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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 

For the quarterly period ended March 31, 2019
 
Commission file number 000-26621
image0a05.jpg
NIC INC.
(Exact name of registrant as specified in its charter)
 
Delaware
52-2077581
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061
(Address of principal executive offices, including Zip Code)

Registrant’s telephone number, including area code:   (877) 234-3468
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value per share
EGOV
The Nasdaq Stock Market, LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
Accelerated filer   o
Non-accelerated filer   o 
Smaller reporting company  o
Emerging growth company  o
 
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o No  ý

On April 26, 2019, the registrant had 66,913,117 shares of common stock outstanding.



NIC INC.
Form 10-Q for the Quarter Ended March 31, 2019
Table of Contents

 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 


2


PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

NIC INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
thousands except par value amount

 
 
March 31, 2019
 
December 31, 2018
ASSETS
Current assets:
 
 
 
 
Cash
 
$
180,556

 
$
191,700

Trade accounts receivable, net
 
113,554

 
80,904

Prepaid expenses & other current assets
 
14,935

 
13,730

Total current assets
 
309,045

 
286,334

Property and equipment, net
 
10,715

 
10,256

Right of use lease assets, net
 
12,648

 

Intangible assets, net
 
16,368

 
13,604

Other assets
 
350

 
332

Total assets
 
$
349,126

 
$
310,526

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 

 
 

Accounts payable
 
$
80,100

 
$
60,092

Accrued expenses
 
20,967

 
24,150

Lease liabilities
 
4,171

 

Other current liabilities
 
5,312

 
4,883

Total current liabilities
 
110,550

 
89,125

 
 
 
 
 
Deferred income taxes, net
 
1,857

 
781

Lease liabilities
 
8,866

 

Other long-term liabilities
 
8,958

 
8,931

Total liabilities
 
130,231

 
98,837

 
 
 
 
 
Commitments and contingencies (Notes 2, 3 and 6)
 

 

 
 
 
 
 
Stockholders' equity:
 
 

 
 

Common stock, $0.0001 par, 200,000 shares authorized, 66,911 and 66,569 shares issued and outstanding
 
7

 
7

Additional paid-in capital
 
118,774

 
117,763

Retained earnings
 
100,114

 
93,919

Total stockholders' equity
 
218,895

 
211,689

Total liabilities and stockholders' equity
 
$
349,126

 
$
310,526

 
See accompanying notes to the unaudited consolidated financial statements.

3


NIC INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
thousands except per share amount
 
 
 
Three Months Ended
March 31,
 
 
 
 
2019
 
2018
Revenues:
 
 
 
 
State enterprise revenues
 
$
77,255

 
$
80,791

Software & services revenues
 
7,925

 
5,934

Total revenues
 
85,180

 
86,725

Operating expenses:
 
 

 
 

State enterprise cost of revenues, exclusive of depreciation & amortization
 
48,655

 
48,642

Software & services cost of revenues, exclusive of depreciation & amortization
 
2,720

 
2,228

Selling & administrative
 
9,964

 
7,503

Enterprise technology & product support
 
6,445

 
5,647

Depreciation & amortization
 
2,421

 
2,065

Total operating expenses
 
70,205

 
66,085

Operating income
 
14,975

 
20,640

Other income:
 
 
 
 
Interest income
 
604

 

Income before income taxes
 
15,579

 
20,640

Income tax provision
 
4,077

 
5,132

Net income
 
$
11,502

 
$
15,508

 
 
 
 
 
Basic net income per share
 
$
0.17

 
$
0.23

Diluted net income per share
 
$
0.17

 
$
0.23

 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

Basic
 
66,670

 
66,323

Diluted
 
66,670

 
66,323

 
See accompanying notes to the unaudited consolidated financial statements.


4



NIC INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
thousands

 
 
Three Months Ended March 31, 2019
 
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
 
 
Total
Balance, January 1, 2019
 
66,569

 
$
7

 
$
117,763

 
$
93,919

 
$
211,689

Net income
 

 

 

 
11,502

 
11,502

Dividends declared
 

 

 

 
(5,402
)
 
(5,402
)
Dividend equivalents on unvested performance-based restricted stock awards
 

 

 
27

 
(27
)
 

Dividend equivalents cancelled upon forfeiture of performance-based restricted stock awards
 

 

 
(122
)
 
122

 

Restricted stock vestings
 
364

 

 

 

 

Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings
 
(153
)
 

 
(2,609
)
 

 
(2,609
)
Stock-based compensation
 

 
 
 
2,272

 

 
2,272

Shares issuable in lieu of dividend payments on performance-based restricted stock awards
 
3

 

 

 

 

Issuance of common stock under employee stock purchase plan
 
128

 

 
1,443

 

 
1,443

Balance, March 31, 2019
 
66,911

 
$
7

 
$
118,774

 
$
100,114

 
$
218,895

 
 
 
Three Months Ended March 31, 2018
 
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
 
 
 
Shares
 
Amount
 
 
 
Total
Balance, January 1, 2018
 
66,271

 
$
7

 
$
111,275

 
$
56,960

 
$
168,242

Net cumulative effect of adoption of accounting standard
 

 

 

 
208

 
208

Net income
 

 

 

 
15,508

 
15,508

Dividends declared
 

 

 

 
(5,370
)
 
(5,370
)
Dividend equivalents on unvested performance-based restricted stock awards
 

 

 
34

 
(34
)
 

Dividend equivalents cancelled upon forfeiture of performance-based restricted stock awards
 

 

 
(140
)
 
140

 

Restricted stock vestings
 
202

 

 
 
 

 

Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings
 
(81
)
 

 
(1,132
)
 
 
 
(1,132
)
Stock-based compensation
 

 

 
1,511

 

 
1,511

Issuance of common stock under employee stock purchase plan
 
122

 

 
1,382

 

 
1,382

Balance, March 31, 2018
 
66,514

 
$
7

 
$
112,930

 
$
67,412

 
$
180,349


See accompanying notes to the unaudited consolidated financial statements.

5


NIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
thousands
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
11,502

 
$
15,508

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 

Depreciation & amortization
 
2,421

 
2,065

Stock-based compensation expense
 
2,272

 
1,511

Deferred income taxes
 
1,076

 
685

Provision for recoveries on accounts receivable
 
(186
)
 
(116
)
Changes in operating assets and liabilities:
 
 

 
 

Trade accounts receivable, net
 
(32,464
)
 
16,813

Prepaid expenses & other current assets
 
(1,205
)
 
(1,635
)
Other assets
 
1,069

 
258

Accounts payable
 
20,008

 
(20,131
)
Accrued expenses
 
(3,183
)
 
(6,360
)
Other current liabilities
 
422

 
295

Other long-term liabilities
 
(664
)
 
325

Net cash provided by operating activities
 
1,068

 
9,218

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment
 
(1,484
)
 
(873
)
Asset acquisition
 
(1,743
)
 

Capitalized software development costs
 
(2,417
)
 
(1,640
)
Net cash used in investing activities
 
(5,644
)
 
(2,513
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Cash dividends on common stock
 
(5,402
)
 
(5,370
)
Proceeds from employee common stock purchases
 
1,443

 
1,382

Tax withholdings related to stock-based compensation awards
 
(2,609
)
 
(1,132
)
Net cash used in financing activities
 
(6,568
)
 
(5,120
)
 
 
 
 
 
Net (decrease) increase in cash
 
(11,144
)
 
1,585

Cash, beginning of period
 
191,700

 
160,777

Cash, end of period
 
$
180,556

 
$
162,362

 
 
 
 
 
Other cash flow information:
 
 

 
 

Cash payments:
 
 

 
 

Income taxes paid, net
 
$
3,637

 
$
4,418

See accompanying notes to the unaudited consolidated financial statements.

