Amendment No.4 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on June 9, 2009

Registration No. 333-156935

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Medidata Solutions, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7389   13-4066508

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

79 Fifth Avenue, 8th Floor

New York, New York 10003

(212) 918-1800

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

Tarek A. Sherif, Chief Executive Officer

79 Fifth Avenue, 8th Floor

New York, New York 10003

(212) 918-1800

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

 

 

With copies to:

Paul Jacobs, Esq.

Warren J. Nimetz, Esq.

Fulbright & Jaworski L.L.P.

666 Fifth Avenue

New York, New York 10103

Telephone (212) 318-3000

Fax (212) 318-3400

 

Christopher J. Austin, Esq.

Michael D. Beauvais, Esq.

Ropes & Gray LLP

One International Place

Boston, MA 02110-2624

Telephone (617) 951-7000

Fax (617) 951-7050

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

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, 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, please 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   Smaller reporting company  ¨
  (Do not check if a 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
    Proposed Aggregate  
Maximum
Offering Price
  Amount of
Registration
Fee(2)(3)

Common stock, $0.01 par value per share

 

7,245,000

 

$13.00

 

$94,185,000

 

$5,256

 
(1) Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Previously paid.

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 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary 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. This preliminary prospectus is not an offer to sell the securities, nor is it a solicitation of an offer to buy the securities, in any state where an offer or sale of the securities is not permitted.

Subject to Completion, dated June 9, 2009

 

PROSPECTUS

6,300,000 Shares

LOGO

Common Stock

 

 

This is an initial public offering of common stock of Medidata Solutions, Inc.

We are selling 6,300,000 shares of our common stock in this initial public offering. The selling stockholders identified in this prospectus have granted the underwriters a 30-day option to purchase up to an aggregate of 945,000 additional shares if the underwriters sell more than 6,300,000 shares of common stock in this offering. We will not receive any proceeds from the sale of shares by the selling stockholders.

No public market currently exists for our common stock. We have applied to list our common stock on the NASDAQ Global Market under the symbol “MDSO.” We currently expect that the initial public offering price will be between $11.00 and $13.00 per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share    Total

Initial public offering price

   $                     $                 

Underwriting discount

   $      $  

Proceeds, before expenses, to Medidata Solutions, Inc.

   $      $  

The underwriters expect to deliver the shares on or about                     , 2009.

 

 

 

Citi    Credit Suisse

 

Jefferies & Company    Needham & Company, LLC

 

 

Prospectus dated                     , 2009


Table of Contents

TABLE OF CONTENTS

 

     Page

PROSPECTUS SUMMARY

   1

RISK FACTORS

   11

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

   24

INDUSTRY INFORMATION

   24

USE OF PROCEEDS

   25

DIVIDEND POLICY

   26

CAPITALIZATION

   27

DILUTION

   29

SELECTED CONSOLIDATED FINANCIAL INFORMATION

   31

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

   34

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   39

BUSINESS

   67

MANAGEMENT

   80

PRINCIPAL AND SELLING STOCKHOLDERS

   98

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   102

DESCRIPTION OF CAPITAL STOCK

   104

SHARES ELIGIBLE FOR FUTURE SALE

   108

UNDERWRITING

   110

LEGAL MATTERS

   115

EXPERTS

   115

WHERE YOU CAN FIND MORE INFORMATION

   115

INDEX TO FINANCIAL STATEMENTS

   F-1

 

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus may be accurate only on the date of this prospectus regardless of the time of delivery of this prospectus.

Dealer Prospectus Delivery Obligation

Until                     , 2009 (the 25th calendar day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


Table of Contents

Prospectus Summary

This summary highlights information contained elsewhere in this prospectus but might not contain all of the information that is important to you. Before investing in our common stock, you should read the entire prospectus carefully, including the “Risk Factors” section and our historical and pro forma condensed consolidated financial statements and the notes thereto included elsewhere in this prospectus.

Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters’ option to purchase additional shares is not exercised.

Medidata Solutions, Inc.

Our Business

We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our customers include pharmaceutical, biotechnology and medical device companies, academic institutions, contract research organizations, or CROs, and other organizations engaged in clinical trials to bring innovative medical products to market and explore new indications for existing medical products. Our solutions allow our customers to achieve clinical results more efficiently and effectively by streamlining the design, planning and management of key aspects of the clinical development process, including protocol development, CRO negotiation, investigator contracting, the capture and management of clinical trial data and the analysis and reporting of that data on a worldwide basis. Our customers rely on our solutions to safely accelerate the clinical development process and maximize the commercial life of their products. Our diverse and expanding customer base currently includes 22 of the top 25 global pharmaceutical companies measured by revenue and many middle-market life sciences companies, as well as CROs through our ASPire to Win program. In 2007, 2008 and in the three months ended March 31, 2009, Johnson & Johnson, AstraZeneca, Amgen, Astellas Pharma and Takeda Pharmaceutical were our largest customers measured by revenue.

Our principal offering, Medidata Rave, is a comprehensive platform that integrates electronic data capture, or EDC, with a clinical data management system, or CDMS, in a single solution that replaces traditional paper-based methods of capturing and managing clinical data. In addition, our on-demand, hosted technology platform facilitates rapid and cost-effective deployment of our solutions on a global basis. We have designed our Medidata Rave software to scale reliably and cost-effectively for clinical trials of all sizes and phases, including those involving substantial numbers of clinical sites and patients worldwide. We also offer applications that improve efficiencies in protocol development and trial planning, contracting and negotiation through Medidata Designer, Medidata Grants Manager and Medidata CRO Contractor.

We derive a majority of our revenues from Medidata Rave application services through multi-study arrangements for a pre-determined number of studies. We also offer our application services on a single-study basis that allows customers to use our solution for a limited number of studies or to evaluate it prior to committing to multi-study arrangements. We support our solutions with comprehensive service offerings, which include global consulting, implementation, technical support and training for customers and investigators. We invest heavily in training our customers, their investigators and other third parties to configure clinical trials independently. We believe this knowledge transfer accelerates customer adoption of our solutions.

For 2008, we generated $105.7 million in revenues, a 67.9% increase over 2007 revenues of $63.0 million. For the three months ended March 31, 2009, we generated $33.6 million in revenues, a 60.2% increase over the revenues of $21.0 million in the comparable period of 2008. Our business model provides us with a recurring revenue stream that we believe delivers greater revenue visibility than perpetual software licensing models.

 

 

1


Table of Contents

The Opportunity for Clinical Trial Solutions

The traditional process of capturing and analyzing data in clinical trials relies on pre-printed, paper case report forms to submit data from the clinical trial sites to the clinical trial sponsor. Each case report form is manually checked for accuracy at the clinical site and subsequently entered into a computerized CDMS. Inconsistent, questionable, or missing data items are identified and must be addressed by facsimile, mail or hand-delivered document exchange. Each change in data requires documentation. These paper-based processes result in significant complexity and cost. Key limitations include:

 

   

Delay in clinical development process. Manual data collection can delay interim and final data analysis, which may reduce the exclusive sales period available under patent protection.

 

   

Impaired data quality. Paper-based data collection and reporting are more susceptible to transcription and other errors.

 

   

Limited data visibility to effect real-time decision making. With manual data collection, sponsors cannot evaluate trial status until relatively late in the process.

Compared to traditional paper-based data collection, EDC technology provides substantial benefits at all stages of the clinical development process and has become widely accepted across the industry. However, we believe that most clinical trials are still conducted using the traditional paper-based format. We believe the total annual market opportunity for EDC solutions is in excess of $1.4 billion.

Despite the increased efficiency provided by EDC, early generation solutions have typically faced the following challenges:

 

   

Integration. EDC solutions have had difficulty integrating complex, diverse and large volumes of data across multiple applications.

 

   

Investigator site requirements. EDC installations can impose specific software and hardware requirements on trial sponsors and their investigator sites.

 

   

Complex customization. EDC solutions often require custom programming to meet the requirements of diverse therapeutic areas across multiple phases.

 

   

Usability. The user interface of EDC solutions often does not accommodate the needs and preferences of the medical researchers, limiting the pace of adoption.

 

   

Workflow and security limitations. EDC solutions often have limited ability to manage multiple languages, multiple workflows and blinded data.

 

   

Scalability. EDC solutions often lack the ability to scale against multiple studies in a single database, requiring increased effort and expense.

The Medidata Solution

Our solutions allow users to accurately and efficiently design clinical trials and capture, manage and report clinical trial data through an easy-to-use, Internet-enabled platform. We believe our solutions provide our customers with the following benefits:

 

   

Accelerated time to market. Our on-demand platform and delivery model streamlines the clinical development process, enabling users to compress the time associated with designing and implementing clinical trials and entering, cleansing and analyzing data.

 

   

Improved quality and visibility of results. Medidata Rave allows users to enhance the quality and completeness of their data earlier in the process by providing real-time data cleansing and eliminating duplicative manual entry of data.

 

 

2


Table of Contents
   

Comprehensive clinical development solution. We have designed our comprehensive solutions to provide support throughout the clinical development process, from protocol authoring to preparing data for regulatory analysis and submission. Medidata Rave can be integrated easily with auxiliary systems, making it the backbone for a complete end-to-end solution.

 

   

Enhanced investigator acceptance. We have designed the user interface of our application services to meet the needs of clinicians, with intuitive, consistent point-and-click navigation and a familiar clinical data entry approach.

 

   

Seamless execution of global trials. Medidata Rave provides a single data repository that can be used in multiple languages simultaneously, avoiding the need for the installation and maintenance of parallel versions of the system.

 

   

Lower cost of ownership. Our product architecture scales reliably and cost-effectively across clinical trials of all sizes. Our customers can run all clinical trials on a single instance, further reducing deployment cost per study.

Our Growth Strategy

Our strategy is to become the global standard for application service solutions for EDC and complementary technologies for the clinical development process. Key elements of our strategy include:

 

   

Expand our global customer base. We will continue to pursue new relationships with large global pharmaceutical and biotechnology companies, as well as to dedicate resources to small- and middle-market life sciences companies, as we believe the middle-market represents an under-penetrated opportunity for customer expansion.

 

   

Increase sales to our existing customers. We intend to drive adoption of our products and services within our existing customer base by facilitating the use of our application services in new trials and converting existing single-study customers into multi-study customers.

 

   

Enhance our suite of products and services. We intend to add new features to our existing offerings and add new offerings to maximize the efficiency of the clinical development process. We believe our clinical trials expertise will enable us to leverage our customers’ operational data to provide metrics-driven insights and advisory services to facilitate enhanced market penetration.

 

   

Expand indirect sales channel initiatives. We will continue to pursue strategic partnerships with CROs and healthcare information technology consultants to position our software solutions as the platform of choice for their outsourced clinical trial management services.

Risks Associated with Our Business

Our business is subject to a number of risks of which you should be aware before making an investment decision. Those risks are discussed in “Risk Factors” beginning on page 11.

Corporate Information

We were organized as a New York corporation in June 1999 and reincorporated in the State of Delaware in May 2000. Our principal executive offices are located at 79 Fifth Avenue, 8th Floor, New York, New York 10003, and our telephone number is (212) 918-1800. Our website is located at www.mdsol.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

All references in this prospectus to “our company,” “Medidata,” “we,” “us” and “our” refer to Medidata Solutions, Inc. and its consolidated subsidiaries and their predecessors.

 

 

3


Table of Contents

This prospectus includes trademarks, trade names and servicemarks of Medidata Solutions, Inc. and its subsidiaries, including Medidata®, Medidata Designer™, Medidata CRO Contractor™, Medidata Rave®, Medidata Grants Manager™ and ASPire to Win®. This prospectus also refers to trademarks, trade names and servicemarks of other entities. All rights are reserved. The mention of such trademarks, trade names and servicemarks in this prospectus is made with due recognition of the rights of these entities and without any intent to misappropriate such names or marks. All other trademarks, trade names and servicemarks appearing in this prospectus are the property of their respective owners.

 

 

4


Table of Contents

The Offering

 

Common stock offered by us

6,300,000 shares.

 

Option to purchase additional shares offered by the selling stockholders

The selling stockholders have granted the underwriters a 30-day option to purchase from them up to an aggregate of 945,000 additional shares of our common stock if the underwriters sell more than 6,300,000 shares in the offering. We will not receive any proceeds from the sale of shares by the selling stockholders.

 

Common stock to be outstanding after the offering(1)

22,353,696 shares.

 

Use of proceeds

We estimate that the net proceeds to us from the offering will be approximately $64.2 million, based on an assumed initial public offering price of $12.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses of approximately $6.1 million, of which approximately $4.1 million was paid as of March 31, 2009 and $2.0 million is payable by us in connection with the offering. We expect to use the net proceeds for general corporate purposes, including working capital, capital expenditures and potential acquisitions. We may also repay all or a portion of our $14.6 million (as of March 31, 2009) senior secured credit facility, plus accrued interest and any fees relating to our prepayment, in the event that we are unable to restructure the credit facility or obtain alternative debt financing on more favorable terms. See “Use of Proceeds.”

 

Dividend policy

We currently do not intend to pay dividends on our common stock.

 

Risk factors

An investment in our common stock involves a high degree of risk. You should carefully consider the risk factors set forth under “Risk Factors” beginning on page 11 and the other information contained in this prospectus prior to making an investment decision regarding our common stock.

 

Listing

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

 

(1) The number of shares of common stock to be outstanding after the offering is based on 7,039,038 shares of common stock outstanding as of March 31, 2009 and the issuance of 9,014,658 shares of common stock upon the automatic conversion of all of the outstanding shares of our preferred stock upon completion of the offering at a conversion rate of one-fifth of a common share for each Series A preferred share and two common shares for each Series B preferred share, Series C preferred share and Series D preferred share. In addition, the number of shares of common stock to be outstanding after the offering assumes that accumulated accrued dividends on the convertible redeemable preferred stock of approximately $2.2 million (as of March 31, 2009) will be paid from cash on hand upon completion of the offering, as elected by holders of our convertible redeemable preferred stock (also referred to in this prospectus as senior preferred stock). The number of shares of common stock to be outstanding after the offering:

 

   

excludes 2,624,112 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2009 at a weighted average exercise price of $7.32 per share;

 

 

5


Table of Contents
   

excludes 2,500,000 shares of common stock reserved for future grants or awards from time to time under our 2009 Long-Term Incentive Plan (including grants and awards to our executive officers and certain other employees of approximately 256,410 shares of restricted stock and options to purchase approximately 436,590 shares of common stock that we anticipate making upon the effectiveness of the registration statement of which this prospectus is a part, assuming an offering price of $12.00 per share, the midpoint of the range set forth on the cover of this prospectus); and

 

   

excludes 500,000 additional shares of common stock to be available for future grant under our 2009 Employee Stock Purchase Plan.

 

 

6


Table of Contents

Summary Consolidated Financial Information and Other Data

The summary consolidated statement of operations data presented for each of the years ended December 31, 2006, 2007 and 2008 and the summary consolidated balance sheet data as of December 31, 2007 and 2008 were derived from our audited consolidated financial statements (as revised, see Note 2, “Restatement of Consolidated Financial Statements”, to our consolidated financial statements), which are included elsewhere in this prospectus. The summary consolidated statement of operations data for the years ended December 31, 2004 and 2005 and the summary consolidated balance sheet data as of December 31, 2004, 2005 and 2006 were derived from our consolidated financial statements which are not included in this prospectus and have been subsequently revised in conjunction with the restatement of our consolidated financial statements as noted above. The summary consolidated statement of operations data presented for the three months ended March 31, 2008 (as subsequently revised in conjunction with the restatement as noted above, see Note 2, “Restatement of Consolidated Financial Statements”, to our unaudited condensed consolidated interim financial statements) and 2009 and the summary consolidated balance sheet data as of March 31, 2009 were derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.

On March 17, 2008, we acquired Fast Track, a provider of clinical trial planning solutions, including software, proprietary contracting data and professional services. The consolidated statement of operations data for the three months ended March 31, 2008 and for subsequent periods includes the impact of the acquisition of Fast Track beginning on the date of acquisition. The consolidated statement of operations data for the prior periods do not include the impact of the acquisition of Fast Track. The information contained in this table should also be read in conjunction with “Use of Proceeds,” “Capitalization,” “Selected Consolidated Financial Information,” “Unaudited Pro Forma Statement of Operations,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto, all included elsewhere in this prospectus.

Consolidated Statement of Operations Data

 

    Year ended December 31,     Three Months Ended
March 31,
    2004     2005     2006     2007     2008(1)     2008(1)     2009
    (in thousands, except share and per share amounts)

Revenues:

             

Application services

  $ 3,226     $ 13,069     $ 25,406     $ 44,592     $ 73,820     $ 14,821     $ 23,665

Professional services

    4,304       3,643       10,851       18,391       31,904       6,158       9,937
                                                     

Total revenues

    7,530       16,712       36,257       62,983       105,724       20,979       33,602

Costs of revenues:(2)

             

Application services(3)

    1,074       2,059       7,288       13,170       19,647       4,475       5,670

Professional services

    4,878       14,459       20,462       33,035       30,801       8,194       6,613
                                                     

Total cost of revenues

    5,952       16,518       27,750       46,205       50,448       12,669       12,283

Gross profit

    1,578       194       8,507       16,778       55,276       8,310       21,319

Operating costs and expenses:(2)

             

Research and development(4)

    2,859       4,104       5,905       10,716       19,340       4,872       5,497

Selling and marketing(5)

    3,829       7,599       12,768       15,484       24,190       5,463       6,713

General and administrative

    4,068       4,574       8,335       13,361       27,474       5,807       6,821
                                                     

Total operating costs and expenses

    10,756       16,277       27,008       39,561       71,004       16,142       19,031

(Loss) income from operations

    (9,178 )     (16,083 )     (18,501 )     (22,783 )     (15,728 )     (7,832 )     2,288

Interest and other expenses (income), net

 

 

 

 

31

 

 

 

 

 

 

38

 

 

 

 

 

 

195

 

 

 

 

 

 

364

 

 

 

 

 

 

1,624

 

 

 

 

 

 

563

 

 

 

 

 

 

412

                                                     

(Loss) income before provision for income taxes

    (9,209 )     (16,121 )     (18,696 )     (23,147 )     (17,352 )     (8,395 )     1,876

Provision for income taxes(6)

    23       110       306       515       920       165       182
                                                     

Net (loss) income

  $ (9,232 )   $ (16,231 )   $ (19,002 )   $ (23,662 )   $ (18,272 )   $ (8,560 )   $ 1,694
                                                     

 

 

7


Table of Contents
    Year ended December 31,     Three Months Ended
March 31,
    2004     2005     2006     2007     2008(1)     2008(1)     2009
    (in thousands, except share and per share amounts)

(Loss) earnings per share:(7)

             

Basic

  $ (1.57 )   $ (2.73 )   $ (3.10 )   $ (3.78 )   $ (2.76 )   $ (1.40 )   $ 0.22
                                                     

Diluted

  $ (1.57 )   $ (2.73 )   $ (3.10 )   $ (3.78 )   $ (2.76 )   $ (1.40 )   $ 0.10
                                                     

Weighted average common shares

    outstanding:(7)

 

 

         

Basic

    6,056,422       6,135,341       6,296,830       6,384,557       6,793,596       6,218,320       7,036,403

