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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, 2020
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
egov-20200331_g1.jpg
NIC INC.
(Exact name of registrant as specified in its charter)
Delaware52-2077581
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par value per shareEGOVThe 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 filerAccelerated 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 April 24, 2020, the registrant had 66,970,030 shares of common stock outstanding.



NIC INC.
Form 10-Q for the Quarter Ended March 31, 2020
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, 2020December 31, 2019
ASSETS
Current assets:  
Cash$217,587  $214,380  
Trade accounts receivable, net101,814  85,399  
Prepaid expenses & other current assets18,375  12,944  
Total current assets337,776  312,723  
Property and equipment, net10,150  10,091  
Right of use lease assets, net9,901  10,778  
Intangible assets, net22,109  22,398  
Goodwill5,965  5,965  
Other assets794  404  
Total assets$386,695  $362,359  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:  
Accounts payable$88,056  $63,685  
Accrued expenses21,118  25,940  
Lease liabilities3,642  3,776  
Other current liabilities8,951  7,191  
Total current liabilities121,767  100,592  
Deferred income taxes, net3,183  2,463  
Lease liabilities6,607  7,373  
Other long-term liabilities6,094  6,003  
Total liabilities137,651  116,431  
Commitments and contingencies (Notes 2, 3 and 6)    
Stockholders' equity:  
Common stock, $0.0001 par, 200,000 shares authorized, 66,968 and 66,968 shares issued and outstanding
7  7  
Additional paid-in capital123,683  123,208  
Retained earnings125,354  122,713  
Total stockholders' equity249,044  245,928  
Total liabilities and stockholders' equity$386,695  $362,359  
 
See accompanying notes to unaudited consolidated financial statements.
3


NIC INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
thousands except per share amounts
 Three Months Ended
March 31,
 
20202019
Revenues:
State enterprise revenues$74,411  $69,853  
Software & services revenues16,708  15,327  
Total revenues91,119  85,180  
Operating expenses:      
State enterprise cost of revenues, exclusive of depreciation & amortization
46,271  41,978  
Software & services cost of revenues, exclusive of depreciation & amortization
10,724  9,397  
Selling & administrative8,064  9,964  
Enterprise technology & product support7,254  6,445  
Depreciation & amortization3,482  2,421  
Total operating expenses75,795  70,205  
Operating income 15,324  14,975  
Other income:
Interest income389  604  
Income before income taxes15,713  15,579  
Income tax provision 3,850  4,077  
Net income$11,863  $11,502  
Basic net income per share$0.18  $0.17  
Diluted net income per share$0.18  $0.17  
Weighted average shares outstanding:  
Basic66,987  66,670  
Diluted66,987  66,670  
 
See accompanying notes to unaudited consolidated financial statements.

4



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

Three Months Ended March 31, 2020
 Common StockAdditional Paid-in CapitalRetained Earnings 
 SharesAmountTotal
Balance, January 1, 202066,968  $7  $123,208  $122,713  $245,928  
Net cumulative effect of adoption of accounting standard (Note 2)
—  —  —  339  339  
Net income—  —  —  11,863  11,863  
Dividends declared—  —  —  (6,105) (6,105) 
Dividend equivalents on unvested performance-based restricted stock awards
—  —  35  (35)   
Dividend equivalents canceled upon forfeiture of performance-based restricted stock awards
—  —  (84) 84    
Restricted stock vestings228  —  —  —  —  
Shares surrendered and canceled upon vesting of restricted stock to satisfy tax withholdings
(91) —  (1,865) (1,865) 
Repurchase of shares
(241) —  (439) (3,505) (3,944) 
Stock-based compensation—  1,319    1,319  
Issuance of common stock under employee stock purchase plan
104  —  1,509  —  1,509  
Balance, March 31, 202066,968  $7  $123,683  $125,354  $249,044  

Three Months Ended March 31, 2019
 Common StockAdditional Paid-in CapitalRetained Earnings 
 SharesAmountTotal
Balance, January 1, 201966,569  $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 canceled upon forfeiture of performance-based restricted stock awards
—  —  (122) 122    
Restricted stock vestings364  —  —  —  —  
Shares surrendered and canceled 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, 201966,911  $7  $118,774  $100,114  $218,895  