6


NIC INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  THE COMPANY

NIC Inc., together with its subsidiaries (the "Company" or "NIC") is a leading provider of digital government services that help governments use technology to provide a higher level of service to businesses and citizens and increase efficiencies. The Company accomplishes this currently through two channels: its state enterprise businesses and its software & services businesses.

In the Company's primary state enterprise businesses, it generally designs, builds, and operates digital government services on an enterprise-wide basis on behalf of state and local governments desiring to provide access to government information and to complete secure government-based transactions through multiple online channels. These digital government services consist of websites and applications the Company has built that allow consumers, such as businesses and citizens, to access government information online and complete transactions. The Company typically manages operations for each contractual relationship through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. The Company is typically responsible for funding the up-front investments and ongoing operations and maintenance costs of the digital government services. The Company’s software & services businesses primarily include its subsidiaries that provide software development and digital government services, other than those services provided under state enterprise contracts, to federal agencies as well as state and local governments.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The consolidated financial statements include all of the Company's direct and indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to fairly present the consolidated financial position and the results of operations, changes in stockholders' equity and cash flows of the Company as of the dates and for the interim periods presented. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2018, including the notes thereto, set forth in the Company’s 2018 Annual Report on Form 10-K.

Certain amounts in the consolidated statements of income for the three months ended March 31, 2018 were reclassified to conform to the current year presentation. The reclassification had no impact on net income or cash flows for the period ended March 31, 2018.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.

Recently issued accounting pronouncements

Leases

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Expenses are recognized in the statement of income in a manner similar to current accounting guidance. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

On January 1, 2019, the Company adopted the standard and all the related amendments, using a modified retrospective approach at the beginning of the period of adoption. Under this approach, the comparative information was not restated and continues to

7


be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company not to reassess (i) whether expired or existing contracts contain a lease under the new standard, or (ii) the lease classification for expired or existing leases. In addition, the Company did not elect to use hindsight and excluded any lease contracts with terms of twelve months or less during transition.

The adoption of the standard resulted in the recognition of ROU lease assets and lease liabilities of $12.6 million and $12.9 million, respectively, as of January 1, 2019. The adoption of the standard did not have an impact on the Company’s consolidated earnings or cash flows for the quarter ended March 31, 2019.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The ASU will be effective for the Company beginning January 1, 2020, with early adoption permitted beginning January 1, 2019. Application of the standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the new standard and the estimated impact it will have on the Company’s consolidated financial statements.

Revenue recognition

The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration which the Company expects to receive in exchange for those goods or services.  


8


Disaggregation of Revenue

The Company currently earns revenues from three main sources: (i) transaction-based fees, which consist of interactive government services (“IGS”), driver history records (“DHR”) and other transaction-based revenues, (ii) development services and (iii) fixed fee management services. The following table summarizes, by reportable and operating segment, our principal activities from which the Company generates revenue (in thousands):

 
 
Three Months Ended March 31, 2019
 
 
State Enterprise
 
Software
& Services
 
Consolidated
Total
IGS
 
$
50,154

 
$

 
$
50,154

DHR
 
23,685

 

 
23,685

Other
 

 
7,925

 
7,925

Total transaction-based
 
73,839

 
7,925

 
81,764

Development services
 
2,178

 

 
2,178

Fixed fee management services
 
1,238

 

 
1,238

Total revenues
 
$
77,255

 
$
7,925

 
$
85,180

 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
State Enterprise
 
Software
& Services
 
Consolidated
Total
IGS
 
$
50,267

 
$

 
$
50,267

DHR
 
27,239

 

 
27,239

Other
 

 
5,934

 
5,934

Total transaction-based
 
77,506

 
5,934

 
83,440

Development services
 
2,047

 

 
2,047

Fixed fee management services
 
1,238

 

 
1,238

Total revenues
 
$
80,791

 
$
5,934

 
$
86,725



Transaction-based revenues

Under certain contracts with its government partners, the Company agrees to provide continuous access to digital government services that allow consumers to complete secure transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report. The Company satisfies its performance obligation by providing access to applications over the contractual term, and by processing transactions as they are initiated by consumers. The performance obligation is satisfied when the Company provides the access and it is used by the consumer.

Development services revenues

The Company earns development services revenues primarily under contracts to provide software development and other time and materials services to its government partners. These contracts are generally not longer than one year in duration. For services provided under development contracts the performance obligation is either satisfied over time or at a point in time upon customer acceptance.

Under its development services contracts, the Company typically does not have significant future performance obligations that extend beyond one year. As of March 31, 2019, the total transaction price allocated to unsatisfied performance obligations was approximately $3.8 million.

Fixed-fee management services revenues

Management services revenues primarily consist of revenues from providing recurring fixed fee digital government services for the Company’s government partner in Indiana. As of March 31, 2019, the Company’s Indiana contract had unsatisfied performance obligations for one month. The total transaction price allocated to the unsatisfied performance obligation is not significant.

9



Unearned Revenues

Unearned revenues at March 31, 2019 and December 31, 2018 were approximately $3.1 million and $1.7 million, respectively. The change in the deferred revenue balance for the three months ended March 31, 2019 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $1.1 million of revenues recognized that were included in the deferred revenue at the beginning of the period.

Leases

All Company lease arrangements are considered operating leases.  Operating leases are included in right of use lease assets and lease liabilities in the consolidated balance sheet. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the term of the lease.

On the commencement date of a lease, the Company recognizes a lease liability and corresponding right of use lease asset based on the present value of lease payments over the lease term. Lease agreements generally do not provide an implicit rate and therefore the Company's incremental borrowing rate at the commencement date is used to determine the present value of lease payments. Accretion of the discount on the lease liability is calculated under the effective interest method and included in operating lease cost. The right of use asset also includes any initial direct costs and prepaid lease payments and excludes any lease incentives received by the lessor. The right of use asset is amortized over the lease term and is included in operating lease cost. The result is a single operating lease cost recognized on a straight-line basis over the term of the lease.

Certain of the Company's leases have both lease and non-lease components. The Company has elected the practical expedient to account for these components as a single lease component for all leases.

3.  GOVERNMENT CONTRACTS

State enterprise contracts

The Company’s state enterprise contracts generally have an initial multi-year term with provisions for renewals for various periods at the option of the government. The Company’s primary business obligation under these contracts is generally to design, build, and operate digital government services on an enterprise-wide basis on behalf of governments desiring to provide access to government information and to digitally complete government-based transactions. NIC typically markets the services and solicits consumers to complete government-based transactions and to enter into subscriber contracts permitting the user to access online applications and the government information contained therein in exchange for transactional and/or subscription user fees. The Company enters into statements of work with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These statements of work preliminarily establish the pricing of the online transactions and data access services the Company provides and the division of revenues between the Company and the government agency. The government oversight authority must approve prices and revenue sharing agreements. The Company has limited control over the level of fees it is permitted to retain.