Diluted

    6,056,422       6,135,341       6,296,830       6,384,557       6,793,596       6,218,320       17,423,430

Pro forma:(8)

             

Pro forma (loss) earnings per share:

 

           

Basic

          $ (1.16 )     $ 0.11
                       

Diluted

          $ (1.16 )     $ 0.10
                       

Pro forma weighted average common

    shares outstanding:

 

 

         

Basic

            15,808,254         16,051,061

Diluted

            15,808,254         17,423,430

 

    Year Ended December 31,   Three Months Ended
March 31,
    2004   2005   2006   2007   2008(1)   2008(1)   2009
    (in thousands)

Stock-based compensation expense and depreciation and amortization of intangible assets included in cost of revenues and operating costs and expenses is as follows:

 

Stock-based compensation

             

Cost of revenues

  $ —     $ 178   $ 108   $ 172   $ 291   $ 57   $ 91

Research and development

    —       27     89     183     503     71     163

Sales and marketing

    —       69     304     448     640     138     248

General and administrative

    —       118     218     491     1,763     335     501
                                         

Total stock-based compensation

  $ —     $ 392   $ 719   $ 1,294   $ 3,197   $ 601   $ 1,003
                                         

Depreciation

             

Cost of revenues

  $ —     $ 563   $ 1,237   $ 3,605   $ 5,941   $ 1,384   $ 1,629

Research and development

    —       136     289     463     650     155     194

Sales and marketing

    —       91     202     243     383     89     118

General and administrative

    347     104     228     305     461     98     152
                                         

Total depreciation

    347     894     1,956     4,616     7,435     1,726     2,093
                                         

Amortization of intangible assets(4)

             

Cost of revenues

    —       —       —       —       1,191     64     421

Sales and marketing

    —       —       —       —       79     4     36
                                         

Total amortization of intangible assets

    —       —       —       —       1,270     68     457
                                         

Total depreciation and amortization of intangible assets

  $ 347   $ 894   $ 1,956   $ 4,616   $ 8,705   $ 1,794   $ 2,550
                                         

 

 

8


Table of Contents
Consolidated Balance Sheet Data                  
     As of December 31,      As of
March 31,
 
     2004      2005      2006      2007      2008      2009  
     (in thousands)  

Cash and cash equivalents

   $ 7,595      $ 6,450      $ 7,016      $ 7,746      $ 9,784      $ 12,977  

Total current assets

     13,149        13,352        19,073        29,556        44,565        50,209  

Restricted cash

     306        305        305        387        545        532  

Total assets

     14,824        16,540        25,121        44,479        75,190        79,582  

Total deferred revenue

     11,253        24,617        42,337        75,635        101,621        107,291  

Total capital lease obligations

     289        507        2,281        8,527        7,060        6,753  

Total long-term debt

     1,500        4,000        3,514        10,781        14,366        14,025  

Convertible redeemable preferred stock

     11,252        11,751        12,249        12,747        13,245        13,370  

Convertible preferred stock

     24        24        24        24        24        24  

Stockholders’ deficit

     (13,706 )      (30,638 )      (49,189 )      (77,888 )      (76,400 )      (73,934 )

Notes to Summary Consolidated Financial Information and Other Data

 

(1) On March 17, 2008, we acquired Fast Track, a provider of clinical trial planning solutions. Our results of operations for the three months ended March 31, 2008 and for subsequent periods include the operations of Fast Track since the date of acquisition. Please refer to “Unaudited Pro Forma Statement of Operations” for the pro forma effects of our acquisition of Fast Track.

 

(2) Prior to January 1, 2006, we accounted for our stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25, and related interpretations. Under APB No. 25, compensation expense of fixed stock options is based on the difference, if any, on the date of the grant between the fair value of our stock and the exercise price of the option. Compensation expense is recognized on a straight-line basis over the requisite service period.

On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS No. 123(R), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by SFAS No. 123(R). Under this transition method, stock-based compensation expense for the fiscal year ended December 31, 2006, includes compensation expense for all stock based compensation awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123, and compensation expense for all stock based compensation awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

 

(3) In 2006, it was claimed that certain applications offered to our customers potentially infringed on intellectual property rights held by a third party. As a result of negotiations with the third party, we entered into a license and settlement agreement in June 2007, pursuant to which we licensed the intellectual property held by the third party for use in our future sales to customers and settled all past infringement claims. We paid a settlement amount of $2.2 million to the third party in 2007. Such amount was recorded in cost of revenues under application services for the year ended December 31, 2006 and in accrued expenses on the consolidated balance sheet as of December 31, 2006.

 

(4) We determined that technological feasibility had not been established for certain in-process research and development projects acquired from Fast Track. These projects were written off, resulting in $0.7 million of additional research and development expenses included in the consolidated statement of operations data for the three months ended March 31, 2008 and for the year ended December 31, 2008. This write-off is not included in amortization of intangible assets in our consolidated statement of operations.

 

 

9


Table of Contents
(5) In 2006, a former employee made a claim seeking compensation of approximately $1.6 million in relation to the termination of her employment. Subsequently, the claim was reduced to approximately $1.4 million as of December 31, 2008. We recorded approximately $0.6 million in sales and marketing expenses during the year ended December 31, 2006 related to this matter. A hearing was held in November 2008 and the court rendered its decision on January 15, 2009, which awarded approximately $0.1 million to the plaintiff. While we believe this decision was favorable to us, it may be appealed by the plaintiff.

 

(6) For the years ended December 31, 2004 to 2008 and for the three months ended March 31, 2009, we did not realize an income tax benefit for available net operating loss carryforwards. As of December 31, 2008, we had approximately $83.7 million of federal operating loss carryforwards available to offset future taxable income expiring from 2019 through 2028. We also had net operating loss carryforwards for state income tax purposes of approximately $106.0 million available to offset future state taxable income expiring from 2009 to 2028.

 

(7) Basic and diluted net loss per share amounts and basic and diluted weighted average common shares outstanding have been adjusted to reflect a two-for-one stock split effective on August 3, 2004.

 

(8) The pro forma information represents the pro forma effect of converting all outstanding shares of convertible preferred stock into common stock at the applicable conversion ratio upon the completion of this offering, as if it had occurred on January 1, 2008 for the basic and diluted net loss per share presented on the consolidated statement of operations data for the year ended December 31, 2008 and for the three months ended March 31, 2009.

 

 

10


Table of Contents

RISK FACTORS

An investment in our common stock involves a high degree of risk. Before making an investment in our common stock, you should carefully consider the following risks, as well as the other information contained in this prospectus, including our consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The risks described below are those which we believe are the material risks we face. Any of the risk factors described below or additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could have a material adverse effect on our business, financial condition and results of operations. As a result, the trading price of our common stock could decline and you may lose a part or all of your investment.

Risks Related to Our Business

We have incurred significant operating losses during our limited operating history and may not be profitable in the future.

We began providing EDC services in 2001. We have recognized operating losses in each year from 1999 through 2008, and our cumulative operating loss since 1999 totaled approximately $86.3 million at December 31, 2008. We may make significant future expenditures related to the development and expansion of our business. In addition, following this offering we will incur significant legal, accounting and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain increased revenue to achieve future profitability. While our revenues have grown in recent periods, this growth may not be sufficient to offset the increase in our expenses and may not be sustainable. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus. Accordingly, we cannot give you any assurance regarding our future profitability. Further, if we continue to incur operating losses following the completion of this offering, or if we experience unanticipated working capital requirements, we may be required to seek additional financing. Such financing may not be available to us when needed, or available on acceptable terms, and may result in dilution to our existing stockholders.

Our quarterly operating results fluctuate and may continue to fluctuate in the future, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.

Our quarterly and annual revenues and operating results have varied in the past and may vary significantly in the future depending on factors such as:

 

   

budgeting cycles of our customers;

 

   

the length of our sales cycle;

 

   

increased competition;

 

   

our ability to develop innovative products;

 

   

the timing of new product releases by us or our competitors;

 

   

market acceptance of our products;

 

   

changes in our and our competitors’ pricing policies;

 

   

the financial condition of our current and potential customers;

 

   

changes in the regulatory environment;

 

   

changes in operating expenses and personnel changes;

 

   

our ability to hire and retain qualified personnel;

 

   

the effect of potential acquisitions and consequent integration;

 

11


Table of Contents
   

changes in our business strategy; and

 

   

general economic factors, including factors relating to the disruptions in the world credit and equity markets and the related impact on our customers’ access to capital.

In addition, a significant portion of our operating expense is relatively fixed and planned expenditures are based in part on expectations regarding future revenues. Accordingly, unexpected revenue shortfalls may decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decrease.

We derive a significant percentage of our revenues from a concentrated group of customers and the loss of one or more major customers could materially and adversely affect our business, results of operations or financial condition.

Our top five customers accounted for approximately 48%, 46% and 43% of our revenues in 2007, 2008 and the three months ended March 31, 2009, respectively. For 2007, two customers, Amgen and Johnson & Johnson, accounted for approximately 13% and 12% of our total revenues, respectively. In 2008, two customers, AstraZeneca and Johnson & Johnson, accounted for approximately 11% and 10% of our total revenues, respectively. For the first three months of 2009, Takeda Pharmaceutical accounted for approximately 12% of our total revenues. No other customer accounted for 10% or more of our total revenues during any of these periods. The loss of any of our major customers could have a material adverse effect on our results of operations and financial condition. We may not be able to maintain our customer relationships, and our customers may delay performance under or fail to renew their agreements with us, which could adversely affect our business, results of operations or financial condition. Any reduction in the amount of revenues that we derive from these customers, without an offsetting increase in new sales to other customers, could have a material adverse effect on our operating results. A significant change in the liquidity or financial position of any of these customers could also have a material adverse effect on the collectability of our accounts receivables, our liquidity and our future operating results.

If our customers cancel their contracts or terminate or delay their clinical trials, we may lose or delay revenues and our business may be harmed.

Certain of our customer contracts are subject to cancellation by our customers at any time with limited notice. Customers engaged in clinical trials may terminate or delay a clinical trial for various reasons, including the failure of the tested product to satisfy safety or efficacy requirements, unexpected or undesired clinical results, decisions to de-emphasize a particular product or forego a particular clinical trial, decisions to downsize clinical development programs, insufficient patient enrollment or investigator recruitment and production problems resulting in shortages of required clinical supplies. In the case of our hosted solutions, any termination or delay in the clinical trials would likely result in a consequential delay or termination in those customers’ service contracts. We have experienced terminations and delays of our customer service contracts in the past (although no such past terminations have had a significant impact on our results of operations) and we expect to experience additional terminations and delays in the future. The termination of a single-study arrangement could result in decreased revenues and the delay of our customers’ clinical trials could result in delayed professional services revenues, which could materially harm our business.

We currently have material weaknesses in our internal controls over financial reporting relating to our revenue recognition and expense cut-off procedures, which we have not yet fully remediated. If we fail to remedy our material weaknesses or otherwise fail to maintain effective internal controls over our financial reporting, the accuracy and timing of our financial reporting may be adversely affected.

In connection with the audit of our consolidated financial statements for the years ended December 31, 2007 and 2006, we, together with our independent registered public accounting firm, identified a number of material weaknesses in our internal controls over financial reporting, as defined in rules established by the American

 

12


Table of Contents

Institute of Certified Public Accountants, or AICPA. A “material weakness” is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis.

The material weaknesses were attributable to deficiencies in our revenue recognition related to ineffective review of contract terms and their impact on timing of revenue recognition, ineffective cut-off procedures, the extensive use of manual procedures and inadequate staffing, as well as ineffective expense cut-off procedures, which resulted in the recording of audit adjustments. While we have initiated a remediation plan to address these issues, we have had only limited operating experience with the remedial measures that have been implemented to date and cannot provide any assurance that these measures or any future measures will adequately remediate the material weaknesses. As of December 31, 2008 these issues were not fully remediated and they continue to be material weaknesses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls over Financial Reporting.” Other material weaknesses or significant deficiencies in our internal controls over financial reporting may be identified in the future. If we fail to remediate the material weaknesses, or fail to implement required new or improved controls, or encounter difficulties in their implementation, it could harm our operating results, cause us to fail to meet our SEC reporting obligations on a timely basis, or result in inaccurate financial reporting or material misstatements in our annual or interim financial statements.

Our failure to fully remediate the material weaknesses that continued to exist as of December 31, 2008 or the identification of additional material weaknesses could also prohibit us from complying with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002, which could apply to us as early as the filing of our annual report on Form 10-K for 2010 and requires annual management assessments of the effectiveness of our internal controls over financial reporting as well as a report by our independent registered public accounting firm regarding the effectiveness of such internal control. If we are unable to comply with Section 404 or otherwise are unable to produce timely and accurate financial statements, our business reputation and stock price may be adversely affected and we may be unable to maintain compliance with the listing requirements of the NASDAQ Global Market.

Restatements of our consolidated financial statements or other accounting-related problems could harm our business or otherwise have an adverse effect on us.

Subsequent to the first amendment to the registration statement of which this prospectus forms a part and during the preparation of our consolidated financial statements for the three months ended March 31, 2009, we reviewed our practice regarding the timing of revenue recognition. As described in Note 2, “Restatement of Consolidated Financial Statements,” to our audited consolidated financial statements included elsewhere in this prospectus, we have restated our consolidated financial statements for the years ended December 31, 2005, 2006, 2007 and 2008. This restatement was the result of previously identified revenue recognition control deficiencies that constituted material weaknesses. Any future restatements or other accounting-related problems could harm our business, financial condition, results of operations and cash flows, cause us to fail to meet our SEC reporting obligations on a timely basis, result in inaccurate financial reporting or material misstatements in our annual or interim financial statements, or adversely affect our stock price and we may be unable to maintain compliance with the listing requirements of the NASDAQ Global Market. Any of these matters may harm our business reputation and contribute to negative publicity and difficulties in attracting and retaining key clients, management personnel and employees.

Our sales cycles for multi-study arrangements can take in excess of nine months from initial contact to contract execution, and require significant employee time and financial resources with no assurances that we will realize sales or revenues.

The sales cycle for multi-study arrangements can take in excess of nine months from initial customer contact to contract execution. During this period, we may expend substantial time, effort and financial resources without realizing any revenues with respect to the potential sale. In addition, it may be difficult for us to rapidly increase our revenues through additional sales in any period, as license revenues and, when applicable, related services revenues from new customers are recognized over the applicable license term, typically one to five years.

 

13


Table of Contents

Substantially all of our computer and communications hardware is located at a single facility, the failure of which would harm our business and results of operations.

Substantially all of the computer hardware necessary to operate our hosting service, which is used by the majority of our customers, is located at our hosting facility in Houston, Texas. Our systems and operations could suffer damage or interruption from human error, fire, flood, power loss, telecommunications failure, break-ins, terrorist attacks, acts of war and similar events, and we do not presently have hosting systems in multiple locations. The occurrence of a natural disaster, an act of terrorism or other unanticipated problems at our hosting facility could result in lengthy interruptions in our service. Although we maintain back-up facilities and disaster recovery services in the event of a system failure, these may be insufficient or fail. Any failure or breach of security of our systems could damage our reputation and cause us to lose customers, which would harm our business and results of operations. Our business may be harmed if our customers and potential customers believe our service is unreliable.

Defects or errors in our software could harm our reputation, result in significant cost to us and impair our ability to market our solutions.

The software applications underlying our hosted products and services, including Medidata Rave, are inherently complex and may contain defects or errors, some of which may be material. Errors may result from our own technology or from the interface of our software with legacy systems and data which we did not develop. The risk of errors is particularly significant when a new product is first introduced or when new versions or enhancements of existing products are released.

We have from time to time found defects in our software. Although these past defects have not resulted in any litigation against us to date, we have invested significant capital, technical, managerial and other resources to investigate and correct these past defects and we have needed to divert these resources from other development efforts. In addition, material performance problems or defects in our software may arise in the future. Material defects in our software could result in a reduction in sales, delay in market acceptance of our software or credits or refunds to our customers. In addition, such defects may lead to the loss of existing customers and difficulty in attracting new customers, diversion of development resources or harm to our reputation.

Correction of defects or errors could prove to be impossible or impractical. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability may be substantial and could adversely affect our operating results.

If we are not able to reliably meet our data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and customer contracts may be terminated.

As part of our current business model, we store and manage hundreds of terabytes of data for our customers, resulting in substantial information technology infrastructure and ongoing technological challenges, which we expect to continue to increase over time. If we do not reliably meet these data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and lead to reduced revenues and increased expenses. Our hosting services are subject to service level agreements and, in the event that we fail to meet guaranteed service or performance levels, we could be subject to customer credits or termination of these customer contracts. If the cost of meeting these data storage and management requirements increases, our results of operations could be harmed.

 

14


Table of Contents

In March 2008 we acquired Fast Track, a provider of clinical trial planning solutions, and we may expand our business further through new acquisitions in the future. Any such acquisitions could disrupt our business, harm our financial condition and dilute current stockholders’ ownership interests in our company.

We intend to pursue potential acquisitions of, and investments in, businesses, technologies, or products complementary to our business and periodically engage in discussions regarding such possible acquisitions. For example, in March 2008, we acquired Fast Track.

Acquisitions, including the Fast Track acquisition, involve numerous risks, including some or all of the following:

 

   

difficulties in identifying and acquiring complementary products, technologies or businesses;

 

   

substantial cash expenditures;

 

   

incurrence of debt and contingent liabilities, some of which we may not identify at the time of acquisition;

 

   

difficulties in assimilating the operations and personnel of the acquired companies;

 

   

diversion of management’s attention away from other business concerns;

 

   

risk associated with entering markets in which we have limited or no direct experience;

 

   

potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business; and

 

   

delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses.

If we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of such acquisitions, we may incur costs in excess of what we anticipate, and management resources and attention may be diverted from other necessary or valuable activities. Any acquisition, including the Fast Track acquisition, may not result in short-term or long-term benefits to us. The failure to evaluate and execute acquisitions or investments successfully or otherwise adequately address these risks could materially harm our business and financial results. We may incorrectly judge the value or worth of an acquired company or business. In addition, our future success will depend in part on our ability to manage the growth anticipated with these acquisitions.

Furthermore, the development or expansion of our business or any acquired business or companies may require a substantial capital investment by us. We may not have these necessary funds or they might not be available to us on acceptable terms or at all. We may also seek to raise funds for an acquisition by issuing equity securities or convertible debt, as a result of which our existing stockholders may be diluted or the market price of our stock may be adversely affected.

Our revenues derived from international operations are subject to risk, including risks relating to unfavorable economic, political, legal, regulatory, tax, labor and trade conditions in the foreign countries in which we operate, that could have a material adverse effect on our results of operations.

Approximately 33%, 32% and 31% of our revenues in each of the years ended December 31, 2007, 2008 and in the three months ended March 31, 2009, respectively, were derived from international operations. We expect that international customers will continue to account for a substantial percentage of our revenues.

