation could be adversely affected.

We contract with biopharmaceutical companies to perform a wide range of services to assist them in bringing new drugs to market. Our services include monitoring clinical trials, data and laboratory analysis, electronic data capture, patient recruitment and other related services. Such services are complex and subject to contractual requirements, government regulations, and ethical considerations. For example, we are subject to regulation by the FDA and comparable foreign regulatory authorities relating to our activities in conducting pre-clinical studies and clinical trials. Before clinical trials begin in the United States, a drug is tested in pre-clinical trials that must comply with Good Laboratory Practice and other requirements. An applicant must file an Investigational New Drug Application, or IND, which must become effective before human clinical testing may begin. Further, an independent Institutional Review Board, or IRB, for each medical center proposing to participate in the clinical trial must review and approve the protocol for the clinical trial. Once initiated, clinical trials must be conducted pursuant to and in accordance with the applicable IND conditions, the requirements of the relevant IRBs, the Federal Food, Drug, and Cosmetic Act and its implementing regulations, including Good Clinical Practice, or GCP, and other requirements. We are also subject to regulation by the Drug Enforcement Administration, or DEA, which regulates the distribution, recordkeeping, handling, security, and disposal of controlled substances. If we fail to perform our services in accordance with these requirements, regulatory authorities may take action against us or our customers. Such actions may include injunctions or failure of such regulatory authority to grant marketing approval of our customers’ products, imposition of clinical holds or delays, suspension or withdrawal of approvals, rejection of data collected in our clinical trials, license revocation, product seizures or recalls, operational restrictions, civil or criminal penalties or prosecutions, damages or fines. Customers may also bring claims against us for breach of our contractual

 

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obligations, and patients in the clinical trials and patients taking drugs approved on the basis of those trials may bring personal injury claims against us. Any such action could have a material adverse effect on our business, financial condition, results of operations, cash flows or reputation.

Such consequences could arise if, among other things, the following occur:

Improper performance of our services. The performance of clinical development services is complex and time-consuming. For example, we may make mistakes in conducting a clinical trial that could negatively impact or obviate the usefulness of results of the trial or cause the results of the trial to be reported improperly. If the trial results are compromised, we could be subject to significant costs or liability, which could have an adverse impact on our ability to perform our services and our reputation would be harmed. As examples:

 

  n   non-compliance generally could result in the termination of ongoing clinical trials or the disqualification of data for submission to regulatory authorities;

 

  n   non-compliance could compromise data from a particular trial, such as failure to verify that adequate informed consent was obtained from patients, which could require us to repeat the trial under the terms of our contract at no further cost to our customer, but at a potentially substantial cost to us; and

 

  n   breach of a contractual term could result in liability for damages or termination of the contract.

The services we provide in connection with large clinical trials can cost tens of millions of dollars, and while we endeavor to contractually limit our exposure to such risks, improper performance of our services could have a material adverse effect on our financial condition, damage our reputation and result in the cancellation of current contracts by the affected customer or other current customers or failure to obtain future contracts from the affected customer or other current or potential customers.

Investigation of customers. From time to time, one or more of our customers are investigated by regulatory authorities or enforcement agencies with respect to regulatory compliance of their clinical trials, programs or the marketing and sale of their drugs. In these situations, we have often provided services to our customers with respect to the clinical trials, programs or activities being investigated, and we are called upon to respond to requests for information by the authorities and agencies. There is a risk that either our customers or regulatory authorities could claim that we performed our services improperly or that we are responsible for clinical trial or program compliance. If our customers or regulatory authorities make such claims against us, we could be subject to significant costs in defending our activities and potential damages, fines or penalties. In addition, negative publicity regarding regulatory compliance of our customers’ clinical trials, programs or products could have an adverse effect on our business and reputation.

Insufficient customer funding to complete a clinical trial. As noted above, clinical trials can cost tens of millions of dollars. There is a risk that we may initiate a clinical trial for a customer, and then the customer becomes unwilling or unable to fund the completion of the trial. In such a situation, notwithstanding the customer’s ability or willingness to pay for or otherwise facilitate the completion of the trial, we may be ethically bound to complete or wind down the trial at our own expense.

Interactive voice/web response service malfunction. We develop and maintain our own, and also use third-parties to run, interactive voice/web response systems. These systems automatically manage the randomization of patients in a given clinical trial to different treatment arms and regulate the supply of investigational drugs. An error in the design, programming or validation of these systems could lead to inappropriate assignment or dosing of patients which could give rise to patient safety issues, invalidation of the trial or liability claims against us. Furthermore, negative publicity associated with such a malfunction could have an adverse effect on our business and reputation. Additionally, errors in randomization may require us to repeat the trial at no further cost to our customer, but at a substantial cost to us.

In addition to the above U.S. laws and regulations, we must comply with the laws of all countries where we do business, including laws governing clinical trials in the jurisdiction where the trials are performed. Failure to comply with applicable requirements could subject us to regulatory risk, liability and potential costs associated with redoing the trials, which could damage our reputation and adversely affect our operating results.

 

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We bear financial risk if we underprice our fixed-fee contracts or overrun cost estimates, and our financial results can also be adversely affected by failure to receive approval for change orders or delays in documenting change orders.

The majority of our Phase I–IV contracts are fixed-fee contracts. We bear the financial risk if we initially underprice our contracts or otherwise overrun our cost estimates. In addition, contracts with our customers are subject to change orders, which we commonly experience and which occur when the scope of work we perform needs to be modified from that originally contemplated by our contract with the customer. Modifications can occur, for example, when there is a change in a key trial assumption or parameter, a significant change in timing or a change in staffing needs. Furthermore, we may be unable to successfully negotiate changes in scope or change orders on a timely basis or at all, which could require us to incur cost outlays ahead of the receipt of any additional revenue. In addition, under U.S. GAAP, we cannot recognize additional revenue anticipated from change orders until appropriate documentation is received by us from the customer authorizing the change. However, if we incur additional expense in anticipation of receipt of that documentation, we must recognize the expense as incurred. Such underpricing, significant cost overruns or delay in documentation of change orders could have a material adverse effect on our business, results of operations, financial condition or cash flows.

If we are unable to successfully execute our growth strategies, our results of operations or financial condition could be adversely affected.

Our key growth strategies include: continued organic growth, continued maintenance of industry-leading margins (compared to our public competitors), increasing capture of the high-growth clinical development market, deepening existing and developing new relationships with our core customer segment, pursuing selective and complementary bolt-on acquisitions and increasing our capture of the large pharmaceutical company market. Though we will strive to meet these goals, we may not have or adequately build the competencies necessary to achieve our objectives. In addition, we may not receive market acceptance for our services and we may face increased competition. If we are unable to successfully continue our organic growth, continue to maintain our margins, increase our capture of the clinical development market, deepen existing and develop new relationships with our core customer segment, pursue complementary and non-transformative acquisitions or attract additional large pharmaceutical company customers, our future business, reputation, results of operations and financial condition could be adversely affected. For more information on our growth strategies, see “Business—Our Growth Strategy.”

If we lose the services of key personnel or are unable to recruit experienced personnel, our business could be adversely affected.

Our success substantially depends on the collective performance, contributions and expertise of our senior management team, including Dr. August J. Troendle, our Chief Executive Officer and founder, and other key personnel including qualified management, professional, scientific and technical operating staff. There is significant competition for qualified personnel in the biopharmaceutical services industry, particularly for those with higher educational degrees, such as a medical or nursing degree, a Doctor of Philosophy, or Ph.D., or an equivalent degree, and our industry generally tends to experience relatively high levels of employee turnover. If any of our key employees were to join a competitor or to form a competing company, some of our customers might choose to use the services of that competitor or new company instead of our own. Furthermore, customers or other companies seeking to develop in-house capabilities may hire some of our senior management or other key employees. The departure of any key contributor, the payment of increased compensation to attract and retain qualified personnel or our inability to continue to identify, attract and retain qualified personnel or replace any departed personnel in a timely fashion may impact our ability to grow our business and compete effectively in our industry and may negatively affect our business, financial condition, results of operations, cash flows or reputation.

 

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Our business depends on the continued effectiveness and availability of our information systems, including the information systems we use to provide our services to our customers, such as ClinTrak, and failures of these systems may materially limit our operations.

Due to the global nature of our business and our reliance on information systems to provide our services, we intend to increase our use of web-enabled and other integrated information systems in delivering our services. We already provide access to such an information system, ClinTrak, to certain of our customers in connection with the services we provide to them. As the breadth and complexity of our information systems continue to grow, we will increasingly be exposed to the risks inherent in the development, integration and ongoing operation of evolving information systems, including:

 

  n   disruption, impairment or failure of data centers, telecommunications facilities or other key infrastructure platforms;

 

  n   security breaches of, cyberattacks on and other failures or malfunctions in our critical application systems or their associated hardware; and

 

  n   excessive costs, excessive delays or other deficiencies in systems development and deployment.

The materialization of any of these risks may impede the processing of data, the delivery of databases and services and the day-to-day management of our business and could result in the corruption, loss or unauthorized disclosure of proprietary, confidential or other data. While we have disaster recovery plans in place, they might not adequately protect us in the event of a system failure. Despite any precautions we take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, information system security breaches and similar events at our facilities or at those of our third party provider that backs up our data centers could result in interruptions in the flow of data to our servers and from our servers to our customers. Corruption or loss of data may result in the need to repeat a trial at no cost to the customer, but at significant cost to us, or result in the termination of a contract or damage to our reputation. Moreover, regulatory authorities may impose requirements on the use of electronic records and signatures for regulatory purposes. For example, FDA’s regulations at 21 CFR Part 11 establish the criteria pursuant to which the FDA will consider electronic records and signatures to be trustworthy, reliable, and generally equivalent to paper records and handwritten signatures. Any failures to comply with those regulatory requirements could impact our customers’ ability to rely on the data contained in those electronic records in our systems or result in the FDA’s rejection of the data. Additionally, in order for our information systems to continue to be effective going forward, we periodically need to upgrade our technology systems and increase our capacity to keep pace with technological developments and our growth as a company. Significant delays in system enhancements or inadequate performance of new or upgraded systems once completed could damage our reputation and harm our business. Our operations also may suffer if we are unable to effectively manage the implementation of and adapt to new technology systems. Any such shortcoming may require us to make substantial further investments in our IT platform, which could adversely affect our financial results. Finally, long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities and acts of terrorism, particularly involving cities in which we have offices, could adversely affect our business. As our business continues to expand globally, these types of risks may be further increased by instability in the geopolitical climate of certain regions, underdeveloped and less stable utilities and communications infrastructure and other local and regional factors. Although we carry property and business interruption insurance, our coverage might not be adequate to compensate us for all losses that may occur.

Unauthorized disclosure of sensitive or confidential data, whether through system failure or breaches or employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose customers. Similarly, unauthorized access to or through our information systems or those we develop for our customers, whether by our employees or third parties, including a cyberattack by computer programmers and hackers who may develop and deploy viruses, worms or other malicious software programs, could result in negative publicity, significant remediation costs, legal liability and damage to our reputation and could have a material adverse effect on our results of operations. In addition, our liability insurance might not be sufficient in type or amount to adequately cover us against claims related to security breaches, cyberattacks and other related breaches.

 

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Our business could be harmed if we are unable to manage our growth effectively.

We believe that sustained growth places a strain on operational, human and financial resources. To manage our growth, we must continue to improve our operating and administrative systems and to attract and retain qualified management, professional, scientific and technical operating personnel. We believe that maintaining and enhancing both our systems and personnel at reasonable cost are instrumental to our success. We cannot assure you that we will be able to enhance our current technology or obtain new technology that will enable our systems to keep pace with developments and the needs of our customers. The nature and pace of our growth introduces risks associated with quality control and customer dissatisfaction due to delays in performance or other problems. In addition, foreign operations involve the additional risks of assimilating differences in foreign business practices, hiring and retaining qualified personnel and overcoming language barriers. Failure to manage growth effectively could have a material adverse effect on our business.

Our customer or therapeutic area concentration may have a material adverse effect on our business, financial condition, results of operations or cash flows.

Although we did not have any customer that represented 10% or more of our net service revenue during the Successor six months ended June 30, 2016 or the Successor year ended December 31, 2015, we derive a significant portion of our revenues from a limited number of large customers. For the Successor six months ended June 30, 2016, we derived 38.2% and 6.3% of our net service revenue from our top 10 customers and our largest customer, respectively. For the Successor year ended December 31, 2015, we derived 39.9% and 6.9% of our net service revenue from our top 10 customers and our largest customer, respectively. For more information about our largest customer, see “Certain Relationships and Related Person Transactions—Service Agreements.” In addition, approximately 44.6% and 7.8% of our backlog, as of June 30, 2016, was concentrated among our top 10 customers and our largest customer by backlog concentration, respectively. Moreover, 4.0% of our backlog, as of June 30, 2016, was concentrated with our largest customer by net service revenue. If any large customer decreases or terminates its relationship with us, our business, financial condition, results of operations or cash flows could be materially adversely affected. Also, consolidation in our actual or potential customer base results in increased competition for important market segments and fewer available customer accounts.

Additionally, conducting multiple clinical trials for different sponsors in a single therapeutic class, involving similar drugs, biologics or medical devices, may adversely affect our business if some or all of the trials are terminated because of new scientific information or regulatory decisions that affect the products as a class. Moreover, even if these trials are not terminated, they may compete with each other, thereby limiting our potential revenue going forward.

Our business is subject to international economic, political and other risks that could negatively affect our results of operations and financial condition.

We have significant operations in foreign countries, including, but not limited to, countries in Europe, Latin America, Asia, the Middle East and Africa, that may require complex arrangements to deliver services on global contracts for our customers. As of June 30, 2016 and December 31, 2015, approximately 34% of our workforce was located outside of North America, and for the Successor six months ended June 30, 2016 and the Successor year ended December 31, 2015, 9.2% and 8.4% of our revenue was denominated in currencies other than the U.S. dollar, respectively. As a result, we are subject to heightened risks inherent in conducting business internationally, including the following:

 

  n   conducting a single trial across multiple countries is complex, and issues in one country, such as a failure to comply with local regulations or restrictions, may affect the progress of the trial in the other countries, for example, by limiting the amount of data necessary for a trial to proceed, resulting in delays or potential cancellation of contracts, which in turn may result in loss of revenue;

 

  n   the United States or other countries could enact legislation or impose regulations or other restrictions, including unfavorable labor regulations or tax policies, which could have an adverse effect on our ability to conduct business in or expatriate profits from those countries;

 

  n   tax rates in certain foreign countries may exceed those in the United States and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions, including restrictions on repatriation;

 

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  n   certain foreign countries are expanding or may expand their regulatory framework with respect to patient informed consent, protection and compensation in clinical trials, and privacy, which could delay or inhibit our ability to conduct trials in such jurisdictions or which could materially increase the risks associated with performing trials in such jurisdictions;

 

  n   certain foreign countries are expanding or may expand their banking regulations that govern international currency transactions, particularly cross-border transfers, which may inhibit our ability to transfer funds into or within a jurisdiction, impeding our ability to pay our principal investigators, vendors and employees, thereby impacting our ability to conduct trials in such jurisdictions;

 

  n   the regulatory or judicial authorities of foreign countries may not enforce legal rights and recognize business procedures in a manner to which we are accustomed or would reasonably expect;

 

  n   we may have difficulty complying with a variety of laws and regulations in foreign countries, some of which may conflict with laws in the United States;

 

  n   potential violations of existing or newly adopted local laws or anti-bribery laws, such as the United States Foreign Corrupt Practices Act, or FCPA, and the UK Bribery Act of 2010, may cause a material adverse effect on our business, financial condition, results of operations, cash flows or reputation;

 

  n   changes in political and economic conditions, including inflation, may lead to changes in the business environment in which we operate, as well as changes in foreign currency exchange rates;

 

  n   foreign governments may enact currency exchange controls that may limit the ability to fund our operations or significantly increase the cost of maintaining operations;

 

  n   customers in foreign jurisdictions may have longer payment cycles, and it may be more difficult to collect receivables in foreign jurisdictions; and

 

  n   natural disasters, pandemics or international conflict, including terrorist acts, could interrupt our services, endanger our personnel or cause project delays or loss of trial materials or results.

These risks and uncertainties could negatively impact our ability to, among other things, perform large, global projects for our customers. Furthermore, our ability to deal with these issues could be affected by applicable U.S. laws and the need to protect our assets. In addition, we may be more susceptible to these risks as we enter and continue to target growth in emerging countries and regions, including Asia, Eastern Europe and Latin America, which may be subject to a relatively higher risk of political instability, economic volatility, crime, corruption and social and ethnic unrest, all of which are exacerbated in many cases by a lack of an independent and experienced judiciary and uncertainties in how local law is applied and enforced. The materialization of any such risks could have an adverse impact on our financial condition, results of operations, cash flows or reputation.

Due to the global nature of our business, we may be exposed to liabilities under the Foreign Corrupt Practices Act and various other anti-corruption laws, and any allegation or determination that we violated these laws could have a material adverse effect on our business.

We are required to comply with the FCPA, UK Bribery Act of 2010 and other U.S. and foreign anti-corruption laws, which prohibit companies from engaging in bribery including corruptly or improperly offering, promising, or providing money or anything else of value to foreign officials and certain other recipients. In addition, the FCPA imposes certain books, records and accounting control obligations on public companies and other issuers. We operate in parts of the world in which corruption can be common and compliance with anti-bribery laws may conflict with local customs and practices. Our global operations face the risk of unauthorized payments or offers being made by employees, consultants, sales agents and other business partners outside of our control or without our authorization. It is our policy to implement safeguards (including mandatory training) to prohibit these practices by our employees and business partners with respect to our operations. However, irrespective of these safeguards, or as a result of monitoring compliance with such safeguards, it is possible that we or certain other parties may discover or receive information at some point that certain employees, consultants, sales agents, or other business partners may have engaged in corrupt conduct for which we might be held responsible. Violations of the FCPA or other foreign anti-corruption laws may result in restatements of, or irregularities in, our financial statements as well as severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In some cases, companies that violate the FCPA may be debarred by the U.S. government and/or lose their U.S. export privileges. Changes in anti-corruption laws or enforcement priorities could also result in increased compliance requirements and related costs which could adversely affect our business,

 

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financial condition and results of operations. In addition, the U.S. or other governments may seek to hold us liable for successor liability FCPA violations or violations of other anti-corruption laws committed by companies in which we invest or that we acquired or will acquire.

In the past, we have had net losses and we may report net losses in the future, which could negatively impact our ability to achieve or sustain profitability.