The Company is typically responsible for funding the up-front development and ongoing operations and maintenance costs of digital government services, and generally owns all the intellectual property in connection with the applications developed under these contracts. After completion of a defined contract term or upon termination for cause, the government partner typically receives a perpetual, royalty-free license to use the applications built by the Company only in its own state. However, certain enterprise applications, proprietary customer management, billing, payment processing and other software applications that the Company has developed and standardized centrally are provided to government partners on a software-as-a-service (“SaaS”) basis, and thus would not be included in any royalty-free license. If the Company’s contract expires after a defined term or if its contract is terminated by a government partner for cause, the government agency would be entitled to take over the applications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.

Any renewal of these contracts beyond the initial term by the government is optional and a government may terminate its contract prior to the expiration date if the Company breaches a material contractual obligation and fails to cure such breach within a specified period or upon the occurrence of other events or circumstances specified in the contract. In addition, 16 contracts under which the Company provides enterprise-wide digital government services, as well as the Company’s contract with the Federal Motor Carrier Safety Administration (“FMCSA”), can be terminated by the other party without cause on a specified period of notice. Collectively, revenues generated from these contracts represented approximately 58% of the Company’s total consolidated revenues for the

10


three months ended March 31, 2019. If any of these contracts is terminated without cause, the terms of the respective contract may require the government to pay the Company a fee to continue to use the Company’s applications.

Under a typical state enterprise contract, the Company is required to fully indemnify its government partners against claims that the Company’s services infringe upon the intellectual property rights of others and against claims arising from the Company’s performance or the performance of the Company’s subcontractors under the contract. At March 31, 2019, the Company was bound by performance bond commitments totaling approximately $10.8 million on certain state enterprise contracts.

Software & services contract

The Company’s subsidiary NIC Federal, LLC has a contract with the FMCSA to develop and manage the FMCSA’s Pre-Employment Screening Program (“PSP”) for motor carriers nationwide, using a transaction-based business model. In February 2019, the FMCSA extended the current contract through August 27, 2019, and included three six-month renewal options. The contract can be terminated by the FMCSA without cause on a specified period of notice.

Expiring contracts

There are currently 15 state enterprise contracts, as well as the Company's contract with the FMCSA, that have expiration dates within the 12-month period following March 31, 2019. Collectively, revenues generated from these contracts represented approximately 46% of the Company’s total consolidated revenues for the three months ended March 31, 2019. Although certain of these contracts have renewal provisions, any renewal is at the option of the Company’s government partner. As described above, if a contract is not renewed after a defined term, the government partner would be entitled to take over the applications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.

The contract under which the Company managed digital government services for the state of Texas expired on August 31, 2018. For the three months ended March 31, 2018 revenues from the contract were $17.5 million, which accounted for approximately 20% of the Company's total consolidated revenue for the three months ended March 31, 2018.

4. ACQUISITION

During 2018, the Company entered into a purchase agreement to acquire certain prescription drug monitoring software technology assets of a Maryland-based, privately held company, Leap Orbit LLC ("Leap Orbit"). The purchase price consisted of initial cash consideration of approximately $3.6 million and potential additional consideration of approximately $3.5 million if certain conditions under the agreement are met. The transaction was accounted for as an asset acquisition, as substantially all of the value related to the prescription drug monitoring software technology acquired. The Company paid additional consideration of $1.7 million in the first quarter of 2019, which was included in the cost of the acquired assets in the consolidated balance sheet. The Company currently expects to make a final payment for additional consideration of $1.7 million in the second quarter of 2019.

5. DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS

The Company has a revolving bank credit facility with Bank of America, N.A. Under the Amended and Restated Credit Agreement ("Credit Agreement"), the credit facility provides $10 million of unsecured financings available to finance working capital, issue letters of credit and finance general corporate purposes. The Credit Agreement also includes an accordion feature that allows the Company to increase the available capacity under the Credit Agreement to $50 million, subject to securing additional commitments from the bank. The Company can obtain letters of credit in an aggregate amount of $5 million, which reduces the maximum amount available for borrowing under the Credit Agreement.

On May 1, 2019, the Company entered into Amendment No. 4 to Amended and Restated Credit Agreement (the “Amendment’), which amends the Credit Agreement, dated as of August 6, 2014, as previously amended, between the Company and Bank of America, N.A.. The Amendment extended the maturity date of the revolving credit facility to May 1, 2021, and also increased the purchase price of a permitted acquisition, as well as the aggregate purchase price of all such permitted acquisitions during the term of the Credit Agreement.  Additionally the Amendment removes the two-tier structure on interest rates and provides that the interest rate on any amounts borrowed by the Company under the Credit Agreement will be at what was previously the lower tier, which is (i) an annual rate adjusted daily and benchmarked to LIBOR for a one-month term, plus a margin of 1.15% of face value per annum, or (ii) an annual rate benchmarked to LIBOR with a term equivalent to such borrowing, plus a margin of 1.15% of face value per annum.  The other material terms of the Credit Agreement remain unchanged, including customary representations and warranties, affirmative and negative covenants and events of default.


11


6. LEASES

The Company leases office space and certain equipment under noncancelable operating leases. Leases have terms which range from 1 year to 9 years, some of which include options to renew the lease. The exercise of lease renewal options is at the Company’s sole discretion and are included in the lease term when it is reasonably certain the Company will exercise the option on the basis of economic factors. The weighted average remaining lease term for operating leases as of March 31, 2019 was 3.8 years.

The aggregate future lease payments for operating leases as of March 31, 2019 and December 31, 2018, which is under previous accounting standards, are as follows (in thousands):
 
 
March 31, 2019
 
December 31, 2018
Fiscal Year
 
 
 
 
2019(1)
 
$
3,572

 
$
4,673

2020
 
3,703

 
3,403

2021
 
2,844

 
2,604

2022
 
2,318

 
2,082

2023
 
940

 
698

Thereafter
 
730

 
690

Total future minimum lease payments
 
14,107

 
14,150

Less: interest
 
(1,070
)
 
N/A

Total lease liabilities
 
$
13,037

 
N/A

(1) The March 31, 2019 column excludes the three months ended March 31, 2019.

Other information related to operating leases is as follows (in thousands):
 
 
March 31, 2019
Operating lease cost (1)
 
$
1,463

Weighted-average discount rate
 
3.8
%
 
 
  

Supplemental cash flow information
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
1,089

Right of use assets obtained in exchange for new lease liabilities (2)
 
13,735

(1) Includes short-term and variable lease costs, which are not significant.
(2) Includes $12.6 million for operating leases existing on January 1, 2019 and $1.1 million for operating leases that commenced in the three months ended March 31, 2019.