International operations are subject to inherent risks. These risks include:

 

   

the economic conditions in these various foreign countries and their trading partners, including conditions resulting from the disruptions in the world credit and equity markets;

 

   

political instability;

 

   

longer payment cycles;

 

15


Table of Contents
   

greater difficulty in accounts receivable collection and enforcement of agreements;

 

   

compliance with foreign laws;

 

   

changes in regulatory requirements;

 

   

fewer legal protections for intellectual property and contract rights;

 

   

tariffs or other trade barriers;

 

   

difficulties in obtaining export licenses;

 

   

staffing and managing foreign operations;

 

   

exposure to currency exchange and interest rate fluctuations;

 

   

transportation delays;

 

   

potentially adverse tax consequences; and

 

   

recently proposed changes to taxation of offshore earnings.

Moreover, with regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar and we incur operating expenses in currencies other than the U.S. dollar. For the years ended December 31, 2007 and 2008 and the three months ended March 31, 2009, approximately 5.8%, 7.7% and 9.2%, respectively, of our sales were denominated in foreign currencies. This creates a foreign currency exchange risk for us that could have a material adverse effect on our business, results of operations and financial condition.

We rely on third parties for our help desk support and technology partnerships, and our business may suffer if these relationships do not continue.

We currently outsource our help desk support functions, which involve important direct interactions with users of our products. In the event that our vendor becomes unable or unwilling to provide these services to us, we are not equipped to provide the necessary range of help desk support and service functions to our customers. We also work with companies such as Integrated Clinical Systems, Inc., Business Objects SA (SAP AG), invivodata, Inc. and SAS Institute Inc. to allow our EDC platform to interface with their products. If we are unable to develop and maintain effective relationships with a wide variety of technology partners, if companies adopt more restrictive policies with respect to, or impose unfavorable terms and conditions on, access to their products, we may not be able to continue to provide our customers with a high degree of interoperability with their existing information technology and business infrastructure, which could reduce our sales and adversely affect our business, operating results and financial condition.

We have been, and may continue to be, subject to claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party. Any such claims may require us to incur significant costs, to enter into royalty or licensing agreements or to develop or license substitute technology.

We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party. For instance, we were recently subject to a patent infringement claim by a third party as a result of which we paid $2.2 million to settle the claim. In addition, two of our ASPire to Win partners have requested us to indemnify them in connection with patent infringement lawsuits filed by a third party. We have agreed to defend and indemnify one of these partners with respect to the allegations, claims, and defenses relating to its use of Medidata Rave. While we have not been named as a defendant in either of these lawsuits, the outcome and the future impact of these lawsuits on us remain uncertain. The vendors who provide us with technology that we incorporate in our product offerings also could become subject to various infringement claims. The technologies used in our product offerings may infringe patents held by others or they may do so in the future. Any future claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our

 

16


Table of Contents

business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses, we could encounter delays in product introductions if we attempt to design around the technology at issue or attempt to find another provider of suitable alternative technology to permit us to continue offering the applicable software solution. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us may have a material adverse effect on our business, results of operations or financial condition.

We may be unable to adequately enforce or defend our ownership and use of our intellectual property and other proprietary rights.

Our success is heavily dependent upon our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license and access agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. The steps we take to protect these rights may not be adequate to prevent misappropriation of our technology by third parties or may not be adequate under the laws of some foreign countries, which may not protect our intellectual property rights to the same extent as do the laws of the United States.

Our attempts to protect our intellectual property may be challenged by others or invalidated through administrative process or litigation, and agreement terms that address non-competition are difficult to enforce in many jurisdictions and may not be enforceable in any particular case. Moreover, the degree of future protection of our intellectual property and proprietary rights is uncertain for products that are currently in the early stages of development because we cannot predict which of these products will ultimately reach the commercial market or whether the commercial versions of these products will incorporate proprietary technologies. In addition, there remains the possibility that others will “reverse engineer” our products in order to determine their method of operation and introduce competing products or that others will develop competing technology independently.

If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. The failure to adequately protect our intellectual property and other proprietary rights may have a material adverse effect on our business, results of operations or financial condition.

We could incur substantial costs resulting from product liability claims relating to our products or services or our customers’ use of our products or services.

Any failure or errors in a customer’s clinical trial caused or allegedly caused by our products or services could result in a claim for substantial damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are generally entitled to indemnification under our customer contracts against claims brought against us by third parties arising out of our customers’ use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, may divert our resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, a court may not enforce our indemnification right if the customer challenges it or the customer may not be able to fund any amounts for indemnification owed to us. In addition, our existing general liability insurance coverage may not continue to be available on reasonable terms or may not be available in amounts sufficient to cover one or more large claims, or the insurer may disclaim coverage as to any future claim.

 

17


Table of Contents

Our failure to properly protect any personal medical information we possess or are deemed to possess in connection with the conduct of clinical trials could subject us to significant liability.

Our customers use our software solutions to collect, manage and report information in connection with the conduct of clinical trials. This information may be considered personal medical information of the clinical trial participants or patients. Regulation related to the use and disclosure of personal medical information continues to expand in scope and complexity. Increased focus on individuals’ rights to confidentiality of their personal information, including personal medical information, could lead to an increase of existing and future legislative or regulatory initiatives giving direct legal remedies to individuals, including rights to damages, against entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in identifying or applying a common law theory of liability, whether or not that law affords a private right of action. Since we receive and process personal information of clinical trial participants and patients from customers utilizing our hosted solutions, there is a risk that we could be liable if there were a breach of any obligation to a protected person under contract, standard of practice or regulatory requirement. If we fail to protect personal information that is in our possession or deemed to be in our possession properly, we could be subjected to significant liability and our reputation would be harmed.

Current and future litigation against us, which may arise in the ordinary course of our business, could be costly and time consuming to defend.

We are from time to time subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes and employment claims made by our current or former employees. For example, we are currently party to a lawsuit in Belgium brought by a former employee seeking approximately $1.4 million. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, overall financial condition and operating results. Insurance may not cover such claims, may not be sufficient for one or more such claims and may not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of our performance, resulting in a reduction in the trading price of our stock.

Risks Related to Our Industry

We face significant competition, which could cause us to lose business or achieve lower margins.

The market for our clinical trial solutions is intensely competitive and characterized by rapidly changing technologies, evolving industry standards and frequent new product and service introductions and enhancements that may render existing products and services obsolete. Accordingly, our market share and margins are subject to sudden declines. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources and greater name recognition than we do. These competitors may respond more quickly than we can to new and emerging technologies and changing customer and regulatory requirements, or devote greater resources to the development, promotion and sale of their solutions. We anticipate that new competitors will enter our market in the future, as barriers to entry are relatively low in our industry. Increased competition is likely to result in pricing pressures, which could negatively impact our sales, gross margins or market share. In addition, current and potential competitors have established, and may in the future establish, relationships with vendors of complementary products, technologies or services to increase the penetration of their products in the marketplace. Even if our products and services are more effective than the products or service offerings of our competitors, current or potential customers might accept competitive products and services in lieu of purchasing our software products, services and hosted solutions. Our failure to compete effectively could materially adversely affect our business, financial condition or results of operations.

 

18


Table of Contents

We depend entirely on the clinical trial market, and a downturn in this market could cause our revenues to decrease.

Our business depends entirely on the clinical trials conducted or sponsored by pharmaceutical, biotechnology and medical device companies, CROs and other entities. Our revenues may decline as a result of conditions affecting these industries, including general economic downturns, increased consolidation, decreased competition or fewer products under development. Other developments that may affect these industries and harm our operating results include product liability claims, changes in government regulation, changes in governmental price controls or third-party reimbursement practices and changes in medical practices. Disruptions in the world credit and equity markets and the current global recession may also result in a global downturn in spending on research and development and clinical trials and may impact our customers’ access to capital and their ability to pay for our solutions. Any decrease in research and development expenditures or in the size, scope or frequency of clinical trials could materially adversely affect our business, results of operations or financial condition.

Extensive governmental regulation of the clinical trial process and our products and services could require significant compliance costs and have a material adverse effect on the demand for our solutions.

The clinical trial process is subject to extensive and strict regulation by the U.S. Food and Drug Administration and other regulatory authorities worldwide. Our software products, services and hosted solutions are also subject to state, federal and foreign regulations. Demand for our solutions is largely a function of such government regulation, which is generally increasing at the state and federal levels in the United States and elsewhere, and subject to change at any time. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the demand for our solutions. For example, proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Similarly, the requirements in the United States, the European Union and elsewhere to create a detailed registry of all clinical trials could have an impact on customers’ willingness to perform certain clinical studies. Likewise, a proposal for government-funded universal health care could subject expenditures for health care to governmental budget constraints and limits on spending. In addition, the uncertainty surrounding the possible adoption and impact on health care of any Good Clinical Practice reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved. Until the new legislative agenda is finalized and enacted, it is not possible to determine the impact of any such changes.

Modifying our software products and services to comply with changes in regulations or regulatory guidance could require us to incur substantial costs. Further, changing regulatory requirements may render our solutions obsolete or make new products or services more costly or time consuming than we currently anticipate. Failure by us, our customers, or our competitors to comply with applicable regulations could result in increased regulatory scrutiny and enforcement. If our solutions fail to comply with government regulations or guidelines, we could incur significant liability or be forced to cease offering our applicable products or services. If our solutions fail to allow our customers to comply with applicable regulations or guidelines, customers may be unwilling to use our solutions and any such non-compliance could result in the termination of or additional costs arising from contracts with our customers.

Consolidation among our customers could cause us to lose customers, decrease the market for our products and result in a reduction of our revenues.

Our customer base could decline because of industry consolidation, and we may not be able to expand sales of our products and services to new customers. Consolidation in the pharmaceutical, biotechnology and medical device industries and among CROs has accelerated in recent years, and we expect this trend to continue. In addition, new companies or organizations that result from such consolidation may decide that our products and

 

19


Table of Contents

services are no longer needed because of their own internal processes or the use of alternative systems. As these entities consolidate, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Also, if consolidation of larger current customers occurs, the combined organization may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined organization’s revenues to continue to achieve growth.

Risks Related to Our Common Stock and this Offering

There is no existing market for our common stock, and a trading market that will provide you with adequate liquidity may not develop. The price of our common stock may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common stock on the NASDAQ Global Market or otherwise. 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 will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common stock that will prevail in the trading market. The market price of our common stock may decline below the initial public offering price. The market price of our common stock may also be influenced by many factors, some of which are beyond our control, including:

 

   

our quarterly or annual earnings or those of other companies in our industry;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

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

 

   

general economic and stock market conditions, including the disruptions in the world credit and equity markets;

 

   

the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts;

 

   

future sales of our common stock; and

 

   

the other factors described in these “Risk Factors.”

In recent years, the stock market in general, and the market for Internet-related companies in particular, has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little to do with our performance, and these fluctuations could materially reduce our stock price.

In the past, some companies, including companies in our industry, have had volatile market prices for their securities and have had securities class action suits filed against them. The filing of a lawsuit against us, regardless of the outcome, could have a material adverse effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of our management’s attention and resources.

Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

Upon completion of this offering, there will be 22,353,696 shares of our common stock outstanding. The 6,300,000 shares being sold in this offering (or 7,245,000 shares, if the underwriters exercise their option to

 

20


Table of Contents

purchase additional shares from the selling stockholders in full) will be freely tradable immediately after this offering (except for shares purchased by affiliates). Of the 22,353,696 shares outstanding upon the completion of this offering, up to 477,140 shares that are not subject to a lock-up will be saleable under Rule 144 immediately upon completion of this offering, 37,490 shares that are not subject to a lock-up will be saleable under Rule 144 90 days after completion of this offering and 15,539,066 shares will be permitted to be sold upon expiration of lock-up agreements 180 days after the date of this offering (subject in some cases to volume limitations). In addition, as of June 1, 2009, we had outstanding options to purchase 2,689,112 shares of common stock that, if exercised, will result in these additional shares becoming available for sale upon expiration of any applicable lock-up agreements. Sales by these stockholders or optionholders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. We are party to a registration rights agreement with certain holders of our senior preferred stock, which provides them with rights to register under the Securities Act of 1933, as amended (Securities Act), shares of our common stock presently held by them and shares of common stock that are issued following the conversion of their shares of convertible redeemable preferred stock upon the completion of this offering. Under this agreement, holders of senior preferred stock are entitled to unlimited piggyback registration rights (other than in connection with this offering), up to two demand registrations and unlimited registrations on Form S-3. In addition, we are party to a registration rights agreement with certain former holders of shares of capital stock of Fast Track, which we acquired in March 2008. This agreement provides for unlimited piggyback registration rights (other than in connection with this offering) to former holders of shares of Fast Track who hold 10,000 or more shares of our common stock at the time we determine to register any of our securities under the Securities Act, either for our own account or for the account of others. Please refer to “Description of Capital Stock—Registration Rights” for a description of these registration rights.

We also intend to register all common stock that we may issue under our Amended and Restated 2000 Stock Option Plan, 2009 Long-Term Incentive Plan and 2009 Employee Stock Purchase Plan. Effective upon the completion of this offering, an aggregate of 5,689,112 shares of our common stock will be reserved for future issuance under these plans. Once we register these shares, which we plan to do shortly after the completion of this offering, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

You will experience immediate and substantial dilution in net tangible book value.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock. As a result, you will pay a price per share that substantially exceeds the tangible book value of our assets after subtracting liabilities. You will incur immediate and substantial dilution of $12.63 per share, based on the pro forma net tangible book value of our common stock if this offering had occurred on March 31, 2009. You will incur additional dilution if stock, restricted stock units, restricted stock, stock options, warrants or other equity awards, whether currently outstanding or subsequently granted, are exercised. See “Dilution” for a detailed description of the dilution you will incur in connection with your investment in our common stock.

We have not determined any specific use for a significant portion of the proceeds from this offering and we may use the proceeds in ways with which you may not agree.

Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that may not improve our financial condition and results of operations or increase our stock price. See “Use of Proceeds.”

 

21


Table of Contents

A limited number of stockholders will have the ability to influence the outcome of director elections and other matters requiring stockholder approval.

After this offering, our directors, executive officers and their affiliated entities will beneficially own 52.5% of our outstanding common stock (or 49.1% if the underwriters’ over-allotment option is exercised in full). These stockholders, if they act together, could exert substantial influence over matters requiring approval by our stockholders, including the election of directors, the amendment of our certificate of incorporation and bylaws and the approval of mergers or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by other stockholders, including those who purchase shares in this offering.

Provisions of Delaware law and our organizational documents may discourage takeovers and business combinations that our stockholders may consider in their best interests, which could negatively affect our stock price.

Provisions of Delaware law and our fourth amended and restated certificate of incorporation and amended and restated bylaws to be in effect upon completion of this offering may have the effect of delaying or preventing a change in control of our company or deterring tender offers for our common stock that other stockholders may consider in their best interests.

Our certificate of incorporation to be in effect upon completion of this offering authorizes us to issue up to 5,000,000 shares of preferred stock in one or more different series with terms to be fixed by our board of directors. Stockholder approval is not necessary to issue preferred stock in this manner. Issuance of these shares of preferred stock could have the effect of making it more difficult and more expensive for a person or group to acquire control of us, and could effectively be used as an anti-takeover device. Following the closing of this offering, no shares of our preferred stock will be outstanding.

Our bylaws to be in effect upon completion of this offering provide for an advance notice procedure for stockholders to nominate director candidates for election or to bring business before an annual meeting of stockholders, including proposed nominations of persons for election to our board of directors, and require that special meetings of stockholders be called only by our chairman of the board, chief executive officer, president or the board pursuant to a resolution adopted by a majority of the board.

The anti-takeover provisions of Delaware law and provisions in our organizational documents may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging takeover attempts in the future.

Being a public company will increase our administrative workload and expenses.

Prior to this offering, we operated as a private company. As a public company with common stock listed on the NASDAQ Global Market, we will need to comply with new laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002, related regulations of the Securities and Exchange Commission, or SEC, and the requirements of the NASDAQ Global Market, which we are not required to comply with as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management. The hiring of additional personnel to handle these responsibilities, including in our accounting and financial reporting departments, will increase our operating costs. We will need to:

 

   

institute a more comprehensive compliance function;

 

22


Table of Contents
   

design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;

 

   

prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

   

involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

   

enhance our investor relations function.

In addition, we expect that being a public company and subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit and compensation committees, and qualified executive officers.

We will be exposed to risks relating to evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act of 2002.

We are in the process of evaluating our internal controls systems to allow management to report on, and our independent registered public accounting firm to audit, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We could be required to comply with Section 404 as early as the filing of our Annual Report on Form 10-K for our fiscal year ending December 31, 2010. However, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations.

Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board rules and regulations that remain unremediated. As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that do, or are reasonably likely to, materially affect internal controls over financial reporting. See “Risk Factors—Risks Related to Our Business—We currently have material weaknesses in our internal controls over financial reporting relating to our revenue recognition and expense cut-off procedures, which we have not fully remediated. If we fail to remedy our material weaknesses or otherwise maintain effective internal controls over our financial reporting, the accuracy and timing of our financial reporting may be adversely affected.” We are aware that we will need, and we intend, to hire additional accounting personnel in order to comply with the rules and regulations that will apply to us as a public company. If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities such as the SEC or the NASDAQ Global Market. Additionally, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements and our stock price may be adversely affected. If we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets, and our stock price may decline.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, covenants in our outstanding senior secured credit facility will restrict our ability to pay dividends in the event that we do not repay the senior secured credit facility with proceeds from this offering. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Shares of our common stock may depreciate in value or may not appreciate in value.

 

23


Table of Contents

CAUTIONARY STATEMENT

REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, the information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of management’s goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “appears,” “projects” and similar expressions, as well as statements in the future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Important factors that could cause such differences include, but are not limited to the factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

In light of these risks, uncertainties and assumptions, our actual results of operations and execution of our business strategy could differ materially from those expressed in, or implied by, the forward-looking statements, and you should not place undue reliance upon them. In addition, past financial and/or operating performance is not necessarily a reliable indicator of future performance and you should not use our historical performance to anticipate results or future period trends. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition.

Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this prospectus.

INDUSTRY INFORMATION

Information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from independent industry analysis, third-party sources (including industry publications, surveys and forecasts and our internal research) and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us derived from such data and our knowledge of such industry and markets, which we believe to be reasonable. Any projections and estimates of our future performance and the future performance of the industries 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, and may constitute “forward-looking statements.” See “Cautionary Statement Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

24


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $64.2 million based on an assumed initial public offering price of $12.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses of approximately $6.1 million, of which approximately $4.1 million was paid as of March 31, 2009 and $2.0 million is payable by us in connection with this offering. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders that may be sold if the underwriters’ option to purchase additional shares from the selling stockholders is exercised. We expect to use the net proceeds for general corporate purposes, including working capital, capital expenditures and possible acquisitions. We may also use these net proceeds to repay all or a portion of our senior secured credit facility in the aggregate principal amount of $14.6 million (as of March 31, 2009), plus accrued interest and any fees relating to such prepayment, which bears interest at a rate equal to the greater of 4.5% or the lender’s most recently announced prime rate (even if it is not the lender’s lowest rate) plus 2.25% (currently 6.75% per year) and matures in September 2013, in the event that we are unable to restructure the credit facility or obtain alternative debt financing on more favorable terms.

The debt under our credit facility was incurred in September 2008, and the proceeds were used for working capital and to repay outstanding principal plus accrued interest in an amount equal to approximately $11.0 million under promissory notes payable to Stonehenge Capital Fund New York, LLC, which bore interest at a rate equal to 10% per year and had a maturity date of January 31, 2011.

