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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 June 30, 2019
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
 
Commission file number 000-26621
image0a06.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:   (877234-3468
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  No 

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 No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer  
Non-accelerated filer  
Smaller reporting company 
Emerging growth company  
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  No 

On July 26, 2019, the registrant had 66,959,777 shares of common stock outstanding.



NIC INC.
Form 10-Q for the Quarter Ended June 30, 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

 
 
June 30, 2019
 
December 31, 2018
ASSETS
Current assets:
 
 
 
 
Cash
 
$
186,535

 
$
191,700

Trade accounts receivable, net
 
113,116

 
80,904

Prepaid expenses & other current assets
 
12,603

 
13,730

Total current assets
 
312,254

 
286,334

Property and equipment, net
 
10,956

 
10,256

Right of use lease assets, net
 
11,924

 

Intangible assets, net
 
23,195

 
13,604

Goodwill
 
5,965

 

Other assets
 
353

 
332

Total assets
 
$
364,647

 
$
310,526

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 

 
 

Accounts payable
 
$
83,708

 
$
60,092

Accrued expenses
 
22,713

 
24,150

Lease liabilities
 
4,077

 

Other current liabilities
 
5,441

 
4,883

Total current liabilities
 
115,939

 
89,125

 
 
 
 
 
Deferred income taxes, net
 
1,757

 
781

Lease liabilities
 
8,263

 

Other long-term liabilities
 
9,346

 
8,931

Total liabilities
 
135,305

 
98,837

 
 
 
 
 
Commitments and contingencies (Notes 2, 3, 4 and 6)
 

 

 
 
 
 
 
Stockholders' equity:
 
 

 
 

Common stock, $0.0001 par, 200,000 shares authorized, 66,956 and 66,569 shares issued and outstanding
 
7

 
7

Additional paid-in capital
 
120,204

 
117,763

Retained earnings
 
109,131

 
93,919

Total stockholders' equity
 
229,342

 
211,689

Total liabilities and stockholders' equity
 
$
364,647

 
$
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
June 30,
 
Six Months Ended
June 30,
 
 
 
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
State enterprise revenues
 
$
82,829

 
$
86,555

 
$
160,085

 
$
167,346

Software & services revenues
 
8,737

 
5,943

 
16,662

 
11,877

Total revenues
 
91,566

 
92,498

 
176,747

 
179,223

Operating expenses:
 
 

 
 

 
 

 
 

State enterprise cost of revenues, exclusive of depreciation & amortization
 
52,277

 
51,711

 
100,933

 
100,353

Software & services cost of revenues, exclusive of depreciation & amortization
 
3,329

 
2,235

 
6,049

 
4,463

Selling & administrative
 
8,356

 
8,268

 
18,320

 
15,771

Enterprise technology & product support
 
6,745

 
5,735

 
13,190

 
11,382

Depreciation & amortization
 
3,130

 
2,145

 
5,551

 
4,210

Total operating expenses
 
73,837

 
70,094

 
144,043

 
136,179

Operating income
 
17,729

 
22,404

 
32,704

 
43,044

Other income:
 
 
 
 
 
 
 
 
Interest income
 
577

 
57

 
1,181

 
58

Income before income taxes
 
18,306

 
22,461

 
33,885

 
43,102

Income tax provision
 
3,846

 
5,450

 
7,923

 
10,582

Net income
 
$
14,460

 
$
17,011

 
$
25,962


$
32,520

 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
0.21

 
$
0.25

 
$
0.38

 
$
0.48

Diluted net income per share
 
$
0.21

 
$
0.25

 
$
0.38

 
$
0.48

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 

 
 

 
 

 
 

Basic
 
66,940

 
66,541

 
66,806

 
66,432

Diluted
 
66,940

 
66,561

 
66,806

 
66,447

 
See accompanying notes to the unaudited consolidated financial statements.