In the past, we have had net losses and we cannot assure you that we will achieve or sustain profitability on a quarterly or annual basis in the future. For the Successor six months ended June 30, 2016 and June 30, 2015, the Successor year ended December 31, 2015, the Successor nine month period ended December 31, 2014, the Predecessor three month period ended March 31, 2014 and the Predecessor year ended December 31, 2013 our net income (loss) was $8.4 million, less than $0.1 million, $(8.7) million, $(14.3) million, $(1.2) million and $24.8 million, respectively. If we cannot reach or maintain profitability, the value of our stock price may be impacted.

Our effective income tax rate may fluctuate, which may adversely affect our operations, earnings and earnings per share.

Our effective income tax rate is influenced by our projected profitability in the various taxing jurisdictions in which we operate. The global nature of our business increases our tax risks. In addition, for various reasons, revenue authorities in many of the jurisdictions in which we operate are known to have become more active in their tax collection activities. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective income tax rate, which in turn could have an adverse effect on our net income and earnings per share. The application of tax laws in various taxing jurisdictions, including the United States, is subject to interpretation, and tax authorities in various jurisdictions may have diverging and sometimes conflicting interpretations of the application of tax laws. Changes in tax laws or tax rulings, in the United States or other tax jurisdictions in which we operate, could materially impact our effective tax rate.

Factors that may affect our effective income tax rate include, but are not limited to:

 

  n   the requirement to exclude from our quarterly worldwide effective income tax calculations losses in jurisdictions where no income tax benefit can be recognized;

 

  n   actual and projected full year pre-tax income, including differences between actual and anticipated income before taxes in various jurisdictions;

 

  n   changes in tax laws, or in the interpretation or application of tax laws, in various taxing jurisdictions;

 

  n   audits or other challenges by taxing authorities;

 

  n   the establishment of valuation allowances against a portion or all of certain deferred income tax assets if we determined that it is more likely than not that future income tax benefits will not be realized; and

 

  n   changes in the relative mix and size of clinical trials and staffing levels in various tax jurisdictions.

These changes may cause fluctuations in our effective income tax rate that could adversely affect our results of operations and cause fluctuations in our earnings and earnings per share.

Governmental authorities may question our intercompany transfer pricing policies or change their laws in a manner that could increase our effective tax rate or otherwise harm our business.

As a U.S. company doing business in international markets through subsidiaries, we are subject to foreign tax and intercompany pricing laws, including those relating to the flow of funds between the parent and subsidiaries. Tax authorities in the United States and in foreign markets closely monitor our corporate structure and how we account for intercompany fund transfers. If tax authorities challenge our corporate structure, transfer pricing mechanisms or intercompany transfers, our operations may be negatively impacted and our effective tax rate may increase. Tax rates vary from country to country and if regulators determine that our profits in one jurisdiction should be increased, we might not be able to fully utilize all foreign tax credits that are generated, which would increase our effective tax rate. Additionally, the Organization for Economic Cooperation and Development, or OECD, has issued certain proposed guidelines regarding base erosion and profit sharing. Once these guidelines are formally adopted by the OECD, it is possible that separate taxing jurisdictions may also adopt some form of these guidelines. In such case, we may need to change our approach to intercompany transfer pricing in order to maintain compliance under the new rules. Our effective tax rate may increase or decrease depending on the current location of global operations at the time of the change. Finally, we might not always be in compliance with all applicable customs, exchange control, Value Added Tax and transfer pricing laws despite our efforts to be aware of and to comply with such laws. In such case, we may need to adjust our operating procedures and our business could be adversely affected.

 

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If we are unable to recruit suitable investigators and enroll patients for our customers’ clinical trials, our clinical development business may suffer.

The recruitment of investigators and patients for clinical trials is essential to our business. Investigators are typically located at hospitals, clinics or other sites and supervise the administration of the investigational drug, biologic or device to patients during the course of a clinical trial. Patients typically include people from the communities in which the clinical trials are conducted. Our clinical development business could be adversely affected if we are unable to attract suitable and willing investigators or patients for clinical trials on a consistent basis. For example, if we are unable to engage investigators to conduct clinical trials as planned or enroll sufficient patients in clinical trials, we may need to expend additional funds to obtain access to resources or else be compelled to delay or modify the clinical trial plans, which may result in additional costs to us. These considerations might result in our being unable to successfully achieve our projected development timelines, or potentially even lead to the termination of ongoing clinical trials or development of a product.

Our research and development services could subject us to potential liability that may adversely affect our results of operations and financial condition.

Our business involves the testing of new drugs, biologics and medical devices on patients in clinical trials. Our involvement in the clinical trial and development process creates a risk of liability for personal injury to or death of patients, particularly for those with life-threatening illnesses, resulting from adverse reactions to the products administered during testing or after regulatory approval. For example, we may be sued in the future by individuals alleging personal injury due to their participation in clinical trials and seeking damages from us under a variety of legal theories. If we are required to pay damages or incur defense costs in connection with any personal injury claim that is outside the scope of indemnification agreements we have with our customers, if any indemnification agreement is not performed in accordance with its terms or if our liability exceeds the amount of any applicable indemnification limits or available insurance coverage, our business, financial condition, results of operations, cash flows or reputation could be materially and adversely affected. We might also not be able to obtain adequate insurance or indemnification for these types of risks at reasonable rates in the future.

We also contract with institutions and physicians to serve as investigators in conducting clinical trials. Investigators are typically located at hospitals, clinics or other sites and supervise the administration of the investigational products to patients during the course of a clinical trial. If the investigators or study staff commit errors or make omissions during a clinical trial that result in harm to trial patients, or patients suffer harm with a delayed onset after a clinical trial is completed and the product has obtained regulatory approval, claims for personal injury or products liability damages may result. Additionally, if the investigators engage in fraudulent or negligent behavior, trial data may be compromised, which may require us to repeat the clinical trial or subject us to liability or regulatory action. We do not believe we are legally responsible for the medical care rendered by such third party investigators, and we would vigorously defend any claims brought against us. However, it is possible we could be found liable for claims with respect to the actions of third party investigators and the institutions at which clinical trials may be conducted.

Some of our services involve direct interaction with clinical trial patients and operation of a Phase I clinical facility, which could create potential liability that may adversely affect our results of operations and financial condition.

We operate a facility where Phase I clinical trials are conducted, which ordinarily involve testing an investigational drug, biologic or medical device on a limited number of individuals to evaluate its safety, determine a safe dosage range and identify side effects. Failure to operate such a facility and clinical trials in accordance with FDA, DEA and other applicable regulations could result in disruptions to our operations. Additionally, we face risks associated with adverse events resulting from the administration of such drugs, biologics and medical devices and the professional malpractice of medical care providers. We also directly employ nurses and other trained employees who assist in implementing the testing involved in our clinical trials, such as drawing blood from subjects. Any professional malpractice or negligence by such investigators, nurses or other employees could potentially result in liability to us in the event of personal injury to or death of a subject in clinical trials. This liability, particularly if it were to exceed the limits of any indemnification agreements and insurance coverage we may have, may adversely affect our financial condition, results of operations and reputation.

 

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Our insurance may not cover all of our indemnification obligations and other liabilities associated with our operations.

We maintain insurance designed to provide coverage for ordinary risks associated with our operations and our ordinary indemnification obligations, which we believe to be customary for our industry. The coverage provided by such insurance may not be adequate for all claims we may make or may be contested by our insurance carriers. If our insurance is not adequate or available to pay liabilities associated with our operations, or if we are unable to purchase adequate insurance at reasonable rates in the future, our business, financial condition, results of operations or cash flows may be materially adversely impacted.

Exchange rate fluctuations may have a material adverse effect on our business, financial condition, results of operations or cash flows.

For the Successor six months ended June 30, 2016 and the Successor year ended December 31, 2015, approximately 9.2% and 8.4% of our revenue was denominated in currencies other than U.S. dollars, respectively, and 24.5% and 24.9% of our operational costs, including, but not limited to, salaries, wages and other employee benefits were denominated in foreign currencies, respectively. Of these exposures, 91.4% and 94.9% of our revenue denominated in foreign currencies, respectively, and 46.0% and 46.8% of our operational costs denominated in foreign currencies, respectively, were Euro denominated. Because a large portion of our net service revenue and expenses are denominated in currencies other than the U.S. dollar and our financial statements are reported in U.S. dollars, changes in foreign currency exchange rates could significantly affect our financial condition, results of operations and cash flows.

The revenue and expenses of our foreign operations are generally denominated in local currencies and translated into U.S. dollars for financial reporting purposes. Accordingly, exchange rate fluctuations will affect the translation of foreign results into U.S. dollars for purposes of reporting our consolidated results.

We are subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of a transaction. We earn revenue from our service contracts over a period of several months and, in some cases, over several years. Accordingly, exchange rate fluctuations during such periods may affect our profitability with respect to such contracts.

Additionally, the majority of our global contracts are denominated in U.S. dollars or Euros, while the currency used to fund our operating costs in foreign countries is denominated in various different currencies. Fluctuations in the exchange rates of the currencies we use to contract with our customers and the currencies in which we incur cost to complete those contracts can have a significant impact on our results of operations.

We may limit these risks through exchange rate fluctuation provisions stated in our service contracts. We have not, however, mitigated all of our foreign currency transaction risk, and we may experience fluctuations in financial results from our operations outside the United States and foreign currency transaction risk associated with our service contracts.

Our relationships with existing or potential customers who are in competition with each other may adversely impact the degree to which other customers or potential customers use our services, which may adversely affect our results of operations.

The biopharmaceutical industry is highly competitive, with companies each seeking to persuade payors, providers and patients that their drug therapies are more cost-effective than competing therapies marketed or being developed by competing firms. In addition to the adverse competitive interests that biopharmaceutical companies have with each other, these companies also have adverse interests with respect to drug selection, coverage and reimbursement with other participants in the healthcare industry, including payors and providers. Biopharmaceutical companies also compete to be first to the market with new drug therapies. We regularly provide services to biopharmaceutical companies who compete with each other, and we sometimes provide services to such customers regarding competing drugs in development. Our existing or future relationships with our biopharmaceutical customers may deter other biopharmaceutical customers from using our services or, in certain instances, may result in our customers seeking to place limits on our ability to serve their competitors and other industry participants. In addition, our further expansion into the broader healthcare market may adversely impact our relationships with biopharmaceutical customers, and such customers may elect not to use our services, reduce the scope of services that we provide to

 

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them or seek to place restrictions on our ability to serve customers in the broader healthcare market with interests that are adverse to theirs. Any loss of customers or reductions in the level of revenues from a customer could have a material adverse effect on our business, financial condition, results of operations or cash flows.

If we are unable to successfully integrate potential future acquisitions, our business, financial condition, results of operations and cash flows could be adversely affected.

We anticipate that a portion of our future growth may come from targeted acquisitions to expand our current capabilities and service offerings. The success of any acquisition will depend upon, among other things, our ability to effectively integrate acquired personnel, operations, products and technologies into our business and to retain the key personnel and customers of our acquired businesses. In addition, we may be unable to identify suitable acquisition opportunities or obtain any necessary financing on commercially acceptable terms. We may also spend time and money investigating and negotiating with potential acquisition targets but not complete the transaction. Any acquisition could involve other risks, including, among others, the assumption of additional liabilities and expenses, difficulties and expenses in connection with integrating the acquired companies and achieving the expected benefits, issuances of potentially dilutive securities or interest-bearing debt, loss of key employees of the acquired companies, transaction expenses, diversion of management’s attention from other business concerns and, with respect to the acquisition of international companies, the inability to overcome differences in international business practices, language and customs. Our failure to successfully integrate potential future acquisitions could have an adverse effect on our business, financial condition, results of operations and cash flows.

We have a significant amount of goodwill and intangible assets on our balance sheet, and our results of operations may be adversely affected if we fail to realize the full value of our goodwill and intangible assets.

Our balance sheet reflects goodwill and intangibles assets of $661.0 million and $161.4 million, respectively, as of June 30, 2016. Collectively, goodwill and intangibles assets represented 82.7% of our total assets as of June 30, 2016. Our goodwill was recorded in connection with the Transaction. In accordance with U.S. GAAP, goodwill and indefinite lived intangible assets are not amortized, but are subject to a periodic impairment evaluation. We assess the realizability of our indefinite lived intangible assets and goodwill annually and conduct an interim evaluation whenever events or changes in circumstances, such as operating losses or a significant decline in earnings associated with the acquired business or asset, indicate that these assets may be impaired. In addition, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. If indicators of impairment are present, we evaluate the carrying value in relation to estimates of future discounted cash flows. Our ability to realize the value of the goodwill and intangible assets will depend on the future cash flows of our businesses. The carrying amount of the goodwill could be impaired if there is a downturn in our business or our industry or other factors that affect the fair value of our business, in which case a charge to earnings would become necessary. If we are not able to realize the value of the goodwill and intangible assets, we may be required to incur material charges relating to the impairment of those assets. For example, in conjunction with the 2015 fourth quarter annual assessment of goodwill, we determined that goodwill related to our Clinics reporting unit was impaired and we recognized an impairment charge of $9.3 million, which represented 100% of the goodwill that had been allocated to this reporting unit. Such impairment charges in the future could materially and adversely affect our business, financial condition, results of operations and cash flows.

Our ability to utilize our net operating loss carryforwards or certain other tax attributes may be limited.

Under Sections 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage point change, by value, in the aggregate stock ownership of certain shareholders over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards to offset its future taxable income and other pre-change tax attributes may be limited. We have experienced at least one ownership change in the past. We may experience additional ownership changes in the future (including in connection with this offering). In addition, future changes in our stock ownership (including future sales by Cinven) could result in additional ownership changes. Any such ownership changes could limit our ability to use our net operating loss carryforwards to offset any future taxable income and other tax attributes. State and foreign tax laws may also impose limitations on our ability to utilize net operating loss carryforwards and other tax attributes.

Our operations involve the use and disposal of hazardous substances and waste which can give rise to liability that could adversely impact our financial condition.

We conduct activities that have involved, and may continue to involve, the controlled use of hazardous materials and the creation of hazardous substances, including medical waste and other highly regulated substances. As a result,

 

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our operations pose the risk of accidental contamination or injury caused by the release of these materials and/or the creation of hazardous substances, including medical waste and other highly regulated substances. In the event of such an accident, we could be held liable for damages and cleanup costs which, to the extent not covered by existing insurance or indemnification, could harm our business. In addition, other adverse effects could result from such liability, including reputational damage resulting in the loss of additional business from certain customers.

The failure of third parties to provide us critical support services could materially adversely affect our business, financial condition, results of operations, cash flows or reputation.

We depend on third parties for support services vital to our business. Such support services include, but are not limited to, laboratory services, third-party transportation and travel providers, technology providers, freight forwarders and customs brokers, drug depots and distribution centers, suppliers or contract manufacturers of drugs for patients participating in clinical trials and providers of licensing agreements, maintenance contracts or other services. In addition, we also rely on third-party CROs and other contract clinical personnel for clinical services either in regions where we have limited resources, or in cases where demand cannot be met by our internal staff. The failure of any of these third parties to adequately provide us critical support services could have a material adverse effect on our business, financial condition, results of operations, cash flows or reputation.

We have only a limited ability to protect our intellectual property rights, and these rights are important to our success.

Our success depends, in part, upon our ability to develop, use and protect our proprietary methodologies, analytics, systems, technologies and other intellectual property. Existing laws of the various countries in which we provide services or solutions offer only limited protection of our intellectual property rights, and the protection in some countries may be very limited. We rely upon a combination of trade secrets, confidentiality policies, nondisclosure, invention assignment and other contractual arrangements, and copyright, trademark and trade secret laws, to protect our intellectual property rights. These laws are subject to change at any time and certain agreements may not be fully enforceable, which could further restrict our ability to protect our innovations. Our intellectual property rights may not prevent competitors from independently developing services similar to or duplicative of ours. Further, the steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property by competitors, former employees or other third parties, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights. Enforcing our rights might also require considerable time, money and oversight, and we may not be successful in enforcing our rights.

The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union, or the EU, in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the EU, including with respect to the laws and regulations that will apply as the United Kingdom determines which EU laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other EU member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations and reduce the price of our common stock.

Potential future investments in our customers’ businesses or products could have a negative impact on our financial results.

We have in the past and may in the future enter into arrangements with our customers or other drug, biologic or medical device companies in which we take on payment risk by making strategic investments in our customers or other drug companies, providing flexible payment terms or fee financing to customers or other companies, or entering into other risk sharing arrangements on trial execution. Our financial results would be adversely affected if the amount realized from any such risk sharing arrangement was less than the value of our services under the contract related to such arrangement.

 

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Our operations might be affected by the occurrence of a natural disaster or other catastrophic event.

We depend on our customers, investigators, laboratories and other facilities for the continued operation of our business. Although we have contingency plans in place for natural disasters or other catastrophic events, these events, including terrorist attacks, pandemic flu, hurricanes, floods and ice and snow storms, could nevertheless disrupt our operations or those of our customers, investigators and collaboration partners, which could also affect us. Even though we carry business interruption insurance policies and typically have provisions in our contracts that protect us in certain events, we might suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies or for which we do not have coverage. Any natural disaster or catastrophic event affecting us or our customers, investigators or collaboration partners could have a significant negative impact on our operations and financial performance.

Risks Relating to Our Industry

Outsourcing trends in the biopharmaceutical industry and changes in aggregate expenditures and R&D budgets could adversely affect our operating results and growth rate.

Our revenues depend on the level of R&D expenditures, size of the drug development pipelines and outsourcing trends of the biopharmaceutical industry, including the amount of such R&D expenditures that is outsourced and subject to competitive bidding among CROs. Accordingly, economic factors and industry trends that affect biopharmaceutical companies affect our business. For example, if biopharmaceutical companies become less able to access capital in the future, they may commit less capital to our services going forward. Also, biopharmaceutical companies continue to seek long-term strategic collaborations with global CROs with favorable pricing terms. Many of our competitors seek out these collaborations, while we generally do not. If our competitors can successfully enter into these collaborations, it may reduce the share of the biopharmaceutical outsourcing business that we might otherwise be positioned to capture.

In addition, if the biopharmaceutical industry reduces its outsourcing of clinical trials or such outsourcing fails to grow at projected or expected rates, or at all, our business, financial condition, results of operations and cash flows could be materially and adversely affected. We may also be negatively impacted by consolidation and other factors in the biopharmaceutical industry, which may slow decision making by our customers, result in the delay or cancellation of existing projects, cause reductions in overall R&D expenditures or lead to increased pricing pressures. Further, in the event that one of our customers combines with a company that is using the services of one of our competitors, the combined company could decide to use the services of that competitor or another provider. All of these events could adversely affect our business, financial condition, cash flows or results of operations.

We face intense competition in many areas of our business and, if we do not compete effectively, our business may be harmed.