Although we continually evaluate acquisition opportunities, we have not entered into any binding commitments or agreements with respect to future acquisitions and we have no current plans, proposals or other arrangements regarding future acquisitions.

Pending use of the net proceeds, we will invest the net proceeds of this offering in interest-bearing, short-term, investment grade, highly liquid securities.

 

25


Table of Contents

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We expect to pay accumulated accrued dividends on our convertible redeemable preferred stock of approximately $2.2 million (as of March 31, 2009) in cash upon completion of this offering. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant.

 

26


Table of Contents

CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 31, 2009:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the conversion of all of our outstanding preferred stock into 9,014,658 shares of our common stock and payment of approximately $2.2 million of accumulated accrued dividends on existing preferred stock from available cash on hand upon the completion of this offering; and

 

   

on a pro forma as adjusted basis to further reflect our sale of 6,300,000 shares of our common stock at a price of $12.00 per share, the midpoint of the range set forth on the cover page of this prospectus; and our use of proceeds, net of estimated underwriting discounts and commissions and estimated offering expenses of approximately $6.1 million, of which approximately $4.1 million was paid and reflected in our financial results as of March 31, 2009 and $2.0 million that is payable by us in connection with this offering.

This table should be read in conjunction with our audited consolidated financial statements, including the notes thereto, “Use of Proceeds,” “Selected Consolidated Financial Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all included elsewhere in this prospectus.

 

     As of March 31, 2009  
     Actual     Pro
Forma
    Pro Forma
As Adjusted
 
    

(in thousands, except share

and per share amounts)

 

Cash and cash equivalents

   $ 12,977     $ 10,805     $ 79,119  
                        

Capital lease obligations, including current portion

   $ 6,753     $ 6,753     $ 6,753  

Long-term debt, including current portion(1)

     14,025       14,025       14,025  

Convertible redeemable preferred stock:

      

Series B, $0.01 par value, 1,335,807 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted(2)

     1,109       —         —    

Series C, $0.01 par value, 180,689 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted(2)

     181      
—  
 
    —    

Series D, $0.01 par value, 2,752,333 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted(2)

     12,080      
—  
 
    —    

Stockholders’ (deficit) equity:

      

Convertible preferred stock, Series A, $0.01 par value, 2,385,000 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted(2)

     24      
—  
 
    —    

Common stock, $0.01 par value, 25,000,000 shares authorized, 7,535,849 shares issued and 7,039,038 shares outstanding, actual; 25,000,000 shares authorized, 16,550,507 shares issued and 16,053,696 shares outstanding, pro forma; 100,000,000 shares authorized, 22,850,507 shares issued and 22,353,696 shares outstanding, pro forma as adjusted(2)

     75       165       228  

Additional paid-in capital

     23,314       34,446       98,587  

Treasury stock, 496,811 shares

     (6,000 )     (6,000 )     (6,000 )

Accumulated other comprehensive income

     (498 )     (498 )     (498 )

Accumulated deficit

     (90,849 )     (90,849 )     (90,849 )
                        

Total stockholders’ (deficit) equity

     (73,934 )     (62,736 )     1,468  
                        

Total capitalization

   $ (39,786 )   $ (41,958 )   $ 22,246  
                        

 

27


Table of Contents

 

(1) Does not reflect the potential paydown of our $14.6 million (as of March 31, 2009) senior secured credit facility. See “Use of Proceeds.”

 

(2) The number of shares of capital stock to be authorized, issued and outstanding after this offering is based on 7,039,038 shares of common stock outstanding as of March 31, 2009 and the issuance of 9,014,658 shares of common stock upon the automatic conversion of all of the outstanding shares of our preferred stock upon completion of this offering. In addition, the number of shares of common stock to be outstanding after this offering assumes that accumulated accrued dividends on the convertible preferred stock of approximately $2.2 million (as of March 31, 2009) will be paid from cash on hand upon completion of this offering, as elected by the holders of our senior preferred stock. The number of shares of capital stock to be authorized, issued and outstanding after this offering:

 

   

excludes 2,624,112 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2009 at a weighted average exercise price of $7.32 per share;

 

   

excludes 2,500,000 shares of common stock reserved for future grants or awards from time to time under our 2009 Long-Term Incentive Plan (including grants and awards to our executive officers and certain other employees of approximately 256,410 shares of restricted stock and options to purchase approximately 436,590 shares of common stock that we anticipate making upon the effectiveness of the registration statement of which this prospectus is a part assuming an offering price of $12.00 per share, the midpoint of the range set forth on the cover page of this prospectus); and

 

   

excludes 500,000 additional shares of common stock to be available for future grant under our 2009 Employee Stock Purchase Plan.

 

28


Table of Contents

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after giving effect to this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock. The information provided below assumes conversion of all our preferred stock into common stock.

Our net tangible book value as of March 31, 2009 was approximately $(89.5) million, or approximately $(12.72) per share of common stock.

We have calculated this amount by:

 

   

subtracting our total liabilities and convertible redeemable preferred stock from our total tangible assets; and

 

   

then dividing the difference by the number of shares of common stock outstanding.

On a pro forma as adjusted basis, after giving effect to the conversion of 6,653,829 shares of our convertible preferred stock into 9,014,658 shares of our common stock, assuming that the accumulated accrued dividends on the convertible redeemable preferred stock of approximately $2.2 million (as of March 31, 2009) will be paid from cash on hand upon completion of this offering, as elected by the holders of our senior preferred stock, and the sale of 6,300,000 shares of common stock in this offering at the initial public offering price of $12.00 per share, the midpoint of the price range shown on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses of approximately $6.1 million, of which approximately $4.1 million was paid and reflected in the net tangible book value as of March 31, 2009 and $2.0 million is payable by us in connection with this offering, our adjusted net tangible book value as of March 31, 2009 would have been approximately $(14.1) million, or approximately $(0.63) per share. This represents an immediate increase in pro forma net tangible book value from this offering of $4.25 per share to our existing stockholders and an immediate dilution of $12.63 per share to new investors purchasing common stock in this offering.

The following table illustrates this dilution to new investors on a per share basis:

 

Assumed initial public offering price

     $ 12.00  

Pro forma net tangible book value per share as of March 31, 2009

   $ (4.88 )  

Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering

     4.25    
          

Pro forma net tangible book value per share after this offering

       (0.63 )
          

Dilution in pro forma net tangible book value per share to investors in this offering

     $ 12.63  
          

The following table summarizes on the basis described above, as of March 31, 2009, the difference between the number of shares of common stock purchased from us, the total cash consideration paid to us, and the average price per share paid by our existing stockholders since our inception and by new investors in this offering, at an assumed initial public offering price of $12.00 per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses that are payable by us:

 

     Shares Purchased(1)     Total Consideration     Average
Price
per Share
     Number    Percent     Amount    Percent    

Existing stockholders

   16,053,696    71.8 %   $ 29,977,346    28.4 %   $ 1.87

New public investors

   6,300,000    28.2 %     75,600,000    71.6 %   $ 12.00
                          

Total

   22,353,696    100.0 %   $ 105,577,346    100.0 %  
                          

 

29


Table of Contents

 

(1) If the underwriters exercise their over-allotment option in full, the percentage of shares of common stock held by existing stockholders will decrease to 15,108,696, or 67.6% of the total number of shares of our common stock outstanding after this offering, and the number of shares of our common stock held by new public investors will increase to 7,245,000, or 32.4% of the total shares of our common stock outstanding after this offering. The tables above assume no exercise of stock options outstanding on March 31, 2009. As of March 31, 2009, there were outstanding stock options to purchase 2,624,112 shares of common stock, at a weighted average exercise price of $7.32 per share, subject to certain vesting requirements. To the extent these stock options are exercised after consummation of this offering, there will be further dilution to new investors.

 

30


Table of Contents

SELECTED CONSOLIDATED FINANCIAL INFORMATION

Our selected consolidated financial information presented for each of the years ended December 31, 2006, 2007 and 2008 and as of December 31, 2007 and 2008 was derived from our audited consolidated financial statements (as revised, see Note 2, “Restatement of Consolidated Financial Statements”, to our consolidated financial statements), which are included elsewhere in this prospectus. Our selected financial information presented for each of the years ended December 31, 2004 and 2005 and as of December 31, 2004, 2005 and 2006 was derived from our consolidated financial statements, which are not included in this prospectus and have been subsequently revised in conjunction with the restatement of our consolidated financial statements as noted above. Our selected consolidated financial information presented for the three months ended March 31, 2008 (as subsequently revised in conjunction with the restatement as noted above, see Note 2, “Restatement of Consolidated Financial Statements”, to our unaudited condensed consolidated interim financial statements) and 2009 and as of March 31, 2009 were derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.

The information contained in this table should also be read in conjunction with “Use of Proceeds,” “Capitalization,” “Unaudited Pro Forma Statement of Operations,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and accompanying notes thereto included elsewhere in this prospectus.

Consolidated Statement of Operations Data

 

    Year ended December 31,     Three Months Ended
March 31,
    2004     2005     2006     2007     2008(1)     2008(1)     2009
    (in thousands, except share and per share amounts)

Revenues:

             

Application services

  $ 3,226     $ 13,069     $ 25,406     $ 44,592     $ 73,820     $ 14,821     $ 23,665

Professional services

    4,304       3,643       10,851       18,391       31,904       6,158       9,937
                                                     

Total revenues

    7,530       16,712       36,257       62,983       105,724       20,979       33,602

Costs of revenues:(2)

             

Application services(3)

    1,074       2,059       7,288       13,170       19,647       4,475       5,670

Professional services

    4,878       14,459       20,462       33,035       30,801       8,194       6,613
                                                     

Total cost of revenues

    5,952       16,518       27,750       46,205       50,448       12,669       12,283

Gross profit

    1,578       194       8,507       16,778       55,276       8,310       21,319

Operating costs and expenses:(2)

             

Research and development(4)

    2,859       4,104       5,905       10,716       19,340       4,872       5,497

Selling and marketing(5)

    3,829       7,599       12,768       15,484       24,190       5,463       6,713

General and administrative

    4,068       4,574       8,335       13,361       27,474       5,807       6,821
                                                     

Total operating costs and expenses

    10,756       16,277       27,008       39,561       71,004       16,142       19,031

(Loss) income from operations

    (9,178 )     (16,083 )     (18,501 )     (22,783 )     (15,728 )     (7,832 )     2,288

Interest and other expenses (income), net

    31       38       195       364       1,624       563       412
                                                     

(Loss) income before provision for income taxes

    (9,209 )     (16,121 )     (18,696 )     (23,147 )     (17,352 )     (8,395 )     1,876

Provision for income taxes(6)

    23       110       306       515       920       165       182
                                                     

Net (loss) income

  $ (9,232 )   $ (16,231 )   $ (19,002 )   $ (23,662 )   $ (18,272 )   $ (8,560 )   $ 1,694
                                                     

(Loss) earnings per share:(7)

             

Basic

  $ (1.57 )   $ (2.73 )   $ (3.10 )   $ (3.78 )   $ (2.76 )   $ (1.40 )   $ 0.22
                                                     

Diluted

  $ (1.57 )   $ (2.73 )   $ (3.10 )   $ (3.78 )   $ (2.76 )   $ (1.40 )   $ 0.10
                                                     

Weighted average common shares outstanding:(7)

             

Basic

    6,056,422       6,135,341       6,296,830       6,384,557       6,793,596       6,218,320       7,036,403

Diluted

    6,056,422       6,135,341       6,296,830       6,384,557       6,793,596       6,218,320       17,423,430

Pro forma:(8)

             

Pro forma (loss) earnings per share:

             

Basic

          $ (1.16 )     $ 0.11
                       

Diluted

          $ (1.16 )     $ 0.10
                       

Pro forma weighted average common shares outstanding:

             

Basic

            15,808,254         16,051,061

Diluted

            15,808,254         17,423,430

 

31


Table of Contents
    Year Ended December 31,     Three Months Ended
March 31,
 
            2004   2005     2006     2007     2008(1)     2008(1)     2009  
    (in thousands)  

Stock-based compensation expense and depreciation and amortization of intangible assets included in cost of revenues and operating costs and expenses are as follows:

             

Stock-based compensation expense

             

Cost of revenues

    $          —   $ 178     $ 108     $ 172     $ 291     $ 57     $ 91  

Research and development

        27       89       183       503       71       163  

Sales and marketing

        69       304       448       640       138       248  

General and administrative

        118       218       491       1,763       335       501  
                                                     

Total stock-based compensation

  $   $ 392     $ 719     $ 1,294     $ 3,197     $ 601     $ 1,003  
                                                     

Depreciation

             

Cost of revenues

  $   $ 563     $ 1,237     $ 3,605     $ 5,941     $ 1,384     $ 1,629  

Research and development

        136       289       463       650       155       194  

Sales and marketing

        91       202       243       383       89       118  

General and administrative

    347     104       228       305       461       98       152  
                                                     

Total depreciation

    347     894       1,956       4,616       7,435       1,726       2,093  
                                                     

Amortization of intangible assets(4)

             

Cost of revenues

                          1,191       64       421  

Sales and marketing

                          79       4       36  
                                                     

Total amortization of intangible assets

                          1,270       68       457  
                                                     

Total depreciation and amortization of intangible assets

  $ 347   $ 894     $ 1,956     $ 4,616     $ 8,705     $ 1,794     $ 2,550  
                                                     
Consolidated Balance Sheet Data  
        As of December 31,     As of
March 31,
 
        2004     2005     2006     2007     2008     2009  
        (in thousands)  

Cash and cash equivalents

  $ 7,595     $ 6,450     $ 7,016     $ 7,746     $ 9,784     $ 12,977  

Total current assets

    13,149       13,352       19,073       29,556       44,565       50,209  

Restricted cash

    306       305       305       387       545       532  

Total assets

    14,824       16,540       25,121       44,479       75,190       79,582  

Total deferred revenue

    11,253       24,617       42,337       75,635       101,621       107,291  

Total capital lease obligations

    289       507       2,281       8,527       7,060       6,753  

Total long-term debt

    1,500       4,000       3,514       10,781       14,366       14,025  

Convertible redeemable preferred stock

    11,252       11,751       12,249       12,747       13,245       13,370  

Convertible preferred stock

    24       24       24       24       24       24  

Stockholders’ deficit

    (13,706 )     (30,638 )     (49,189 )     (77,888 )     (76,400 )     (73,934 )

Notes to Selected Consolidated Financial Information:

 

(1) On March 17, 2008, we acquired Fast Track, a provider of clinical trial planning solutions. Our results of operations for the three months ended March 31, 2008 and for subsequent periods include the operations of Fast Track since the date of acquisition. Please refer to “Unaudited Pro Forma Statement of Operations” for the pro forma effects of our acquisition of Fast Track.

 

(2)

Prior to January 1, 2006, we accounted for our stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25, and related interpretations. Under APB No. 25, compensation expense of fixed

 

32


Table of Contents
 

stock options is based on the difference, if any, on the date of the grant between the fair value of our stock and the exercise price of the option. Compensation expense is recognized on a straight-line basis over the requisite service period.

On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS No. 123(R), requiring us to recognize expense related to the fair value of our stock-based compensation awards. We elected the modified prospective transition method as permitted by SFAS No. 123(R). Under this transition method, stock-based compensation expense for the fiscal year ended December 31, 2006, includes compensation expense for all stock based compensation awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123, and compensation expense for all stock based compensation awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

 

(3) In 2006, it was claimed that certain applications offered to our customers potentially infringed on intellectual property rights held by a third party. As a result of negotiations with the third party, we entered into a license and settlement agreement in June 2007, pursuant to which we licensed the intellectual property held by the third party for use in our future sales to customers and settled all past infringement claims. We paid a settlement amount of $2.2 million to the third party in 2007. Such amount was recorded in cost of revenues under application services for the year ended December 31, 2006 and in accrued expenses on the consolidated balance sheet as of December 31, 2006.

 

(4) We determined that technological feasibility had not been established for certain in-process research and development projects acquired from Fast Track. These projects were written off, resulting in $0.7 million of additional research and development expenses included in the consolidated statement of operations data for the three months ended March 31, 2008 and for the year ended December 31, 2008. This write-off is not included in amortization of intangible assets in the consolidated statement of operations.

 

(5) In 2006, a former employee made a claim seeking compensation of approximately $1.6 million in relation to the termination of her employment. Subsequently, the claim was reduced to approximately $1.4 million as of December 31, 2008. We recorded approximately $0.6 million in sales and marketing expenses during the year ended December 31, 2006 related to this matter. A hearing was held in November 2008 and the court rendered its decision on January 15, 2009, which awarded approximately $0.1 million to the plaintiff. While we believe this decision was favorable to us, it may be appealed by the plaintiff.

 

(6) For the years ended December 31, 2004 to 2008 and for the three months ended March 31, 2009, we did not realize an income tax benefit for available net operating loss carryforwards. As of December 31, 2008, we had approximately $83.7 million of federal net operating loss carryforwards available to offset future taxable income expiring from 2019 through 2028. We also had net operating loss carryforwards for state income tax purposes of approximately $106.0 million available to offset future state taxable income expiring from 2009 to 2028.

 

(7) Basic and diluted net loss per share amounts and basic and diluted weighted average common shares outstanding have been adjusted to reflect a two-for-one stock split effective on August 3, 2004.

 

(8) The pro forma information represents the pro forma effect of converting outstanding shares of convertible preferred stock into common stock at the applicable conversion ratio upon the completion of this offering, as if it had occurred on January 1, 2008 for the basic and diluted net loss per share presented on the consolidated statement of operations data for the year ended December 31, 2008 and for the three months ended March 31, 2009.

 

33


Table of Contents

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

On March 17, 2008, we acquired Fast Track for a purchase price of approximately $18.1 million. The following unaudited pro forma statement of operations for the year ended December 31, 2008 gives pro forma effect to the acquisition of Fast Track as if it had occurred on January 1, 2008.

The unaudited pro forma statement of operations is based on estimates and assumptions. These estimates and assumptions have been made solely for purposes of developing this pro forma information. Unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved if the acquisition of Fast Track had been consummated as of the date indicated, nor is it necessarily indicative of the results of future operations. The pro forma financial information does not give effect to any cost savings or restructuring and integration costs that may result from the integration of Fast Track’s business.

In connection with our purchase of Fast Track, we issued 864,440 shares of our common stock in exchange for all of Fast Track’s existing preferred stock and common stock as well as 25,242 shares of common stock reserved for the exercise of outstanding vested employee stock options, 20,004 shares of common stock reserved for the exercise of outstanding unvested employee stock options and 444 shares of common stock reserved for the exercise of outstanding warrants.

The Fast Track purchase price has been allocated based on the fair market value of the acquired assets and liabilities. See Note 1 to the Notes to Unaudited Pro Forma Statement of Operations.