4



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

 
 
Six Months Ended June 30, 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

Net income
 

 

 

 
14,460

 
14,460

Dividends declared
 

 

 

 
(5,416
)
 
(5,416
)
Dividend equivalents on unvested performance-based restricted stock awards
 

 

 
27

 
(27
)
 

Restricted stock vestings
 
47

 

 

 

 

Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings
 
(2
)
 

 
(28
)
 

 
(28
)
Stock-based compensation
 

 

 
1,431

 

 
1,431

Balance, June 30, 2019
 
66,956

 
$
7

 
$
120,204

 
$
109,131

 
$
229,342



5


NIC INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
thousands
 
 
 
Six Months Ended June 30, 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

Net income
 

 

 

 
17,011

 
17,011

Dividends declared
 

 

 

 
(5,385
)
 
(5,385
)
Dividend equivalents on unvested performance-based restricted stock awards
 

 

 
33

 
(33
)
 

Restricted stock vestings
 
44

 

 

 

 

Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings
 
(2
)
 

 
(32
)
 

 
(32
)
Stock-based compensation
 

 

 
1,576

 

 
1,576

Balance, June 30, 2018
 
66,556

 
$
7

 
$
114,507

 
$
79,005

 
$
193,519


See accompanying notes to the unaudited consolidated financial statements.

6


NIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
thousands
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
25,962

 
$
32,520

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

Depreciation & amortization
 
5,551

 
4,210

Stock-based compensation expense
 
3,703

 
3,087

Deferred income taxes
 
976

 
614

Provision for (recoveries) losses on accounts receivable
 
(148
)
 
343

Changes in operating assets and liabilities:
 
 

 
 

Trade accounts receivable, net
 
(31,613
)
 
10,838

Prepaid expenses & other current assets
 
1,130

 
(170
)
Other assets
 
2,191

 
262

Accounts payable
 
23,616

 
(19,460
)
Accrued expenses
 
(1,439
)
 
(4,393
)
Other current liabilities
 
32

 
(209
)
Other long-term liabilities
 
(2,190
)
 
758

Net cash provided by operating activities
 
27,771

 
28,400

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment
 
(2,831
)
 
(2,411
)
Business combination
 
(10,000
)
 

Asset acquisition
 
(3,486
)
 

Capitalized software development costs
 
(4,607
)
 
(3,503
)
Net cash used in investing activities
 
(20,924
)
 
(5,914
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Cash dividends on common stock
 
(10,818
)
 
(10,755
)
Proceeds from employee common stock purchases
 
1,443

 
1,382

Tax withholdings related to stock-based compensation awards
 
(2,637
)
 
(1,165
)
Net cash used in financing activities
 
(12,012
)
 
(10,538
)
 
 
 
 
 
Net (decrease) increase in cash
 
(5,165
)
 
11,948

Cash, beginning of period
 
191,700

 
160,777

Cash, end of period
 
$
186,535

 
$
172,725

 
 
 
 
 
Other cash flow information:
 
 

 
 

Non-cash investing activities:
 
 

 
 

Contingent consideration - business combination
 
$
960

 
$

Capital expenditures accrued but not yet paid
 

 
166

Cash payments:
 
 

 
 

Income taxes paid, net
 
$
6,925

 
$
8,883

See accompanying notes to the unaudited consolidated financial statements.

7


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 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 and six months ended June 30, 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 June 30, 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

8


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 a significant impact on the Company’s consolidated earnings or cash flows for the three and six months ended June 30, 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.  


9


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, the principal activities from which the Company generates revenue (in thousands):

 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
State Enterprise
 
Software
& Services
 
Consolidated
Total
 
State Enterprise
 
Software
& Services
 
Consolidated
Total
IGS
 
$
55,537

 
$

 
$
55,537

 
105,691

 

 
$
105,691

DHR
 
23,413

 

 
23,413

 
47,098

 

 
47,098

Other
 

 
8,737

 
8,737

 

 
16,662

 
16,662

Total transaction-based
 
78,950

 
8,737

 
87,687

 
152,789

 
16,662

 
169,451

Development services
 
2,642

 

 
2,642

 
4,821

 

 
4,821

Fixed fee management services
 
1,237

 

 
1,237

 
2,475

 

 
2,475

Total revenues
 
$
82,829

 
$
8,737

 
$
91,566

 
$
160,085

 
$
16,662

 
$
176,747

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
State Enterprise
 
Software
& Services
 
Consolidated
Total
 
State Enterprise
 
Software
& Services
 
Consolidated
Total
IGS
 
$
55,111

 
$

 
$
55,111

 
$
105,379

 
$

 
$
105,379

DHR
 
26,645

 