The CRO industry is highly competitive. We often compete for business with other CROs as well as internal development departments at some of our customers, some of which could be considered large CROs in their own right. We also compete with universities and teaching hospitals. Some of these competitors have greater financial resources and a wider range of service offerings over a greater geographic area than we do. If we do not compete successfully, our business will suffer. The industry is highly fragmented, with numerous smaller specialized companies and a handful of full-service companies with global capabilities similar to ours. Increased competition has led to price and other forms of competition, such as acceptance of less favorable contract terms, which could adversely affect our operating results. In recent years, our industry has experienced consolidation. This trend is likely to produce more competition from the resulting larger companies. Further, certain of our key competitors are private and, therefore, they do not contend with the cost pressures of being a public company. We compete with both large CROs and mid-sized CROs, and have increasingly faced more competition from larger CROs. Our ability to continue to grow and perform effectively will directly impact our success against our competitors. In addition, there are few barriers to entry for smaller specialized companies considering entering the industry. Because of their size and focus, small CROs might compete effectively against larger companies such as us, especially in lower cost geographic areas, which could have a material adverse effect on our business.

 

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We may be affected by healthcare reform and potential additional regulatory reforms, which may adversely impact the biopharmaceutical industry or otherwise reduce the need for our services or negatively impact our profitability.

Numerous government bodies are considering or have adopted various healthcare reforms and may undertake, or are in the process of undertaking, efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with healthcare providers and biopharmaceutical companies, including many of our customers. By way of example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act, was signed into law, which, among other things, expanded, over time, health insurance coverage, imposed health industry cost containment measures, enhanced remedies against healthcare fraud and abuse, added new transparency requirements for healthcare and health insurance industries, imposed new taxes and fees on pharmaceutical and medical device manufacturers, added new requirements for certain applicable drug and device manufacturers to disclose payments to physicians, including principal investigators, and imposed additional health policy reforms, any of which may significantly impact the biopharmaceutical industry. We are uncertain as to the full effects of these reforms on our business and are unable to predict what legislative proposals, if any, will be adopted in the future. If regulatory cost containment efforts limit the profitability of new drugs, our customers may reduce their R&D expenditures, which could reduce the business they outsource to us. Similarly, if regulatory requirements for product testing are relaxed or harmonized across jurisdictions, or simplified drug approval procedures are adopted, the demand for our services could decrease.

Government bodies may also adopt healthcare legislation or regulations that are more burdensome than existing regulations. For example, product safety concerns and recommendations by the Drug Safety Oversight Board could change the regulatory environment for drug products, and new or heightened regulatory requirements may increase our expenses or limit our ability to offer some of our services. Additionally, new or heightened regulatory requirements may have a negative impact on the ability of our customers to conduct industry sponsored clinical trials, which could reduce the need for our services.

Recent consolidation in the biopharmaceutical industry could lead to a reduction in our revenues.

The biopharmaceutical industry is currently undergoing a period of increased merger activity. Several large biopharmaceutical companies have recently completed mergers and acquisitions that will consolidate the outsourcing trends and R&D expenditures into fewer companies, and many larger and medium sized biopharmaceutical companies have been acquiring smaller biopharmaceutical companies. As a result of this and future consolidations, our customer diversity may decrease and our business may be adversely affected.

If we fail to comply with federal, state and foreign healthcare laws, including fraud and abuse laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.

Even though we do not order healthcare services or bill directly to Medicare, Medicaid or other third party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse are applicable to our business. We could be subject to healthcare fraud and abuse laws of both the federal government and the states in which we conduct our business. Because of the breadth of these laws and the narrowness of available statutory and regulatory exceptions, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, imprisonment and the curtailment or restructuring of our operations, any of which could materially adversely affect our ability to operate our business and our financial results.

Current and proposed laws and regulations regarding the protection of personal data could result in increased risks of liability or increased cost to us or could limit our service offerings.

The confidentiality, collection, use and disclosure of personal data, including clinical trial patient-specific information, are subject to governmental regulation generally in the country in which the personal data was collected or used. For example, U.S. federal regulations under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 and their implementing regulations, including the Privacy and Security Rules, or collectively, HIPAA, generally require individuals’ written authorization, in addition to any required informed consent, before protected health information may be used for research and such regulations specify standards for de-identifications and for limited data sets. We may also be subject to applicable state privacy and security laws and regulations in states in which we operate. Two

 

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of our subsidiaries, Medpace Clinical Pharmacology, LLC and C-MARC, LLC, are covered entities under HIPAA. Further, because of amendments to the HIPAA Privacy and Security Rules that were promulgated on January 25, 2013, known as the Omnibus Final Rule, service providers to covered entities under HIPAA, known as business associates, are now directly subject to HIPAA. There are some instances where we may be a HIPAA “business associate” of a “covered entity,” meaning that we may be directly liable for any breaches of protected health information and other HIPAA violations. We are also liable contractually under any business associate agreements we have signed with covered entities. If we are determined to be a business associate, we would be subject to HIPAA’s enforcement scheme, which, as amended, can result in up to $1.5 million in annual civil penalties for each HIPAA violation. A single breach incident can result in multiple violations of the HIPAA standards, meaning that penalties could be in excess of $1.5 million.

HIPAA also authorizes state attorneys general to file suit on behalf of their residents for violations. Courts are able to award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to file suit against us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care cases in state civil suits such as those for negligence or recklessness in the misuse or breach of protected health information. In addition, HIPAA mandates that the Secretary of the U.S. Department of Health and Human Services conduct periodic compliance audits of HIPAA covered entities and their business associates for compliance with the HIPAA privacy and security standards.

In the EU, personal data includes any information that relates to an identified or identifiable natural person with health information carrying additional obligations, including obtaining the explicit consent from the individual for collection, use or disclosure of the information. In addition, we are subject to EU rules with respect to export of such data out of the EU. Such data export rules are constantly changing, for example, following a decision of the European Court of Justice in October 2015, transferring personal data to U.S. companies like us that had certified as a member of the EU-U.S. Safe Harbor Scheme was declared invalid and the other methods to permit transfer are now under review. In February 2016, the European Commission issued the proposed legal texts of the EU-U.S. Privacy Shield, which is intended to replace the U.S. Safe Harbor Scheme. These legal texts are currently under review by the European legislative bodies and it is unclear when they will be approved and when data exports out of the EU will be allowed to take place under the new framework. The United States, the EU and its member states, and other countries where we have operations, such as Singapore and Russia, continue to issue new privacy and data protection rules and regulations that relate to personal data and health information. Failure to comply with certain certification/registration and annual re-certification/registration provisions associated with these data protection and privacy regulations and rules in various jurisdictions, or to resolve any serious privacy or security complaints, could subject us to regulatory sanctions, criminal prosecution or civil liability. Federal, state and foreign governments may propose or have adopted additional legislation governing the collection, possession, use or dissemination of personal data, such as personal health information, and personal financial data as well as security breach notification rules for loss or theft of such data. Additional legislation or regulation of this type might, among other things, require us to implement new security measures and processes or bring within the legislation or regulation de-identified health or other personal data, each of which may require substantial expenditures or limit our ability to offer some of our services. Additionally, if we violate applicable laws, regulations or duties relating to the use, privacy or security of personal data, we could be subject to civil liability or criminal prosecution, be forced to alter our business practices and suffer reputational harm. The laws in the EU are under reform and from early 2018 onwards, we will be subject to the requirements of the General Data Protection Regulation, or GDPR, because we are processing data in the EU. The GDPR increases the deadline for data breach notifications, imposes additional obligations when we process personal data on behalf of our customers, including in relation to security measures, and increases administrative burdens on companies processing personal data. If we do not comply with our obligations under the GDPR we could be exposed to significant fines of up to 20 million EUR or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher.

The biopharmaceutical industry has a history of patent and other intellectual property litigation, and we might be involved in costly intellectual property lawsuits.

The biopharmaceutical industry has a history of intellectual property litigation, and these lawsuits will likely continue in the future. Accordingly, even without wrongdoing on our part, we may face patent infringement suits by companies that have patents for similar business processes or other suits alleging infringement of their intellectual property rights. Legal proceedings relating to intellectual property could be expensive, take significant time and

 

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divert management’s attention from other business concerns, regardless of the outcome of the litigation. If we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages, and we could be required to stop the infringing activity or obtain a license to use technology on unfavorable terms. Further, our customers could be similarly exposed to intellectual property suits and the resulting economic and operational strain defending such claims could negatively impact such customers’ ability to fund or continue ongoing clinical trials on which we are working.

Actions by regulatory authorities or customers to limit the scope of or withdraw an approved drug, biologic or medical device from the market could result in a loss of revenue.

Government regulators have the authority, after approving a drug, biologic or medical device, to limit its indication for use by requiring additional labeled warnings or to withdraw the product’s approval for its approved indication based on safety or other concerns. Similarly, customers may act to voluntarily limit the availability of approved products or withdraw them from the market after we begin our work. If we are providing services to customers for products that are limited in availability or withdrawn, we may be required to narrow the scope of or terminate our services with respect to such products, which would prevent us from earning the full amount of net service revenue anticipated under the related service contracts.

If we do not keep pace with rapid technological changes, our services may become less competitive or obsolete.

The biopharmaceutical industry generally, and drug development and clinical research more specifically, are subject to rapid technological changes. Our current competitors or other businesses might develop technologies or services that are more effective or commercially attractive than, or render obsolete, our current or future technologies and services. If our competitors introduce superior technologies or services and if we cannot make enhancements to remain competitive, our competitive position would be harmed. If we are unable to compete successfully, we may lose customers or be unable to attract new customers, which could lead to a decrease in our revenue and have a material adverse effect on our financial condition.

Circumstances beyond our control could cause the CRO industry to suffer reputational or other harm that could result in an industry-wide reduction in demand for CRO services, which could harm our business.

Demand for our services may be affected by perceptions of our customers regarding the CRO industry as a whole. For example, other CROs could engage in conduct that could render our customers less willing to do business with us or any CRO. Likewise, a widely reported injury to clinical trial participants could result in negative perceptions of clinical trial activity, thereby adversely impacting our industry. One or more CROs could engage in or fail to detect malfeasance, such as inadequately monitoring sites, producing inaccurate databases or analysis, falsifying patient records, and performing incomplete lab work, or take other actions that would reduce the confidence of our customers in the CRO industry. As a result, the willingness of biopharmaceutical companies to outsource R&D services to CROs could diminish and our business could thus be harmed materially by events outside our control.

Risks Relating to Our Indebtedness

Our indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations and may otherwise restrict our activities.

Our Senior Secured Credit Facilities consist of a $60.0 million Senior Secured Revolving Credit Facility maturing in April 2019 and a $530.0 million Senior Secured Term Loan Facility maturing in April 2021. On an as adjusted basis, after giving effect to this offering and the use of proceeds therefrom, as of June 30, 2016, we would have had approximately $225.7 million of outstanding indebtedness under our Senior Secured Term Loan Facility and no borrowings outstanding under our Senior Secured Revolving Credit Facility. In addition, we would have had up to $60.0 million of additional borrowing capacity available under our Senior Secured Revolving Credit Facility. Our substantial indebtedness could adversely affect our financial condition and thus make it more difficult for us to satisfy our obligations with respect to our Senior Secured Credit Facilities. If our cash flow is not sufficient to service our debt and adequately fund our business, we may be required to seek further additional financing or refinancing or dispose of assets. We might not be able to influence any of these alternatives on satisfactory terms or at all. Our substantial indebtedness could also:

 

  n   increase our vulnerability to adverse general economic, industry or competitive developments;

 

  n   require us to dedicate a more substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, investments, acquisitions, capital expenditures, and other general corporate purposes;

 

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  n   limit our ability to make required payments under our existing contractual commitments, including our existing long-term indebtedness;

 

  n   limit our ability to fund a change of control offer;

 

  n   require us to sell certain assets;

 

  n   restrict us from making strategic investments, including acquisitions or cause us to make non-strategic divestitures;

 

  n   limit our flexibility in planning for, or reacting to, changes in market conditions, our business and the industry in which we operate;

 

  n   place us at a competitive disadvantage compared to our competitors that have less debt;

 

  n   cause us to incur substantial fees from time to time in connection with debt amendments or refinancings;

 

  n   increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates; and

 

  n   limit our ability to borrow additional funds or to borrow on terms that are satisfactory to us.

For more information about our indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

Despite our current level of indebtedness, we may incur more debt and undertake additional obligations. Incurring such debt or undertaking such additional obligations could further exacerbate the risks to our financial condition.

Although the credit agreement governing the Senior Secured Credit Facilities contains restrictions on our incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and the indebtedness incurred in compliance with these restrictions could increase. To the extent new debt is added to our current debt levels, the risks to our financial condition would increase.

While the credit agreement governing the Senior Secured Credit Facilities also contains restrictions on our ability to make loans and investments, these restrictions are subject to a number of qualifications and exceptions, and the investments incurred in compliance with these restrictions could be substantial.

Covenant restrictions under our Senior Secured Credit Facilities may limit our ability to operate our business.

The agreement governing our Senior Secured Credit Facilities contains covenants that may restrict our ability to, among other things:

 

  n   create, incur or assume any lien upon any of our property, assets or revenue;

 

  n   make or hold certain investments;

 

  n   incur or assume any indebtedness;

 

  n   merge, dissolve, liquidate or consolidate with or into another person;

 

  n   make certain dispositions of property or other assets (including sale leaseback transactions);

 

  n   declare or make certain restricted payments, including dividends;

 

  n   enter into certain transactions with affiliates;

 

  n   prepay subordinated debt;

 

  n   enter into burdensome agreements;

 

  n   engage in any material line of business substantially different from our currently conducted business; or

 

  n   change our fiscal year.

In addition, if we have drawn greater than 30% of the commitments under the Senior Secured Revolving Credit Facility as of the last date of any quarter, then we are required to report compliance with a financial covenant that is tested at the end of such quarter. This financial covenant requires us to maintain a funded first lien net debt to consolidated EBITDA leverage ratio of less than or equal to 8.00:1.00 for any fiscal quarter ending on or prior to March 31, 2016 and 7.50:1.00, thereafter. As of June 30, 2016, we maintained a net debt to consolidated EBITDA leverage ratio, as defined under the Senior Secured Credit Facilities, of 2.95:1.00. As of June 30, 2016, we were in compliance with all covenants under our Senior Secured Credit Agreement.

Although the covenants in our Senior Secured Credit Facilities are subject to various exceptions, we cannot assure you that these covenants will not adversely affect our ability to finance future operations or capital needs or to

 

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engage in other activities that may be in our best interest. In addition, in certain circumstances, our long-term debt requires us to maintain a specified financial ratio and satisfy certain financial condition tests, which may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. A breach of any of these covenants could result in a default under our Senior Secured Credit Facilities. If an event of default under our Senior Secured Credit Facilities occurs, the lenders thereunder could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. In such case, we might not have sufficient funds to repay all the outstanding amounts. In addition, our Senior Secured Credit Facilities are secured by first priority security interests on substantially all of our assets, including the capital stock of certain of our subsidiaries. If an event of default under our Senior Secured Credit Facilities occurs, the lenders thereunder could exercise their rights under the related security documents. Any acceleration of amounts due under the Senior Secured Credit Facilities or the substantial exercise by the lenders of their rights under the security documents would likely have a material adverse effect on us.

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

Our ability to satisfy our debt obligations will depend upon, among other things:

 

  n   our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control; and

 

  n   the future availability of borrowings under our Senior Secured Credit Facilities, which depends on, among other things, our complying with the covenants in those facilities.

We cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our Senior Secured Credit Facilities or otherwise, in an amount sufficient to fund our liquidity needs.

If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements, may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all, and any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due.

Interest rate fluctuations may affect our results of operations and financial condition.

Because a substantial portion of our debt is variable-rate debt, fluctuations in interest rates could have a material effect on our business. As a result, we may incur higher interest costs if interest rates increase. These higher interest costs could have a material adverse impact on our financial condition and the levels of cash we maintain for working capital.

We are dependent upon our lenders for financing to execute our business strategy and meet our liquidity needs. If our lenders are unable to fund borrowings under their credit commitments or we are unable to borrow, it could negatively impact our business.

During periods of volatile credit markets, there is risk that any lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to, extending credit up to the maximum permitted by a credit facility. If our lenders are unable to fund borrowings under their revolving credit commitments or we are unable to borrow (such as having insufficient capacity under our borrowing base), it could be difficult in such environments to obtain sufficient liquidity to meet our operational needs.

 

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Risks Relating to Our Common Stock and This Offering

Cinven and our Chief Executive Officer and founder will collectively control a substantial majority of our outstanding common stock following this offering and their interests may be different from or conflict with those of our other shareholders.

Upon the completion of this offering, Cinven will own approximately 58.0% of the outstanding shares of our common stock (or 56.5% if the underwriters exercise their option to purchase additional shares in full) and Dr. August J. Troendle, our Chief Executive Officer and founder, through his direct ownership of 351,851 shares of our common stock and his beneficial ownership of 9,201,377 shares of our common stock held by MPI, will control approximately 24.1% of the outstanding shares of our common stock (or 23.5% if the underwriters exercise their option to purchase additional shares in full). Additionally, upon a distribution of our common stock held by MPI, our Chief Executive Officer would receive approximately 73% of such shares. Accordingly, both Cinven and Dr. Troendle will be able to exert a significant degree of influence or actual control over our management and affairs and will control all corporate actions requiring shareholder approval, irrespective of how our other shareholders may vote, including:

 

  n   subject to the voting arrangements described in “Certain Relationships and Related Person Transactions,” the election and removal of directors and the size of our board of directors, or the Board;

 

  n   any amendment of our articles of incorporation or bylaws; or

 

  n   the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets.

Dr. Troendle has indicated an interest in purchasing shares of our common stock in this offering at the initial public offering price. If he were to purchase all of the shares he has indicated an interest in purchasing in this offering, assuming an initial public offering price of $21.50 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, he would purchase an aggregate of approximately 930,233 shares, and as a result the percentage of the outstanding shares of our common stock that he would control directly or through his beneficial ownership of shares of our common stock held by MPI would increase to approximately 26.4% (or 25.8% if the underwriters exercise their option to purchase additional shares in full).

Moreover, Cinven’s and Dr. Troendle’s share ownership may also adversely affect the trading price for our common stock to the extent investors perceive disadvantages in owning shares of a company with controlling shareholders. In addition, we have historically paid an affiliate of Cinven an annual fee for certain advisory and consulting services pursuant to an advisory services agreement, or the Advisory Services Agreement. See “Certain Relationships and Related Person Transactions—Advisory Fees.” The Advisory Services Agreement will be terminated in connection with the consummation of this offering. In addition, Cinven is in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Cinven may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue, and as a result, the interests of Cinven may not coincide and may even conflict with the interests of our other shareholders.