 

34


Table of Contents

PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2008

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

     Medidata
Solutions,
Inc.
January 1
to
December 31,
2008
(Historical)*
    Fast Track
Systems,
Inc.
January 1
to March 17,
2008
(Historical)
    Pro Forma
Adjustments
for Fast
Track
Acquisition
(1)(2(a))
         Pro Forma
Combined
     

Revenues:

             

Application services

   $ 73,820     $ 1,370     $ (118 )   2(b)    $ 75,072    

Professional services

     31,904       —              31,904    
                                     

Total revenues

     105,724       1,370       (118 )        106,976    

Cost of revenues:

             

Application services

     19,647       256       351     2(c)      20,254    

Professional services

     30,801       —              30,801    
                                     

Total cost of revenues

     50,448       256       351          51,055    

Gross profit

     55,276       1,114       (469 )        55,921    

Operating costs and expenses:

             

Research and development

     19,340       225            19,565    

Sales and marketing

     24,190       364       30     2(c)      24,584    

General and administrative

     27,474       959            28,433    
                                     

Total operating costs and expenses

     71,004       1,548       30          72,582    
                                     

Operating loss

     (15,728 )     (434 )     (499 )        (16,661 )  

Interest and other expenses (income), net

     1,624       (9 )          1,615    
                                     

Loss before income taxes

     (17,352 )     (425 )     (499 )        (18,276 )  

Provision for income taxes

     920       11       —       2(d)      931    
                                     

Net loss

     (18,272 )     (436 )     (499 )        (19,207 )  

Preferred stock dividends and accretion

     498       81       (81 )   2(e)      498    
                                     

Net loss available to common stockholders

   $ (18,770 )   $ (517 )   $ (418 )      $ (19,705 )  
                                     

Basic and diluted net loss per share

   $ (2.76 )          $ (2.83 )  
                         

Weighted average basic and diluted common shares outstanding

     6,793,596              6,973,589     2(f)

 

* As restated, see Note 2, “Restatement of Consolidated Financial Statements”, to our consolidated financial statements for the years ended December 31, 2006, 2007 and 2008, which are included elsewhere in this prospectus.

See notes to unaudited pro forma statement of operations.

 

35


Table of Contents

NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2008

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

(1) ACQUISITION OF FAST TRACK

The purchase price of Fast Track was based on a negotiated fair market value of Fast Track as of the acquisition date. The fair market value of our common stock issued to Fast Track shareholders of $19.66 was based on a valuation of our common stock performed by Financial Strategies Consulting Group LLC, or FSCG, an independent third-party valuation specialist, as of March 2008. FSCG used the market-comparable approach and the income approach to estimate our aggregate enterprise value at the valuation date (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Stock-Based Compensation—Significant Factors, Assumptions and Methodologies Used in Determining the Fair Value of our Capital Stock”). The determination of fair market value of our common stock requires us to make judgments that are complex and inherently subjective.

The following table sets forth the components of the purchase price:

 

Fair market value of common stock issued (864,440 shares)

   $ 16,995

Fair market value of stock options and warrants exchanged (25,242 and 444 shares underlying the options and warrants, respectively)

     459

Transaction costs

     625
      

Total purchase price

   $ 18,079
      

The issuance of 864,440 shares of our common stock in exchange for all Fast Track’s existing preferred stock and common stock held by Fast Track employees and stockholders was based on the estimated fair market value of our common stock of $19.66 on the date of the acquisition.

The fair market value of the 25,242 shares of fully vested exchanged stock options and 20,004 shares of unvested exchanged stock options issued in connection with the acquisition was estimated using the Black-Scholes pricing model utilizing the following weighted-average assumptions:

 

Risk-free interest rate

   2.61 %

Expected life

   2.4  years

Expected volatility

   59 %

Expected dividend yield

   —    

As a result of the valuation, the fair market value of $370 associated with the 20,004 shares of unvested exchanged stock options will be recorded into stock-based compensation expense over the stock option vesting term, which is approximately one year subsequent to the acquisition.

The fair market value of the 444 shares of exchanged warrants was also estimated using the Black-Scholes pricing model and was not material.

 

36


Table of Contents

The allocation of the purchase price paid in connection with our acquisition of Fast Track among the assets acquired and liabilities assumed is based on their fair market value. The following table provides the allocation of the purchase price based upon Fast Track’s unaudited balance sheet as of March 17, 2008, the date of the acquisition:

 

Assets acquired

  

Cash and cash equivalents and other current assets

   $ 1,827  

Restricted cash

     158  

Furniture, fixture and equipment

     232  

Intangible assets

     8,200  

Goodwill

     9,799  
        

Total assets acquired

   $ 20,216  
        

Liabilities assumed

  

Accounts payable and accrued expenses

     (798 )

Deferred revenue

     (1,338 )

Other long-term liabilities

     (1 )
        

Net assets acquired

   $ 18,079  
        

In accordance with Statement of Financial Accounting Standards, or SFAS, No. 109, Accounting for Income Taxes, we have provided for deferred tax assets of $3,470 for the difference between the currently estimated book and tax basis of the net assets acquired. Based on our lack of a history of profits and uncertainty in regards to future profitability, we determined that it was more likely than not that such tax benefit would not be realized and therefore a valuation allowance of $3,470 was established to fully offset such net deferred tax assets. In addition, we did not recognize a deferred tax asset relating to the future tax distribution that will arise when the Fast Track employee exchanged options are exercised. When such exercises occur and a tax deduction is ultimately realized, we will recognize such benefit as an adjustment to income tax expense in accordance with SFAS No. 141(R), Business Combinations, which was adopted by us on January 1, 2009.

 

(2) PRO FORMA FAST TRACK ACQUISITION ADJUSTMENTS

 

  (a) Adjustment to calculate goodwill and other intangible assets and to allocate the purchase price to the fair value of Fast Track net assets acquired:

 

Common stock issued (see Note 1)

   $ 16,995

Common stock reserved for stock options and warrants exchanged (see Note 1)

     459

Transaction costs

     625
      

Total purchase price

   $ 18,079
      

Purchase price is allocated as follows:

  

Goodwill

   $ 9,799

Intangible assets

     8,200

Net assets assumed

     80
      

Total purchase price

   $ 18,079
      

 

  (b)

We estimated the fair value of the legal performance obligation associated with acquired deferred revenue in accordance with Emerging Issues Task Force Issue No. 01-3, Accounting in a Business Combination for Deferred Revenue of an Acquiree. We concluded that the value of the legal performance obligation represents the direct costs to fulfill such obligation plus an expected profit margin. Our valuation of the acquired deferred revenue resulted in a 38% write-down of the deferred revenue balance as of the date of the acquisition. The performance obligation associated with the acquired deferred revenue has a duration of one year, thus this write-down has been reflected on a

 

37


Table of Contents
 

pro forma basis as of January 1, 2008, resulting an adjustment to application services revenues of $118 (net of historical impact of $664) in the pro forma statement of operations for the year ended December 31, 2008.

 

  (c) Adjustment to historical amortization of intangible assets expense to reflect the incremental expense associated with the purchase price allocation and estimated useful lives:

 

     Purchase
Allocation
   Estimated
Useful
Lives (Years)
   Year Ended
December 31,
2008

Technology

   $ 2,400    5.00    $ 480

Database

     1,900    5.00      380

Customer relationships

     1,600    5.00      110

Customer contracts

     1,600    3.00      681

Research and development

     700    None      —  
                
   $ 8,200         1,651
            

Historical expense

           1,270
            

Incremental pro forma expense for the year ended December 31, 2008

         $ 381
            

Cost of revenues-application services

         $ 351

Sales and marketing

           30
            

Total

         $ 381
            

Of the $8,200 of acquired intangibles, $700 was assigned to in-process research and development projects. Subsequent to the date of the acquisition, we determined that technological feasibility had not been established for any of these projects, and as a result, these projects were written off. This write-off is included as research and development expense in Medidata’s historical results of operations for the year ended December 31, 2008.

The acquired technology and database will be amortized on a straight-line basis over the estimated useful life of five years. The customer relationships and customer contracts will be amortized using an accelerated method which reflects the pattern in which the economic benefits derived from the related intangible assets are consumed or utilized. Amortization of customer relationships and customer contracts over their remaining useful lives as of December 31, 2008 is as follows:

 

Years ending December 31,

  

2009

   $ 967

2010

     599

2011

     517

2012

     448

2013

     80
      
   $ 2,611
      

 

  (d) Pro forma provision for income taxes represents only foreign, state and local income taxes imposed on a pro forma combined company basis, as we do not expect to pay U.S. income taxes on our net loss. We have not reflected a tax benefit on such loss as it is not assured that a tax benefit would be realized.

 

  (e) Pro forma adjustments for preferred stock dividends and accretion represent the elimination of Fast Track’s historical preferred stock dividends, as all of Fast Track’s preferred stock was exchanged for Medidata’s common stock in connection with the acquisition.

 

  (f) Pro forma combined weighted average basic and diluted common shares outstanding were based on Medidata’s historical weighted average basic and diluted common shares outstanding with the pro forma effect of the issuance of 864,440 shares of common stock in connection with the acquisition of Fast Track as if it had occurred on January 1, 2008.

 

38


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations. You should read this discussion and analysis together with our consolidated financial statements and notes to those consolidated financial statements included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those described under the caption “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading global provider of hosted clinical development solutions that enhance the efficiency of our customers’ clinical development processes and optimize their research and development investments. Our solutions allow our customers to achieve clinical results more efficiently and effectively by streamlining the design, planning and management of key aspects of the clinical development process, including protocol development, CRO negotiation, investigator contracting, the capture and management of clinical trial data and the analysis and reporting of that data on a worldwide basis.

The demand for electronic clinical solutions, such as those provided by Medidata, has been driven by the increasing complexity and cost associated with paper-based trials and inefficiencies with early generation EDC solutions. Paper-based trials may delay the clinical development process, impair data quality and prevent real-time decision making, while traditional EDC solutions have faced challenges with integration, site requirements, customization and scalability.

We have grown our revenues significantly since inception by expanding our customer base, increasing penetration with existing customers, enhancing our products and services and growing our indirect channel. In order to achieve and sustain our growth objectives, we have and will continue to invest in key areas, including: new personnel, particularly in direct domestic and international sales activities; resources to support our product development, including product functionality and platform; marketing programs to build brand awareness; and infrastructure to support growth.

We derive a majority of our application services revenues through multi-study arrangements for a pre-determined number of studies. We also offer our application services on a single-study basis that allows customers to use our solution for a limited number of studies or to evaluate it prior to committing to multi-study arrangements. We invest heavily in training our Medidata Rave customers, their investigators and other third parties to configure clinical trials independently. We believe this knowledge transfer accelerates customer adoption of our solutions.

We use a number of metrics to evaluate and manage our business. These metrics include customer growth, customer retention rate, revenues from lost customers, geographic contribution, and backlog.

Our customer base has grown from 33 at January 1, 2006 to 153 at March 31, 2009. Our relationships with some of these customers include multiple divisions and business units at various domestic and international locations. We generate revenues from sales to new customers as well as sales and renewals from our existing customers. Our global direct sales organization represents our primary source of sales, with an increasing number of sales generated through our CRO relationships. Our customer retention rate was 81.8%, 92.0% and 87.0% in 2006, 2007 and 2008, respectively. We did not lose any customers during the first three months of 2009. We calculate customer retention based upon the number of customers that existed both at the beginning and end of the relevant period. Revenues from lost customers accounted for 3.3%, 1.0% and 2.9% of total prior year revenues in 2006, 2007 and 2008, respectively. To calculate the impact of customers lost during the year, we consider the revenues recognized from lost customers during the most recent prior fiscal year as a percentage of total company revenues from the same period. We believe revenue from lost customers coupled with customer

 

39


Table of Contents

retention rate gives the best sense of volume and scale of customer loss and retention. Our presentation of customer retention and revenues from lost customers may differ from other companies in our industry.

We manage our business as one reportable segment. Historically, we have generated most of our revenues from sales to customers located in the United States. However, revenues generated from customers located in Europe and Asia (including Australia) represent a significant portion of overall revenues. Revenues generated from customers located in Europe represented approximately 15%, 20%, 21% and 21% of total revenues in 2006, 2007, 2008 and the three months ended March 31, 2009, respectively. Revenues generated from customers in Asia represented approximately 12%, 13%, 10% and 10% of total revenues in 2006, 2007, 2008 and the three months ended March 31, 2009, respectively. We expect sales from customers in Europe and Asia to continue to represent a significant portion of total sales as we continue to serve existing and new customers in these markets.

Our backlog is primarily associated with application services and represents the total future contract value of outstanding, multi-study and single-study arrangements, billed and unbilled, at a point in time. Thus, our backlog includes deferred revenue. Revenue for any given period is a function of revenue recognized from the beginning of period backlog, contract renewals, and new customer contracts. For this reason, backlog at the beginning of any period is not necessarily indicative of long-term future performance. We monitor as an annual metric the amount of revenues expected to be recognized from backlog over the current fiscal year, or full year backlog. As of January 1, 2009, we had full year backlog of approximately $116.7 million. We also track, quarterly, the remaining amount of revenue to be recognized from backlog in the current year, or remaining backlog, which as of March 31, 2009 was approximately $91.6 million. Our presentation of backlog may differ from other companies in our industry.

We consider the global adoption of EDC solutions to be essential to our future growth. Our future growth will also depend on our ability to sustain the high levels of customer satisfaction and our ability to increase sales to existing customers. In addition, the market for our products is often characterized by rapid technological change and evolving regulatory standards. Our future growth is dependent on the successful development and introduction of new products and enhancements. To address these challenges, we will continue to expand our direct and indirect sales channels in domestic and international markets, pursue research and development as well as acquisition opportunities to expand and enhance our product offerings, expand our marketing efforts, and drive customer adoption through our knowledge transfer professional services offerings. Our success in these areas will depend upon our abilities to execute on our operational plans, interpret and respond to customer and regulatory requirements, and retain key staff.

Restatement of Consolidated Financial Statements

Subsequent to the issuance of our 2008 consolidated financial statements, we reviewed our practice regarding the timing of revenue recognition. Specifically, we examined our treatment of certain customer arrangements in which application services and professional services were sold in the same single-study or multi-study arrangement.

Application services include software licenses that provide the customer with a “right to use” the software, as well as hosting and other support services, to be provided over a specific term. Professional services include various offerings that customers have the ability to utilize on an as-needed basis.

Historically, when application services and professional services were sold in the same single-study or multi-study arrangement, we allocated arrangement consideration to professional services based on fair value and recognized such professional services revenues as services were performed. The remaining arrangement consideration was allocated to application services and recognized as revenue ratably over the term of the arrangement, beginning with the commencement of the arrangement term, which correlates with the activation of the hosting services, assuming all other revenue recognition criteria were met. This accounting practice assumed that application services had been delivered upon the activation of the hosting services, and that professional services were delivered at various times subsequent to the activation of the hosting services, during the term of the arrangement.

 

40


Table of Contents

However, given that we have a continuing obligation to provide hosting services throughout the arrangement term, we are not able to determine fair value for hosting services, and since professional services are performed at various times during the term of an arrangement, we determined that recognition of application services and professional services as a combined single unit of accounting is appropriate. As a result, when application services and professional services are associated with the same single-study or multi-study arrangement, the related revenues are recognized ratably beginning with the commencement of the arrangement term, assuming all other revenue recognition criteria are met. The restatement resulted in the deferral to future periods of $52.0 million of revenues previously recognized through December 31, 2008.

For arrangements where revenue is recognized over the relevant contract period, we continue to capitalize the related paid sales commissions and recognize these commissions as expense as we recognize the related revenue. As a result of our restatement of revenues, we adjusted the timing of commission expense to correlate with our restated revenues in each restated period. Sales commission expense is captured as a component of sales and marketing in our operating costs and expenses.

As a result of the above, we have restated our consolidated balance sheets as of December 31, 2005, 2006, 2007 and 2008 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. The restatement did not impact any period prior to 2005. For a further description of the restatement, please see Note 2, “Restatement of Consolidated Financial Statements,” to our consolidated financial statements for the years ended December 31, 2006, 2007 and 2008, which are included elsewhere in this prospectus.

Acquisition of Fast Track Systems, Inc.

On March 17, 2008, we acquired Fast Track Systems, Inc., or Fast Track, a provider of clinical trial planning solutions. With this acquisition, we extended our ability to serve customers throughout the clinical research process with solutions that improve efficiencies in protocol development and trial planning, contracting and negotiation. We paid total consideration of approximately $18.1 million, which consisted of the issuance of 864,440 shares of common stock in exchange for all Fast Track’s existing preferred stock and common stock as well as 444 and 25,242 shares of common stock reserved for the exercise of outstanding warrants and vested employee stock options, respectively.

The results of operations or other discussions below for the years ended December 31, 2006 and 2007 do not give effect to the impact of this acquisition. Our results of operations for the three months ended March 31, 2008 and for subsequent periods include the operations of Fast Track since the date of acquisition. The unaudited pro forma statement of operations for the year ended December 31, 2008 provides the pro forma effect to the acquisition of Fast Track as if it had occurred on January 1, 2008.

Sources of Revenue

We derive revenues from application services and professional services. Application services consist of multi-study or single-study arrangements, which give our customers the right to use our software solutions, hosting and site support, as well as clinical trial planning software solutions we acquired from Fast Track. Professional services consist of assisting our customers and partners with the design, workflow, implementation and management of their clinical trials.

Our application services are principally provided for both multi-study arrangements, which grant customers the right to manage up to a predetermined number of clinical trials for a term generally ranging from three to five years, as well as single-study arrangements that allow customers to use application services on a short-term basis for an individual study or to evaluate our application services prior to committing to multi-study arrangements. Many of our customers have migrated from single-study arrangements to multi-study arrangements and multi-study arrangements represent the majority of our application services revenues.

 

41


Table of Contents

Our professional services provide our customers with reliable, repeatable and cost-effective implementation and training in the use of our application services. Professional services revenues have represented a significant portion of overall revenues to date. We expect professional services revenues to decline as a percentage of total revenues as our customers and partners become more adept at the management and configuration of their clinical trials as part of our knowledge transfer efforts.

Cost of Revenues

Cost of revenues consists primarily of costs related to hosting, maintaining and supporting our application suite and delivering our professional services and support. These costs include salaries, benefits, bonuses and stock-based compensation for our data center and professional services staff. Cost of revenues also includes outside service provider costs, data center and networking expenses and allocated overhead. We allocate overhead such as depreciation expense, rent and utilities to all departments based on relative headcount. As such, a portion of general overhead expenses are reflected in cost of revenues. The costs associated with providing professional services are recognized as such costs are incurred and are significantly higher as a percentage of revenue than the costs associated with delivering our application services due to the labor costs associated with providing professional services. Over the long term, we believe that cost of revenues as a percentage of total revenues will decrease.

Operating Costs and Expenses

Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses and stock-based compensation, the cost of certain third-party service providers and allocated overhead. We have focused our research and development efforts on expanding the functionality and ease of use of our applications. We expect research and development costs to increase in absolute dollars in the future as we intend to release new features and functionality designed to maximize the efficiency and effectiveness of the clinical development process for our customers. Over the long term, we believe that research and development expenses as a percentage of total revenues will remain relatively constant.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses and stock-based compensation, commissions, travel costs, and marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses and allocated overhead. Our sales and marketing expenses have increased in absolute dollars primarily due to our ongoing substantial investments in customer acquisition. We expect sales and marketing expenses to increase in absolute dollars. Over the long term, we believe that sales and marketing expenses will decline slightly as a percentage of total revenues.