7.  EARNINGS PER SHARE

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method for all periods presented. The two-class method is an earnings allocation formula that treats a participating security as having rights to undistributed earnings that would otherwise have been available to common stockholders. The Company’s service-based restricted stock awards contain non-forfeitable rights to dividends and are participating securities. Accordingly, service-based restricted stock awards were included in the calculation of earnings per share using the two-class method for all periods presented. Unvested service-based restricted shares totaled 0.7 million for both of the three months ended March 31, 2019 and 2018. Basic earnings per share is calculated by first allocating earnings between common stockholders and participating securities. Earnings attributable to common stockholders are divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by giving effect to dilutive potential common shares outstanding during the period. The dilutive effect of shares related to the Company’s employee stock purchase plan is determined based on the treasury stock method. The dilutive effect of service-based restricted stock awards is based on the more dilutive of the treasury stock method or the two-class method assuming a reallocation of undistributed earnings to common stockholders after considering the dilutive effect of potential common shares other than the participating unvested restricted stock awards. The dilutive effect of performance-based restricted stock awards is based on the treasury stock method.


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The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Numerator:
 
 
 
 
Net income
 
$
11,502

 
$
15,508

Less: Income allocated to participating securities
 
(127
)
 
(171
)
Net income available to common stockholders
 
$
11,375

 
$
15,337

Denominator:
 
 

 
 

Weighted average shares - basic
 
66,670

 
66,323

Performance-based restricted stock awards
 

 

Weighted average shares - diluted
 
66,670

 
66,323

 
 
 
 
 
Basic net income per share:
 
$
0.17

 
$
0.23

 
 
 
 
 
Diluted net income per share:
 
$
0.17

 
$
0.23



8.  STOCKHOLDERS’ EQUITY

The Company's Board of Directors declared and paid the following dividends (payment in millions):
Declaration Date
Dividend per Share
Record Date
Payment Date
Payment
January 28, 2019
$0.08
March 5, 2019
March 19, 2019
$5.4
January 29, 2018
$0.08
March 6, 2018
March 20, 2018
$5.4


On May 7, 2019, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.08 per share, payable to stockholders of record as of June 11, 2019. The dividend, which is expected to total approximately $5.4 million, will be paid on June 25, 2019, out of the Company’s available cash.

9.  INCOME TAXES

The Company's effective tax rate was 26.2% and 24.9% for the three months ended March 31, 2019 and 2018, respectively. The Company's effective tax rate was higher than the applicable federal statutory income tax rate of 21.0% primarily because of state income taxes and non-deductible expenses. The increase in the effective tax rate was mainly due to approximately $2.6 million of executive severance costs for the three months ended March 31, 2019, as previously disclosed, a significant portion of which is not deductible for income tax purposes.

10.  STOCK BASED COMPENSATION

During the three months ended March 31, 2019, the Compensation Committee of the Board of Directors of the Company granted to certain management-level employees and executive officers, service-based restricted stock awards totaling 291,935 shares with a grant-date fair value totaling approximately $5.0 million. Such restricted stock awards vest beginning one year from the date of grant in annual installments of 25%. Restricted stock is valued at the date of grant, based on the closing market price of the Company’s common stock, and expensed using the straight-line method over the requisite service period (generally the vesting period of the award). The Company records forfeitures when they occur.

During the three months ended March 31, 2019, the Compensation Committee of the Board of Directors of the Company granted performance-based restricted stock awards to certain executive officers pursuant to the terms of the Company’s executive compensation program totaling 111,135 shares with a grant-date fair value totaling approximately $1.9 million. This represents the maximum number of shares the executive officers can earn at the end of a three-year performance period ending December 31, 2021. The actual number of shares earned will be based on the Company’s performance related to the following performance criteria over the performance period:

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Operating income growth (three-year compound annual growth rate); and
Total consolidated revenue growth (three-year compound annual growth rate).

At the end of the three-year period, the executive officers are eligible to receive up to a specified number of shares based upon the Company’s performance relative to these performance criteria over the performance period. In addition, the executive officers will accrue dividend equivalents for any cash dividends declared during the performance period, payable in the form of additional shares of Company common stock, based upon the maximum number of shares to be earned by the executive officers for each performance-based restricted stock award. Such hypothetical cash dividend payment shall be divided by the fair value of the Company’s common stock on the dividend payment date to determine the maximum number of notional shares to be awarded. At the end of the three-year performance period and on the date some or all of the shares are paid under the agreement, a pro rata number of notional dividend shares will be converted into an equivalent number of dividend shares paid and granted to the executive officers based upon the actual number of underlying shares earned during the performance period.

At December 31, 2018, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 22, 2016 ended. Based on the Company’s actual financial results from 2016 through 2018, 64,846 of the shares and 4,226 of dividend equivalent shares were earned. The remaining 73,345 shares subject to the awards were forfeited in the first quarter of 2019.

Stock-based compensation cost for performance-based restricted stock awards is measured at the grant date based on the fair value of shares expected to be earned at the end of the performance period and is recognized as expense over the performance period based upon the probable number of shares expected to vest.

The following table presents stock-based compensation expense included in the Company’s unaudited consolidated statements of income (in thousands):
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
State enterprise cost of revenues, exclusive of depreciation & amortization
 
$
361

 
$
443

Software & services cost of revenues, exclusive of depreciation & amortization
 
35

 
39

Selling & administrative
 
1,716

 
838

Enterprise technology & product support
 
160

 
191

Stock-based compensation expense
 
$
2,272

 
$
1,511


  
11.  REPORTABLE SEGMENT AND RELATED INFORMATION

The state enterprise segment is the Company’s only reportable segment and generally includes the Company’s subsidiaries operating digital government services on an enterprise-wide basis for state and local governments. The software & services category primarily includes the Company’s subsidiaries that provide software development and digital government services, other than those provided on an enterprise-wide basis, to federal agencies as well as other state and local governments. Each of the Company’s businesses within the Software & Services category is an operating segment and has been grouped together to form the Software & Services category, as none of the operating segments meets the quantitative threshold of a separately reportable segment. There have been no significant intersegment transactions for the periods reported. The summary of significant accounting policies applies to all operating segments.

The measure of profitability by which management, including the Company’s chief operating decision maker, evaluates the performance of its segments and allocates resources to them is operating income (loss). Segment assets or other segment balance sheet information is not presented to the Company’s chief operating decision maker. Accordingly, the Company has not presented information relating to segment assets.

The table below reflects summarized financial information for the Company’s reportable and operating segments for the three months ended March 31, (in thousands):

14


 
 
State Enterprise
 
Software
& Services
 
Other Reconciling Items
 
Consolidated
Total
2019
 
 
 
 
 
 
 
 
Revenues
 
$
77,255

 
$
7,925

 
$

 
$
85,180

Costs & expenses
 
48,655

 
2,720

 
16,409

 
67,784

Depreciation & amortization
 
636

 
21

 
1,764

 
2,421

Operating income (loss)
 
$
27,964

 
$
5,184

 
$
(18,173
)
 
$
14,975

 
 
 
 
 
 
 
 
 
2018
 
 

 
 

 
 

 
 

Revenues
 
$
80,791

 
$
5,934

 
$

 
$
86,725

Costs & expenses
 
48,642

 
2,228

 
13,150

 
64,020

Depreciation & amortization
 
877

 
27

 
1,161

 
2,065

Operating income (loss)
 
$
31,272

 
$
3,679

 
$
(14,311
)
 
$
20,640


The legacy contract under which the Company managed digital government services for the state of Texas expired on August 31, 2018 and accounted for approximately 20% of the Company's total consolidated revenues for the three months ended March 31, 2018. The Company's state enterprise contract with the state of Colorado accounted for approximately 10% of the Company's total consolidated revenues for the three months ended March 31, 2019. No other government partner accounted for more than 10% of the Company's total consolidated revenues for any period presented.