See accompanying notes to unaudited consolidated financial statements.
5


NIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
thousands
 Three Months Ended March 31,
 20202019
Cash flows from operating activities:  
Net income$11,863  $11,502  
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation & amortization3,482  2,421  
Stock-based compensation expense1,319  2,272  
Deferred income taxes603  1,076  
Provision (recoveries) for losses on accounts receivable347  (186) 
Changes in operating assets and liabilities:  
Trade accounts receivable, net(16,306) (32,464) 
Prepaid expenses & other current assets(5,431) (1,205) 
Other assets697  1,069  
Accounts payable24,371  20,008  
Accrued expenses(4,822) (3,183) 
Other current liabilities1,416  422  
Other long-term liabilities(675) (664) 
Net cash provided by operating activities16,864  1,068  
Cash flows from investing activities:  
Purchases of property and equipment(1,060) (1,484) 
Asset acquisition  (1,743) 
Capitalized software development costs(2,192) (2,417) 
Net cash used in investing activities(3,252) (5,644) 
Cash flows from financing activities:  
Cash dividends on common stock(6,105) (5,402) 
Proceeds from employee common stock purchases1,509  1,443  
Shares surrendered upon vesting of restricted stock to satisfy tax withholdings
(1,865) (2,609) 
Repurchase of shares(3,944)   
Net cash used in financing activities(10,405) (6,568) 
Net increase (decrease) in cash3,207  (11,144) 
Cash, beginning of period214,380  191,700  
Cash, end of period$217,587  $180,556  
Other cash flow information:  
Cash payments:  
Income taxes paid, net$4,391  $3,637  
See accompanying notes to 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 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, complete transactions and make electronic payments. 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 payment processing services, 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, 2019, including the notes thereto, set forth in the Company’s 2019 Annual Report on Form 10-K.

Certain amounts in the consolidated statements of income for the three months ended March 31, 2019 were reclassified to conform to the current year presentation. In 2020, the Company began classifying the current Texas payment processing contract in the software & services category. The Company reclassified $7.4 million of revenues and $6.7 million of cost of revenues from this contract from the state enterprise category to the software & services category in the prior year. The reclassification had no impact on net income or cash flows for the period ended March 31, 2019.

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, 2020.

Recently issued accounting pronouncements

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
7


recognizing credit losses which reflects losses that are probable. On January 1, 2020, the Company adopted the standard and all the related amendments, using a modified retrospective approach. The adoption of the standard resulted in a cumulative-effect adjustment to retained earnings of approximately $0.3 million. The adoption of the standard did not have a significant impact on the Company’s consolidated earnings or cash flows.

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.  

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 services. The following table summarizes, by reportable and operating segment, the principal activities from which the Company generates revenue (in thousands):

Three Months Ended March 31, 2020
 State EnterprisePaymentsAll OtherConsolidated
Total
IGS$48,187  $  $  $48,187  
DHR22,849      22,849  
Other  10,016  5,464  15,480  
Total transaction-based71,036  10,016  5,464  86,516  
Development services2,137      2,137  
Fixed-fee services1,238    1,228  2,466  
Total revenues$74,411  $10,016  $6,692  $91,119  
Three Months Ended March 31, 2019
State EnterprisePaymentsAll OtherConsolidated
Total
IGS$42,751  $  $  $42,751  
DHR23,685      23,685  
Other  9,352  5,534  14,886  
Total transaction-based66,436  9,352  5,534  81,322  
Development services2,179      2,179  
Fixed-fee services1,238    441  1,679  
Total revenues$69,853  $9,352  $5,975  $85,180  

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, in exchange for transaction-based fees. 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.

8


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, 2020, the total transaction price allocated to unsatisfied performance obligations was approximately $5.4 million.

Fixed-fee Services Revenues

Fixed-fee services revenues primarily consist of revenues from providing recurring fixed fee digital government services to the Company’s government partner in Indiana and smaller contracts for subscription-based services in the Company's software & services businesses. As of March 31, 2020, 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.

The subscription-based service contracts in the Company's software & services businesses are a fixed-fee single performance obligation to provide government partners continuous access to digital services. As of March 31, 2020, the unsatisfied performance obligations related to these contracts was $16.7 million, which will be recognized over the term of such contracts, generally 1 - 5 years.

Unearned Revenues

Unearned revenues at March 31, 2020 and December 31, 2019 were approximately $3.3 million and $3.8 million, respectively. The change in the deferred revenue balance for the three months ended March 31, 2020 is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by $2.3 million of revenues recognized that were previously included in deferred revenue.

Trade accounts receivable

The Company records trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts. The Company calculates this allowance based on its history of write-offs, and its relationship with, and the forecasted economic status of, its customers. Trade accounts receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. The Company’s allowance for doubtful accounts at March 31, 2020 and December 31, 2019 was approximately $1.1 million and $1.2 million, respectively.

