10. SHAREHOLDERS’ EQUITY

Authorized Shares

On August 16, 2016 the Company amended its Certificate of Incorporation in connection with the closing of its IPO to increase the authorized number of shares of common stock to 250,000,000 and to authorize 5,000,000 shares of preferred stock that may be issued from time to time by the Company’s Board of Directors.

Stock-Based Compensation

2016 Incentive Award Plan

On August 11, 2016 in connection with the Company's IPO, the Board approved the formation of the 2016 Incentive Award Plan (the “2016 Plan”), which replaced our 2014 Equity Incentive Plan (the “2014 Plan”). The 2016 Plan provides for long-term equity incentive compensation for key employees, officers and non-employee directors. A variety of discretionary awards (collectively, the “Awards”) for employees and non-employee directors are authorized under the 2016 Plan, including vested shares, stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), or other cash based or stock dividend equivalent awards, which are all equity-classified instruments under the 2016 Plan. The number of shares registered and available for grant under the 2016 Plan is 6,000,000. The vesting of such awards may be conditioned upon either a specified period of time or the attainment of specific performance goals as determined by the administrator of the 2016 Plan. The option price and term are also subject to determination by the administrator with respect to each grant. Option prices are generally expected to be set at the market price of the Company’s common stock at the date of grant and option terms are not expected to exceed ten years. The Company granted 648,180 stock options under the 2016 Plan during the Successor year ended December 31, 2016, consisting of 626,650 stock options vesting after four years and 21,530 stock options with various vesting schedules, but all of which vest within a calendar year of the respective grant date. The 2016 Plan has reserved 6,000,000 shares for issuance of RSAs, RSUs or stock options, of which approximately 5,400,000 awards were available for future grants as of December 31, 2016. The 2016 Plan expires in 2026, except for awards then outstanding, and is administered by the Board. All Awards granted at the IPO or thereafter were or will be issued under the 2016 Plan.

The company satisfies stock option exercises and vested stock awards with newly issued shares. Shares available for future stock compensation grants totaled 5.4 million at December 31, 2016.

2014 Equity Incentive Plan

The 2014 Plan for employees and directors provided the issuance of vested shares, stock options, RSAs and RSUs in Medpace Holdings, Inc.’s common stock. The awards were granted to key employees as additional compensation for services rendered and as a means of retention over the vesting period, typically three to four years. RSAs awarded under the 2014 Plan were subject to automatic forfeiture upon departure until vested and entitle the shareholder to all rights of common stock ownership except that they may not be sold, transferred, pledged or otherwise disposed of during the restriction period, except as noted in the following paragraph. The 2014 Plan allowed for the issuance of non-qualified stock options to employees, officers, and directors under this plan (collectively, “the Participants”). Under the 2014 Plan, options could be granted with an exercise price equal to or greater than the fair value of common stock at the grant date as determined by the Board of Directors. The stock options, if unexercised, expired seven years from the date of grant. The Company granted 45,932 Awards under the 2014 Plan, consisting of 34,821 stock options vesting equally over four years and 11,111 fully vested shares, during the Successor year ended December 31, 2016.

As a condition to exercising stock options and acceptance of certain restricted shares, employees must have executed a Contribution and Subscription Agreement (the “Subscription Agreement”) that provided for the exchange of the shares issued for incentive units (the “Incentive Units”) in Medpace Investors upon the occurrence of certain events. The Incentive Units were tied directly to common stock ownership in Medpace Holdings, Inc. and entitled the Incentive Unit holder to participate in the risks and rewards of owning the Successor’s stock through ownership in Medpace Investors. The awards containing this condition were liability-classified instruments as they were inevitably settled in the equity of a non-consolidated related party. Restricted share awards excluding the requirement to execute a Contribution and Subscription Agreement and settlement in common shares of Medpace Holdings, Inc. were equity-classified instruments.

At the grant date for RSAs that were liability-classified, restricted shares were legally issued and exchanged for MPI Incentive Units on behalf of the employee. If the RSAs were not yet vested and an employee left the Successor’s employment, the restricted shares of Medpace Holdings, Inc. reverted back to the Successor and were available for re-issuance under the Successor Plan. Upon the vesting of RSAs and RSUs and upon the exercise of stock options, the stock-based compensation liability was settled by exchanging the Successor’s stock for MPI Incentive Units. If an employee left the Successor’s employment after they vested in the Awards and the exchange for Incentive Units was made, Medpace Investors may exercise a call option to repurchase an employee’s Incentive Units at a price determined by the manager and majority unit holder of Medpace Investors, who is also the chief executive officer of Medpace. If Medpace Investors exercised the call right, it could do so up to the later of twelve months following the employee’s departure date or six months following the determination that the former employee was directly or indirectly engaged in competitive business activities.