12. Subsequent Event
On May 1, 2019, the Company completed the stock acquisition of Complia, LLC, a licensing platform business. The Company acquired all of the outstanding equity of Complia, LLC for initial consideration of approximately $10 million in cash. In addition, the sellers are eligible for an earn out, which is capped at $5 million, on new contract wins that utilize the Complia, LLC licensing platform through April 2022. This transaction will be recorded as a business combination, and the purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated fair value. Due to the timing of this transaction, the allocation of the purchase price has not yet been finalized.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with our Unaudited Consolidated Financial Statements and the related Notes included in this Quarterly Report on Form 10-Q.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q regarding NIC Inc. and its subsidiaries (referred to herein as “the Company”, “NIC”, “we”, “our” or “us”) and its business, which are not current or historical facts, are “forward-looking statements” that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements of plans and objectives, statements of future economic performance or financial projections, statements regarding the planned implementation of new contracts and new projects under existing contracts, the expected length of contract terms, statements relating to the our business plans, objectives and expected operating results, statements relating to our expected effective tax rate, statements relating to possible future dividends and share repurchases, statements regarding the expected effects of changes in accounting standards, statements of assumptions underlying such statements, and statements of our intentions, hopes, beliefs, expectations, or predictions of the future. For example, statements like we “expect,” we “believe,” we “plan,” we “intend,” or we “anticipate” are forward-looking statements. Investors should be aware that our actual operating results and financial performance may differ materially from our expressed expectations because of risks and uncertainties about the future including those risks discussed in this Quarterly Report on Form 10-Q and in our 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 21, 2019.

There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward-looking statements. These include, among others, our success in renewing existing contracts and in signing contracts with new states and with federal and state government agencies; our ability to successfully increase the adoption and use of digital government services; the possibility of security breaches or disruptions through cyber-attacks or other events and any resulting liability; our ability to implement new contracts and any related technology enhancements in a timely and cost-effective manner; the possibility of reductions in fees or revenues as a result of budget deficits, government shutdowns, or changes in government policy; continued favorable government legislation; acceptance of digital government services by businesses and citizens; our ability to identify and acquire suitable acquisition candidates and to successfully integrate any acquired businesses; competition; general economic conditions; and the other factors discussed under “RISK FACTORS” in Part I, Item 1A and “Cautions About Forward Looking Statements" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of NIC’s 2018 Annual Report on Form 10-K filed on February 21, 2019 with the SEC. Investors should read all of these discussions of risks carefully.

All forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this report. Except as may be required by applicable law, we will not update the information in this Quarterly Report on Form 10-Q if any forward-looking statement later turns out to be inaccurate. Investors are cautioned not to put undue reliance on any forward-looking statement.

OVERVIEW OF OUR BUSINESS MODEL

We are a leading provider of digital government services that help governments use technology to provide a higher level of service to businesses and citizens and increase efficiencies. We accomplish this through two channels: our state enterprise businesses and our software & services businesses.

In our primary state enterprise businesses, we generally enter into contracts primarily with state and local governments to design, build, and operate digital government services on an enterprise-wide basis on their behalf. We typically enter into multi-year contracts and manage operations for each government partner through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. The internet-based services that we build, allow businesses and citizens to access government information through multiple digital channels and complete secure transactions. We are typically responsible for funding the up-front development and ongoing operations and maintenance costs of the digital government services. Our unique business model allows us to generate revenues by sharing in the fees collected from digital government transactions. Our government partners benefit because they reduce their financial and technological risks, increase their operational efficiencies, and gain a centralized, customer-focused presence on the internet, while businesses and citizens gain a faster, more convenient, and more cost-effective means to interact with governments.

On behalf of our government partners, we enter into statements of work with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These statements of work preliminarily establish the pricing of

16


the online transactions and data access services we provide and the division of revenues between us and the government agency. The government oversight authority must approve prices and revenue sharing agreements. We have limited control over the level of fees we are permitted to retain. Any changes made to the amount or percentage of fees retained by us, or to the amounts charged for the services offered, could materially affect the profitability of the respective contract. We typically own all the intellectual property related to the applications developed under these contracts. After completion of a defined contract term or upon termination for cause, the government partner typically receives a perpetual, royalty-free license to use the applications and digital government services we built only in its own state. However, certain enterprise applications and proprietary customer management, billing, payment processing or other applications that we have developed and standardized centrally are provided to our government partners on a software-as-a-service (“SaaS”) basis, and thus would not be included in any royalty-free license. If our contract expires after a defined term or if our contract is terminated by our government partner for cause, the government agency would be entitled to take over the owned or licensed applications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.

We also provide certain payment processing services to state and local agencies in states where we do not maintain an enterprise-wide contract and to a few private sector entities and will continue to market these services to other entities in the future. In some cases, we enter into contracts to provide consulting, software development and management services to governments in exchange for an agreed-upon fee.

For additional information on our government contracts, refer to Note 3, Government Contracts, in Part I, Item 1 of this Quarterly Report on Form 10-Q. The loss of a contract due to the expiration, termination or failure to renew the contract, if not replaced, could significantly reduce our revenues and profitability. In addition, any changes made to the amount or percentage of fees retained by us, or to the amounts charged for the services offered, could materially affect the profitability of our contracts. 

REVENUES

We classify our revenues into two primary categories based upon our segments reporting: (1) state enterprise and (2) software & services. Each of these categories are described below:

State Enterprise Revenues: We earn state enterprise revenues from our subsidiaries operating enterprise-wide state contracts that provide digital government services to multiple government agencies. We categorize our state enterprise revenues into three main sources: transaction-based fees, development services and fixed fee management services. Transaction-based revenues and fixed fee management services revenues are generally recurring while development services revenues are generally non-recurring. Each of these revenue sources are further described below:

Transaction-based:
IGS: fees from a wide variety of interactive government services, other than digital access to motor vehicle driver history records, for transactions conducted by business users and consumers. For a representative listing of the IGS applications we currently offer through our state enterprise businesses in conjunction with our government partners, refer to Part I, Item 1 in our 2018 Annual Report on Form 10-K, filed with the SEC on February 21, 2019.
DHR: fees from driver history records for providing data resellers, insurance companies, and other pre-authorized customers digital access to state motor vehicle driver history records on behalf of our state partners.
Development Services: revenues from the performance of software development projects and other time and materials services for our government partners. While we actively market these services, they do not have the same degree of predictability as our transaction-based or fixed fee management services and are generally non-recurring.
Fixed Fee Management Services: our state enterprise business in Indiana earns fixed fees from the performance of digital government services for numerous government partners.
Software & Services Revenues: We earn revenues from our businesses that provide software development and digital government services, other than those services provided under state enterprise contracts, to federal agencies as well as state and local governments. Our Software & Services revenue is mainly transaction-based and classified by two types of contracts: NIC Federal and Other. Each of these revenue types is further described below:

NIC Federal: primarily transaction-based, fees from contracts with certain Federal agencies in the United States, including the Department of Transportation's Federal Motor Carrier Safety Administration ("FMCSA") to manage the Pre-Employment Screening Program ("PSP") and the United States National Park Service to manage the YourPassNow electronic park pass service. We also earn transaction-based revenues as a subcontractor to Booz Allen Hamilton on its Recreation.gov contract. The revenues in NIC Federal are generally recurring under their respective contracts.