General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for executive, legal, quality assurance, finance and human resources, including wages, benefits, bonuses and stock-based compensation, professional fees, insurance premiums, allocated overhead and other corporate expenses, including certain one-time costs in anticipation of becoming a public company. During 2008, we strengthened our management and corporate infrastructure, particularly in our finance department, and implemented financial reporting, compliance and other infrastructure associated with being a public company. On an ongoing basis, we expect general and administrative expenses to increase in absolute dollars as we continue to add administrative personnel and incur additional professional fees and other expenses resulting from continued growth and the compliance requirements of operating as a public company. Over the long term, we believe that general and administrative expenses as a percentage of total revenues will decrease.

 

42


Table of Contents

Internal Controls over Financial Reporting

In connection with the audit of our consolidated financial statements for the years ended December 31, 2006 and 2007, we, together with our independent registered public accounting firm, identified material weaknesses in our internal controls over financial reporting attributable to deficiencies in our revenue recognition and expense cut-off procedures. Our material weaknesses resulted from inadequate controls, policies and procedures, as well as inadequate staffing of accounting positions, especially in regard to revenue recognition. More specifically, our control deficiencies related to:

Revenue recognition

 

   

Inadequate review of contract provisions, such as start and end dates, early renewal provisions or optional renewal periods, and their impact on the timing of revenue recognition;

 

   

Lack of standardized contracts or the ability to account for contracts that contain non-standardized terms;

 

   

Lack of a centralized contract management system to maintain control over the population of contracts;

 

   

Lack of adequate cut-off procedures;

 

   

Inadequate documentation of revenue recognition conclusions; and

 

   

Reliance on extensive manual processes.

Expense cut-off

 

   

Lack of formal cut-off procedures, including procedures to properly accrue for invoices representing goods or services obtained by us for which invoices have not yet been received, at the end of each period to ensure that all expenses are recorded in the proper period.

Subsequent to the issuance of our 2008 consolidated financial statements, we reviewed our practice regarding the timing of revenue recognition. Specifically, we examined our treatment of certain customer arrangements in which application services and professional services were sold in the same single-study or multi-study arrangement. As a result of this review, we restated our consolidated financial statements for the years ended December 31, 2005, 2006, 2007 and 2008. For additional information, see Note 2, “Restatement of Consolidated Financial Statements,” to our audited consolidated financial statements included elsewhere in this prospectus. This restatement was the result of the previously identified revenue recognition control deficiencies that constituted material weaknesses described above. While we have initiated a plan to remediate our material weaknesses and commenced a number of specific remedial activities during 2008, our material weaknesses were not fully remediated as of December 31, 2008.

The actions we have taken to date include hiring a new director of revenue accounting and additional technical accounting personnel, designing a comprehensive revenue recognition policy, and establishing a methodology for accruing missing invoices and expense reports. We performed additional analyses and other procedures designed to ensure that our annual and interim consolidated financial statements included herein were prepared in accordance with accounting principles generally accepted in the United States of America. These measures included, among other things, accounting reviews by senior finance staff, certain manual procedures, including the centralized review of key contracts and transactions; and the utilization of outside professionals to supplement our staff in assisting us in meeting the objectives otherwise fulfilled by an effective control environment. As a result, we believe our annual and interim consolidated financial statements fairly present, in all material respects, our financial position, results of operations and cash flows for all periods presented. While we believe that our remediation plan will address the identified material weaknesses, we have not yet completed all of the steps required for remediation and our testing procedures have not yet been completed.

The process of improving our internal controls has required and will continue to require us to expend resources to design, implement and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. Upon completion of this offering, we will become subject to the requirements of the Sarbanes-Oxley Act of 2002, Section 404, which could apply to us as early as the filing of our annual

 

43


Table of Contents

report on Form 10-K for 2010 and requires annual management assessments of the effectiveness of our internal controls over financial reporting as well as a report by our independent registered public accounting firm regarding the effectiveness of such internal controls. The remediation efforts we began in 2008 may not be successful in meeting this standard. Material weaknesses and other deficiencies in our internal controls or future restatements could cause investors to lose confidence in our financial reporting, particularly as a result of inaccurate financial reporting, and also cause our stock price to decline. Material weaknesses in our internal controls or future restatements may impede our ability to produce timely and accurate financial statements, which could cause us to fail to file our periodic reports timely, result in inaccurate financial reporting or restatements of our financial statements, subject our stock to delisting and materially harm our business reputation and our stock price. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal controls over financial reporting on an ongoing basis.

We currently estimate that we will be able to report the completion of our remediation in connection with the issuance of our audited financial statements for the year ending December 31, 2009. The anticipated additional costs that we may incur in relation to additional staff, external advisors and the implementation of controls or use of software tools to manage our compliance with such controls are expected to approximate $0.5 million in 2009. Our board of directors, in coordination with our audit committee, will continually assess the progress and sufficiency of these initiatives and make adjustments as necessary.

Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Our critical accounting policies, including the assumptions and judgments underlying them, require the application of significant judgment in the preparation of our financial statements, and as a result they are subject to a greater degree of uncertainty. In applying these policies, we use our judgment to determine the appropriate assumptions to be used in calculating estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates and assumptions are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates. Our critical accounting policies include the following:

Revenue Recognition

We derive our revenues from the sale of application services and the rendering of professional services. We recognize revenues when all of the following conditions are satisfied:

 

   

persuasive evidence of an arrangement exists;

 

   

service has been delivered to the customer;

 

   

amount of the fees to be paid by the customer is fixed or determinable; and

 

   

collection of the fees is reasonably assured or probable.

Application Services

We typically enter into multi-study and single-study arrangements that include the sale of software licenses that provide our customers the “right to use” our software, as well as hosting and other support services to be provided over a specified term. We recognize revenues ratably over the term of the arrangement, beginning with the commencement of the arrangement term, which correlates with the activation of the hosting services, assuming all other revenue recognition criteria are met. The term of the arrangement includes optional renewal periods if such renewal periods are likely to be exercised.

Professional Services

We also provide a range of professional services that our customers have the ability to utilize on an as-needed basis. These services generally include training, implementation, interface creation, trial configuration, data testing, reporting, procedure documentation and other customer-specific services. Professional services do not result in significant alterations to our underlying software.

 

44


Table of Contents

Our professional services are typically sold together with application services as a component of a single- study or multi-study arrangement. We account for arrangements that include both application services and professional services as a combined single unit of accounting and the related revenues are recognized ratably beginning with the commencement of the arrangement term, assuming all other remaining revenue recognition criteria are met.

In certain situations, when professional services are sold separate and apart from application services, they are recognized as services are rendered.

Management’s estimate of fair value for professional services is used to derive a reasonable approximation for presenting application services and professional services separately in our consolidated financial statements.

Deferred Revenue

Deferred revenue consists of billings or payments received in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Amounts that have been invoiced are initially recorded in accounts receivable and deferred revenue. We invoice our customers in accordance with the terms of the underlying contract, usually in installments in advance of the related service period. Accordingly, the deferred revenue balance does not represent the total contract value of outstanding arrangements. Payment terms are net 30 to 45 days. Deferred revenue that will be recognized during the subsequent 12-month period is recorded as current deferred revenue and the remaining portion as non-current deferred revenue.

In some instances, customers elect to renew their application services arrangements prior to the original termination date of the arrangement. The renewed application services agreement provides support for in-process clinical trials, and includes the “right to use” the software for initial clinical studies. As such, the unrecognized portion of the deferred revenue associated with the initial arrangement is aggregated with the consideration received upon renewal and recognized as revenues over the renewed term of the application services arrangements.

Stock-Based Compensation

We adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS No. 123(R), on January 1, 2006, and previously applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. According to SFAS No. 123(R), all forms of share-based payments to employees, including employee stock options and employee stock purchase plans, are treated the same as any other form of compensation by recognizing the related cost in the statement of operations.

Under SFAS No. 123(R), stock-based compensation expense is measured at the grant date based on the fair value of the award, and the expense is recognized ratably over the award’s vesting period. For all grants, we recognize compensation cost under the straight-line method.

We measure the fair value of stock options on the date of grant using the Black-Scholes pricing model which requires the use of several estimates, including:

 

   

the volatility of our stock price;

 

   

the expected life of the option;

 

   

risk free interest rates; and

 

   

expected dividend yield.

The use of different assumptions in the Black-Scholes pricing model would result in different amounts of stock-based compensation expense. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.

 

45


Table of Contents

Prior to the completion of this offering, we were not a publicly traded company and we had limited historical information on the price of our stock as well as employees’ stock option exercise behavior. As a result, we could not rely on historical experience alone to develop assumptions for stock price volatility and the expected life of options. As such, our stock price volatility was estimated with reference to a peer group of companies. Subsequent to the completion of this offering, we will utilize the closing prices of our publicly-traded stock to determine our volatility.

We estimate the expected life of options based on the likely date of exercise as opposed to the actual life of the options. We consider internal studies of historical experience and projected exercise behavior to determine such estimate. The risk-free interest rate is based on the United States Treasury yield curve with a maturity tied to the expected life of the option. We have not and do not expect to pay dividends on our common shares.

We recorded stock-based compensation of $0.7 million, $1.3 million and $3.2 million during 2006, 2007 and 2008, respectively, and $1.0 million during the three months ended March 31, 2009. In future periods, stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation and as we issue additional equity-based awards to continue to attract and retain employees and non-employee directors. As of December 31, 2008 and March 31, 2009, we had $7.6 million and $8.3 million, respectively, of unrecognized stock-based compensation costs related to stock options granted under our 2000 Stock Option Plan. The unrecognized compensation cost is expected to be recognized over an average period of 1.43 years as of December 31, 2008 and 1.47 years as of March 31, 2009.

Significant Factors, Assumptions and Methodologies Used in Determining the Fair Value of our Capital Stock

Financial Strategies Consulting Group, LLC, or FSCG, an unrelated third-party valuation firm, has performed valuations of our common stock in order to assist our board of directors in determining the fair value of our common stock. These contemporaneous valuation reports valued our common stock as of December 31, 2005, February 28, 2006, September 30, 2006, December 31, 2006, April 30, 2007, December 31, 2007, March 31, 2008, June 30, 2008, September 30, 2008, December 31, 2008 and March 31, 2009. In addition, a retrospective valuation report was performed to value our common stock as of September 30, 2007. We have discussed with FSCG whether the previous valuations performed would be impacted by the subsequent restatement of our consolidated financial statements for the years ended December 31, 2005, 2006, 2007 and 2008, as described in Note 2, “Restatement of Consolidated Financial Statements,” to our audited consolidated financial statements. Since the historical valuations for the most part were completed on a contemporaneous basis with the information available at the time, including cash flow considerations, we and FSCG believe the previously utilized methodology remains appropriate and consistent with AICPA guidelines.

Market-comparable and income approaches were used to estimate our aggregate enterprise value at each valuation date. The market-comparable approach estimates the fair market value of the company by applying market multiples of publicly-traded firms in the same or similar lines of business to the results and projected results of the company being valued. When choosing the comparable companies used for the market-comparable approach, we included companies providing products and services in the EDC market. The list of comparable companies remained largely unchanged throughout the valuation process. Under the income approach, the fair value is equal to the present value of estimated future cash flows that could potentially be removed from the company without impairing future operations and profitability. The estimated future cash flows and the terminal value, or the value of the company at the end of the future estimation period, are discounted to their present value at a discount rate which would provide a sufficient return to a potential investor, reflecting the risk of achieving those cash flows.

We prepared financial forecasts for each valuation report date used in the computation of the enterprise value for both the market-comparable approach and the income approach. The financial forecasts were based on long-term revenue growth assumptions, and expense targets over time, expressed as a percentage of revenue that

 

46


Table of Contents

reflected our past experience and future expectations, as well as evolving estimates of industry growth. These forecasts also contemplated the achievement of certain milestones such as key customer sales, customer renewals, product development and the hiring of key personnel. We considered the risk associated with achieving these forecasts as one company specific factor in selecting the appropriate cost of capital rates, which ranged from 24% at the beginning of 2008 to 17% at the end of March 2009.

We also applied an illiquidity discount under both the income and market-comparable valuation approaches, given that the lack of public information and the illiquidity of shares held by private company shareholders typically results in lower valuations for privately held companies relative to comparable public companies. This factor ranged from 24% at the beginning of 2008 to 14% at the end of March 2009.

The average of the values derived under the market-comparable approach and the income approach resulted in an initial estimated value under four potential scenarios (initial public offering, or IPO, sale, private company and liquidation). We applied the probability weighted expected return method, which is outlined in the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, to the valuations of each of the four potential scenarios in order to derive the per share value of our common stock at various points in time.

In the IPO valuation scenario, the enterprise value was based on an estimated IPO value discounted to the present value taking into consideration both the risk and timing of the IPO. This scenario assumed that all of our outstanding preferred stock would automatically convert into common stock, and that related accrued dividends would be paid out in cash upon IPO completion.

In the sale scenario, we utilized both the income and market-comparable approaches, with the enterprise value based on the sale of a controlling interest in a private company, adjusted for liquidation preferences associated with our preferred stock.

In the private company scenario, the enterprise value was estimated using the market-comparable and income approaches, adjusted for liquidation preferences associated with our preferred stock, as well as the illiquidity inherent in private company ownership.

In the liquidation scenario, the enterprise value is estimated assuming a liquidation of assets, net of liability settlement.

During 2008, the volume of IPO issuance decreased significantly compared to prior periods due in part to the overall decline in the global equity markets. As a result, we reduced the probability of completing our IPO from 70% to 80% at the beginning of the period, to 50% to 60% at the end of the period. Concurrently, we increased the probability of a sale from 15% to 20% at the beginning of the period, after a reduction to 10% to 15% in March of 2008, to 25% to 30% at the end of the period. Similarly, we increased the probability of remaining a private company from 5% to 10% at the beginning of the period, to 15% to 20% at the end of the period. For purposes of making the estimates with respect to a potential IPO and sale, we assumed the time period to such event at the beginning of 2008 was three to six months and at the end of 2008 was one to three months.

During the first three months of 2009, we maintained the probability of completing our IPO at 50% to 60% as weakness in the global equity markets continued. As a result of the volatility in the global equity markets, we increased the probability of remaining a private company to 20% to 25%, fully offset by the decrease of the probability of a sale to 20% to 25%. In addition, we reduced the assumed timing of a potential IPO and sale to one month or less.

These estimates were made in the context of providing for adequate stock-based compensation expense recognition. There is inherent uncertainty in our assumptions and estimates, and if we had made different assumptions and estimates than those described above, the amount of our stock-based compensation expense, net loss and basic and diluted net loss per share amounts could have been materially different.

 

47


Table of Contents

The valuation as of December 31, 2007 resulted in an estimated fair value per common share of $21.55. By March 31, 2008, the estimated fair value per common share was $19.23, reflecting a more conservative long-term revenue growth expectation, decreases in comparable company valuations, and an increase in the probability of remaining private relative to a sale. In addition, we reduced the risk-adjusted discount rate due to more conservative revenue expectations, which we believed reduced the risk of achieving such expectations.

The valuation as of June 30, 2008 resulted in an estimated fair value per common share of $19.75. The increase was attributable to a revised expectation of lower capital expenses, resulting in greater cash flow over the valuation period, offset by a reduction in the probability of completing an IPO and a corresponding increase in the probability of a potential sale.

The valuation as of September 30, 2008 resulted in an estimated fair value per common share of $20.58. The increase was primarily attributable to increases in key comparable company valuations, offset by a reduction in the probability of completing an IPO and a corresponding increase in the probability of a potential sale.

The valuation at December 31, 2008 resulted in an estimated fair value per common share of $15.38. The decline was primarily attributed to an overall decline in the value of comparable companies as equity markets sharply weakened and, to a lesser extent, refinement of our long-term revenue and expense assumptions. Several positive factors partially offset the impact of these declines. We reduced the risk-adjusted discount rate slightly to reflect greater certainty regarding our ability to achieve the revised financial plan. We reduced the illiquidity discount to reflect our expectations for a shorter timeframe to a potential IPO or sale. Finally, our revenue growth exceeded that of our peer group.

The valuation at March 31, 2009 resulted in an estimated fair value per common share of $15.70. The increase from December 31, 2008 was primarily attributable to an improvement in the value of key comparable companies. In addition the reduction of illiquidity discount from 18% to 14% resulting from moving closer to the IPO event also contributed to this increase.

During the twelve months ended March 31, 2009, we granted the following stock options with exercise prices as follows:

 

Grant Date

   Options Granted    Fair Value of
Common Stock
at Grant
   Exercise Price    Intrinsic Value

05/14/08

   52,066    $ 19.48    $ 19.23    $ 0.25

08/13/08

   99,960      20.15      19.75      0.40

11/13/08

   5,000      17.70      20.58      —  

01/15/09

   189,500      15.43      15.70      —  

02/11/09

   7,000      15.53      15.70      —  

In May 2009, we granted options to purchase an additional 65,000 shares of our common stock to our employees at an exercise price of $15.70 per share.

In granting these options, our board of directors intended to set the exercise prices based on the per share fair market value of our common stock underlying those options on the date of grant. In the absence of a public trading market, our board of directors relied upon the most recent FSCG valuation report of our common stock prior to the grant date.

In 2007, we contracted with FSCG to provide contemporaneous valuations on April 30, 2007 and December 31, 2007. Given the material change in value between these reports, we elected to perform an additional retrospective valuation as of September 30, 2007. In 2008, FSCG provided quarterly valuations and we expect that they will continue to do so until such time as our stock is publicly traded. Our board of directors uses its judgment to determine the fair value per share on dates of grant that fall between the formal FSCG

 

48


Table of Contents

valuation report dates. In applying this judgment, we consider whether there are any significant events or changes in our business that would have a material impact on the fair value of our common stock between the formal FSCG valuation dates. If no events arise, we conclude that the price per common share between valuation dates increase or decrease on a ratable basis. We then utilize this value as a basis for recognizing stock-based compensation expense in our financial statements in accordance with SFAS 123 (R).

The exercise price of certain granted stock options was less than the fair value of the common stock at the date of grant. As these options vest, we will recognize a higher stock-based compensation expense due to the intrinsic value associated with these grants.

As discussed above, during the 12 months ended March 31, 2009 and subsequently through May 31, 2009, we granted stock options with exercise prices ranging from $15.70 to $20.58 per share. Also as disclosed, we determined that the fair value of our common stock ranged from $15.43 to $20.15 per share during that period. Each of these values was in excess of an assumed initial public offering price of $12.00 per share, the midpoint of the range of $11.00 to $13.00 as set forth on the cover page of this prospectus. The assumed initial public offering price of $12.00 per share is also less than our most recent external valuation performed at March 31, 2009 of $15.70 per share. While some participants in the clinical development industry have described customer demand challenges from early stage life sciences companies, we believe there has been no material adverse change to our business outlook. The difference between the assumed initial public offering price of $12.00 per share and our most recent valuation of $15.70 at March 31, 2009 was caused by a change in the primary valuation metrics we believe investors are focused on in the current volatile IPO market. In particular, we believe investors have become more focused on profitability, rather than revenue, as a primary valuation metric. In determining our IPO price range, we focused primarily on profitability metrics rather than revenue metrics to respond to this recent change.

There is no additional intrinsic value on such granted options that would require additional compensation expense to be recognized in future periods.