Upon the listing of our common stock on NASDAQ, we will be a “controlled company” within the meaning of the rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

We understand that, substantially concurrently with the closing of this offering, Cinven and Dr. August J. Troendle, our Chief Executive Officer and founder, intend to enter into a voting agreement, or the Voting Agreement. Pursuant to the terms of the Voting Agreement, for so long as Cinven and Dr. Troendle collectively hold at least 40% of our outstanding voting shares, or the Voting Agreement is otherwise terminated in accordance with its terms, Cinven will agree to vote its shares of our common stock in favor of the election of Dr. Troendle to our Board (so long as Dr. Troendle remains our Chief Executive Officer) upon his nomination by our Board and Dr. Troendle will agree to vote his shares of our common stock in favor of the election of the directors affiliated with Cinven upon their nomination by our Board; provided, that in the event that Cinven holds less than (a) 40% but greater than or equal to 25% of our voting shares then outstanding, Dr. Troendle shall be required to vote for two directors affiliated with Cinven, after giving effect to the directors then sitting on the Board, (b) 25% but greater than or equal to 10% of our voting shares then outstanding, Dr. Troendle shall be required to vote for one director affiliated with Cinven, after

 

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giving effect to the directors then sitting on the Board and (c) 10% of our voting shares then outstanding, Dr. Troendle shall not be required to vote for any directors affiliated with Cinven.

Because of the Voting Agreement and the aggregate voting power of Cinven and Dr. Troendle, we are considered a “controlled company” within the meaning of the corporate governance standards of NASDAQ. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our common stock:

 

  n   we have a Board that is composed of a majority of “independent directors,” as defined under the rules of such exchange;

 

  n   we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

  n   director nominations be made, or recommended to the full Board, by our independent directors or by a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

After we cease to be a “controlled company,” we will be required to comply with the above-referenced requirements within one year.

Following this offering, we will not have a nominating and corporate governance committee. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of NASDAQ. Cinven and Dr. Troendle, however, are not subject to any contractual obligation to retain their controlling interest, except that they have agreed, subject to certain exceptions, not to sell or otherwise dispose of any shares of our common stock or other capital stock or other securities exercisable or convertible therefor for a period of at least 180 days after the date of this prospectus without the prior written consent of Jefferies LLC. Except for this brief period, there can be no assurance as to the period of time during which Cinven and Dr. Troendle will maintain their ownership of our common stock following the offering. As a result, there can be no assurance as to the period of time during which we will be able to avail ourselves of the controlled company exemptions.

Our anti-takeover provisions could prevent or delay a change in control of our company, even if such change in control would be beneficial to our shareholders.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, as they will be in effect upon completion of this offering, as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial to our shareholders. These provisions include:

 

  n   authorizing the issuance of “blank check” preferred stock that could be issued by our Board to increase the number of outstanding shares and thwart a takeover attempt;

 

  n   establishing a classified Board so that not all members of our Board are elected at one time;

 

  n   the removal of directors only for cause;

 

  n   prohibiting the use of cumulative voting for the election of directors;

 

  n   limiting the ability of shareholders to call special meetings or amend our bylaws;

 

  n   requiring all shareholder actions to be taken at a meeting of our shareholders and not by written consent; and

 

  n   establishing advance notice and duration of ownership requirements for nominations for election to the Board or for proposing matters that can be acted upon by shareholders at shareholder meetings.

These provisions could also discourage proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take other corporate actions you desire. In addition, because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our shareholders to replace current members of our management team.

In addition, the Delaware General Corporation Law, or the DGCL, to which we are subject, prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations

 

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with any shareholder or group of shareholders who owns at least 15% of our common stock for three years following their becoming the owner of 15% of our common stock.

Cinven and our non-employee directors may acquire interests and positions that could present potential conflicts with our and our shareholders’ interests.

Cinven and our non-employee directors make investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Cinven and our non-employee directors may also pursue, for their own accounts, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities might not be available to us. Our organizational documents contain provisions renouncing any interest or expectancy held by Cinven or by our non-employee directors in corporate opportunities. Accordingly, the interests of Cinven and our non-employee directors may supersede ours, causing Cinven or its affiliates or our non-employee directors and their affiliates to compete against us or to pursue opportunities instead of us, for which we have no recourse. Such actions on the part of Cinven or our non-employee directors and inaction on our part could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Full-time investment professionals of Cinven occupy three seats on our Board. Because Cinven could invest in entities that directly or indirectly compete with us, when conflicts arise between the interests of Cinven and the interests of our shareholders, these directors may not be disinterested.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Our amended and restated certificate of incorporation will authorize us to issue one or more series of preferred stock. Our Board will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our common stock.

The provision of our amended and restated certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.

Our amended and restated certificate of incorporation will require, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our shareholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or the bylaws or (iv) any action asserting a claim against us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

Dilution is the difference between the offering price per share and the net tangible book value per share of our common stock immediately after the offering. The price you pay for shares of our common stock sold in this offering is substantially higher than our net tangible book value per share immediately after this offering. If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $(28.14) per share based upon an assumed initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus). In addition, you may also experience additional dilution, or potential dilution, upon future equity issuances to investors or to our employees and directors under the Plan and any other equity incentive plans we may adopt. As a result of this dilution, investors purchasing shares of common stock in this offering may receive significantly less than the full purchase price that they paid for the stock purchased in this offering in the event of liquidation. See “Dilution.”

 

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Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are not currently required to comply with the rules of the U.S. Securities and Exchange Commission, or the SEC, implementing Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. Additionally, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

To comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

We will incur significant costs as a result of operating as a public company, and our management will devote substantial time to new compliance initiatives.

As a privately-held company, we were not required to comply with certain corporate governance and financial reporting practices and policies required of a publicly traded company. As a publicly traded company, we will incur significant legal, accounting and other expenses that we were not required to incur in the recent past, particularly after we are no longer an “emerging growth company” as defined under the JOBS Act. In addition, compliance with new and changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Customer Protection Act, or the Dodd-Frank Act, and the rules and regulations promulgated and to be promulgated thereunder, as well as under the Sarbanes-Oxley Act, and the rules and regulations of the SEC, will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly. For example, the Exchange Act will require us, among other things, to file annual, quarterly and current reports with respect to our business and operating results. We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. As such, we expect to incur additional annual expenses of $3.0 million to $4.0 million related to operating as a public company. These factors may therefore strain our resources, divert management’s attention, and affect our ability to attract and retain qualified members of our Board and adversely affect our operating margins.

Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a publicly traded company. However, the measures we take may not be sufficient to satisfy our obligations as a publicly traded company.

 

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There is no existing market for our common stock, and we do not know if one will develop to provide you with liquidity.

Prior to this offering, there has not been a public market for our common stock. An active market for our common stock might not develop following the consummation of this offering, or if it does develop, might not be maintained. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters and might not be indicative of prices that will prevail in the open market following this offering. Consequently, you might not be able to sell shares of our common stock at prices equal to or greater than the initial public offering price.

Our Chief Executive Officer and founder, Dr. August J. Troendle, has indicated an interest to purchase up to $20.0 million in shares of our common stock in this offering at the initial public offering price. To the extent Dr. Troendle is allocated and purchases shares in this offering, such a purchase may reduce the available public float for our shares because Dr. Troendle will be restricted from selling the shares by restrictions under applicable securities laws and contractual agreements described in “Shares Eligible for Future Sale.” As a result, the liquidity of our common stock could be significantly reduced from what it would have been if these shares had been purchased by investors that were not affiliated with us.

Our operating results and share price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results have fluctuated, and are likely to fluctuate in the future as a publicly traded company. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of shares of our common stock to wide price fluctuations regardless of our operating performance. We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price, or at all. Our operating results and the trading price of shares of our common stock may fluctuate in response to various factors, including:

 

  n   market conditions in the broader stock market or in the healthcare sector;

 

  n   developments affecting biopharmaceutical companies generally or biopharmaceutical research and development outsourcing;
  n   actual or anticipated fluctuations in our quarterly financial and operating results;

 

  n   introduction of new products or services by us or our competitors;

 

  n   the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

  n   changes in, or failure to meet, earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industries;

 

  n   strategic actions by us, our customers or our competitors, such as acquisitions or restructurings;

 

  n   changes in accounting standards, policies, guidance, interpretations or principles;

 

  n   issuance of new or changed securities analysts’ reports or recommendations or termination of coverage of our common stock by securities analysts;

 

  n   sales, or anticipated sales, of large blocks of our stock;

 

  n   the granting or exercise of employee stock options;

 

  n   volume of trading in our common stock;

 

  n   additions or departures of key personnel;

 

  n   regulatory or political developments;

 

  n   litigation and governmental investigations;

 

  n   changing economic conditions;

 

  n   defaults on our indebtedness;

 

  n   exchange rate fluctuations; and

 

  n   the other factors listed in this “Risk Factors” section.

 

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These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for shares of our common stock to fluctuate substantially. While we believe that operating results for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of shares of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. After this offering, we will have 39,642,113 shares of outstanding common stock (or 40,692,113 if the underwriters exercise their option to purchase additional shares in full). In addition, under the Plan, we intend to grant to certain of our employees and non-employee directors in connection with this offering awards of stock options at an exercise price equal to the initial public offering price of our common stock with respect to an aggregate of up to 685,310 shares of common stock immediately following the completion of this offering. We have not yet determined the allocation of such awards of stock options among the individuals, except for the executive officers and certain non-employee directors. See “Executive and Director Compensation—Narrative to Summary Compensation Table—Offering Grants to Employees under the 2016 Incentive Award Plan” and “Executive and Director Compensation—Director Compensation.” The shares of common stock sold in this offering or issuable pursuant to the equity awards we grant will be freely tradable without restriction under the Securities Act, except as described in the next paragraph with respect to the lock-up arrangements and for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

We and each of our directors, executive officers and holders of substantially all of our outstanding common stock have agreed with the underwriters, subject to certain exceptions, not to sell or otherwise dispose of any shares of our common stock or other capital stock or other securities exercisable or convertible therefor for a period of at least 180 days after the date of this prospectus without the prior written consent of Jefferies LLC. See “Underwriting” and “Shares Eligible for Future Sale—Lock-Up Agreements.” All of the shares of our common stock outstanding as of the date of this prospectus may be sold in the public market by existing shareholders following the expiration of the applicable lock-up period, subject to applicable limitations imposed under federal securities laws.

We also intend to enter into a Registration Rights Agreement pursuant to which the shares of common stock held by Cinven and Dr. August J. Troendle, our Chief Executive Officer and founder, will be eligible for resale, subject to certain limitations set forth therein. See “Certain Relationships and Related Person Transactions—Registration Rights Agreement.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of common stock issued or issuable under the Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market following the expiration of the applicable lock-up period. We expect that the initial registration statement on Form S-8 will cover 6,000,000 shares of our common stock.

See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

In the future, we may also issue additional securities if we need to raise capital or make acquisitions, which could constitute a material portion of our then-outstanding shares of common stock.

 

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Because we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our common stock for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may continue to be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur, including under our existing Senior Secured Credit Facilities. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

We are a holding company and rely on dividends and other payments, advances and transfers of funds from our subsidiaries to meet our obligations and pay any dividends.

We have no direct operations and no significant assets other than ownership of 100% of the capital stock of our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments to generate the funds necessary to meet our financial obligations, and to pay any dividends with respect to our common stock. Legal and contractual restrictions in our Senior Secured Credit Facilities and other agreements which may govern future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. The earnings from, or other available assets of, our subsidiaries might not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or other obligations. Any of the foregoing could materially and adversely affect our business, financial condition, results of operations and cash flows. See “Dividend Policy.”

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for shares of our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

The JOBS Act provides that, so long as a company qualifies as an “emerging growth company,” it will, among other things:

 

  n   be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

 

  n   be exempt from the “say on pay” and “say on golden parachute” advisory vote requirements of the Dodd-Frank Act;

 

  n   be exempt from certain disclosure requirements of the Dodd-Frank Act relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Exchange Act; and

 

  n   be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on the financial statements.

We currently intend to take advantage of each of the exemptions described above. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act. We could be an emerging growth company for up to five years after this offering. We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock. For additional information about the implications of qualifying as an emerging growth company, see “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward looking statements. The words “believe,” “may,” “might,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “should,” “expect” and similar expressions are intended to identify forward looking statements. Examples of forward looking statements include, but are not limited to, statements we make regarding: (i) growth of (a) the CRO market, (b) biopharmaceutical companies’ development expenditures and (c) the percentage of biopharmaceutical clinical development costs that are outsourced to CROs; (ii) the amount of the expected conversion of our backlog to net service revenue; (iii) high-growth therapeutic areas and (iv) the continuous enhancement of our clinical development services and our therapeutic expertise. Forward looking statements are based largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward looking statements are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward looking statements we may make. In light of these risks, uncertainties and assumptions, the forward looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward looking statements. We caution you therefore against relying on these forward looking statements.

Some of the key factors that could cause actual results to differ from our expectations include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:

 

  n   the potential loss, delay or non-renewal of our contracts, or the non-payment by customers for services we have performed;

 

  n   the failure to convert backlog to revenue at our historical conversion rate;

 

  n   fluctuation in our results between fiscal quarters and years;

 

  n   decreased operating margins due to increased pricing pressure or other pressures;

 

  n   failure to perform our services in accordance with contractual requirements, government regulations and ethical considerations;

 

  n   the impact of underpricing our contracts, overrunning our cost estimates or failing to receive approval for or experiencing delays with documentation of change orders;

 

  n   our failure to successfully execute our growth strategies;

 

  n   the impact of a failure to retain key personnel or recruit experienced personnel;

 

  n   the risks associated with our information systems infrastructure;

 

  n   our failure to manage our growth effectively;

 

  n   adverse results from customer or therapeutic area concentration;

 

  n   the risks associated with doing business internationally;

 

  n   the risks associated with the Foreign Corrupt Practices Act and other anti-corruption laws;

 

  n   future net losses;

 

  n   the impact of income tax rate fluctuations on operations, earnings and earnings per share;

 

  n   the risks associated with our intercompany transfer pricing policies;

 

  n   our failure to attract suitable investigators and patients for our clinical trials;

 

  n   the liability risks associated with our R&D services;

 

  n   the risks related to our Phase I clinical services;

 

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  n   inadequate insurance coverage for our operations and indemnification obligations;

 

  n   fluctuations in exchange rates;

 

  n   the risks related to our relationships with existing or potential customers who are in competition with each other;

 

  n   our failure to successfully integrate potential future acquisitions;

 

  n   potential impairment of goodwill or other intangible assets;

 

  n   our limited ability to utilize our net operating loss carryforwards or other tax attributes;

 

  n   the risks associated with the use and disposal of hazardous substances and waste;

 

  n   the failure of third parties to provide us critical support services;

 

  n   our limited ability to protect our intellectual property rights;

 

  n   the impact of the United Kingdom’s referendum on withdrawal from the EU;

 

  n   the risks associated with potential future investments in our customers’ businesses or drugs;

 

  n   the impact of a natural disaster or other catastrophic event;

 

  n   negative outsourcing trends in the biopharmaceutical industry and a reduction in aggregate expenditures and R&D budgets;

 

  n   our inability to compete effectively with other CROs;

 

  n   the impact of healthcare reform;

 

  n   the impact of recent consolidation in the biopharmaceutical industry;

 

  n   failure to comply with federal, state and foreign healthcare laws;

 

  n   the effect of current and proposed laws and regulations regarding the protection of personal data;

 

  n   our potential involvement in costly intellectual property lawsuits;

 

  n   actions by regulatory authorities or customers to limit the scope of or withdraw an approved drug, biologic or medical device from the market;

 

  n   failure to keep pace with rapid technological changes;

 

  n   the impact of industry-wide reputational harm to CROs;

 

  n   our ability to fulfill our debt obligations;

 

  n   the risks associated with incurring additional debt or undertaking additional debt obligations;

 

  n   the effect of covenant restrictions under our debt agreements on our ability to operate our business;

 

  n   our inability to generate sufficient cash to service all of our indebtedness;

 

  n   fluctuations in interest rates;

 

  n   our dependence on our lenders, which may not be able to fund borrowings under their credit commitments, and our inability to borrow; and

 

  n   the other factors set forth in “Risk Factors.”

See “Risk Factors” for a further description of these and other factors. The forward looking statements included in this prospectus are made only as of the date hereof. You should not rely upon forward looking statements as predictions of future events. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward looking statements. We undertake no obligation to update publicly any forward looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as may be required by law.

You should read this prospectus with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of shares of 7,000,000 our common stock in this offering will be approximately $138.3 million, assuming an initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus), and after deducting $12.2 million of estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering. The underwriters may also purchase up to a maximum of 1,050,000 additional shares of common stock from us pursuant to their option to purchase additional shares. We estimate that the net proceeds to us, if the underwriters exercise their right to purchase the maximum of 1,050,000 additional shares of common stock from us, will be approximately $159.5 million, assuming an initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus), and after deducting underwriting estimated discounts and commissions and estimated expenses payable by us in connection with this offering.

We intend to use the net proceeds of this offering to repay $138.3 million in aggregate principal amount of outstanding borrowings under our Senior Secured Term Loan Facility.

The Senior Secured Term Loan Facility had $364.0 million outstanding (net of an unamortized discount of $1.8 million and unamortized debt issuance costs of $9.2 million) as of June 30, 2016 with a maturity date of April 1, 2021. Borrowings under the Senior Secured Term Loan Facility bear interest at a rate equal to, at our option, either (a) a Eurocurrency rate based on LIBOR for U.S. dollar deposits for loans denominated in dollars, EURIBOR for Euro deposits for loans denominated in Euros and the offer rate for any other currencies for loans denominated in such other currencies for the relevant interest period, plus 4.00% per annum if our total net leverage ratio is greater than 4.75:1.00, or 3.75% if our total net leverage ratio is less than or equal to 4.75:1:00; provided that the relevant Eurocurrency rate shall be deemed to be no less than 1.00% per annum; or (b) a base rate, which is defined as the highest of (i) the Federal Funds Rate on such day plus  12 of 1.00%, (ii) the Prime Lending Rate on such day, (iii) the Adjusted Eurocurrency Rate for Loans denominated in U.S. dollars published on such day for an Interest Period of one month plus 1.00% and (iv) 2.00%, plus 3.00% per annum if our total net leverage ratio is greater than 4.75:1.00, or 2.75% if our total net leverage ratio is less than or equal to 4.75:1:00; provided that the base rate shall be deemed to be no less than 2.00% per annum. We may voluntarily prepay outstanding loans under the Senior Secured Term Loan Facility without premium or penalty. As of June 30, 2016, the interest applicable on the Senior Secured Term Loan Facility was the Eurocurrency minimum floor interest rate of 4.75%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

If the underwriters exercise their option to purchase additional shares from us in full, we estimate that we will receive additional net proceeds of $21.2 million, which we intend to use to repay additional borrowings outstanding under our Senior Secured Term Loan Facility.