17


Other: primarily transaction-based fees from contracts with state and local governments that are not part of an enterprise-wide state contract. The majority of revenues from these sources are recurring.

OPERATING EXPENSES

The primary categories of operating expenses include: cost of revenues, selling & administrative, enterprise technology & product support, and depreciation & amortization. Each of these categories are described below:

Cost of Revenues: This consists of all direct costs associated with providing digital government services both on a state enterprise basis and a software & services basis and excludes depreciation and amortization. We categorize costs of revenues between fixed and variable costs:

Fixed costs include costs such as employee compensation and benefits (including stock-based compensation), subcontractor labor costs, telecommunications costs, provision for losses on accounts receivable, and all other costs associated with the provision of dedicated client service such as dedicated facilities.

Variable costs fluctuate with the level of revenues and primarily include interchange fees required to process credit/debit card transactions, bank fees to process automated clearinghouse transactions and, to a much lesser extent, costs associated with revenue share arrangements with certain state partners. A significant percentage of our transaction-based revenues are generated from online applications whereby users pay for information or transactions via credit/debit cards. We typically earn a portion of the credit/debit card transaction amount, but also must pay an associated interchange fee to the financial institution that processes the credit/debit card transaction. We earn a lower incremental gross profit percentage on these transactions as compared to our DHR and other IGS transactions. However, we plan to continue to implement these services because they are needed by our government partners and they contribute favorably to our operating income growth.

Selling & Administrative: This category consists primarily of corporate-level expenses (including all forms of compensation and benefits) relating to market development and sales, human resource management, marketing, corporate communications and public relations, administration, legal, finance and accounting, internal audit and other non-customer service related costs.

Enterprise Technology & Product Support: This category consists primarily of corporate-level expenses (including all forms of compensation and benefits) for our information technology, product and security teams that support our centrally hosted data center infrastructure and centrally developed payment processing solutions, government agency vertical products, including outdoor recreation and healthcare, and other platform solutions, including our citizen-centric Gov2Go enterprise platform and enterprise microservices and internal development platforms.

Depreciation and Amortization: This category consists of depreciation of fixed assets and amortization of both our internally developed software and software purchased as part of an acquisition.

RESULTS OF OPERATIONS

The discussion below focuses on our consolidated results of operations for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Total Revenues

Total revenues for the three months ended March 31, 2019 were $85.2 million, a 2% decrease from the three months ended March 31, 2018. Recurring revenues as a percentage of total revenues for the three months ended March 31, 2019 was 97% compared to 98% for the three months ended March 31, 2018.

State Enterprise Revenues

In the table below, we have categorized our state enterprise revenues according to the underlying source of revenue, with the corresponding percentage change from the comparative prior year period:

18


 
 
Three Months Ended March 31,
(dollar amounts in thousands)
 
2019
 
2018
 
Change
% Change
IGS transaction-based
 
$
50,154

 
$
50,267

 
$
(113
)
 %
DHR transaction-based
 
23,685

 
27,239

 
(3,554
)
(13
)%
Development services
 
2,178

 
2,047

 
131

6
 %
Fixed fee management services
 
1,238

 
1,238

 

 %
Total
 
$
77,255

 
$
80,791

 
$
(3,536
)
(4
)%

The following table summarizes key financial metrics for state enterprise revenues. For the three months ended March 31, 2019, the results of the legacy Texas contract, the new Texas payment processing contract and the Illinois contract were excluded from the same-state enterprise category as they both did not generate revenues for two full comparable periods.
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Same-state IGS revenue growth
 
15
 %
 
10
%
Same-state DHR revenue growth
 
3
 %
 
1
%
Same-state revenue growth - other services*
 
(4
)%
 
14
%
Same-state revenue growth - total
 
10
 %
 
7
%
* Represents the combined growth of development services and fixed fee management services revenues.

State enterprise revenues in the current quarter decreased 4%, or approximately $3.5 million, from the prior year quarter largely due to a $17.5 million decrease in revenues from the legacy Texas contract, which expired on August 31, 2018. This decrease was partially offset by a 10%, or approximately $6.3 million, increase in same-state enterprise revenues and a $7.4 million increase in revenues from the Texas payment processing contract, which commenced on September 1, 2018.

The 10% increase in same-state revenues was mainly due to higher revenues in Indiana, South Carolina and Pennsylvania, among other states. Same-state IGS revenues increased 15% in the three months ended March 31, 2019 driven in part by higher payment processing volumes in Indiana and New Jersey and higher driver's license renewals in South Carolina, among other services. Same-state DHR revenues grew 3% in the three months ended March 31, 2019 mainly due to a prior period price increase in one state and higher volumes across several states. Same-state revenue growth for other services declined 4% primarily due to the timing of projects for development services in certain states.

Software & Services Revenues

In the table below, we have categorized our software & services revenues by business, with the corresponding percentage change from the comparative prior year period:

 
 
Three Months Ended March 31,
(dollar amounts in thousands)
 
2019
 
2018
 
Change
% Change
NIC Federal
 
$
5,951

 
$
4,096

 
$
1,855

45%
Other
 
1,974

 
1,838

 
136

7%
Total
 
$
7,925

 
$
5,934

 
$
1,991

34%

Software & services revenues increased 34% or approximately $2.0 million, over the prior year quarter driven mainly by growth in transactions from our NIC Federal business. This includes our subcontracting relationship with Booz Allen Hamilton on its Recreation.gov contract, which launched on October 1, 2018 and our contract with the FMCSA due to increased demand for the PSP service offering.


19


State Enterprise Cost of Revenues

In the table below, we have categorized our state enterprise cost of revenues between fixed and variable costs, with the corresponding percentage change from the comparative prior year period:

 
 
Three Months Ended March 31,
(dollar amounts in thousands)
 
2019
 
2018
 
Change
% Change
Fixed costs
 
$
24,323

 
$
28,128

 
$
(3,805
)
(14
)%
Variable costs
 
24,332

 
20,514

 
3,818

19
 %
Total
 
$
48,655

 
$
48,642

 
$
13

 %

State enterprise cost of revenues in the three months ended March 31, 2019 were flat compared to the prior year period as the increase in same-state costs and costs associated with the new Texas payment processing contract were offset by decreases in costs from the legacy Texas contract. The increase in variable costs was primarily attributable to an increase in credit card interchange fees associated with higher IGS payment processing revenues in Texas, Indiana and New Jersey. The decrease in fixed costs was primarily attributable to lower employee compensation related costs associated with the expiration of the legacy Texas contract on August 31, 2018.

State enterprise gross profit percentage was 37% in the three months ended March 31, 2019 compared to 40% in the prior year period. The decrease was largely attributable to significantly lower revenues and profit margins from the new Texas payment processing contract compared to the legacy Texas contract. We carefully monitor our state enterprise gross profit percentage to strike a balance between generating a solid return for our stockholders and delivering value to our government partners through ongoing investment in our state enterprise operations (which, we believe, also benefits our stockholders).