 
26,645

 
53,883

 

 
53,883

Other
 

 
5,943

 
5,943

 

 
11,877

 
11,877

Total transaction-based
 
81,756

 
5,943

 
87,699

 
159,262

 
11,877

 
171,139

Development services
 
3,562

 

 
3,562

 
5,609

 

 
5,609

Fixed fee management services
 
1,237

 

 
1,237

 
2,475

 

 
2,475

Total revenues
 
$
86,555

 
$
5,943

 
$
92,498

 
$
167,346

 
$
11,877

 
$
179,223



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 June 30, 2019, the total transaction price allocated to unsatisfied performance obligations was approximately $6.2 million.

Fixed-fee management services revenues

Fixed-fee 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 June 30, 2019, the Company’s Indiana contract had unsatisfied

10


performance obligations for one month. The total transaction price allocated to the unsatisfied performance obligation is not significant.

Unearned Revenues

Unearned revenues at June 30, 2019 and December 31, 2018 were approximately $2.6 million and $1.7 million, respectively. The change in the deferred revenue balance for the six months ended June 30, 2019 is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by $4.7 million of revenues recognized that were included in the deferred revenue during the period.

Leases

All of the Company's lease arrangements are considered operating leases and 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.

Business Combinations

Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires the Company to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. The Company anticipates that its annual goodwill impairment test will be performed during the fourth quarter of its fiscal year.

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

11


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 59% of the Company’s total consolidated revenues for both the three and six months ended June 30, 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 June 30, 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.

Expiring contracts

There are currently 13 state enterprise contracts, as well as the Company's contract with the FMCSA, that have expiration dates within the 12-month period following June 30, 2019. Collectively, revenues generated from these contracts represented approximately 38% and 39% of the Company’s total consolidated revenues for the three and six months ended June 30, 2019. Although four of these state enterprise 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. The Texas contract accounted for approximately 20% of the Company's total consolidated revenue for both the three and six months ended June 30, 2018. For the six months ended June 30, 2018 revenues from the Texas contract were $35.8 million.

4. ACQUISITIONS

Complia, LLC

On May 1, 2019, the Company completed the stock acquisition of Complia, LLC ("Complia"), a regulatory licensing platform business, which the Company rebranded as NIC Licensing Solutions. The Company acquired all outstanding equity of Complia, LLC for initial consideration of $10 million in cash. The sellers are eligible to earn additional cash consideration, up to $5 million, on new contracts that utilize the licensing platform through April 2022. The Company has recorded a liability of $1.0 million for the fair value of this contingent consideration at the date of acquisition as part of the consideration transferred. The fair value of the contingent consideration was determined using a scenario-based model, which includes inputs such as actual and projected earnings‑based measures, probability of achievement and a discount rate, that are not observable in the market. At each reporting period, the contingent consideration liability is recorded at fair value with any changes reflected in selling & administrative expenses. As of June 30, 2019, the Company estimated the total purchase consideration was $11.0 million.

This transaction was accounted for as a business combination, and the purchase price was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. The valuation of the acquired net assets remains preliminary while management completes its valuation, particularly the valuation of acquired intangible assets. The consolidated financial statements include the results of Complia's operations from the date of acquisition. Pro-forma results of operations, assuming this acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of this acquisition was not material to the Company's results.


12


The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands).

 
 
As of May 1, 2019
Current assets
 
$
451

Software
 
4,200

Customer relationships
 
425

Non-compete agreements
 
250

Trade name
 
35

Goodwill
 
5,965

Other assets
 
11

Total assets acquired
 
11,337

 
 
 
Accrued expenses and other liabilities
 
(377
)
Net assets acquired
 
$
10,960



The goodwill was included within the Software & Services category, which is further described in Note 12, and represents future economic benefits that the Company expects to achieve as a result of the acquisition. The acquired capitalized software has an estimated amortization period of five years. The acquired customer relationships have an estimated amortization period of seven years. The non-compete and trade names each have an estimated amortization period of three years. The goodwill and intangible assets associated with this acquisition are deductible for tax purposes.