Assuming no exercise of the underwriters’ option to purchase additional shares, a $1.00 increase (decrease) in the assumed initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by $6.6 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by $20.2 million, assuming an initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering.

 

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DIVIDEND POLICY

We have no current plans to pay any cash dividends on our common stock for the foreseeable future and instead intend to retain earnings, if any, for future operations, expansion and debt repayment. However, in the future, subject to the factors described below and our future liquidity and capitalization, we may change this policy and choose to pay dividends.

We are a holding company which does not conduct any business operations of our own. As a result, our ability to pay cash dividends on our common stock is dependent upon cash dividends and distributions and other transfers from our subsidiaries. The ability of our subsidiaries to pay dividends is currently restricted by the terms of our Senior Secured Credit Facilities and may be further restricted by any future indebtedness we or they incur.

In addition, under Delaware law, our Board may declare dividends only to the extent of our surplus (which is defined as total assets at fair market value minus total liabilities, minus statutory capital) or, if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal year.

Any future determination to declare dividends will be at the discretion of our Board and will take into account:

 

  n   restrictions in our debt instruments, including our Senior Secured Credit Facilities;

 

  n   general economic business conditions;

 

  n   our net income, financial condition and results of operations;

 

  n   our capital requirements;

 

  n   our prospects;

 

  n   the ability of our operating subsidiaries to pay dividends and make distributions to us;

 

  n   legal restrictions; and

 

  n   such other factors as our Board may deem relevant.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness” for restrictions on our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization, as of June 30, 2016:

 

  n   on an actual basis; and

 

  n   on an as adjusted basis to give effect to our issuance and sale of 7,000,000 shares of our common stock in this offering at the initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering and the application of the net proceeds to be received by us from this offering as described under “Use of Proceeds.”

You should read this information together with our audited consolidated financial statements and related notes included elsewhere in this prospectus and the information set forth under the headings ‘‘Use of Proceeds,’’ ‘‘Selected Historical Consolidated Financial and Other Data’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’

 

 

 

     AS OF JUNE 30, 2016  
(In thousands, except share amounts)    ACTUAL     AS ADJUSTED(3)  

Cash and cash equivalents

   $ 13,674      $ 13,674   
  

 

 

   

 

 

 

Debt:

    

Senior Secured Term Loan Facility (1)

     364,033        225,744   

Senior Secured Revolving Credit Facility (2)

              
  

 

 

   

 

 

 

Total long-term debt, net

     364,033        225,744   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock, par value $0.01 per share; 60,000,000 shares authorized, 32,642,113 shares issued and outstanding, actual; 250,000,000 shares authorized and 39,642,113 shares issued and outstanding, as adjusted

     326        396   

Additional paid-in-capital

     439,460        575,818   

Accumulated deficit

     (14,599     (14,599

Accumulated other comprehensive loss

     (2,551     (2,551
  

 

 

   

 

 

 

Total shareholders’ equity

     422,636        559,064   
  

 

 

   

 

 

 

Total capitalization

   $ 786,669        784,808   
  

 

 

   

 

 

 

 

 

(1)    This amount is presented net of an unamortized discount of $1.8 million and unamortized debt issuance costs of $9.2 million.

 

(2)    As of June 30, 2016, the Senior Secured Credit Facilities provided for a $60.0 million Senior Secured Revolving Credit Facility, under which we had no borrowings outstanding and $60.0 million of available borrowings.
(3)    Assuming no exercise of the underwriters’ option to purchase additional shares, a $1.00 increase (decrease) in the assumed initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus) would increase (decrease) the as adjusted amount of the Senior Secured Term Loan Facility, additional paid-in capital and total shareholders’ equity by $6.6 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the as adjusted amount of the Senior Secured Term Loan Facility, additional paid-in capital and total shareholders’ equity by $20.2 million, assuming an initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus).

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Net tangible book value per share represents our total tangible assets less our total liabilities, divided by the total number of shares of common stock deemed to be outstanding at that date. Our net tangible book value (deficit) as of June 30, 2016 was $(399.8) million, or $(12.25) per share of our common stock.

After giving effect to the sale of 7,000,000 shares of common stock in this offering at the assumed initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus) and the application of the net proceeds from this offering, our as adjusted net tangible book value (deficit) as of June 30, 2016 would have been $(263.3) million, or $(6.64) per share of our common stock. This represents an immediate increase in net tangible book value (deficit) of $5.61 per share to our existing investors and an immediate dilution in net tangible book value (deficit) of $(28.14) per share to new investors.

The following table illustrates this dilution on a per share of common stock basis:

 

 

 

Assumed initial public offering price per share of common stock

     $ 21.50   

Net tangible book value (deficit) per share as of June 30, 2016 before this offering

   $ (12.25  

Increase in net tangible book value (deficit) per share attributable to new investors

     5.61     
  

 

 

   

As adjusted net tangible book value (deficit) per share after this offering

       (6.64
    

 

 

 

Dilution in net tangible book value (deficit) per share to new investors

     $ (28.14
    

 

 

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus) would increase (decrease) the as adjusted net tangible book value (deficit) per share after this offering by approximately $0.17, and dilution in net tangible book value (deficit) per share to new investors by approximately $(0.17), assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering.

If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the as adjusted net tangible book value (deficit) after the offering would be $(5.95) per share, the increase in net tangible book value (deficit) per share to existing shareholders would be $6.30 and the dilution in net tangible book value (deficit) per share to new investors would be $(27.45) per share, in each case assuming an initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus).

The following table summarizes as of June 30, 2016, on an as adjusted basis after giving effect to this offering, the total number of shares of common stock purchased from us, the total cash consideration paid to us, or to be paid, and the average price per share paid, or to be paid, by our existing investors and by new investors purchasing shares in this offering, at the assumed initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus) before deducting the estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering:

 

 

 

     SHARES
PURCHASED
    TOTAL
CONSIDERATION
    AVERAGE PRICE
PER SHARE
 
     NUMBER      PERCENT     AMOUNT      PERCENT    

Existing shareholders

     32,642,113         82.3   $ 414,960,028         73.4   $ 12.71   

New investors

     7,000,000         17.7   $ 150,500,000         26.6   $ 21.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     39,642,113         100   $ 565,460,028         100   $ 14.26   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

 

 

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $21.50 per share (the midpoint of the price range listed on the cover page of this prospectus) would increase (decrease) the total consideration paid by new investors and the total consideration paid by all shareholders by $7.0 million, assuming the number of shares offered by us remains the same and before deducting the estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering.

If the underwriters were to fully exercise their option to purchase 1,050,000 additional shares of our common stock, the percentage of shares of our common stock held by existing investors would be 80.2%, and the percentage of shares of our common stock held by new investors would be 19.8%.

The above discussion and tables are based on the number of shares outstanding as of June 30, 2016 and excludes:

 

  n   1,779,637 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2016 at a weighted average exercise price of $15.48 per share; and

 

  n   an additional 6,000,000 shares of common stock reserved for future issuance under the Plan, including pursuant to equity awards to be granted in connection with this offering, as described in “Executive and Director Compensation—Narrative to Summary Compensation Table—Offering Grants to Employees under the 2016 Incentive Award Plan.”

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our shareholders. See “Risk Factors—Risks Relating to Our Common Stock and this Offering—If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.”

Our Chief Executive Officer and founder, Dr. August J. Troendle, has indicated an interest to purchase up to $20.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, this existing shareholder may determine to increase or reduce the amount of his indication of interest, or otherwise elect not to purchase any shares. It is also possible that the number of shares, if any, allocated to this shareholder in the offering may be smaller than the amount of his indication of interest. Any allocation of shares in the offering to this existing shareholder will be made at our direction.

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our selected consolidated historical financial and other data for the periods ending on and as of the dates indicated. We derived the consolidated statements of operations data for the years ended December 31, 2013 (Predecessor) and December 31, 2015 (Successor) and the consolidated balance sheet data as of December 31, 2014 and December 31, 2015 from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. We derived the consolidated statements of operations data for the Predecessor three month period ended March 31, 2014 and the Successor nine month period ended December 31, 2014 from our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. We derived the condensed consolidated statements of operations data for the Successor six months ended June 30, 2015 and June 30, 2016 and the condensed consolidated balance sheet data as of June 30, 2016 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial information set forth below on the same basis as our audited consolidated financial statements and have included all adjustments, consisting of only normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods.

The accompanying consolidated statements of operations, cash flows and shareholders’ equity are presented for two periods, Predecessor and Successor, which relate to the period preceding the Transaction and the period succeeding the Transaction, respectively. The Company refers to the operations of Medpace Holdings, Inc. and subsidiaries for both the Predecessor period and Successor period.

The results for any interim period are not necessarily indicative of the results that may be expected for a full year. Additionally, our historical results are not necessarily indicative of future results. You should read the information set forth below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

 

 

 

    SUCCESSOR     PREDECESSOR  

(In thousands, except per share data)

  SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1,

2014
THROUGH
DECEMBER 31,
2014
    THREE MONTH
PERIOD FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

Consolidated Statements of Operations Data:

             

Service revenue, net

  $ 180,433      $ 152,782      $ 320,101      $ 219,791      $ 70,250      $ 244,270   

Reimbursed out-of-pocket revenue

    25,107        18,105        38,958        28,708        7,679        28,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    205,540        170,887        359,059        248,499        77,929        272,890   

Operating expenses:

             

Direct costs, excluding depreciation and amortization

    96,215        77,725        163,707        117,550        38,759        119,779   

Reimbursed out-of-pocket expenses

    25,107        18,105        38,958        28,708        7,679        28,620   

Selling, general and administrative

    28,333        23,448        56,998        29,465        10,203        35,109   

Acquisition and integration

                         9,297        12,420          

Impairment of goodwill

                  9,313                        

Depreciation

    3,566        3,110        6,379        4,610        1,832        6,665   

Amortization

    25,336        34,243        63,142        56,422        5,199        23,854   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    178,557        156,631        338,497        246,052        76,092        214,027   
 

Income from operations

    26,983        14,256        20,562        2,447        1,837        58,863   

Other (expense) income, net:

             

Miscellaneous (expense) income, net

    (941 )       (978     (1,133     (301     1,213        (1,718

Interest expense, net

    (11,894     (13,975     (27,259     (23,185     (3,272     (18,000
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

    (12,835     (14,953     (28,392     (23,486     (2,059     (19,718
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    14,148        (697     (7,830     (21,039     (222     39,145   

Income tax provision (benefit)

    5,738        (733     843        (6,703     1,014        14,301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 8,410      $ 36      $ (8,673   $ (14,336   $ (1,236   $ 24,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

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    SUCCESSOR     PREDECESSOR  

(In thousands, except per share data)

  SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1,

2014
THROUGH
DECEMBER 31,
2014
    THREE MONTH
PERIOD FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

Net income (loss) per share attributable to common shareholders:

             

Basic

  $ 0.26      $ 0.00      $ (0.28   $ (0.46   $ (0.05   $ 0.99   

Diluted

  $ 0.26      $ 0.00      $ (0.28   $ (0.46   $ (0.05   $ 0.95   

Weighted average common shares outstanding:

             

Basic

    32,631        31,527        31,346        30,869        25,047        25,204   

Diluted

    32,631        31,591        31,346        30,869        25,047        26,150   
 

Cash Flow Data:

             

Net cash provided by operating activities

  $ 19,982      $ 26,271      $ 84,117      $ 62,539      $ 12,807      $ 98,142   

Net cash used in investing activities

    (5,653     (2,658     (6,432     (907,640     (827     (4,472

Net cash (used in) provided by financing activities

    (15,678     (65,702     (116,489     900,171        (17,968     (95,851

 

 

 

 

 

    SUCCESSOR     PREDECESSOR  
(In thousands)   SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE
MONTH
PERIOD
FROM
APRIL 1,
2014
THROUGH
DECEMBER
31, 2014
    THREE MONTH
PERIOD FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

Other Financial Data:

             

EBITDA (1)

  $ 54,944      $ 50,631      $ 88,950      $ 63,178      $ 10,081      $ 87,664   

Adjusted EBITDA (1)

    56,427        48,385        101,216        70,450        21,710        85,409   

Adjusted net income (1)

    26,271        21,147        40,445        26,685        9,715        41,407   

Free Cash Flow (1)

    13,545        23,030        76,360        57,030        11,552        93,581   

Backlog (at period end) (2)

    465,738        400,627        429,659        394,023        386,047        359,341   

Net new business awards (3)

    218,113        162,638        359,538        231,918        97,220        291,577  
           
                                                 
       
(In thousands)   AS OF
JUNE 30,
2016
    AS OF
DECEMBER
31, 2015
    AS OF
DECEMBER 31,
2014
 

Consolidated Balance Sheet Data

     

Cash and cash equivalents

  $ 13,674      $ 14,880      $ 54,285   

Restricted cash

    3,366        2,857        1,104   

Accounts receivable and unbilled, net

    90,048        65,088        65,248   

Working capital

    (22,260     (39,296     (319

Total assets

    994,863        984,041        1,096,912   

Total long-term debt, net

    364,033        377,882        491,518   

Total liabilities

    572,227        570,567        694,942   

Total shareholders’ equity

    422,636        413,474        401,970   

Total liabilities and shareholders’ equity

    994,863        984,041        1,096,912   

 

 

(1)    We prepare our financial statements in conformity with U.S. GAAP. To supplement this information, we also use the following non-GAAP financial measures in this prospectus: EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow. EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are measures used by management to assess operating performance. EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are not presented in accordance with U.S. GAAP, are not measures of financial condition or profitability and should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP or net cash provided by operating activities determined in accordance with U.S. GAAP, as applicable, or any other performance measure derived in accordance with U.S. GAAP and should not be construed as an inference that our future results will be unaffected by unusual non-recurring items. Management uses EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow or comparable metrics:

 

  n   as a measurement used in evaluating our operating performance on a consistent basis;

 

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  n   as a consideration to assess incentive compensation for our employees;

 

  n   for planning purposes, including the preparation of our internal annual operating budget; and

 

  n   to evaluate the performance and effectiveness of our operational strategies.

We believe that the inclusion of EBITDA and Adjusted EBITDA in this prospectus is useful to provide additional information to investors about certain material non-cash and non-recurring items. While we believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors, because not all companies use identical calculations, this presentation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies and should not be considered as an alternative to performance measures derived in accordance with U.S. GAAP. EBITDA is calculated as net income (loss) attributable to Medpace Holdings, Inc. before income tax expense, interest expense, net, depreciation and amortization with Adjusted EBITDA being further adjusted for unusual and other items reflected in the reconciliation table below. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by usual or non-recurring items.

EBITDA and Adjusted EBITDA have important limitations as analytical tools and you should not consider them in isolation, or as a substitute for, analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 

  n   they do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

  n   they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

  n   they do not reflect changes in, or cash requirements for, our working capital needs;

 

  n   although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect the cash requirements for such replacements;

 

  n   they do not reflect our income tax expense or the cash requirements to pay our taxes;

 

  n   Adjusted EBITDA does not reflect the non-cash component of certain stock based awards related to fair value adjustments and unusual non-recurring stock awards;

 

  n   Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, as discussed in our presentation of Adjusted EBITDA and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus; and

 

  n   other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only supplementally.

We utilize Free Cash Flow as a measure of profitability and an assessment of our ability to generate cash. Free Cash Flow is a commonly utilized metric that companies provide to investors, although the calculation of Free Cash Flow may not be comparable to other similarly titled metrics of other companies and should not be considered as an alternative to cash flow measures derived in accordance with U.S. GAAP. We define Free Cash Flow as net cash provided by operating activities, less capital expenditures and the principal portion of payments related to campus leases classified for accounting purposes as deemed landlord liabilities.

Adjusted Net Income measures our operating performance by adjusting net income (loss) attributable to Medpace Holdings, Inc. to include cash expenditures related to rental payments on leases classified for accounting purposes as deemed landlord liabilities, and exclude amortization expense, certain stock based compensation award non-cash expenses, certain litigation expenses, deferred financing fees and certain other non-recurring items. Management uses this measure to evaluate our core operating results as it excludes certain items whose fluctuations from period-to-period do not necessarily correspond to changes in the core operations of the business, but includes certain items such as depreciation, interest expense and tax expense, which are otherwise excluded from Adjusted EBITDA. We believe the presentation of Adjusted Net Income enhances our investors’ overall understanding of the financial performance and cash flow of our business. You should not consider Adjusted Net Income as an alternative to net income (loss) attributable to Medpace Holdings, Inc., determined in accordance with U.S. GAAP, as an indicator of operating performance.

 

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See the consolidated financial statements included elsewhere in this prospectus for our U.S. GAAP results. Set forth below are the reconciliations of EBITDA, Adjusted EBITDA, Adjusted Net Income and Free Cash Flow to our closest reported U.S. GAAP measures.

 

 

 

    SUCCESSOR     PREDECESSOR  
(In thousands)   SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1, 2014
THROUGH
DECEMBER 31,
2014
    THREE
MONTH
PERIOD
FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

EBITDA and Adjusted EBITDA:

             

Net income (loss) as reported

  $ 8,410      $ 36      $ (8,673   $ (14,336   $ (1,236   $ 24,844   

Interest expense, net

    11,894        13,975        27,259        23,185        3,272        18,000   

Income tax provision (benefit)

    5,738        (733     843        (6,703     1,014        14,301   

Depreciation

    3,566        3,110        6,379        4,610        1,832        6,665   

Amortization

    25,336        34,243        63,142        56,422        5,199        23,854   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    54,944        50,631        88,950        63,178        10,081        87,664   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock compensation expense: liability awards mark-to-market and CEO award (a)

    2,576        (12     9,780                        

Private equity transaction related cost (b)

                         9,297        12,420          

Corporate campus lease payments (c)

    (1,860     (1,860     (3,720     (2,773     (918     (3,635

Litigation matters (d)

           (374     (3,107     748        127        1,380   

Impairment of goodwill

                  9,313                        

Other transaction expenses (f)

    767                                      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 56,427      $ 48,385      $ 101,216      $ 70,450      $ 21,710      $ 85,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income:

             

Net income (loss) as reported

  $ 8,410      $ 36      $ (8,673   $ (14,336   $ (1,236   $ 24,844   

Amortization

    25,336        34,243        63,142        56,422        5,199        23,854   

Stock compensation expense: liability awards mark-to-market and CEO award (a)

    2,576        (12     9,780                        

Private equity transaction related cost (b)

                         9,297        12,420          

Corporate campus lease payments—principal portion (c)

    (744     (576     (1,292     (1,284     (165       

Litigation matters (d)

           (374     (3,107     748        127        1,380   

Impairment of goodwill

                  9,313                        

Deferred financing fees (e)

    1,345        1,328        2,687        2,064        371        1,918   

Other transaction expenses (f)

    767                                      

Income tax effect of adjustments (39.0%)

    (11,419     (13,498     (31,405     (26,226     (7,001     (10,589
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 26,271      $ 21,147      $ 40,445      $ 26,685      $ 9,715      $ 41,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow:

             

Cash flow provided by operating activities

  $ 19,982      $ 26,271      $ 84,117      $ 62,539      $ 12,807      $ 98,142   

Less: Capital expenditures

    (5,693     (2,665     (6,465     (4,225     (1,090     (4,561

Less: Corporate campus lease payments—principal portion (c)

    (744     (576     (1,292     (1,284     (165       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

  $ 13,545      $ 23,030      $ 76,360      $ 57,030      $ 11,552      $ 93,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (a)    Consists of period end mark-to-market fair value adjustments associated with liability classified awards and the impact of a one-time stock based compensation award to our Chief Executive Officer and founder. Future stock based awards activity is expected to be classified as equity for accounting purposes and will not be subject to period ending fair value adjustments.