Software & Services Cost of Revenues

In the table below, we have categorized our software & services cost of revenues between fixed and variable costs, with the corresponding percentage change from the comparative prior year period:

 
 
Three Months Ended March 31,
(dollar amounts in thousands)
 
2019
 
2018
 
Change
% Change
Fixed costs
 
$
2,318

 
$
1,801

 
$
517

29
 %
Variable costs
 
402

 
427

 
(25
)
(6
)%
Total
 
$
2,720

 
$
2,228

 
$
492

22
 %

Software & services cost of revenues in the three months ended March 31, 2019 increased 22% compared to the prior year period largely driven by compensation related costs to support the subcontracting work for Booz Allen Hamilton on its Recreation.gov contract.

Our software & services gross profit percentage was 66% in the three months ended March 31, 2019 compared to 62% in the comparative prior year. The increase was largely attributable to incremental revenues from our subcontracting relationship with Booz Allen Hamilton on its Recreation.gov contract.

Selling & Administrative

Selling & administrative expenses for the three months ended March 31, 2019 were $10.0 million, an increase of $2.5 million, or 33%, compared to the same period in the prior year, driven by executive severance costs totaling $2.6 million in the current quarter, as previously disclosed. These severance costs consisted of a one-time cash payment of $1.5 million and $1.1 million of stock-based compensation expense associated with the accelerated vesting of certain restricted stock awards. As a percentage of total consolidated revenues, selling & administrative expenses were 12% for the first quarter of 2019 compared to 9% for the first quarter of 2018.


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Enterprise Technology & Product Support

Enterprise technology & product support expenses for the three months ended March 31, 2019 were $6.4 million, an increase of $0.8 million, or 14%, compared to the same period in the prior year. The increase was primarily driven by higher personnel costs to support product development and enhance company-wide information technology, including the continued development of the Company's citizen-centric Gov2Go® enterprise platform and enterprise microservices platform. As a percentage of total consolidated revenues, enterprise technology and product support expenses were 8% for the first quarter of 2019 compared to 7% for the first quarter of 2018.

Depreciation & Amortization

 
 
Three Months Ended March 31,
(dollar amounts in thousands)
 
2019
 
2018
 
Change
% Change
Depreciation
 
$
1,025

 
$
1,448

 
$
(423
)
(29
)%
Amortization
 
1,396

 
617

 
779

126
 %
Depreciation & amortization
 
$
2,421

 
$
2,065

 
$
356

17
 %

Depreciation & amortization expense increased 17%, or $0.4 million for the three months ended March 31, 2019 compared to the same period in the prior year. The increase was driven primarily by intangible asset amortization related to the Leap Orbit asset acquisition as well as the amortization of capitalized software development costs related to enterprise product and platform investments made in prior periods. This increase was partially offset by lower depreciation related to the legacy Texas contract. As a percentage of total consolidated revenues, depreciation & amortization expense was 3% for the first quarter of 2019 compared to 2% for the same period in the prior year.

Interest Income

Interest income was $0.6 million for the three months ended March 31, 2019. The increase from the comparative prior year period was primarily driven by an increase in interest rates on our average cash balance for the current period.

Income Taxes

Our effective tax rate was approximately 26.2% and 24.9% for the three months ended March 31, 2019 and 2018, respectively. The higher effective tax rate for the three months ended March 31, 2019 was primarily driven by executive severance costs in the current period, a significant portion of which is not deductible for income tax purposes.

Liquidity and Capital Resources

Operating Activities

Cash flows provided by operating activities were $1.1 million for the first quarter of 2019 compared to $9.2 million for the first quarter of 2018. The decrease was mainly the result of a decrease in net income and fluctuations in working capital mainly associated with the timing of payments to and receipts from our government partners.

Investing Activities

Cash flows used in investing activities were $5.6 million for the first quarter of 2019 compared to $2.5 million for the first quarter of 2018. The increase was primarily due to the additional consideration of $1.7 million paid during the first quarter of 2019 for the software technology acquired in the Leap Orbit asset acquisition, and by a $0.6 million and $0.8 million increase in purchases of property and equipment and capitalized software development costs, respectively.

Financing Activities

Cash flows used in financing activities were $6.6 million for the first quarter of 2019 compared to $5.1 million for the first quarter of 2018. The increase was primarily due to a $1.5 million increase in tax withholdings related to the vesting of employee stock-based compensation awards.


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Liquidity

We recognize revenues primarily from providing outsourced digital government services at the contractual net fee earned by the Company for each transaction. In these arrangements, the Company is acting as an agent and the gross transaction fees collected by us from consumers on behalf of our government partners are not recognized as revenue but are accrued as accounts payable when the services are provided at the time of the transactions. We must remit a certain amount or percentage of these fees to government agencies regardless of whether we ultimately collect the fees from the consumer. As a result, trade accounts receivable and accounts payable reflect the gross amounts outstanding at the balance sheet dates. We typically collect a majority of our accounts receivable prior to remitting amounts payable to our government partners.

We believe our working capital and current ratio are important measures of our short-term liquidity. Working capital, defined as current assets minus current liabilities, increased to $198.5 million at March 31, 2019, from $197.2 million at December 31, 2018. The increase in our working capital was primarily due to cash generated from operations in the period. Our current ratio, defined as current assets divided by current liabilities, was 2.8 and 3.2 at March 31, 2019 and December 31, 2018, respectively.

At March 31, 2019, our cash balance was $180.6 million compared to $191.7 million at December 31, 2018. We believe that our currently available liquid resources and cash generated from operations will be sufficient to meet our operating requirements, capital expenditure requirements and potential dividend payments for at least the next 12 months without the need for additional capital. We have a $10.0 million unsecured revolving credit facility (the “Credit Agreement”) with a bank that is available to finance working capital, issue letters of credit and finance general corporate purposes. The Credit Agreement also includes an accordion feature that will allow us to increase the available capacity under the Credit Agreement to $50 million, subject to securing additional commitments from the bank. We can obtain letters of credit in an aggregate amount of $5.0 million, which reduces the maximum amount available for borrowing under the Credit Agreement. In total, we had $4.8 million in available capacity to issue additional letters of credit and $9.8 million of unused borrowing capacity at March 31, 2019 under the Credit Agreement. We were in compliance with all of our covenants under the Credit Agreement at March 31, 2019. As further discussed in Note 5 of the Notes to the Unaudited Consolidated Financial Statements on this Form 10-Q, on May 1, 2019, we entered into an amendment to our Credit Agreement that, among other things, amended and extended our Credit Agreement from May 1, 2019 to May 1, 2021.

At March 31, 2019, we were bound by performance bond commitments totaling approximately $10.8 million on certain government contracts.

We currently expect our capital expenditures to range from approximately $4.5 million to $5.5 million in the fiscal year 2019, which we intend to fund from our cash flows from operations and existing cash reserves. This estimate includes capital expenditures for normal fixed asset additions in our state enterprise businesses including equipment upgrades and enhancements, and in our centralized hosting environment to support and enhance corporate-wide information technology and security infrastructure, including Web servers, software licenses, and office equipment. We currently expect our capitalized internal-use software development costs to range from approximately $7.0 million to $8.0 million. This estimate includes costs related to the enhancement of centralized customer management, billing and payment processing solutions that support our business operations and accounting systems in addition to our citizen-centric Gov2Go enterprise platform, enterprise microservices platform and enterprise licensing and permitting platform.