Leap Orbit LLC

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 were met. The transaction was accounted for as an asset acquisition, as substantially all the value related to the prescription drug monitoring software technology acquired. The Company paid the additional consideration of $3.5 million in the first half of 2019, which was included in the cost of the acquired assets in the consolidated balance sheet. The acquired software has an estimated amortization period of three years. The Company rebranded its prescription drug monitoring platform as RxGov.

5. GOODWILL AND INTANGIBLE ASSETS, NET

The Company recognized goodwill of $6.0 million as a result of the acquisition of Complia. See Note 4, Asset Acquisition, for additional information.

Excluding goodwill, intangible assets, net consisted of the following (in thousands):
 
 
June 30, 2019
 
December 31, 2018
 
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Book
Value
 
Gross Carrying
Value
 
Accumulated
Amortization
 
Net Book
Value
Software development cost
 
$
26,767

 
$
(13,931
)
 
$
12,836

 
$
22,190

 
$
(11,647
)
 
$
10,543

Purchased software
 
11,271

 
(1,589
)
 
9,682

 
$
3,555

 
$
(494
)
 
3,061

Customer relationships
 
425

 
(17
)
 
408

 

 

 

Non-compete agreements
 
250

 
(14
)
 
236

 

 

 

Trade name
 
35

 
(2
)
 
33

 

 

 

Total
 
$
38,748

 
$
(15,553
)
 
$
23,195

 
$
25,745

 
$
(12,141
)
 
$
13,604



During the six months ended June 30, 2019, the Company recorded approximately $7.7 million of intangible asset software purchases in connection with the Complia and Leap Orbit acquisitions, as further discussed in Note 4, Asset Acquisition.


13


Amortization expense for intangible assets with finite lives was $2.0 million and $3.4 million for the three and six months ended June 30, 2019, respectively, and $0.6 million and $1.3 million for the three and six months ended June 30, 2018, respectively. Intangible asset amortization expense is currently expected to total $5.0 million for the remainder of 2019, $8.9 million for fiscal year 2020, $6.1 million for fiscal year 2021, $1.8 million for fiscal year 2022 and $0.9 million for fiscal year 2023.

6. 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 amended 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 Credit Agreement to May 1, 2021, and 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 removed the previous two-tier structure on interest rates and provided that the interest rate on any amounts borrowed by the Company under the Credit Agreement will be at (i) an annual rate adjusted daily and benchmarked to one-month LIBOR, plus a margin of 1.15% per annum, or (ii) an annual rate benchmarked to LIBOR with a term equivalent to such borrowing, plus a margin of 1.15% 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.

7. LEASES

The Company leases office space and certain equipment under noncancelable operating leases. Leases have terms which range from one year to nine years, some of which include options to renew the lease. The exercise of lease renewal options are at the Company’s sole discretion and are included in the lease term when it is reasonably certain the Company will exercise the option based on economic factors. The weighted average remaining lease term for operating leases as of June 30, 2019 was 3.7 years.

The aggregate future lease payments for operating leases as of June 30, 2019 and December 31, 2018 (which is under previous accounting standards), are as follows (in thousands):
 
 
June 30, 2019
 
December 31, 2018
Fiscal Year
 
 
 
 
2019(1)
 
$
2,384

 
$
4,673

2020
 
3,770

 
3,403

2021
 
2,913

 
2,604

2022
 
2,389

 
2,082

2023
 
1,008

 
698

Thereafter
 
752

 
690

Total future minimum lease payments
 
13,216

 
14,150

Less: interest
 
(876
)
 
N/A

Total lease liabilities
 
$
12,340

 
N/A

(1) The June 30, 2019 column excludes the six months ended June 30, 2019.


14


Other information related to operating leases is as follows (in thousands):
 
 
June 30, 2019
Operating lease cost (1)
 
$
2,871

Weighted-average discount rate
 
3.7
%
 
 
  

Supplemental cash flow information
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
2,247

Right of use assets obtained in exchange for new lease liabilities (2)
 
14,136

(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 $1.5 million for operating leases that commenced in the six months ended June 30, 2019.

8.  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 the three and six months ended June 30, 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.