 

  (b)    Represents attorney fees, advisory fees and other professional service fees incurred in connection with the Transaction.

 

  (c)    Represents cash rental payments on two corporate headquarter buildings that are accounted for as deemed assets and subject to depreciation expense over the life of the lease. Payments made for these leases are accounted for with a principal portion and an interest portion, consistent with deemed landlord liability accounting. For purposes of Free Cash Flow, the interest portion of these payments is included in net cash provided by operating activities in our statement of cash flows. The principal portion is reflected as a financing activity in our statement of cash flows. These adjustments for purposes of arriving at Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have the effect of presenting these leases consistently with all other office lease rentals that we have globally.

 

  (d)    Represents non-recurring costs and recovery related to a customer bad debt and non-recurring expenses related to the settlement of an employment related matter.

 

 

  (e)   Represents amortization of the discount and issuance costs deferred on the consolidated balance sheet associated with the issuance of the Senior Secured Credit Facility.

 

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  (f)    Represents advisory costs and other fees related to this offering.

 

(2)    Backlog represents anticipated future net service revenue from net new business awards that have not commenced or are currently in process but not complete. However, because the contracts included in our backlog are generally terminable without cause, we do not believe that our backlog as of any date is necessarily a meaningful predictor of future results.

 

(3)    Net new business awards are new business awards net of award modifications and cancellations that had previously been recognized in backlog during the period. New business awards represent the value of anticipated future net service revenue that has been awarded during the period that is recognized in backlog. This value is recognized upon the signing of a contract or receipt of a written pre-contract confirmation from a customer that confirms an agreement in principle on budget and scope. New business awards also include contract amendments, or changes in scope, where the customer has provided written authorization for changes in budget and scope or has approved us to perform additional work as of the measurement date. Awards may not be recognized as backlog after consideration of a number of factors, including whether (i) the relevant net service revenue is expected only after a pending regulatory hurdle, which might result in cancellation of the study, (ii) the customer funding needed for commencement of the study is not believed to have been secured or (iii) study timelines are uncertain or not well defined. In addition, study amounts that extend beyond a three-year timeline are not included in backlog. The number and amount of new business awards can vary significantly from period to period, and an award’s contractual duration can range from several months to several years based on customer and project specifications.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with “Selected Historical Consolidated Financial and Other Data” and the consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward looking statements related to future events and our future financial performance that are based on current expectations and subject to risks and uncertainties. Our actual results may differ materially from those anticipated in these forward looking statements as a result of many factors, including those set forth under “Risk Factors,” “Cautionary Note Regarding Forward Looking Statements” and elsewhere in this prospectus.

The following discussion and analysis presents operations and cash flows for two periods, Predecessor and Successor, which relate to the period preceding the Transaction (as defined below) and the period succeeding the Transaction, respectively. References to the “Successor nine month period ended December 31, 2014” refer to the period from April 1, 2014 to December 31, 2014 and references to the “Predecessor three month period ended March 31, 2014” refer to the period from January 1, 2014 to March 31, 2014. The Company refers to the operations of Medpace Holdings., Inc. and subsidiaries for both the Predecessor period and Successor period.

Business Overview

We are one of the world’s leading clinical contract research organizations, or CROs, by revenue, solely focused on providing scientifically-driven outsourced clinical development services to the biotechnology, pharmaceutical and medical device industries. Our mission is to accelerate the global development of safe and effective medical therapeutics. We differentiate ourselves from our competitors by our disciplined operating model centered on providing full-service Phase I-IV clinical development services and our therapeutic expertise. We believe this combination results in timely and cost-effective delivery of clinical development services for our customers. We believe that we are a partner of choice for small and mid-sized biopharmaceutical companies based on our ability to consistently utilize our full-service, disciplined operating model to deliver timely and high-quality results for our customers. Accordingly, we believe we are well positioned to continue to expand our market share and sustain margins in the growing $23 billion overall Phase I-IV CRO market.

We focus on conducting clinical trials across all major therapeutic areas, with particular strength in Cardiology, Metabolic Disease, Oncology, Endocrinology, Central Nervous System, or CNS, Anti-Viral and Anti-Infective, or AVAI, as well as therapeutic expertise in Medical Devices. Our global platform includes approximately 2,300 employees across 35 countries, providing our customers with broad access to diverse markets and patient populations and local regulatory expertise and market knowledge.

Our History

We were founded in 1992 as a Phase II-IV-focused CRO with a strong, scientifically-driven and disciplined operating model, and we continue today as a founder-led enterprise. Throughout our 24-year history, we have grown almost exclusively organically, with our core founding members having been integrally involved in developing and instilling our differentiated culture and operating philosophy across our company.

In April 2014, investment funds managed by Cinven Capital Management (V) General Partner Limited, or Cinven, a private equity firm, acquired 100% of the outstanding shares of Medpace IntermediateCo, Inc., or Medpace IntermediateCo, for an aggregate purchase price of $921.3 million. In connection with the acquisition, certain employees of the Company, through Medpace Investors, LLC, or MPI, agreed to contribute shares held in Medpace IntermediateCo in exchange for a percentage stake in Medpace Holdings, Inc. We refer to these transactions collectively, as the “Transaction.” Immediately following the Transaction, Cinven and MPI owned approximately 75% and 25%, respectively, of Medpace Holdings, Inc. For an overview of our ownership structure following this offering, see “Prospectus Summary—Our Structure.”

Prior to the Transaction, CCMP Capital, or CCMP, a private equity firm, held 80% of our equity interests and the noncontrolling interests were held by certain current and former members of management, along with former members of the board of directors of Medpace, Inc., our wholly owned subsidiary.

 

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The Transaction was accounted for as a business combination using the acquisition method of accounting. As of the Transaction date, our consolidated financial statements reflect the allocation of the $921.3 million purchase price to the assets acquired, including identifiable intangible assets of $306.3 million, and liabilities assumed based on fair values at the date of the Transaction. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed amounted to $670.3 million, which was recorded as goodwill. Transaction related costs, including attorney fees, advisory fees and other professional service fees related to the Transaction, were $9.3 million, including $3.3 million related to success based advisory fees, for the Successor nine month period ended December 31, 2014 and $12.4 million, including $10.1 million related to success based advisory fees, for the Predecessor three month period ended March 31, 2014.

Stock Split

On July 25, 2016, the Board approved, and made legally effective, a 1-for-1.35 reverse stock split of the Company’s common stock. All share, stock option and per share information presented in the Successor consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis for all periods presented. The Company will make a cash payment to shareholders for all fractional shares which would have otherwise been required to be issued as a result of the reverse stock split. There was no change in number of authorized shares or the par value of the Company’s common stock.

How We Generate Revenue

Our revenue consists of net service revenue and reimbursed-out-of-pocket revenue.

Net Service Revenue

We earn customer fees through the performance of services detailed in our customer contracts. Contract scope and pricing is typically based on either a fixed-fee or unit-of-service model and our contracts can range in duration from a few months to several years. These contracts are individually priced and negotiated based on the anticipated project scope, including the complexity of the project and the performance risks inherent in the project. The majority of our contracts are structured with an upfront fee that is collected at the time of contract signing, and the balance of the fee is collected over the duration of the contract either through an arranged billing schedule or upon completion of certain performance targets or defined milestones. This payment structure is standard in the CRO industry.

Net service revenue, which is distinct from billing and cash receipt, is generally recognized based on the proportional performance methodology, which is determined by assessing the proportion of performance completed or delivered to date compared to total specific measures to be delivered or completed under the terms of the contract. The measures utilized to assess performance are specific to the service provided. Net service revenue for unit-of-service contracts is recognized as services are performed or delivered. Cancellation provisions in our contracts allow our customers to terminate a contract either immediately or according to advance notice terms specified within the applicable contract, which is typically 30 days. Contract cancellation may occur for various reasons, including, but not limited to, adverse patient reactions, lack of efficacy or inadequate patient enrollment. Upon cancellation, we are entitled to fees for services rendered through the date of termination, including payment for subsequent services necessary to conclude the study or close out the contract. These fees are typically subject to negotiation and are realized as net service revenue when collection is reasonably assured. Changes in net service revenue from period to period are driven primarily by new business volume and task order execution activity, project cancellations, and the mix of active studies during a given period that can vary based on therapeutic and or study life cycle stage.

Reimbursed Out-of-Pocket Revenue

Reimbursed out-of-pocket revenue consists primarily of expenses we incur in relation to projects that are reimbursed by our customers with no profit or mark-up. These expenses are defined in our contracts and generally include, but are not limited to, travel, meetings, printing and shipping and handling fees. Such reimbursements received are included in revenue with the expenditures reflected as a separate component of operating expense. Certain fees paid to investigators and other disbursements in which we act as an agent on behalf of the study sponsor are reflected in the consolidated statements of operations with no resulting effect on our revenue or expenses.

Costs and Expenses

Our costs and expenses are comprised primarily of our direct costs, selling, general and administrative costs, depreciation and amortization and income taxes. In addition, as noted above, we also have reimbursed out-of-pocket expenditures that are directly offset by our reimbursed out-of-pocket revenue.

 

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Table of Contents

Direct Costs, Excluding Depreciation and Amortization

Direct costs, excluding depreciation and amortization are primarily driven by labor and related employee benefits, but also include laboratory supplies and other expenses contributing to service delivery. The other costs of service delivery can include office rent, utilities, supplies and software license expenses, which are allocated between direct costs, excluding depreciation and amortization and selling, general and administrative expenses based on the estimated contribution among service delivery and support function efforts on a percentage basis. Direct costs, excluding depreciation and amortization exclude reimbursed out-of-pocket expenses. Direct costs, excluding depreciation and amortization are expensed as incurred and are not deferred in anticipation of contracts being awarded or finalization of changes in scope. Direct costs, excluding depreciation and amortization as a percentage of net service revenue can vary from period to period due to project labor efficiencies, changes in workforce, compensation/bonus programs and service mix.

Selling, General and Administrative

Selling, general and administrative expenses are primarily driven by compensation and related employee benefits, as well as rent, utilities, supplies, software licenses, professional fees (e.g., legal and accounting expenses), travel, marketing and other operating expenses.

Depreciation

Depreciation is provided on our property and equipment on the straight-line method at rates adequate to allocate the cost of the applicable assets over their estimated useful lives, which is three to five years for computer hardware, software, phone and medical imaging equipment, five to seven years for furniture and fixtures and other equipment, and thirty to forty years for buildings. Leasehold improvements and deemed assets from landlord building construction are amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the associated remaining lease term.

Amortization

Amortization relates to finite-lived intangible assets recognized as expense using the straight-line method or using an accelerated method over their estimated useful lives, which range in term from 17 months to 15 years.

Income Tax Provision (Benefit)

Income tax provision (benefit) consists of federal, state and local taxes on income in multiple jurisdictions. Our income tax is impacted by the pre-tax earnings in jurisdictions with varying tax rates and any related tax credits that may be available to us. Our current and future provision for income taxes will vary from statutory rates due to the impact of valuation allowances in certain countries, income tax incentives, certain non-deductible expenses and other discrete items.

Key Performance Metrics

To evaluate the performance of our business, we utilize a variety of financial and performance metrics. These key measures include new business awards, cancellations and backlog.

New Business Awards, Cancellations and Backlog

New business awards represent the value of anticipated future net service revenue that has been awarded during the period that is recognized in backlog. This value is recognized upon the signing of a contract or receipt of a written pre-contract confirmation from a customer that confirms an agreement in principle on budget and scope. New business awards also include contract amendments, or changes in scope, where the customer has provided written authorization for changes in budget and scope or has approved us to perform additional work as of the measurement date. Awards may not be recognized as backlog after consideration of a number of factors, including whether (i) the relevant net service revenue is expected only after a pending regulatory hurdle, which might result in cancellation of the study, (ii) the customer funding needed for commencement of the study is not believed to have been secured or (iii) study timelines are uncertain or not well defined. In addition, study amounts that extend beyond a three-year timeline are not included in backlog. The number and amount of new business awards can vary significantly from period to period, and an award’s contractual duration can range from several months to several years based on customer and project specifications.

Cancellations arise in the normal course of business and are reflected when we receive written confirmation from the customer to cease work on a contractual agreement. The majority of our customers can terminate our contracts

 

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without cause upon 30 days’ notice. Similar to new business awards, the number and amount of cancellations can vary significantly period over period due to timing of customer correspondence and study-specific circumstances. Total cancellations in a period are offset against gross new business awards received in a period to determine net new business awards in our backlog calculation. Our average quarterly cancellation rates as a percentage of the beginning of the period backlog were 4.2% and 2.7% for the Successor six months ended June 30, 2016 and June 30, 2015, respectively, and 3.2% for the Successor year ended December 31, 2015, 3.3% for the Successor nine month period ended December 2014, 2.5% for the Predecessor three month period ended March 2014 and 3.7% for the Predecessor year ended December 2013.

Net new business awards were $218.1 million and $162.6 million for the Successor six months ended June 30, 2016 and June 30, 2015, respectively. Net new business awards were $359.5 million, $329.1 million (of which $231.9 million related to the Successor nine month period ended December 31, 2014 and $97.2 million related to the Predecessor three month period ended March 31, 2014), and $291.6 million for the Successor year ended December 31, 2015, the combined Successor nine month period ended December 31, 2014 and Predecessor three month period ended March 31, 2014, and the Predecessor year ended December 31, 2013, respectively.

Backlog represents anticipated future net service revenue from net new business awards that have not commenced or are currently in process but not complete. Reported backlog will fluctuate based on new business awards, changes in the scope of existing contracts, cancellations, revenue recognition on existing contracts and foreign exchange adjustments from non-U.S. dollar denominated backlog. As of June 30, 2016, our backlog increased by $65.1 million, or 16.3%, to $465.7 million compared to $400.6 million as of June 30, 2015. Our backlog increased by $35.6 million, or 9.0%, to $429.7 million as of December 31, 2015, compared to $394.0 million as of December 31, 2014. Our backlog increased by $34.7 million, or 9.7%, to $394.0 million as of December 31, 2014, compared to $359.3 million as of December 31, 2013. Included within backlog as of June 30, 2016 was approximately $170.1 million to $175.1 million that we expect to convert to net service revenue in 2016, with the remainder expected to convert to net service revenue in years after 2016.

The effect of foreign currency adjustments on backlog was as follows: unfavorable foreign currency adjustments of $1.4 million for the Successor six months ended June 30, 2016, unfavorable foreign currency adjustments of $2.9 million for the Successor six months ended June 30, 2015, unfavorable foreign currency adjustments of $3.6 million for the Successor year ended December 31, 2015; unfavorable foreign currency adjustments of $3.4 million for the Successor nine month period ended December 2014; no net currency adjustments for the Predecessor three month period ended March 2014; and foreign currency adjustments of $0.2 million for the Predecessor year ended December 2013.

Backlog and net new business award metrics may not be reliable indicators of our future period revenue as they are subject to a variety of factors that may cause material fluctuations from period to period. These factors include, but are not limited to, changes in the scope of projects, cancellations and duration and timing of services provided.

Exchange Rate Fluctuations

The majority of our contracts and operational transactions are U.S. dollar denominated. The Euro represents the largest foreign currency denomination of our contractual and operational exposure. As a result, a portion of our revenue and expenses are subject to exchange rate fluctuations. We have translated the Euro into U.S. dollars using the following average exchange rates based on data obtained from www.xe.com:

 

 

 

    SUCCESSOR           PREDECESSOR  
    SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1,

2014 THROUGH
DECEMBER 31,
2014
          THREE MONTH
PERIOD FROM
JANUARY 1,
2014 THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

U.S. dollars per Euro

    1.11        1.11        1.10        1.31            1.37        1.33   

 

 

 

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Results of Operations

Successor six months ended June 30, 2016 compared to the Successor six months ended  June 30, 2015

 

 

 

     SUCCESSOR              
(In thousands, except percentages)    SIX
MONTHS

ENDED
JUNE 30,
2016
    SIX
MONTHS

ENDED
JUNE 30,
2015
    CHANGE     %
CHANGE
 

Service revenue, net

   $ 180,433      $ 152,782      $ 27,651        18.1

Reimbursed out-of-pocket revenue

     25,107        18,105        7,002        38.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     205,540        170,887        34,653        20.3

Direct costs, excluding depreciation and amortization

     96,215        77,725        18,490        23.8

Reimbursed out-of-pocket expenses

     25,107        18,105        7,002        38.7

Selling, general and administrative

     28,333        23,448        4,885        20.8

Depreciation

     3,566        3,110        456        14.7

Amortization

     25,336        34,243        (8,907     (26.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     178,557        156,631        21,926        14.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     26,983        14,256        12,727        89.3

Miscellaneous (expense) income, net

     (941     (978     37        (3.8 %) 

Interest expense, net

     (11,894     (13,975     2,081        (14.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     14,148        (697     14,845        (2,129.8 %) 

Income tax provision (benefit)

     5,738        (733     6,471        (882.8 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 8,410      $ 36      $ 8,374        23,261.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Net service revenue and Reimbursed out-of-pocket revenue

Net service revenue was $180.4 million for the six months ended June 30, 2016, compared to $152.8 million for the six months ended June 30, 2015. Contributing to the $27.7 million growth in net service revenue was an increase in Phase II-IV study activity as measured by both number of active projects and employee time reporting. In addition, there was a higher concentration of active studies in phases that are generally attributed to higher levels of project activity, including patient enrollment and monitoring phases. Contract execution timing was also a factor in this increase, with a higher percentage of overall revenue driven from change in scope and task order executions in the six months ended June 30, 2016, compared to the six months ended June 30, 2015. On average, we converted 20.6% of our beginning of the period backlog to revenue in the six months ended June 30, 2016, compared to 19.1% of our beginning of the period backlog to revenue in the six months ended June 30, 2015.