Goodwill and Intangibles

Goodwill, which consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired, is evaluated for impairment using a two-step process that is performed at least annually on October 1 of each year, or whenever events or circumstances indicate that impairment may have occurred. The first step is a comparison of the fair value of an internal reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its fair value, a second test is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of the goodwill is greater that the implied value, an impairment loss is recognized for the difference.

The implied value of goodwill is determined as of the test date by performing a purchase price allocation, as if the reporting unit had just been acquired, using currently estimated fair values of the individual assets and liabilities of the reporting unit, together with an estimate of the fair value of the reporting unit taken as a whole. The estimate of the fair value of the reporting unit is based upon information available regarding prices of similar groups of assets, or other valuation techniques including present value techniques based upon estimates of future cash flow.

Intangible assets, including technology, database, customer relationships, and customer contracts arising from the acquisition of Fast Track, are recorded at cost less accumulated amortization and are amortized using a method which reflects the pattern in which the economic benefit of the related intangible asset is utilized. For intangible assets subject to amortization, impairment is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible asset.

 

49


Table of Contents

As of December 31, 2008 and March 31, 2009, we had goodwill and intangible assets of $16.0 million and $15.6 million, respectively. We have determined that there were no indicators of impairment of goodwill or intangible assets as of December 31, 2008 and March 31, 2009. There are many assumptions and estimates used that directly impact the results of impairment testing, including an estimate of future expected revenues, earnings and cash flows, and discount rates applied to such expected cash flows in order to estimate fair value. We have the ability to influence the outcome and ultimate results based on the assumptions and estimates we choose for testing. To mitigate undue influence, we set criteria that are reviewed and approved by various levels of management. The determination of whether or not goodwill or acquired intangible assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of our reporting unit. Changes in our strategy or market conditions could significantly impact these judgments and require adjustments to recorded amounts of intangible assets.

Income Taxes

We use the asset and liability method of accounting for income taxes, as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

On January 1, 2007, we adopted Financial Accounting Standards Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, or FIN No. 48. FIN No. 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The impact of the adoption of FIN No. 48 did not have a material effect on our consolidated financial position, results of operations or cash flows.

We had approximately $56.1 million and $83.7 million of federal net operating loss carryforwards as of December 31, 2007 and 2008 respectively, available to offset future taxable income, expiring from 2019 through 2028. We also had net operating loss carryforwards for state income tax purposes of approximately $60.9 million and $106.0 million as of December 31, 2007 and 2008, respectively, available to offset future state taxable income, expiring from 2009 through 2028. Certain net operating loss carryforwards were obtained through our acquisition of Fast Track in 2008.

The future utilization of the net operating loss carryforwards may be subject to significant limitations under the Internal Revenue Code. Due to these limitations and the likelihood that our future taxable income may be insufficient to utilize these tax benefits, we provided a valuation allowance against the net deferred tax assets as their future utilization is uncertain at this time. We believe the net deferred tax assets of $0.2 million and $0.1 million as of December 31, 2007 and 2008, respectively, are realizable as they were generated in foreign jurisdictions where we are taxpayers. The net change in the valuation allowance was an increase of $8.5 million in 2006, an increase of $11.1 million in 2007 and an increase of $7.7 million in 2008.

In calculating the provision for income taxes on an interim basis, we follow FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods, an interpretation of APB Opinion No. 28, and have developed an estimate of the annual effective tax rate based upon the facts and circumstances known at the time. Our effective tax rate is based upon expected income, statutory rates and permanent differences applicable to us in the various jurisdictions in which we operate.

 

50


Table of Contents

The following Results of Operations section for the years ended December 31, 2006, 2007 and 2008 and the three months ended March 31, 2008 have been revised. See Note 2, “Restatement of Consolidated Financial Statements”, to our consolidated financial statements for the years ended December 31, 2006, 2007 and 2008, and our unaudited condensed consolidated interim financial statements for the three months ended March 31, 2008 and 2009, which are included elsewhere in this prospectus.

Results of Operations

We recognize revenue from applications services arrangements ratably over the terms of these arrangements. As a result, a substantial majority of our application services revenue in each quarter is generated from arrangements entered into during prior periods. Consequently, an increase or a decrease in new application services arrangements in any one quarter may not affect our results of operations in that quarter.

Additionally, when we sell application services and professional services in a single-study arrangement, which is our typical practice, we recognize revenue from professional services ratably over the term of the arrangement, rather than as the professional services are delivered, which varies throughout the arrangement term. Accordingly, a significant portion of the revenue for professional services performed in any reporting period will be deferred to future periods. We recognize expenses related to our professional services in the period in which the expenses are incurred. As a result, our professional services revenue and gross margin for any reporting period may not be reflective of the professional services delivered during that reporting period or of the current business trends with respect to our professional services.

The following table sets forth our consolidated results of operations as a percentage of total revenues for the periods shown:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2006     2007     2008         2008             2009      

Revenues:

          

Application services

   70.1 %   70.8 %   69.8 %   70.6 %   70.4 %

Professional services

   29.9 %   29.2 %   30.2 %   29.4 %   29.6 %
                              

Total revenues

   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %
                              

Cost of revenues:

          

Application services

   20.1 %   20.9 %   18.6 %   21.3 %   16.9 %

Professional services

   56.4 %   52.5 %   29.1 %   39.1 %   19.7 %
                              

Total cost of revenues

   76.5 %   73.4 %   47.7 %   60.4 %   36.6 %
                              

Gross profit

   23.5 %   26.6 %   52.3 %   39.6 %   63.4 %
                              

Operating costs and expenses:

          

Research and development

   16.3 %   17.0 %   18.3 %   23.2 %   16.4 %

Sales and marketing

   35.2 %   24.6 %   22.9 %   26.0 %   20.0 %

General and administrative

   23.0 %   21.2 %   26.0 %   27.7 %   20.3 %
                              

Total operating costs and expenses

   74.5 %   62.8 %   67.2 %   76.9 %   56.7 %
                              

(Loss) income from operations

   (51.0 )%   (36.2 )%   (14.9 )%   (37.3 )%   6.7 %

 

51


Table of Contents

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Revenue

 

     Three months ended March 31,  
     2008     2009     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amount in thousands)  

Revenues:

               

Application services

   $ 14,821    70.6 %   $ 23,665    70.4 %   $ 8,844    59.7 %

Professional services

     6,158    29.4 %     9,937    29.6 %     3,779    61.4 %
                                       

Total revenues

   $ 20,979    100.0 %   $ 33,602    100.0 %   $ 12,623    60.2 %
                                       

Total revenues. Total revenues increased $12.6 million, or 60.2%, from $21.0 million in 2008 to $33.6 million in 2009. The increase in revenues was primarily due to a $8.8 million, or 59.7%, increase in revenues from application services, and a $3.8 million, or 61.4%, increase in revenues from professional services. At the start of 2009, we had approximately $116.7 million of full year backlog. As of March 31, 2009, the total 2009 remaining backlog was approximately $91.6 million.

Application services revenues. Revenues from application services increased $8.8 million, or 59.7%, from $14.8 million in 2008 to $23.7 million in 2009. Our acquisition of Fast Track contributed $1.3 million of this increase as revenues increased to $1.5 million as we were able to recognize a full quarter of revenues in 2009 versus only one half month in 2008. Excluding the impact of Fast Track, application services revenues increased $7.5 million, or 51.4%, compared to the prior period. This increase was primarily due to the increase in the number of customers to 153 compared to 100 a year ago. We were able to sell and implement several large multi-year arrangements as well as make significant inroads into new midmarket customers. We also benefited from strong renewal activity and customer retention as we did not lose any customers during the first quarter of 2009. Revenues expanded significantly in North America, Europe and in Japan.

Professional services revenues. Revenues from professional services increased $3.8 million, or 61.4%, from $6.2 million in 2008 to $9.9 million in 2009. The increase in professional services revenue was attributable to higher demand for our services from new application services customers as well continued demand from existing customers driven by the increase in the number of studies performed by our customers.

Cost of Revenues

 

     Three months ended March 31,  
     2008     2009     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount     %  
     (Amount in thousands)  

Cost of revenues:

              

Application services

   $ 4,475    21.3 %   $ 5,670    16.9 %   $ 1,195     26.7 %

Professional services

     8,194    39.1 %     6,613    19.7 %     (1,581 )   (19.3 )%
                                        

Total cost of revenues

   $ 12,669    60.4 %   $ 12,283    36.6 %   $ (386 )   (3.0 )%
                                        

Total cost of revenues. Total cost of revenues decreased $0.4 million, or 3.0%, from $12.7 million in 2008 to $12.3 million in 2009. The decrease in total cost of revenues was primarily due to the decrease in cost of professional services revenues, partially offset by the increase in cost of application services revenues.

Cost of application services revenues. Cost of application services revenues increased $1.2 million, or 26.7%, from $4.5 million in 2008 to $5.7 million in 2009. The increase was primarily due to $0.8 million of additional costs incurred by Fast Track resulting from a full quarter of operations in 2009 as opposed to one half

 

52


Table of Contents

month in 2008. The remaining increase was due to an increase of $0.5 million in personnel related costs, increased depreciation of $0.3 million and $0.1 million of other costs, partially offset by a decrease in consulting expenses of $0.5 million. The increase was a result of our growth in business and our combined efforts to replace outside consultants with employees.

Cost of professional services revenues. Cost of professional services decreased $1.6 million, or 19.3%, from $8.2 million in 2008 to $6.6 million in 2009. The decrease was primarily due to a decrease in consulting costs of $0.8 million as we continued to reduce the use of outside consultants, personnel related costs of $0.3 million, a decrease in travel expense of $0.2 million and a decrease in other costs of $0.5 million, partially offset by $0.2 million of additional costs due to a full quarter of Fast Track operations in 2009.

Operating Costs and Expenses

 

     Three months ended March 31,  
     2008     2009     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  

Operating costs and expenses:

               

Research and development

   $ 4,872    23.2 %   $ 5,497    16.4 %   $ 625    12.8 %

Sales and marketing

     5,463    26.0 %     6,713    20.0 %     1,250    22.9 %

General and administrative

     5,807    27.7 %     6,821    20.3 %     1,014    17.5 %
                                       

Total operating costs and expenses

   $ 16,142    76.9 %   $ 19,031    56.7 %   $ 2,889    17.9 %
                                       

Total operating costs and expenses. Total operating costs and expenses increased $2.9 million, or 17.9%, from $16.1 million in 2008 to $19.0 million in 2009. Costs increased in each department with the larger increase in sales and marketing and general and administrative.

Research and development expenses. Research and development expenses increased $0.6 million, or 12.8%, from $4.9 million in 2008 to $5.5 million in 2009. The increase was primarily due to an increase in personnel related costs of $1.7 million, partially offset by a savings from a non-recurring write off of in-process research and development projects of $0.7 million in 2008, a decrease in professional and consulting fees of $0.3 million and a decrease in miscellaneous costs of $0.1 million. Our full quarter operations of Fast Track in 2009 accounted for $0.7 million of the increase in personnel related costs. The remaining increase in personnel related costs was to support our strategy to enhance and broaden our products offerings.

Sales and marketing expenses. Sales and marketing expenses increased $1.3 million, or 22.9%, from $5.5 million in 2008 to $6.7 million in 2009. The increase was attributable to higher personnel related costs of $1.4 million as we increased staffing levels in both our sales team and marketing department. The full quarter operations of Fast Track in 2009 generated an increase in sales and marketing expenses of $0.3 million, primarily due to higher personnel related costs. The increase was partially offset by a decrease in other miscellaneous costs of $0.1 million.

General and administrative expenses. General and administrative expenses increased $1.0 million, or 17.5%, from $5.8 million in 2008 to $6.8 million in 2009. The increase was primarily due to an increase in personnel related costs of $1.5 million partially offset by a decrease in professional and consulting fees of $0.3 million and a gain from foreign currency exchange of $0.2 million. The full quarter operations of Fast Track in 2009 resulted in an increase in general and administrative expenses of $0.2 million, primarily due to higher personnel related costs. The remaining increase in personnel related costs was due to higher staffing levels, bonuses and stock based compensation as we continued to expand our back office support groups in anticipation of our initial public offering. The decrease in professional and consulting fees was due to the reduction of certain non-recurring accounting related costs incurred in 2008 in anticipation of becoming a public company.

 

53


Table of Contents

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenues

 

     Year Ended December 31,  
     2007     2008     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amount in thousands)  

Revenues:

               

Application services

   $ 44,592    70.8 %   $ 73,820    69.8 %   $ 29,228    65.5 %

Professional services

     18,391    29.2 %     31,904    30.2 %     13,513    73.5 %
                                       

Total revenues

   $ 62,983    100.0 %   $ 105,724    100.0 %   $ 42,741    67.9 %
                                       

Total revenues. Total revenues increased $42.7 million, or 67.9%, from $63.0 million in 2007 to $105.7 million in 2008. The increase in revenues was primarily due to a $29.2 million, or 65.5%, increase in revenues from application services, and a $13.5 million, or 73.5%, increase in revenues from professional services. Revenues for 2008 includes Fast Track application and professional services revenues of $4.0 million from the date of acquisition (March 17, 2008) through December 31, 2008. At the start of 2008, we had approximately $79.7 million of full year backlog.

Application services revenues. Revenues from application services increased $29.2 million, or 65.5%, from $44.6 million in 2007 to $73.8 million in 2008. Our acquisition of Fast Track contributed $3.8 million of additional applications services revenues in 2008. Excluding the impact of Fast Track, application services revenues increased $25.4 million, or 57.0%, compared to the prior year. The majority of the increase in application services revenues was derived from increased activity in our existing customer base, primarily resulting from new studies and renewals. In addition to maintaining a high customer retention rate, we also benefited from providing a full year of services to those customers who began their multi-year arrangements in the prior year. Revenues from domestic customers grew 59.9%, whereas revenues from customers in Europe and Asia grew 66.2% and 23.8%, respectively. Excluding the impact of Fast Track, our customer base grew to 120 compared to 93 at the end of 2007, accounting for the remaining growth in applications services revenues. The acquisition of Fast Track expanded our customer base by approximately 27 customers.

Professional services revenues. Revenues from professional services increased $13.5 million, or 73.5%, from $18.4 million in 2007 to $31.9 million in 2008. Our acquisition of Fast Track contributed $0.2 million of additional professional services revenues. Excluding the impact of Fast Track, the increase in professional services revenues was due to a higher number of studies started in the period, derived from both existing customers and new customers added during the year.

Cost of Revenues

 

     Year Ended December 31,  
     2007     2008     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount     %  
     (Amounts in thousands)  

Cost of revenues:

              

Application services

   $ 13,170    20.9 %   $ 19,647    18.6 %   $ 6,477     49.2 %

Professional services

     33,035    52.5 %     30,801    29.1 %     (2,234 )   (6.8 )%
                                        

Total cost of revenues

   $ 46,205    73.4 %   $ 50,448    47.7 %   $ 4,243     9.2 %
                                        

 

54


Table of Contents

Total cost of revenues. Total cost of revenues increased $4.2 million, or 9.2%, from $46.2 million in 2007 to $50.4 million in 2008. The increase in total cost of revenues was primarily due to the increase in cost of application services revenues. Cost of revenues for 2008 included $2.6 million of cost of revenues incurred by Fast Track since the date of acquisition.

Cost of application services revenues. Cost of application services revenues increased $6.5 million, or 49.2%, from $13.2 million in 2007 to $19.6 million in 2008. The increase was due to $3.6 million in personnel related costs, depreciation of $2.3 million primarily associated with the build out and maintenance of our Houston data center, intangible asset amortization of $1.2 million associated with the acquisition of Fast Track and $0.7 million of other costs. This increase was partially offset by a decrease in consulting expenses of $1.3 million.

Cost of professional services revenues. Cost of professional services decreased $2.2 million, or 6.8%, from $33.0 million in 2007 to $30.8 million in 2008. The decrease was primarily due to a decrease in consulting costs of $4.4 million as we replaced outside consultants with employees and $0.6 million of other costs, partially offset by an increase in personnel related costs of $2.8 million.

Operating Costs and Expenses

 

     Year Ended December 31,  
     2007     2008     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Operating costs and expenses:

               

Research and development

   $ 10,716    17.0 %   $ 19,340    18.3 %   $ 8,624    80.5 %

Sales and marketing

     15,484    24.6 %     24,190    22.9 %     8,706    56.2 %

General and administrative

     13,361    21.2 %     27,474    26.0 %     14,113    105.6 %
                                       

Total operating costs and expenses

   $ 39,561    62.8 %   $ 71,004    67.2 %   $ 31,443    79.5 %
                                       

Total operating costs and expenses. Total operating costs and expenses increased $31.4 million, or 79.5%, from $39.6 million in 2007 to $71.0 million in 2008. Costs increased in each department with the largest increase in general and administrative costs. Total operating costs and expenses for 2008 included Fast Track operating expenses of $6.0 million from the date of acquisition through December 31, 2008.

Research and development expenses. Research and development expenses increased $8.6 million, or 80.5%, from $10.7 million in 2007 to $19.3 million in 2008. The increase was primarily due to an increase in personnel related costs of $6.1 million, professional and consulting fees of $0.8 million and a $0.7 million write off of in-process research and development projects, which were acquired from Fast Track. The personnel increase was planned to support our development and investment in new products, including the integration of the Fast Track products. Our acquisition of Fast Track accounted for $0.8 million of the increase in personnel related costs. The write-off of certain in-process research and development projects was required as we determined that technological feasibility had not been established for these acquired projects. The write-off occurred in the first quarter of 2008. The remaining $1.0 million increase in research and development expenses related to higher rent, travel related costs and other miscellaneous costs.

Sales and marketing expenses. Sales and marketing expenses increased $8.7 million, or 56.2%, from $15.5 million in 2007 to $24.2 million in 2008. The increase was primarily attributable to higher personnel related costs of $6.6 million as we increased our staff in both our sales team and marketing departments, travel and conference related costs of $0.8 million and $0.4 million related to the increased professional and consulting fees. The remaining $0.9 million increase in sales and marketing costs related to other miscellaneous costs. $1.0 million of the increase in personnel related costs was attributable to our acquisition of Fast Track.

 

55


Table of Contents

General and administrative expenses. General and administrative expenses increased $14.1 million, or 105.6%, from $13.4 million in 2007 to $27.5 million in 2008. The increase was primarily due to increases in personnel related costs of $8.9 million, professional and consulting fees of $3.2 million, facility related costs of $0.7 million primarily associated with a new office space, technology related expenses of $0.6 million to support our growth and increased travel related expenses of $0.3 million. Our acquisition of Fast Track accounted for $1.9 million of the increase in personnel related costs. The remaining increase in personnel related costs was due to higher staffing levels, bonuses and stock based compensation as we expanded our back office support groups in anticipation of our initial public offering. The increase in professional and consulting fees includes certain non-recurring accounting related costs also incurred in anticipation of becoming a public company. We expect that costs incurred during 2008 as we strengthened our management team and corporate infrastructure, particularly in the finance department, and implemented the financial reporting, compliance and other infrastructure associated with being a public company will not increase significantly in 2009. The remaining $0.4 million increase in general and administrative expenses was primarily due to other costs resulting from our acquisition of Fast Track and other miscellaneous expenses.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues

 

     Year Ended December 31,  
      2006     2007     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amount in thousands)  

Revenues:

               

Application services

   $ 25,406    70.1 %   $ 44,592    70.8 %   $ 19,186    75.5 %

Professional services

     10,851    29.9 %     18,391    29.2 %     7,540    69.5 %
                                       

Total revenues

   $ 36,257    100.0 %   $ 62,983    100.0 %   $ 26,726    73.7 %
                                       

Total revenues. Total revenues increased $26.7 million, or 73.7%, from $36.3 million in 2006 to $63.0 million in 2007. The $26.7 million increase in revenues was primarily due to a $19.2 million, or 75.5%, increase in revenues from application services, and $7.5 million, or 69.5%, increase in revenues from professional services.