Restricted Awards Modification

On December 17, 2015, the Board of Directors approved a resolution to accelerate the vesting period for all issued, outstanding and unvested RSAs and RSUs to vest on December 31, 2015, so long as the recipient of each restricted share or unit was in good standing, had not provided notice of resignation and continued to be employed by the Company as of December 31, 2015. In total, 688,599 unvested restricted awards held by 158 current employees were modified resulting in settlement of 688,599 shares.

According to the authoritative guidance for stock-based compensation, under these circumstances a company should recognize additional stock-based compensation expense in the amount of the incremental fair value of the modified award. Because the restricted awards that were modified were liability-classified, the awards were at fair value at the time of the modification and no incremental cost was recognized. While there was no incremental cost related to fair value of the awards, $5.7 million of stock-based compensation expense was recorded in 2015 related to previously unrecognized stock-based compensation cost for awards expected to vest in 2016, 2017 and 2018.

Option Awards Modification

As a result of the Company’s IPO, a condition of all outstanding stock options issued before August 10, 2016 under the 2014 Plan that previously required the exchange of the shares issued for incentive units in the equity of a non-consolidated related party was dissolved. All future exercises of options issued pursuant to the 2014 Plan will now settle in shares of the Company. As a result of the modification in the settlement condition, the options will now be equity-classified instruments and changes in the fair value of the stock compensation liability that occur during the requisite service period are no longer recognized. According to the authoritative guidance for stock-based compensation, at modification the Company should recognize additional stock-based compensation expense in the amount of the incremental fair value of the modified award. As a result, the Company recognized $3.1 million of incremental stock-based compensation expense during the Successor year ended December 31, 2016. In addition, the $10.5 million stock-based compensation liability associated with the modified stock options was reclassified to additional paid-in capital as a result of the change to equity classification. There is no stock-based compensation liability at December 31, 2016. The stock-based compensation liability was $3.6 million at December 31, 2015, of which $1.7 million was included in Other current liabilities and $1.9 million was included in Other long-term liabilities in the consolidated balance sheet.

Predecessor Awards

In 2011, the Predecessor adopted a stock option plan (the “2011 Stock Option Plan”) and was authorized to issue non-qualified stock options to employees, officers, and directors under this plan (collectively “the Participants”). Under the 2011 Stock Option Plan, options may be granted with an exercise price equal to or greater than the fair value of common stock at the date of the grant as determined by the Board of Directors. In April 2012, the Board of Directors amended the 2011 Stock Option Plan to increase the maximum number of shares available for issuance as options to the Participants. Options granted under the plans may be exercised at certain times subsequent to certain events, as set forth in the grant. The stock options, if unexercised, expire ten years from the date of grant.

In December 2012, the Predecessor’s Board of Directors established a restricted stock plan (the “2012 Restricted Stock Plan”) and approved the issuance of RSAs and RSUs (collectively, the “Restricted Shares”) up to an authorized amount of 350,000 total Restricted Shares. These shares are subject to certain restrictions, and are issued to key employees of the Company as a means of retention. RSAs awarded under the plan entitle the shareholder to all rights of common stock ownership except that they may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period.

The terms of the 2011 Stock Option Plan and the 2012 Restricted Stock Plan (collectively, the “Predecessor Equity Plans”) permitted, but did not require, the acceleration of vesting for awards upon a change in control. On March 24, 2014, the Predecessor’s Board of Directors approved the acceleration of vesting for outstanding Restricted Share awards and stock options, the effect of which took place immediately prior to the April 1, 2014 Transaction. The Predecessor’s Board of Directors, at the same time, also approved the cancellation of any remaining unvested equity awards and terminated the Predecessor Equity Plans. The acceleration of vesting was determined to be a modification of the Predecessor Equity Plans and, pursuant to accounting guidance governing such transactions, the Predecessor recorded incremental stock-based compensation expense of $7.1 million. The modification of the Predecessor Equity Plans resulted in accelerated vesting for 172,492 Restricted Shares and 992,412 stock options. This change impacted 266 employees. In connection with the Transaction, all Participants exercised their options, resulting in exercise proceeds aggregating $15.2 million.

Treasury Shares

The Predecessor’s Shareholder Agreement (the “Predecessor Shareholder Agreement”) permitted the Company to directly purchase the shares of employee shareholders that separated from the Company. The Predecessor did not exercise its option to repurchase shares from separated employees during any Predecessor period covered by the Predecessor’s Financial Statements.