Reimbursed out-of-pocket revenue was $25.1 million for the six months ended June 30, 2016, compared to $18.1 million for the six months ended June 30, 2015. Reimbursed out-of-pocket revenues fluctuate significantly from period to period based on the timing of program initiation or closeout, and these changes do not necessarily correlate to changes in net service revenue. The reimbursements were offset by an equal amount of reimbursed out-of-pocket expenses.

Direct costs, excluding depreciation and amortization and Reimbursed out-of-pocket expenses

Direct costs, excluding depreciation and amortization were $96.2 million for the six months ended June 30, 2016, compared to $77.7 million for the six months ended June 30, 2015. The $18.5 million increase was primarily attributed to increases in employee related costs of $12.1 million and increases in contracted services of $2.3 million related to growth in project volume.

Selling, general and administrative

Selling, general and administrative expenses were $28.3 million for the six months ended June 30, 2016, compared to $23.4 million for the six months ended June 30, 2015. The $4.9 million increase was primarily attributed to increases in employee related costs of $3.0 million related to additional headcount in business support functions.

 

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Depreciation and Amortization

Depreciation and amortization expense was $28.9 million for the six months ended June 30, 2016, compared to $37.4 for the six months ended June 30, 2015. The $8.5 million decrease in depreciation and amortization was primarily related to definite lived intangible assets acquired as part of the Transaction with relatively short useful lives.

Miscellaneous (expense) income, net

Miscellaneous (expense) income, net was ($0.9) million of expense for the six months ended June 30, 2016, compared to ($1.0) million of expense for the six months ended June 30, 2015. These changes were mainly attributable to foreign exchange gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment.

Interest expense, net

Interest expense, net was $11.9 million for the six months ended June 30, 2016, compared to $14.0 for the six months ended June 30, 2015. The $2.1 million decrease in interest expense, net was related to the average lower outstanding balance under our Senior Secured Term Loan Facility (as defined below).

Income tax provision (benefit)

Income tax provision was $5.7 million for the six months ended June 30, 2016, compared to an income tax benefit of $0.7 million for the six months ended June 30, 2015. The overall effective tax rate for the six months ended June 30, 2016 was 40.6% compared to 105.2% for the six months ended June 30, 2015. The change in effective tax rate was primarily due to the notable increase in projected pre-tax book income for the six months ended June 30, 2016 coupled with relatively consistent year over year rate reconciliation drivers.

 

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Successor year ended December 31, 2015 compared to the Successor nine month period from April 1, 2014 through December 31, 2014 and Predecessor three month period from January 1, 2014 through March 31, 2014

 

 

 

     SUCCESSOR      PREDECESSOR     CHANGE     %
CHANGE
 
(In thousands, except percentages)    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1, 2014
THROUGH
DECEMBER 31,
2014
     THREE
MONTH
PERIOD FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
     

Service revenue, net

   $ 320,101      $ 219,791       $ 70,250      $ 30,060        10.4

Reimbursed out-of-pocket revenue

     38,958        28,708         7,679        2,571        7.1
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

     359,059        248,499         77,929        32,631        10.0

Direct costs, excluding depreciation and amortization

     163,707        117,550         38,759        7,398        4.7

Reimbursed out-of-pocket expenses

     38,958        28,708         7,679        2,571        7.1

Selling, general and administrative

     56,998        29,465         10,203        17,330        43.7

Acquisition and integration

            9,297         12,420        (21,717     -100.0

Impairment of goodwill

     9,313                       9,313          

Depreciation

     6,379        4,610         1,832        (63     -1.0

Amortization

     63,142        56,422         5,199        1,521        2.5
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     338,497        246,052         76,092        16,353        5.1
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     20,562        2,447         1,837        16,278        380.0

Miscellaneous (expense) income, net

     (1,133     (301      1,213        (2,045     -224.2

Interest expense, net

     (27,259     (23,185      (3,272     (802     3.0
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (7,830     (21,039      (222     13,431        -63.2

Income tax provision (benefit)

     843        (6,703      1,014        6,532        -114.8
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (8,673   $ (14,336    $ (1,236   $ 6,899        -44.3
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

 

Net service revenue and Reimbursed out-of-pocket revenue

Net service revenue was $320.1 million for the Successor year ended December 31, 2015, compared to $219.8 million for the Successor nine month period ended December 31, 2014, and $70.3 million for the Predecessor three month period ended March 31, 2014. Contributing to growth in net service revenue in the Successor year ended December 31, 2015 was a larger number of active projects. On average, we converted 19.7% of our beginning of the quarter backlog to revenue each quarter during the Successor year ended December 31, 2015. In comparison, we converted an average of 18.7% and 19.6% of our beginning of quarter backlog to revenue each quarter during the Successor nine month period ended December 31, 2014 and Predecessor three month period ended March 31, 2014, respectively.

Reimbursed out-of-pocket revenue was $39.0 million for the Successor year ended December 31, 2015, $28.7 million for the Successor nine month period ended December 31, 2014 and $7.7 million for the Predecessor three month period ended March 31, 2014. Reimbursed out-of-pocket revenues fluctuate significantly from period to period based on the timing of program initiation or closeout, and these changes do not necessarily correlate to changes in net service revenue. The reimbursements were offset by an equal amount of reimbursed out-of-pocket expenses.

 

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Direct costs, excluding depreciation and amortization and Reimbursed out-of-pocket expenses

Direct costs, excluding depreciation and amortization were $163.7 million for the Successor year ended December 31, 2015, compared to $117.6 million for the Successor nine month period ended December 31, 2014 and $38.8 million for the Predecessor three month period ended March 31, 2014. The increase for the Successor year ended December 31, 2015 was primarily the result of an increase in revenue generating headcount from December 31, 2014 to support our increased project activity and new business awards.

While direct costs, excluding depreciation and amortization, increased in the Successor year ended December 31, 2015 compared to the Successor nine month period ended December 31, 2014 and Predecessor three month period ended March 31, 2014, they decreased to 51.1% of net service revenue, from 53.5% of net service revenue in the Successor nine month period ended December 31, 2014 and 55.2% of net service revenue for the Predecessor three month period ended March 31, 2015. An increase in headcount drove salaries, wages and other employee related direct costs to $119.8 million, or 37.4%, of net service revenue, from $86.8 million, or 39.5% of net service revenue, in the Successor nine month period ended December 31, 2014, and $25.7 million, or 36.6% of net service revenue, in the Predecessor three month period ended March 31, 2014. In addition, stock based compensation expense recognized in direct costs, excluding depreciation and amortization, was $9.2 million, or 2.9% of net service revenue, in the Successor year ended 2015, compared to $4.4 million, or 2.0% of net service revenue, in the Successor nine month period ended December 31, 2014 and $5.4 million, or 7.7% of net service revenue, in the Predecessor three month period ended March 31, 2014. Stock based compensation expense was elevated in the Predecessor three month period ended March 31, 2014 as a result of the acceleration of stock option vesting that occurred in advance of the Transaction.

Selling, general and administrative

Selling, general and administrative expenses were $57.0 million for the Successor year ended December 31, 2015, compared to $29.5 million for the Successor nine month period ended December 31, 2014, and $10.2 million for the Predecessor three month period ended March 31, 2014. The increase for the Successor year ended December 31, 2015 was primarily due to $13.1 million of stock based compensation expense related to the issuance of new stock based awards granted to select management personnel, recurring and accelerated amortization of previously granted restricted share awards, and the impact of mark-to-market expense adjustments due to an increase in the fair value of liability classified stock based awards. Stock based compensation expense was $1.0 million and $1.9 million for the Successor nine month period ended December 31, 2014 and Predecessor three month period ended March 31, 2014, respectively.

Selling, general and administrative expenses increased to 17.8% of net service revenue for the Successor year ended December 31, 2015, compared to 13.4% of net service revenue for the Successor nine month period ended December 31, 2014, and 14.5% of net service revenue for the Predecessor three month period ended March 31, 2014. The increase in selling, general and administrative expense as a percentage of net service revenue was primarily related to the aforementioned increase in stock based compensation expense to 4.1% of net service revenue for the Successor year ended December 31, 2015 from 0.5% of net service revenue for the Successor nine month period ended December 31, 2014 and 2.7% of net service revenue for the Predecessor three month period ended March 31, 2014. Further contributing to this increase as a percentage of net service revenue were higher salaries and wages. Salaries and wages as a percentage of net service revenue were 7.4% for the Successor year ended December 31, 2015, compared to 5.6% and 5.5% of net service revenue for the Successor nine month period ended December 31, 2014 and the Predecessor three month period ended March 31, 2014, respectively. Salaries and wages grew at a higher percentage than net service revenue for the Successor year ended December 31, 2015 as we continued to hire both sales force and administrative personnel in anticipation of future growth. Offsetting the increase in selling, general and administrative expense as a percentage of net service revenue were bad debt recoveries and gains on litigation matters of $2.7 million, or 0.9% of net service revenue, for the Successor year ended December 31, 2015, compared to bad debt expense and litigation losses of $2.2 million, or 1.0% of net service revenue, for the Successor nine month period ended December 31, 2014.

 

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Acquisition and integration expenses

There were no acquisition and integration expenses for the Successor year ended December 31, 2015. Acquisition and integration expenses were $9.3 million for the Successor nine month period ended December 31, 2014 and $12.4 million for the Predecessor three month period ended March 31, 2014. These expenses included attorney fees, advisory fees and other professional service fees related to the Transaction.

Impairment of goodwill

During the Successor year ended December 31, 2015, we determined that the fair value of our Clinics reporting unit did not exceed its carrying value resulting in a $9.3 million impairment of goodwill. This impairment was identified during the annual impairment assessment in the fourth quarter of 2015 when we updated our forecasted discounted cash flows to reflect operating results that lagged prior forecasted results.

Depreciation and Amortization

Depreciation and amortization expense was $69.5 million for the Successor year ended December 31, 2015, compared to $61.0 million for the Successor nine month period ended December 31, 2014 and $7.0 million for the Predecessor three month period ended March 31, 2014. The increase in depreciation and amortization was primarily related to the amortization expense associated with the Transaction in which $274.7 million in finite-lived intangible assets that were identified and capitalized as part of the Transaction. Depreciation and amortization as a percentage of net service revenue, decreased to 21.7% in the Successor year ended 2015, compared to 27.8% for the Successor nine month period ended December 31, 2014. This decrease primarily related to the accelerated amortization methodology of our backlog and customer relationship intangibles. Within the Successor nine month period ended December 31, 2014 and the Predecessor three month period ended March 31, 2014, depreciation and amortization expense as a percentage of net service revenue increased to 27.8% from 10.0%, respectively. This increase was the result of the capitalization and amortization of the finite-lived intangible assets identified as part of the Transaction.

Miscellaneous (expense) income, net

Miscellaneous (expense) income, net was $1.1 million of expense for the Successor year ended December 31, 2015, compared to $0.3 million of expense for the Successor nine month period ended December 31, 2014 and $1.2 million of income for the Predecessor three month period ended March 31, 2014. Changes are mainly attributable to foreign exchange gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment.

Interest expense, net

Interest expense, net was $27.3 million for the Successor year ended December 31, 2015, compared to $23.2 million for the Successor nine month period ended December 31, 2014 and $3.3 million for the Predecessor three month period ended March 31, 2014. Interest expense, net was 8.5% of net service revenue for the Successor year ended December 31, 2015, compared to 10.5% of net service revenue for the Successor nine month period ended December 31, 2014 and 4.7% of net service revenue for the Predecessor three month period ended March 31, 2014. The change in interest expense, net was primarily attributed to the average lower outstanding balance under our Senior Secured Term Loan Facility in the Successor year ended December 31, 2015, compared to the Successor nine month period ended December 31, 2014, as $116.1 million of principal payments were applied to the Senior Secured Term Loan Facility throughout the year. For the Successor nine month period ended December 31, 2014, compared to the Predecessor three month period ended March 31, 2014, the increase in interest expense, net was related to entering into the Senior Secured Credit Facilities (as defined below) to finance a portion of the Transaction, which increased outstanding debt, net from $143.7 million (that was paid in full at the Transaction date) to $530.0 million as of April 1, 2014.

Income tax provision (benefit)

Income tax provision was $0.8 million for the Successor year ended December 31, 2015, compared to a benefit of $6.7 million for the Successor nine month period ended December 31, 2014 and a provision of $1.0 million for the Predecessor three month period ended March 31, 2014.

 

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The effective tax rate for the Successor year ended December 31, 2015 was negative 10.8%, compared to 31.8% for the Successor nine month period ended December 31, 2014. This change in the effective tax rates was primarily the result of higher non-deductible expenses in the Successor year ended December 31, 2015. The nondeductible expenses for the Successor year ended December 31, 2015 included goodwill impairment and stock based compensation expense resulting from the vesting of stock based awards for foreign employees and an increase of domestic and foreign uncertain tax positions in the Successor year ended December 31, 2015. In the Successor nine month period ended December 31, 2014, the Company experienced significant nondeductible transaction costs resulting from the Transaction. Although both periods experienced high levels of nondeductible expenses, the total nondeductible expenses related to the Successor year ended December 31, 2015 exceeded nondeductible expenses incurred in the Successor nine month period ended December 31, 2014.

The effective tax rate for the Successor nine month period ended December 31, 2014 was 31.8%, compared to negative 456.1% for the Predecessor three month period ended March 31, 2014. The change in the effective tax rates between the Successor nine month period ended December 31, 2014 and the Predecessor three month period ended March 31, 2014 was primarily due to an increase in the valuation allowance on U.S. deferred tax assets relating to a capital loss that was recorded in the Predecessor three month period ended March 31, 2014 due to the sale of an investment. The valuation allowance was recorded in the Predecessor three month period ended March 31, 2014 because the Company did not anticipate generating capital gains that could be used to offset the capital loss. Another contributing factor was non-deductible stock based compensation expense recorded for the Predecessor three month period ended March 31, 2014 resulting from the acceleration of vesting of stock based awards for foreign employees that occurred prior to the Transaction.

Successor nine month period from April 1, 2014 through December 31, 2014 and Predecessor three month period from January 1, 2014 through March 31, 2014 compared to the Predecessor year ended December 31, 2013

 

 

 

     SUCCESSOR      PREDECESSOR     CHANGE     %
CHANGE
 
(In thousands, except percentages)    NINE MONTH
PERIOD
FROM APRIL 1,
2014
THROUGH
DECEMBER 31,
2014
     THREE
MONTH
PERIOD FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
     

Service revenue, net

   $ 219,791       $ 70,250      $ 244,270      $ 45,771        18.7

Reimbursed out-of-pocket revenue

     28,708         7,679        28,620        7,767        27.1
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     248,499         77,929        272,890        53,538        19.6

Direct costs, excluding depreciation and amortization

     117,550         38,759        119,779        36,530        30.5

Reimbursed out-of-pocket expenses

     28,708         7,679        28,620        7,767        27.1

Selling, general and administrative

     29,465         10,203        35,109        4,559        13.0

Acquisition and integration

     9,297         12,420               21,717          

Impairment of goodwill

                                    

Depreciation

     4,610         1,832        6,665        (223     -3.3

Amortization

     56,422         5,199        23,854        37,767        158.3
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     246,052         76,092        214,027        108,117        50.5
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,447         1,837        58,863        (54,579     -92.7

Miscellaneous (expense) income, net

     (301      1,213        (1,718     2,630        -153.1

Interest expense, net

     (23,185      (3,272     (18,000     (8,457     47.0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (21,039      (222     39,145        (60,406     -154.3

Income tax (benefit) provision

     (6,703      1,014        14,301        (19,990     -139.8
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (14,336    $ (1,236   $ 24,844      $ (40,146     -162.7
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

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Net service revenue and Reimbursed out-of-pocket revenue

Net service revenue was $219.8 million for the Successor nine month period ended December 31, 2014 and $70.3 million for the Predecessor three month period ended March 31, 2014, compared to $244.3 million for the Predecessor year ended December 31, 2013. Results in the Successor nine month period ended December 31, 2014, compared to the Predecessor three month period ended March 31, 2014 benefitted from a larger number of overall active projects. Compared to the Predecessor year ended December 31, 2013, the Predecessor three month period ended March 31, 2014 also benefitted from more active projects, combined with relatively low project cancellations. Average quarterly backlog conversion was 18.7% for the Successor nine month period ended December 31, 2014 and 19.6% for the Predecessor three month period ended March 31, 2014, compared to 18.7% for the Predecessor year ended December 31, 2013.

Reimbursed out-of-pocket revenue was $28.7 million for the Successor nine month period ended December 31, 2014, $7.7 million for the Predecessor three month period ended March 31, 2014 and $28.6 million for the Predecessor year ended December 31, 2013. Reimbursed out-of-pocket revenues fluctuate significantly from period to period based on the timing of program initiation or closeout and these changes do not necessarily correlate to changes in net service revenue. The reimbursements were offset by an equal amount of reimbursed out-of-pocket expenses.

Direct costs, excluding depreciation and amortization and Reimbursed out-of-pocket expenses

Direct costs, excluding depreciation and amortization, were $117.6 million for the Successor nine month period ended December 31, 2014 and $38.8 million for the Predecessor three month period ended March 31, 2014, compared to $119.8 million for the Predecessor year ended December 31, 2013. The increase for the Successor nine month period ended December 31, 2014 and the Predecessor three month period ended March 31, 2014 was primarily due to an increase in revenue generating headcount from the Predecessor year ended December 31, 2013 to support higher project activity and new business awards. Additionally, stock based compensation increased to $4.4 million for the Successor nine month period ended December 31, 2014 and $5.4 million for the Predecessor three month period ended March 31, 2014, compared to $0.6 million for the Predecessor year ended December 31, 2013. The increase in stock based compensation was primarily driven by the acceleration of stock option vesting that occurred in advance of the Transaction and new stock based awards issued subsequent to the Transaction.

As a percentage of net service revenue, direct costs, excluding depreciation and amortization, increased to 53.5% of net service revenue for the Successor nine month period ended December 31, 2014 and 55.2% for the Predecessor three month period ended March 31, 2014, compared to 49.0% for the Predecessor year ended December 31, 2013. The primary driver of the increase as a percentage of net service revenue was the aforementioned higher stock based compensation. As a percentage of net service revenue stock based compensation was 2.0% and 7.7% for the Successor nine month period ended December 31, 2014 and Predecessor three month period ended March 31, 2014, respectively, compared to 0.3% for the Predecessor year ended December 31, 2013.