Application services revenues. Revenues from application services increased $19.2 million, or 75.5%, from $25.4 million in 2006 to $44.6 million in 2007. The increase in application services revenues was primarily the result of the increase in the number of customers. Our customer base increased 86.0% to 93 by the end of 2007 compared to 50 at the end of 2006. Application services revenues also benefited from the full year impact of the large multi-study arrangements we signed during the prior year. A significant portion of our revenue growth was generated from international customers. Revenues from international customers increased 127.0% and 101.8% in Europe and Asia, respectively. Revenues from domestic customers grew 57.6% compared to the prior year.

Professional services revenues. Revenues from professional services increased $7.5 million, or 69.5%, from $10.9 million in 2006 to $18.4 million in 2007. The increase was due to the large number of new customer contracts during the year as well as the full-year impact of the large multi-study arrangements added in 2006. The growth of professional services revenues relative to application services revenues was related to several large multi-study arrangements signed in 2006, and is not indicative of our expectation of relative growth going forward, as our customers become more adept at the management and configuration of their clinical trials as part of our knowledge transfer efforts.

 

56


Table of Contents

Cost of Revenues

 

     Year Ended December 31,  
     2006     2007     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Cost of revenues:

               

Application services

   $ 7,288    20.1 %   $ 13,170    20.9 %   $ 5,882    80.7 %

Professional services

     20,462    56.4 %     33,035    52.5 %     12,573    61.4 %
                                       

Total cost of revenues

   $ 27,750    76.5 %   $ 46,205    73.4 %   $ 18,455    66.5 %
                                       

Total cost of revenues. Total cost of revenues increased $18.5 million, or 66.5%, from $27.8 million in 2006 to $46.2 million in 2007. The increase in total cost of revenues was primarily due to the increase in cost of professional services revenues.

Cost of application services revenues. Cost of application services revenues increased $5.9 million, or 80.7%, from $7.3 million in 2006 to $13.2 million in 2007. The increase was primarily attributable to increased outside contractor costs of $3.3 million due to additional support needed for our Houston data center, depreciation of $1.9 million due to the full-year impact of the Houston data center as well as additional equipment purchased to support the business, personnel related costs of $1.3 million stemming from new employee hires in 2007, incremental computer related cost of $0.8 million and other applications services cost of $0.8 million, partially offset by a decrease in royalty costs due to the settlement of a royalty claim in 2006 for $2.2 million.

Cost of professional services revenues. Cost of professional services revenues increased $12.6 million, or 61.4%, from $20.5 million in 2006 to $33.0 million in 2007. The increase was due to increases in outside contractor cost of $5.3 million, personnel related costs of $5.2 million as personnel increased to keep pace with the large increase in customer volume, certain pass through expenses for reimbursable out of pocket costs and hardware provisioning of $0.6 million and depreciation of $0.5 million. The remaining $1.0 million increase consisted of professional fees and other costs.

Operating Costs and Expenses

 

     Year Ended December 31,  
     2006     2007     Change  
     Amount    % of
Revenues
    Amount    % of
Revenues
    Amount    %  
     (Amounts in thousands)  

Operating costs and expenses:

               

Research and development

   $ 5,905    16.3 %   $ 10,716    17.0 %   $ 4,811    81.5 %

Sales and marketing

     12,768    35.2 %     15,484    24.6 %     2,716    21.3 %

General and administrative

     8,335    23.0 %     13,361    21.2 %     5,026    60.3 %
                                       

Total operating costs and expenses

   $ 27,008    74.5 %   $ 39,561    62.8 %   $ 12,553    46.5 %
                                       

Total operating costs and expenses. Total operating costs and expenses increased $12.6 million, or 46.5%, from $27.0 million in 2006 to $39.6 million in 2007. The increase in operating costs and expenses was primarily due to increased research and development, sales and marketing, and general and administrative as discussed below.

Research and development expenses. Research and development expenses increased $4.8 million, or 81.5%, from $5.9 million in 2006 to $10.7 million in 2007. The increase was primarily due to an increase in personnel related expense of approximately $2.7 million as personnel increased by 80% year over year, consulting expense of $1.0 million and other research and development expenses of $1.1 million. Additional staffing was required to support our application development and investment in our new software applications.

 

57


Table of Contents

Sales and marketing expenses. Sales and marketing expenses increased $2.7 million, or 21.3%, from $12.8 million in 2006 to $15.5 million in 2007. The increase was due to increases in personnel related costs of $0.9 million as a result of higher commission expense compared to the prior year and increases in our marketing staff, professional fees of $0.6 million and advertising and promotion related costs of $0.4 million. The remaining increase of $0.8 million consisted of recruiting, travel, and other sales and marketing costs.

General and administrative expenses. General and administrative expenses increased $5.0 million, or 60.3%, from $8.3 million in 2006 to $13.4 million in 2007. The increase was primarily due to higher personnel related expenses and recruiting fees of $2.1 million and consulting and professional services fees of $1.1 million. The personnel related costs were the result of increased staffing, including several senior level positions. The increase in consulting and professional services fees primarily related to audit and accounting services. We also leased additional office space for certain corporate and professional services staff which resulted in an increase in rent, depreciation, and other office related costs of $0.8 million. The remaining increase of $1.0 million consisted of higher travel related costs, insurance and other general expenses.

Unaudited Quarterly Consolidated Results of Operations Data

The following table presents our unaudited quarterly consolidated results of operations data for the year ended December 31, 2007 and 2008 and for the quarter ended March 31, 2009. This information is derived from our unaudited consolidated financial statements, and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for the fair presentation of the results of operations for the quarters presented. Historical results are not necessarily indicative of the results to be expected in future periods. You should read this data together with our consolidated financial statements and the related notes to these financial statements included elsewhere in this prospectus.

 

    Quarter Ended     Quarter Ended(2)     Quarter
Ended
   
 
Mar. 31,
2007
 
 
   
 
Jun. 30,
2007
 
 
   
 
Sept. 30,
2007
 
 
   
 
Dec. 31,
2007
 
 
   
 
Mar. 31,
2008
 
 
   
 
Jun. 30,
2008
 
 
   
 
Sept. 30,
2008
 
 
   
 
Dec. 31,
2008
 
 
   
 
Mar. 31,
2009
                                                                     
     (Amounts in thousands)

As restated(1):

                 

Revenues:

                 

Application services

  $ 9,706     $ 10,633     $ 11,700     $ 12,553     $ 14,821     $ 18,076     $ 19,132     $ 21,791     $ 23,665

Professional services

    3,940       3,339       6,056       5,056       6,158       7,677       8,678       9,391       9,937
                                                                     

Total revenues

    13,646       13,972       17,756       17,609       20,979       25,753       27,810       31,182       33,602
                                                                     

Cost of revenues:

                 

Application services

    2,399       3,504       3,415       3,852       4,475       4,889       5,226       5,057       5,670

Professional services

    7,656       8,379       8,165       8,835       8,194       8,257       7,364       6,986       6,613
                                                                     

Total cost of revenues

    10,055       11,883       11,580       12,687       12,669       13,146       12,590       12,043       12,283
                                                                     

Gross profit

    3,591       2,089       6,176       4,922       8,310       12,607       15,220       19,139       21,319
                                                                     

Operating costs and expenses:

                 

Research and development(3)

    2,125       2,462       2,817       3,312       4,872       4,778       4,982       4,708       5,497

Sales and marketing

    3,577       3,621       3,888       4,398       5,463       6,173       6,018       6,536       6,713

General and administrative

    2,285       2,718       3,432       4,926       5,807       7,144       7,096       7,427       6,821
                                                                     

Total operating costs and expenses

    7,987       8,801       10,137       12,636       16,142       18,095       18,096       18,671       19,031
                                                                     

Loss (income) from operations

    (4,396 )     (6,712 )     (3,961 )     (7,714 )     (7,832 )     (5,488 )     (2,876 )     468       2,288

Interest and other expenses (income), net

    (19 )     (2 )     44       341       563       247       372       442       412
                                                                     

Loss (income) before provision for income taxes

    (4,377 )     (6,710 )     (4,005 )     (8,055 )     (8,395 )     (5,735 )     (3,248 )     26       1,876

Provision for income taxes

    91       91       169       164       165       169       147       439       182
                                                                     

Net (loss) income

  $ (4,468 )   $ (6,801 )   $ (4,174 )   $ (8,219 )   $ (8,560 )   $ (5,904 )   $ (3,395 )   $ (413 )   $ 1,694
                                                                     

 

58


Table of Contents

 

    Quarter Ended   Quarter Ended(2)   Quarter
Ended
    Mar. 31,
2007
  Jun. 30,
2007
  Sept. 30,
2007
  Dec. 31,
2007
  Mar. 31,
2008
  Jun. 30,
2008
  Sept. 30,
2008
  Dec. 31,
2008
  Mar. 31,
2009
    (Amounts in thousands)    

Stock-based compensation expense and depreciation and amortization of intangible assets included in cost of revenues and operating costs and expenses are as follows:

 

Stock-Based Compensation

                 

Cost of revenues

  $ 34   $ 40   $ 51   $ 47   $ 57   $ 75   $ 78   $ 81   $ 91

Research and development

    24     36     54     69     71     118     145     169     163

Sales and marketing

    99     108     122     119     138     163     169     170     248

General and administrative

    77     75     90     249     335     408     478     542     501
                                                     

Total stock-based compensation

  $ 234   $ 259   $ 317   $ 484   $ 601   $ 764   $ 870   $ 962   $ 1,003
                                                     

Depreciation

                 

Cost of revenues

  $ 549   $ 747   $ 1,062   $ 1,247   $ 1,384   $ 1,496   $ 1,579   $ 1,482   $ 1,629

Research and development

    84     126     111     142     155     164     175     156     194

Sales and marketing

    58     49     58     78     89     97     103     94     118

General and administrative

    75     66     73     91     98     111     139     113     152
                                                     

Total depreciation

    766     988     1,304     1,558     1,726     1,868     1,996     1,845     2,093
                                                     

Amortization of intangible assets

                 

Cost of revenues

    —       —       —       —       64     381     381     365     421

Sales and marketing

    —       —       —       —       4     25     25     25     36
                                                     

Total amortization of intangible assets

    —       —       —       —       68     406     406     390     457
                                                     

Total depreciation and amortization of intangible assets

  $ 766   $ 988   $ 1,304   $ 1,558   $ 1,794   $ 2,274   $ 2,402   $ 2,235   $ 2,550
                                                     

 

(1) Except for the unaudited consolidated results of operations data for the quarter ended March 31, 2009, the unaudited quarterly consolidated results of operations data for the years ended December 31, 2007 and 2008 have been restated. See Note 2, “Restatement of Consolidated Financial Statements”, to our consolidated financial statements for the years ended December 31, 2006, 2007 and 2008, and our unaudited condensed consolidated interim financial statements for the three months ended March 31, 2008 and 2009, which are included elsewhere in this prospectus.

 

(2) On March 17, 2008, we acquired Fast Track Systems, Inc., a provider of clinical trial planning solutions. The consolidated statements of operations data beginning from the first quarter of 2008 include the impact of the acquisition and operations of Fast Track since the date of acquisition. The information set forth above should be read in conjunction with the consolidated financial statements included elsewhere in this prospectus.

 

(3) We determined that technological feasibility had not been established for certain in-process research and development projects acquired from Fast Track. These projects were written off, resulting in a $0.7 million charge to research and development expense for the quarter ended March 31, 2008.

Liquidity and Capital Resources

We have funded our growth primarily through the private sale of equity securities of approximately $12.6 million, long term debt of $15.0 million, working capital and equipment leases. At December 31, 2008 and March 31, 2009, our principal sources of liquidity were cash and cash equivalents of $9.8 million and $13.0 million, respectively. Cash and cash equivalents increased $3.2 million during the first three months of 2009 primarily due to cash receipts from higher sales activity, partially offset by funding of capital expenditures. The increase in cash and cash equivalents of $2.0 million in 2008 in comparison with 2007 primarily due to cash receipts from higher sales activity and proceeds from our new senior secured credit facility, partially offset by cash used to repay our term notes and fund capital expenditures required to support our growth. The increase in cash and cash equivalents of $0.7 million in 2007 in comparison to 2006 was primarily due to cash receipts from increased sales activity and proceeds from our term note agreement, partially offset by repurchases of our common stock and funding of capital expenditures.

In September 2008, we entered into a new senior secured credit facility that included a $15.0 million term loan and a $10.0 million revolving line of credit. We incurred $0.7 million in fees to secure this credit facility.

 

59


Table of Contents

The term loan was fully drawn at closing and a portion of the proceeds was used to fully repay $11.0 million of existing term notes. The revolving credit line, all of which remains undrawn, is available for future borrowings. Due to the structure of the credit agreement, any future borrowings under the revolving credit line would be classified as a current liability. Prior to 2008, we obtained additional working capital through various term notes provided by one of our preferred stockholders in November 2003 for $1.5 million, December 2005 for $2.5 million and October 2007 for $8.0 million. We previously repaid $1.0 million of these term notes prior to fully repaying all of the term notes in September 2008.

We believe that our cash flows from operations, our available cash as of March 31, 2009 and our existing revolving line of credit will be sufficient to satisfy the anticipated cash requirements associated with our existing operations for at least the next 12 months. During 2009, we expect to make approximately $10.0 million in capital expenditures to support the expected growth of our business. Historically, approximately half of our capital expenditures have been made through capital lease obligations. Our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors, including any expansion of our business that we may complete. See “Risk Factors.”

Cash Flows

Cash Flows Provided By Operating Activities

Cash flows provided by operating activities during the three months ended March 31, 2009 were $7.1 million, which consisted primarily of net income of $1.7 million, non-cash adjustments of depreciation and amortization and stock-based compensation of $2.6 million and $1.0 million, respectively, and an increase in deferred revenue of $5.7 million, partially offset by a decrease in accounts payable and accrued payroll and other compensation of $2.8 million. The increase in deferred revenue was due to our continued growth in sales. The decrease in accounts payable and accrued payroll and other compensation was primarily due to payments of our annual bonus.

Cash flows provided by operating activities during 2008 were $9.5 million, which consisted of net loss of $18.3 million, offset by positive non-cash adjustments to net loss of $13.0 million and by a $14.8 million increase in other operating activities. Positive non-cash adjustments to net loss consisted principally of $8.7 million of depreciation and amortization, $3.2 million of stock-based compensation and $0.7 million related to the write-off of in-process research and development projects acquired from Fast Track. The significant increase in other operating activities includes the increase in deferred revenue of $24.6 million and accrued expenses of $3.0 million, partially offset by the increase in accounts receivable of $8.9 million and the decrease in our accounts payable of $4.2 million. Other operating activities were impacted by increased sales activity compared to the prior year and the timing of customer payments.

Cash flows provided by operating activities during 2007 were $6.0 million, which consisted primarily of net loss of $23.7 million, plus $4.6 million of depreciation and amortization, $1.3 million of stock-based compensation and $33.3 million increase in deferred revenue, offset by a $6.8 million increase in accounts receivable. The increase in deferred revenue and accounts receivable was primarily due to increased sales activity compared to the prior year.

Cash flows provided by operating activities during 2006 were $3.5 million, which consisted primarily of net loss of $19.0 million, plus $2.0 million of depreciation and amortization, $0.7 million of stock-based compensation and a $17.7 million increase in deferred revenue, partially offset by a $3.5 million increase in accounts receivable. The increase in deferred revenue and accounts receivable was a result of an increase in sales from both existing and new customers during 2006.

Cash Flows Used In Investing Activities

Cash flows used in investing activities during the three months ended March 31, 2009 were related to the $0.6 million of purchases of furniture, fixtures and equipment. We also acquired $1.0 million of equipment through capital lease arrangements.

 

60


Table of Contents

Cash flows used in investing activities during 2008 were $4.1 million, which consisted of purchase of furniture, fixtures and equipment of $4.6 million and costs incurred to acquire Fast Track of $0.6 million, partially offset by cash and cash equivalents acquired from acquisition of Fast Track of $1.0 million. We also acquired $2.7 million of equipment through capital lease arrangements. All acquisitions of furniture, fixtures and equipment were required to support our business growth.

Cash flows used in investing activities during 2007 were $3.8 million, which consisted of purchases of furniture, fixtures and equipment of $3.7 million and an increase in our restricted cash. We acquired $9.1 million of equipment through capital lease arrangements.

Cash flows used in investing activities during 2006 were $1.5 million due to purchases of furniture, fixtures and equipment to support our continued growth.

Cash Flows Used In Financing Activities

Cash flows used in financing activities during the three months ended March 31, 2009 were $3.3 million, which consisted primarily of $1.6 million of costs associated with our initial public offering, $1.3 million of capital lease principal payments and $0.4 million of quarterly repayment of the term loan under our credit facility.

Cash flows used in financing activities during 2008 were $3.3 million, which consisted of $4.2 million of capital lease principal payments and $2.5 million of costs associated with our initial public offering, partially offset by $3.4 million from the proceeds of borrowings under our new credit facility net of repayment of existing term loans and the payment of debt issuance costs. Non-cash financing activities included capital lease obligations of $2.7 million with repayment terms of 36 months. Please refer to “— Contractual Obligations and Commitments” for additional information on future cash requirements.

Cash flows used in financing activities during 2007 were $1.5 million, which consisted of $2.8 million of capital lease principal payments and $6.0 million relating to the acquisition of treasury stock, partially offset by $7.3 million of net proceeds from our borrowing activities. The net proceeds from our borrowings were principally used to acquire our treasury stock. Non-cash financing activities included capital lease obligations of $9.1 million.

Cash flows used in financing activities during 2006 were $1.5 million, which consisted of $1.7 million of payments of capital lease principal and repayments of notes payable, partially offset by proceeds of $0.2 million from the exercise of stock options.

Contractual Obligations and Commitments

The following table of our material contractual obligations as of December 31, 2008 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated. There was no material change in our contractual obligations during the first three months of 2009.

 

     Payments Due by Period
      Total    1 year
or less
   2-3 years    4-5 years    More
than
5 years
      (Amounts in thousands)

Contractual Obligations:

              

Long-term debt

   $ 15,000    $ 1,500    $ 3,000    $ 10,500    $ —  

Estimated interest on long-term debt

     3,865      1,011      1,706      1,148      —  

Capital lease obligations

     7,490      4,728      2,762      —        —  

Operating lease obligations

     10,048      2,534      3,670      2,724      1,120

Letters of credit

     531      531      —        —        —  
                                  

Total

   $ 36,934    $ 10,304    $ 11,138    $ 14,372    $ 1,120