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

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
14,460

 
$
17,011

 
$
25,962

 
$
32,520

Less: Income allocated to participating securities
 
(160
)
 
(187
)
 
(286
)
 
(355
)
Net income available to common stockholders
 
$
14,300

 
$
16,824

 
$
25,676

 
$
32,165

Denominator:
 
 

 
 

 
 

 
 

Weighted average shares - basic
 
66,940

 
66,541

 
66,806

 
66,432

Performance-based restricted stock awards
 

 
20

 

 
15

Weighted average shares - diluted
 
66,940

 
66,561

 
66,806

 
66,447

 
 
 
 
 
 
 
 
 
Basic net income per share:
 
$
0.21

 
$
0.25

 
$
0.38

 
$
0.48

 
 
 
 
 
 
 
 
 
Diluted net income per share:
 
$
0.21

 
$
0.25

 
$
0.38

 
$
0.48




15


9.  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
May 7, 2019
$0.08
June 11, 2019
June 25, 2019
$5.4
January 28, 2019
$0.08
March 5, 2019
March 19, 2019
$5.4
May 1, 2018
$0.08
June 5, 2018
June 19, 2018
$5.4
January 29, 2018
$0.08
March 6, 2018
March 20, 2018
$5.4


On July 29, 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 September 6, 2019. The dividend, which is expected to total approximately $5.4 million, will be paid on September 20, 2019, out of the Company’s available cash.

10.  INCOME TAXES

The Company's effective tax rate was 21.0% and 23.4% for the three and six months ended June 30, 2019, respectively, compared to 24.3% and 24.6% three and six months ended June 30, 2018, respectively. The decrease in the Company's effective tax rate for the three months ended June 30, 2019 was primarily driven by the release of uncertain tax positions as a result of the completion of an IRS examination of the Company's 2016 consolidated U.S. federal income tax return, which resulted in no changes to the Company's previously filed return. The Company remains subject to U.S. federal examination for amended tax returns filed in 2016 and the tax years ending after December 31, 2016. For the six months ended June 30, 2019, the effective tax rate was impacted by approximately $2.6 million of executive severance costs incurred in the first quarter of 2019, as previously disclosed, a significant portion of which is not deductible for income tax purposes.

11.  STOCK BASED COMPENSATION

During the six months ended June 30, 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 305,743 shares with a grant-date fair value totaling approximately $5.2 million. Such restricted stock awards vest beginning one year from the date of grant in annual installments of 25%. In addition, during the first half of 2019, non-employee directors of the Company were granted service-based restricted stock awards totaling 47,560 shares with a grant-date fair value of approximately $0.8 million. Such restricted stock awards vest one year from the date of grant. 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 six months ended June 30, 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:

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 on 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 on 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 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 on 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,

16


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 on 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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
State enterprise cost of revenues, exclusive of depreciation & amortization
 
$
395

 
$
362

 
$
757

 
$
805

Software & services cost of revenues, exclusive of depreciation & amortization
 
21

 
36

 
56

 
76

Selling & administrative
 
857

 
1,021

 
2,572

 
1,858

Enterprise technology & product support
 
158

 
157

 
318

 
348

Stock-based compensation expense
 
$
1,431

 
$
1,576

 
$
3,703

 
$
3,087


  
12.  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 June 30, (in thousands):
 
 
State Enterprise
 
Software
& Services
 
Other Reconciling Items
 
Consolidated
Total
2019
 
 
 
 
 
 
 
 
Revenues
 
$
82,829

 
$
8,737

 
$

 
$
91,566

Costs & expenses
 
52,277

 
3,329

 
15,101

 
70,707

Depreciation & amortization
 
647

 
196

 
2,287

 
3,130

Operating income (loss)
 
$
29,905

 
$
5,212

 
$
(17,388
)
 
$
17,729

 
 
 
 
 
 
 
 
 
2018
 
 

 
 

 
 

 
 

Revenues
 
$
86,555

 
$
5,943

 
$

 
$
92,498

Costs & expenses
 
51,711

 
2,235

 
14,003

 
67,949

Depreciation & amortization
 
930

 
28

 
1,187

 
2,145

Operating income (loss)