Dividends

We paid dividends of $0.08 per common share during the first quarter of 2019 and 2018. The total cash dividends paid during the first quarter of 2019 and 2018 were $5.4 million and $5.4 million, respectively.

On May 7, 2019, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.08 per share, payable to stockholders of record as of June 11, 2019. The dividend, which is expected to total approximately $5.4 million, will be paid on June 25, 2019, out of the Company’s available cash.

Future Financing

We may need to raise additional capital within the next 12 months to further:

fund operations if unforeseen costs arise;
support our expansion into other federal, state and local government agencies beyond what is contemplated if unforeseen opportunities arise;
expand our product and service offerings beyond what is contemplated if unforeseen opportunities arise;

22


fund acquisitions;
respond to unforeseen competitive pressures; and
acquire technologies beyond what is contemplated.
  
Any projections of future earnings and cash flows are subject to substantial uncertainty. If our cash generated from operations and the unused portion of our line of credit are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or issue debt securities. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions, as well as our financial condition and results of operations at the time we seek additional financing. The sale of additional equity securities could result in dilution to our stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.

Off-Balance Sheet Arrangements and Contractual Obligations

We had unused outstanding letters of credit totaling approximately $0.2 million at March 31, 2019.

As of March 31, 2019, there have been no material changes outside the ordinary course of business from the disclosures relating to contractual obligations contained under “Off-Balance Sheet Arrangements and Contractual Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019. While we have significant operating lease commitments for office space, except for our headquarters, those commitments are generally tied to the period of performance under related contracts. We have income tax uncertainties of approximately $9.0 million at March 31, 2019. These obligations are classified as non-current on our consolidated balance sheet, as resolution is expected to take more than a year. We estimate that these matters could be resolved in one to three years. However, the ultimate timing of resolution is uncertain.
 

23


CRITICAL ACCOUNTING POLICIES

We have updated our accounting policies related to leases in conjunction with the adoption of ASC 842 as further described in Note 2 in the Notes to the Unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no other material changes in our critical accounting policies from the information provided under “Critical Accounting Policies” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk.  
Our results of operations are exposed to financial market risks due primarily to changes in interest rates on our interest-bearing cash accounts. We currently have no principal amounts of indebtedness outstanding under our line of credit, the terms of which are discussed in Note 5 to the Unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. Based on our cash balances as of March 31, 2019, a one percent change in interest rates would not have a significant impact on our cash flows or results of operations.

We do not use derivative financial instruments.
 
ITEM 4.  CONTROLS AND PROCEDURES

a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that material information required to be disclosed in its filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting that occurred during the first quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


24


PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in litigation arising from the operation of our business that is considered routine and incidental to our business. We do not believe the results of such litigation will have a material adverse effect on our business, results of operations, financial condition or cash flow.

ITEM 1A. RISK FACTORS

There were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchases

During the first quarter of 2019, we acquired and cancelled shares of common stock surrendered by employees to pay income taxes due upon the vesting of restricted stock as follows:
 
Period
 
Total Number of Shares Purchased
 
Average Price
Paid Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the Plans
or Programs (1)
January 15, 2019
 
2,568

 
$
13.65

 
N/A
 
N/A
January 18, 2019
 
665

 
13.81

 
N/A
 
N/A
January 20, 2019
 
2,421

 
13.81

 
N/A
 
N/A
January 28, 2019
 
1,502

 
14.13

 
N/A
 
N/A
January 30, 2019
 
881

 
14.16

 
N/A
 
N/A
February 6, 2019
 
42,726

 
17.31

 
N/A
 
N/A
February 22, 2019
 
86,252

 
17.26

 
N/A
 
N/A
February 23, 2019
 
15,542

 
17.26

 
N/A
 
N/A
Total
 
152,557

 
17.01

 
 
 
 

(1) In March 2018, we announced that our Board of Directors had authorized a stock buyback program allowing the Company to repurchase up to $25 million of our common stock. Share repurchases may be made in the open market or in privately negotiated transactions as permitted by securities laws and other legal requirements and may be made under a Rule 10b5-1 plan. No purchases have been made under this program.
 
ITEM 5. OTHER INFORMATION

We are providing the following disclosure in lieu of providing this information in a current report on Form 8-K pursuant to Item 5.07, “Submission of Matters to a Vote of Security Holders.”

At the 2019 Annual Meeting of Stockholders of the Company held on May 7, 2019, stockholders of the Company voted on three proposals and cast their votes as described below.  The proposals are described in the Company’s definitive proxy statement filed with the SEC on March 22, 2019.


25


Proposal 1

The following directors were elected to serve until the 2020 Annual Meeting of Stockholders and until their successors are elected and qualified, as set forth below:

Name
 
For
 
Withheld
 
Broker Non-Votes
Harry H. Herington
 
53,129,007
 
454,694
 
8,633,788
Art N. Burtscher
 
52,902,225
 
681,476
 
8,633,788
Venmal (Raji) Arasu
 
51,243,873
 
2,339,828
 
8,633,788
C. Brad Henry
 
51,362,310
 
2,221,391
 
8,633,788
Alexander C. Kemper
 
53,152,830
 
430,871
 
8,633,788
William M. Lyons
 
49,692,874
 
3,890,827
 
8,633,788
Antony Scott
 
53,442,873
 
140,828
 
8,633,788
Jayaprakash Vijayan
 
53,449,477
 
134,224
 
8,633,788
Pete Wilson
 
51,188,875
 
2,394,826
 
8,633,788

Proposal 2

Company stockholders approved, on an advisory basis, the compensation of the Company’s named executive officers as set forth in the Company’s proxy statement for the 2019 Annual Meeting of Stockholders, as set forth below:

For
 
Against
 
Abstentions
 
Broker Non-Votes
51,437,925
 
2,095,962
 
49,814
 
8,633,788

Proposal 3

Company stockholders ratified the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2019, as set forth below:

For
 
Against
 
Abstentions
 
Broker Non-Votes
61,755,292
 
402,012
 
60,185
 


26


ITEM 6.  EXHIBITS
 
10.1*
 
 
31.1*
 
 
31.2*
 
 
32.1**
 
 
101
The following financial information from NIC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language) includes (i) Consolidated Balance Sheets at March 31, 2019 (unaudited) and December 31, 2018, (ii) Consolidated Statements of Income (unaudited) for the three months ended March 31, 2019 and 2018, (iii) Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2019 and 2018, (iv) Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018, and (v) the Notes to the Unaudited Consolidated Financial Statements (submitted electronically herewith).

* Filed herewith.

** Pursuant to Item 601(b)(32) of Regulation S-K, this Exhibit is furnished rather than filed with this Quarterly Report on Form 10-Q.

27



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
NIC INC.
 
 
 
Dated:
May 7, 2019
/s/ Stephen M. Kovzan
 
 
Stephen M. Kovzan
 
 
Chief Financial Officer


28