Successor and Predecessor Equity Awards

Valuation Assumptions

The Company determines the fair value of stock options using the Black-Scholes-Merten option pricing model (the “BSM Model”). The BSM Model is primarily affected by the fair value of the Successor’s common stock (see restricted share valuation discussion below), the expected holding period for the option, expected stock price volatility over the term of the awards, the risk-free interest rate, and expected dividends.

The following table sets forth the key weighted-average assumptions used in the BSM Model to calculate the fair value of options:

	SUCCESSOR						PREDECESSOR
	Year Ended		Year Ended		Period Ended		Period Ended
	December 31,		December 31,		December 31,		March 31,
	2016		2015		2014		2014
Expected holding period - years	3.6		4.2		5.4		N/A
Expected volatility		30.2%		36.4%		41.8%	N/A
Risk-free interest rate		1.0%		1.2%		1.7%	N/A
Expected dividend yield		0.0%		0.0%		0.0%	N/A

The assumptions used in the table above reflect both grant date inputs to arrive at the grant date fair values for stock options subject to equity-classified stock compensation accounting and reflect a fair value calculation for stock options outstanding in the period subject to liability-classified stock compensation accounting. As of December 31, 2016 all outstanding stock based awards are subject to equity classification through either modifications of the award terms and conditions that occurred during the Successor year ended December 31, 2016, or based on terms and conditions applicable as of the grant date.

The expected holding period represents the period of time the grants are expected to be outstanding. The Company uses the simplified method, as prescribed by accounting guidance governing such awards, to calculate the expected holding period for options granted to employees as we do not have sufficient historical evidence data to provide a reasonable basis upon which to estimate the expected holding period. For options issued prior to or during the Predecessor period ended March 31, 2014, the expected holding period was based on a probability-weighted assessment of an anticipated liquidity event. For options valued by the Successor for the years ended December 31, 2016 and 2015 and the Successor Period ended December 31, 2014, the expected holding period is based on an average between the midpoint of the vesting date and the expiration date of the options.

The Company estimates expected volatility primarily by using the historical volatility of a publicly traded peer group that operates in the clinical research and development industry. The Company does not have adequate history to calculate its own historical or implied volatility and believes the Company’s expected volatility will approximate the historical experience of the peer group.

The risk-free interest rate is based on the yield on U.S. Treasury obligations with remaining durations equal to the expected holding period of the options. The expected dividend yield is assumed to be zero based on recent and anticipated dividend activity.

Subsequent to the IPO, the fair value of common stock is based upon the market price of the Company’s common stock on the date of grant as listed on the NASDAQ. Due to the absence of an active market for the Company’s common stock prior to the IPO, the Company determined the fair value of restricted shares by obtaining an independent valuation of the fair value of the Company’s equity, applying a discount for lack of marketability, and then calculating the implied share price. The fair value of the Company was estimated primarily using an income approach which is based on assumptions and estimates made by management and, secondarily, using other market-related factors in current industry trends as well as observed transaction values. In determining the estimated future cash flows used in the income approach, the Company developed and applied certain estimates and judgments, including current and projected future levels of income based on management’s plans, business trends, prospects and market and economic conditions, including market-participant considerations. Significant assumptions utilized in the income approach were based on company specific information and projections, which were not observable in the market and are thus considered Level 3 measurements by authoritative guidance (see discussion of fair value measurements). The discount for lack of marketability (the “Marketability Discount”) was applied to reflect what a market participant would consider in relation to the post-vesting restrictions imposed regarding the inability to sell, transfer, or pledge the shares during the restriction period. The Marketability Discount was estimated by using the BSM Model to calculate the cost of a theoretical put option to hedge the fluctuation in value of the investment between the valuation date and an anticipated liquidity date.

The following table summarizes the grant date fair values of stock options and restricted shares issued during the period as well as the allocation of stock-based compensation expense to Direct costs, excluding depreciation and amortization, and Selling, general and administrative reported in the consolidated statements of operations:

	SUCCESSOR						PREDECESSOR
	Year Ended		Year Ended		Period Ended		Period Ended
	December 31,		December 31,		December 31,		March 31,
	2016		2015		2014		2014
Weighted average, grant date fair value
Stock Options	$	6.91	$	3.81	$	4.33	N/A
Restricted shares (RSAs and RSUs)	$	15.08	$	12.53	$	10.80	N/A

Stock-based compensation expense allocated to:
Direct costs, excluding depreciation and amortization	$	5,555	$	9,243	$	4,399	$	5,422
Selling, general, and administrative		4,260		13,081		1,024		1,918
Total stock-based compensation expense	$	9,815	$	22,324	$	5,423	$	7,340

Award Activity

The following table sets forth the Successor’s and Predecessor’s stock option activity:

	SUCCESSOR															PREDECESSOR
	Year Ended					Year Ended					Period Ended					Period Ended
	December 31,					December 31,					December 31,					March 31,
	2016					2015					2014					2014
				Weighted Average					Weighted Average					Weighted Average					Weighted Average
	Options			Exercise Price		Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price
Outstanding - beginning of Period		1,794,709		$	15.42		1,091,048		$	14.40		-		$	-		1,438,800		$	11.03
Granted		683,001		$	22.80		889,849		$	16.67		1,131,895		$	14.40		-		$	-
Exercised		(36,980	)	$	-		(17,404	)	$	-		-		$	-		(1,388,000	)	$	10.97
Forfeited		(90,564	)	$	15.85		(168,784	)	$	15.53		(40,847	)	$	14.40		(32,200	)	$	12.53
Expired		-		$	-		-		$	-		-		$	-		(18,600	)	$	11.27
Outstanding - end of period		2,350,166		$	17.57		1,794,709		$	15.42		1,091,048		$	14.40		-		$	-

Exercisable - end of period		647,343		$	15.22		242,777		$	14.40		-		$	-		-		$	-

The following table sets forth the Successor and Predecessor’s Restricted Share activity:

	SUCCESSOR									PREDECESSOR
	Year Ended			Year Ended			Period Ended			Period Ended
	December 31,			December 31,			December 31,			March 31,
	2016			2015			2014			2014
	Shares			Shares			Shares			Shares
Outstanding and unvested - beginning of period		90,697			407,171			-			176,643
Granted		11,111			1,253,924			707,721			-
Vested		(41,069	)		(1,530,547	)		(283,042	)		(172,492	)
Forfeited		(1,481	)		(39,851	)		(17,508	)		(4,151	)
Outstanding and unvested - end of period		59,258			90,697			407,171			-

Cumulative vested shares - end of period		1,854,658			1,813,589			283,042			263,490

During the Successor years ended December 31, 2016 and 2015 and the Successor Period ended December 31, 2014, 11,111, 583,021 and 283,042 Restricted Shares were granted and immediately vested upon issuance (the “Vested Shares”), respectively. There was no stock-based compensation liability related to Restricted Shares as of the Successor year ended December 31, 2016, The stock-based compensation liability related to 231,229 and 283,042 Vested Shares granted during the Successor year ended December 31, 2015 and the Successor Period ended December 31, 2014, respectively, were settled by exchanging the awards for Medpace Investors’ Incentive Units. The stock-based liability related to the residual 351,851 Vested Shares granted during the Successor year ended December 31, 2015 was settled by exchanging the awards for the Company’s common stock.

The following table summarizes information about stock options expected to vest, stock options exercisable, and unvested restricted share awards expected to vest at December 31, 2016:

	Weighted Average						Weighted Average
	Exercise		Stock		Restricted		Remaining
Issued in Successor Year Ended	Price		Options		Shares		Life (Years)
December 31, 2016
Number of stock options expected to vest	$	17.51		2,304,229		-		5.4
Number of Restricted Shares expected to vest				-		59,258
Total expected to vest - December 31, 2016				2,304,229		59,258
Total stock options exercisable - December 31, 2016	$	15.22		647,343				4.8
Unrecognized compensation cost - December 31, 2016 (in thousands)			$	7,909	$	538
Weighted average years over which unrecognized compensation cost will be recognized				2.4		2.0

The following table sets forth the aggregate intrinsic value of stock options exercised, the fair values of awards vested, and share based liabilities settled during the respective periods (in thousands):

	SUCCESSOR							PREDECESSOR
	Year Ended		Year Ended			Period Ended		Period Ended
	December 31,		December 31,			December 31,		March 31,
	2016		2015			2014		2014
Total intrinsic value of stock options exercised	$	403	$	(36	)	$	-	$	25,378
Total grant-date fair value of stock options vested	$	1,384	$	1,168		$	-	$	3,446
Total grant-date fair value of restricted shares vested	$	614	$	18,284		$	3,057	$	1,466
Total settlement date fair value of restricted shares vested	$	1,236	$	21,134		$	3,057	N/A
Total share-based liabilities settled	$	76	$	16,858		$	3,057	N/A

There was no stock-based compensation liability at December 31, 2016. The stock-based compensation liability of $3.6 million at December 31, 2015 is related to outstanding stock options. Further, $1.7 million is included in Other current liabilities and $1.9 million is included in Other long-term liabilities in the consolidated balance sheets at December 31, 2015.

The actual tax benefits recognized related to stock-based compensation totaled $1.0 million, $4.6 million, $3.3 million and $8.2 million for the Successor years ended December 31, 2016 and 2015, the Successor Period ended December 31, 2014 and the Predecessor Period ended March 31, 2014, respectively.