 

Selling, general and administrative

Selling, general and administrative expenses were $29.5 million for the Successor nine month period ended December 31, 2014 and $10.2 million for the Predecessor three month period ended March 31, 2014, compared to $35.1 for the Predecessor year ended December 31, 2013. The increase was primarily related to higher litigation costs resulting from a certain customer bad debt and an employee matter, representing $1.8 million for the Successor nine month period ended December 31, 2014 and $0.0 million for the Predecessor three month period ended March 31, 2014, compared to $0.0 million for the Predecessor year ended December 31, 2013. Further increasing selling, general and administrative expenses was higher employee stock based compensation expense of $1.0 million for the Successor nine month period ended December 31, 2014 for stock based awards issued after the Transaction and $1.9 million for the Predecessor three month period ended March 31, 2014 due to the aforementioned acceleration of stock option vesting that occurred immediately prior to the Transaction, compared to $1.4 million for the Predecessor year ended December 31, 2013.

Selling, general and administrative expenses as a percentage of net service revenue were 13.4% for the for the Successor nine month period ended December 31, 2014 and 14.5% for the Predecessor three month period ended March 31, 2014, compared to 14.4% for the Predecessor year ended December 31, 2013. Growth of net service

 

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revenue over for the Successor nine month period ended December 31, 2014 and Predecessor three month period ended March 31, 2014 outpaced the corresponding period increases to selling, general and administrative salary and wage growth, causing the decrease as a percent of net service revenue, compared to the Predecessor year ended December 31, 2013.

Acquisition and integration expenses

Acquisition and integration expenses were $9.3 million for the Successor nine month period ended December 31, 2014 and $12.4 million for the Predecessor three month period ended March 31, 2014 related to the Transaction. There were no acquisition and integration expenses for the Predecessor year ended December 31, 2013. The expenses in the Successor nine month period ended December 31, 2014 and Predecessor three month period ended March 31, 2014 include attorney fees, advisory fees and other professional service fees related to the Transaction.

Depreciation and Amortization

Depreciation and amortization expense was $61.0 million for the Successor nine month period ended December 31, 2014 and $7.0 million for the Predecessor three month period ended March 31, 2014, compared to $30.5 million for the Predecessor year ended December 31, 2013. The increase in depreciation and amortization was primarily related to the Transaction in which $274.7 million in finite-lived intangible assets were identified and capitalized as part of the purchase accounting adjustments as of April 1, 2014. The gross carrying value of finite-lived intangible assets prior to the transaction date was $181.7 million. The additional capitalized intangible assets caused depreciation and amortization expense to be 27.8% of net service revenue for the Successor nine month period ended December 31, 2014 and 10.0% of net service revenue for the Predecessor three month period ended March 31, 2014, compared to 12.5% of net service revenue for the Predecessor year ended December 31, 2013. The increase in depreciation and amortization expense in the Successor period ended December 31, 2014 is further driven by certain intangible assets, such as backlog and customer relationships that have an accelerated amortization that aligns to the time period over which cash flows of each respective intangible asset is generated.

Miscellaneous (expense) income, net

Miscellaneous (expense) income, net was $0.3 million of expense for the Successor nine month period and $1.2 million of income for the Predecessor three month period ended March 31, 2014, compared to $1.7 million of expense in the Predecessor year ended December 31, 2013. Changes in miscellaneous (expense) income, net were mainly attributed to foreign exchange gains or losses that arise in connection with the revaluation of short-term inter-company balances between our domestic and international subsidiaries, and gains or losses from foreign currency transactions, such as those resulting from the settlement of third-party accounts receivables and payables denominated in a currency other than the local currency of the entity making the payment.

Interest expense, net

Interest expense, net was $23.2 million for the Successor nine month period ended December 31, 2014 and $3.3 million for the Predecessor three month period ended March 31, 2014, compared to $18.0 million for the Predecessor year ended December 31, 2013. Interest expense, net was 10.5% of net service revenue for the Successor nine month period December 31, 2014 and 4.7% of net service revenue for the Predecessor three month period ended March 31, 2014, compared to 7.4% of net service revenue for the Predecessor year ended December 31, 2013. The increase in interest expense, net in the Successor nine month period ended December 31, 2014 was related to entering into the Senior Secured Credit Facilities to finance a portion of the Transaction, which increased outstanding debt, net from $143.7 million (that was paid in full at the Transaction date) in the Predecessor three month period ended March 31, 2014, to $530.0 million as of December 31, 2014.

Income tax provision (benefit)

We had an income tax benefit of $6.7 million for the Successor nine month period ended December 31, 2014, compared to a provision of $1.0 million for the Predecessor three month period ended March 31, 2014, and a provision of $14.3 million for the Predecessor year ended December 31, 2013.

The effective tax rate for the Successor nine month period ended December 31, 2014 was 31.8%, compared to negative 456.1% for the Predecessor three month period ended March 31, 2014. The change in the effective tax rates between the Successor nine month period ended December 31, 2014 and the Predecessor three month period ended March 31, 2014 was primarily due to an increase in the valuation allowance on U.S. deferred tax assets relating to a capital loss that was recorded in the Predecessor three month period ended March 31, 2014 due to the

 

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sale of an investment. The valuation allowance was recorded in the Predecessor three month period ended March 31, 2014 because the Company did not anticipate generating taxable gains that could be used to offset the capital loss. Another contributing factor was non-deductible stock based compensation expense recorded for the Predecessor three month period ended March 31, 2014 resulting from the acceleration of vesting of stock based awards for foreign employees that occurred prior to the Transaction.

The effective tax rate for the Predecessor three month period ended March 31, 2014 was negative 456.1%, compared to 36.5% for the Predecessor year ended December 31, 2013. The change in the effective tax rates between the Predecessor three month period ended March 31, 2014 and the Predecessor year ended December 31, 2013 was primarily due to an increase in our valuation allowance on U.S. deferred tax assets. The valuation allowance was recorded on a deferred tax asset resulting from a capital loss realized in March 2014 on the sale of an investment. The capital loss is limited to offset future taxable gains which the Company does not anticipate will be generated, resulting in a full valuation allowance. The change in the effective tax rate was also related to non-deductible stock based compensation expense related to foreign earnings due to the acceleration of stock based awards vesting in advance of the Transaction.

 

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Table of Contents

Quarterly Results of Operations

The tables below present selected unaudited quarterly condensed consolidated statements of operations for our last eight completed fiscal quarters. The information for each of these quarters has been prepared on the same basis as our audited consolidated financial statements appearing elsewhere in this prospectus and, in the opinion of management, includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations for these periods. The quarterly results of operations should be read in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this prospectus. The results for any interim period are not necessarily indicative of the results that may be expected for a full year. Additionally, our historical results are not necessarily indicative of future results.

 

 

 

    SUCCESSOR  
(In thousands, except per share
data)
  THREE
MONTHS
ENDED
JUNE 30,
2016
    THREE
MONTHS
ENDED
MARCH 31,
2016
    THREE
MONTHS
ENDED
DECEMBER 31,
2015
    THREE
MONTHS
ENDED
SEPTEMBER 30,
2015
    THREE
MONTHS
ENDED
JUNE 30,
2015
    THREE
MONTHS
ENDED
MARCH 31,
2015
    THREE
MONTHS
ENDED
DECEMBER 31,
2014
    THREE
MONTHS
ENDED
SEPTEMBER 30,
2014
 

Revenue:

               

Service revenue, net

  $ 92,633      $ 87,800      $ 85,681      $ 81,638      $ 76,752      $ 76,030      $ 74,476      $ 68,773   

Reimbursed out-of-pocket revenue

    13,321        11,786        10,360        10,493        11,102        7,003        9,278        10,064   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    105,954        99,586        96,041        92,131        87,854        83,033        83,754        78,837   

Operating Expenses:

               

Direct costs, excluding depreciation and amortization

    49,234        46,981        44,219        41,763        38,600        39,125        39,264        40,780   

Reimbursed out-of-pocket expenses

    13,321        11,786        10,360        10,493        11,102        7,003        9,278        10,064   

Selling, general and administrative

    14,824        13,509        18,255        15,295        11,706        11,742        10,247        10,382   

Acquisition and integration

                                              (160     50   

Impairment of goodwill

                  9,313                                      

Depreciation

    1,793        1,773        1,658        1,611        1,537        1,573        1,753        1,395   

Amortization

    12,668        12,668        13,125        15,774        17,042        17,201        18,879        18,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    91,840        86,717        96,930        84,936        79,987        76,644        79,261        81,442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    14,114        12,869        (889     7,195        7,867        6,389        4,493        (2,605

Other (Expense) Income, Net:

               

Miscellaneous (expense) income, net

    (6     (935     (205     50        (2     (976     (240     (247

Net interest (expense) income

    (5,921     (5,973     (6,547     (6,737     (6,902     (7,073     (7,184     (7,766
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net

    (5,927     (6,908     (6,752     (6,687     (6,904     (8,049     (7,424     (8,013
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    8,187        5,961        (7,641     508        963        (1,660     (2,931     (10,618

Income tax provision (benefit)

    3,225        2,513        935        641        868        (1,601     (1,218     (3,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 4,962      $ 3,448      $ (8,576   $ (133   $ 95      $ (59   $ (1,713   $ (7,341
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data

               

Net income (loss) per share attributable to common stockholders:

               

Basic

  $ 0.15      $ 0.11      $ (0.27   $ (0.00   $ 0.00      $ (0.00   $ (0.06   $ (0.24

Diluted

  $ 0.15      $ 0.11      $ (0.27   $ (0.00   $ 0.00      $ (0.00   $ (0.06   $ (0.24

Weighted average common shares outstanding:

               

Basic

    32,636        32,625        31,604        31,430        31,722        30,969        30,950        30,941   

Diluted

    32,828        32,625        31,604        31,430        31,770        30,969        30,950        30,941   

 

 

 

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The following table presents the reconciliation of net income (loss) to EBITDA, Adjusted EBITDA, and Adjusted Net Income:

 

 

 

    SUCCESSOR  
(In thousands, except per share data)   THREE
MONTHS
ENDED
JUNE 30,
2016
    THREE
MONTHS
ENDED
MARCH 31,
2016
    THREE
MONTHS
ENDED
DECEMBER 31,
2015
    THREE
MONTHS
ENDED
SEPTEMBER 30,
2015
    THREE
MONTHS
ENDED
JUNE 30,
2015
    THREE
MONTHS
ENDED
MARCH 31,
2015
    THREE
MONTHS
ENDED
DECEMBER 31,
2014
    THREE
MONTHS
ENDED
SEPTEMBER 30,
2014
 

EBITDA and Adjusted EBITDA:

               

Net income (loss) as reported

  $ 4,962      $ 3,448      $ (8,576   $ (133   $ 95      $ (59   $ (1,713   $ (7,341

Interest expense, net

    5,921        5,973        6,547        6,737        6,902        7,073        7,184        7,766   

Income tax provision (benefit)

    3,225        2,513        935        641        868        (1,601     (1,218     (3,277

Depreciation

    1,793        1,773        1,658        1,611        1,537        1,573        1,753        1,395   

Amortization

    12,668        12,668        13,125        15,774        17,042        17,201        18,879        18,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 28,569      $ 26,375      $ 13,689      $ 24,630      $ 26,444      $ 24,187      $ 24,885      $ 17,314   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock compensation expense: liability awards mark-to-market and CEO award(a)

    2,576               4,681        5,111        (185     173                 

Private equity transaction related cost(b)

                                              (160     50   

Corporate campus lease payments(c)

    (930     (930     (930     (930     (930     (930     (930     (925

Litigation matters(d)

                  28        (2,761     (391     17        207        410   

Impairment of goodwill

                  9,313                                      

Other transaction expenses(f)

    453        314                                             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 30,668      $ 25,759      $ 26,781      $ 26,050      $ 24,938      $ 23,447      $ 24,002      $ 16,849   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income:

               

Net income (loss) as reported

  $ 4,962      $ 3,448      $ (8,576   $ (133   $ 95      $ (59   $ (1,713   $ (7,341

Amortization

    12,668        12,668        13,125        15,774        17,042        17,201        18,879        18,771   

Stock compensation expense: liability awards mark-to-market and CEO award(a)

    2,576               4,681        5,111        (185     173                 

Private equity transaction related cost(b)

                                              (160     50   

Corporate campus lease payments—principal portion(c)

    (375     (369     (362     (354     (347     (229     (930     (201

Litigation matters(d)

                  28        (2,761     (391     17        207        410   

Impairment of goodwill

                  9,313                                      

Deferred financing fees(e)

    673        672        679        680        673        655        681        710   

Other transaction expenses(f)

    453        314                                             

Income tax effect of adjustments (39.0%)

    (6,238     (5,181     (10,711     (7,196     (6,549     (6,949     (7,284     (7,699
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 14,719      $ 11,552      $ 8,177      $ 11,121      $ 10,338      $ 10,809      $ 9,680      $ 4,700   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted Adjusted Net Income per share

  $ 0.45      $ 0.35      $ 0.26      $ 0.35      $ 0.33      $ 0.35      $ 0.31      $ 0.15   

Diluted average common shares outstanding

    32,828        32,625        31,604        31,430        31,770        30,969        30,950        30,941   

 

 

 

  (a)    Consists of period end mark-to-market fair value adjustments associated with liability classified awards and the impact of a one-time stock based compensation award to our Chief Executive Officer and founder. Future stock based awards activity are expected to be classified as equity for accounting purposes and will not be subject to period ending fair value adjustments.

 

  (b)    Represents attorney fees, advisory fees and other professional service fees incurred in connection with the Transaction.

 

  (c)    Represents cash rental payments on two corporate headquarter buildings that are accounted for as deemed assets and subject to depreciation expense over the life of the lease. Payments made for these leases are accounted for with a principal portion and an interest portion, consistent with deemed landlord liability accounting. For purposes of Free Cash Flow, the interest portion of these payments is included in net cash provided by operating activities in our statement of cash flows. The principal portion is reflected as a financing activity in our statement of cash flows. These adjustments for purposes of arriving at Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have the effect of presenting these leases consistently with all other office lease rentals that we have globally.

 

  (d)    Represents non-recurring costs and recovery related to a customer bad debt and non-recurring expenses related to the settlement of an employment related matter.

 

  (e)   Represents amortization of the discount and issuance costs deferred on the consolidated balance sheet associated with the issuance of the Senior Secured Credit Facility.

 

  (f)    Represents advisory costs and other fees related to this offering.

 

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Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal sources of liquidity are operating cash flows and funds available for borrowing under our Senior Secured Revolving Credit Facility (as defined below). As of June 30, 2016, we had cash and cash equivalents of $17.0 million, including approximately $3.4 million of restricted cash, primarily related to advanced payments received pursuant to certain sponsor contracts. Approximately $5.8 million of our cash and cash equivalents, none of which was restricted, was held by our foreign subsidiaries as of June 30, 2016. Additionally, as of June 30, 2016, we had $60.0 million available for borrowing under our Senior Secured Revolving Credit Facility.

Our expected primary cash needs on both a short and long-term basis are for investment in operational growth, capital expenditures, payment of debt and other general corporate purposes. We have historically funded our operations and growth, including acquisitions, with cash flow from operations and borrowings under our credit facilities. We expect to continue expanding our operations through organic growth and selective strategic bolt-on acquisitions and investments. We expect these activities will be funded from existing cash, cash flow from operations and, if necessary, borrowings under our existing or future credit facilities. We have deemed that foreign earnings will be indefinitely reinvested and therefore we have not provided taxes on these earnings. While we do not anticipate the need to repatriate these foreign earnings for liquidity purposes given our cash flows from operations and available borrowings under existing and future credit facilities, we would incur taxes on these earnings if the need for repatriation due to liquidity purposes arises.

We believe that our sources of liquidity and capital will be sufficient to finance our investment in operational growth, capital expenditures, payment of debt, selective strategic bolt-on acquisitions, other investments, additional expenses we expect to incur as a public company and other general corporate needs for the next 12 months and on a longer-term basis. However, we cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our Senior Secured Credit Facilities or otherwise, in an amount sufficient to fund our liquidity needs. If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all, and any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. See “Risk Factors—Risks Relating to our Indebtedness—We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.”

 

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Table of Contents

Discussion of Cash Flows

 

 

 

    SUCCESSOR     PREDECESSOR  
Cash Flows (In thousands)   SIX
MONTHS
ENDED
JUNE 30,
2016
    SIX
MONTHS
ENDED
JUNE 30,
2015
    YEAR ENDED
DECEMBER 31,
2015
    NINE MONTH
PERIOD FROM
APRIL 1, 2014
THROUGH
DECEMBER 31,
2014
    THREE
MONTH
PERIOD
FROM
JANUARY 1,
2014
THROUGH
MARCH 31,
2014
    YEAR ENDED
DECEMBER 31,
2013
 

Net cash provided by operating activities

  $ 19,982      $ 26,271      $ 84,117      $ 62,539      $ 12,807      $ 98,142   

Net cash used in investing activities

    (5,653     (2,658     (6,432     (907,640     (827     (4,472

Net cash (used in) provided by financing activities

    (15,678     (65,702     (116,489     900,171       (17,968     (95,851

Effect of exchange rates on cash and cash equivalents

    143        (95     (601     (785     (25     159   

Increase (decrease) in cash and cash equivalents

    (1,206     (42,184     (39,405     54,285       (6,013     (2,022

 

 

Cash Flows from Operating Activities

Cash flows from operations are driven mainly by net income and net movement in accounts receivable and unbilled, net, advanced billings, pre-funded liabilities, accounts payable and accrued expenses. Accounts receivable and unbilled, net, advanced billings and pre-funded liabilities fluctuate on a regular basis as we perform our services, bill our customers and ultimately collect on those receivables. We attempt to negotiate payment terms in order to provide for payments prior to or soon after the provision of services, but this timing of collection can vary significantly on a period by period comparative basis.

Net cash provided by operating activities was $20.0 million for the six months ended June 30, 2016 consisting of net income of $8.4 million. Adjustments to reconcile net income to net cash provided by operating activities were $33.8 million, primarily related to amortization of intangibles of $25.3 million, depreciation of $3.6 million and stock based compensation expense of $4.3 million. Changes in operating assets and liabilities used $22.3 million in operating cash flows and were primarily driven by increased accounts receivable and unbilled, net of $24.8 million, increased prepaid expenses and other assets of $8.5 million primarily related to federal tax payments and decreased accounts payable of $2.1 million, offset by increased pre funded study costs of $2.4 million and advanced billings of $15.0 million.

Net cash provided by operating activities was $26.3 million for the six months ended June 30, 2015 consisting of net income of less than $0.1 million. Adjustments to reconcile net income to net cash provided by operating activities were $37.3 million, primarily related to amortization of intangibles of $34.2 million, depreciation of $3.1 million and stock based compensation expense of $4.9 million, offset by $6.5 million of benefit from deferred taxes. Changes in operating assets and liabilities used $11.0 million in operating cash flows and were primarily driven by lower accrued expenses of $2.8 million related to incentive compensation payments and $6.5 million from a decrease in advanced billings offset