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 and payments. 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
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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, 15 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 the three months ended March 31, 2020. 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.

Software & services contracts

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 7 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, 2020. Collectively, revenues generated from these contracts represented approximately 27% of the Company’s total consolidated revenues for the three months ended March 31, 2020. Although three 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.

Performance Bond Commitments

At March 31, 2020, the Company was bound by performance bond commitments totaling approximately $25.2 million on certain government contracts and other business relationships.

4.  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 months ended March 31, 2020 and 2019. 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,
 20202019
Numerator:
Net income$11,863  $11,502  
Less: Income allocated to participating securities(129) (127) 
Net income available to common stockholders$11,734  $11,375  
Denominator:  
Weighted average shares - basic66,987  66,670  
Performance-based restricted stock awards    
Weighted average shares - diluted66,987  66,670  
Basic net income per share:$0.18  $0.17  
Diluted net income per share:$0.18  $0.17  

5.  STOCKHOLDERS’ EQUITY

The Company's Board of Directors declared and paid the following dividends (payment amount in millions):
Declaration DateDividend per ShareRecord DatePayment DatePayment Amount
January 27, 2020$0.09March 4, 2020March 18, 2020$6.1
January 28, 2019$0.08March 5, 2019March 19, 2019$5.4

On April 23, 2020, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.09 per share, payable to stockholders of record as of June 11, 2020. The dividend, which is expected to total approximately $6.1 million, will be paid on June 25, 2020, out of the Company’s available cash.

Share Repurchase

In March 2018, the Company announced that its Board of Directors authorized a stock repurchase program allowing the Company to repurchase up to $25 million of common stock. During the three months ended March 31, 2020, the Company repurchased and retired 241,180 shares at a weighted average purchase price of $16.33 for a total value of $3.9 million under the repurchase program.

6.  INCOME TAXES

The Company's effective tax rate was 24.5% and 26.2% for the three months ended March 31, 2020 and 2019, respectively. The Company's effective tax rate for the three months ended March 31, 2020 and 2019 was higher than the federal statutory rate of 21% primarily due to state income taxes and non-deductible expenses. Additionally, the effective tax rate was higher in the prior year period due to $2.6 million of executive severance costs, a significant portion of which were not deductible for income tax purposes.

7.  STOCK BASED COMPENSATION

During the three months ended March 31, 2020, 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 265,293 shares with a grant-date fair value totaling approximately $5.5 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.

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During the three months ended March 31, 2020, 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 137,052 shares with a grant-date fair value totaling approximately $2.8 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, 2022. 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, 2019, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 22, 2017 ended. Based on the Company’s actual financial results from 2017 through 2019, no shares or dividend equivalent shares were earned, and the 87,241 shares subject to the awards were forfeited in the first quarter of 2020.

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
March 31,
 20202019
State enterprise cost of revenues, exclusive of depreciation & amortization
$358  $361  
Software & services cost of revenues, exclusive of depreciation & amortization
28  35  
Selling & administrative768  1,716  
Enterprise technology & product support165  160  
Total stock-based compensation expense $1,319  $2,272  
  
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8.  REPORTABLE SEGMENT AND RELATED INFORMATION

Beginning in the first quarter of 2020, the Company determined that it has two reportable segments: 1) State Enterprise and 2) Payments. Prior to the first quarter of 2020, the Company had one reportable segment: State Enterprise. The change from one to two reportable segments was based on quantitative and qualitative considerations, and was a result of recent changes in the Company's reporting structure to reclassify the current Texas payment processing contract from the state enterprise category to the software & services category. The revised reportable segments reflect the way the Company evaluates its business performance and manages its operations. All prior year amounts have been restated to conform to the current year presentation.

The State Enterprise reportable segment generally includes the Company’s subsidiaries operating digital government services on an enterprise-wide basis for state and local governments. The Payments reportable segment includes subsidiaries in the software & services category that provide certain payment processing-related, transaction-based services to state and local government agencies in states where the Company does not maintain an enterprise-wide contract and to a few private sector entities. The All Other category primarily includes subsidiaries in the software & services category that provide software development and digital government services, other than those provided on an enterprise-wide basis, to federal agencies, including the Company's contract with the FMCSA to operate the Federal PSP and the Company's subcontract for the Recreation.gov outdoor recreation service, as well as to other state and local governments, including the Company's RxGov prescription drug monitoring business and NIC Licensing Solutions regulatory licensing business. Each of the Company’s businesses within the All Other category is an operating segment and has been grouped together to form the All Other 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 ("CODM"), evaluates the performance of its operating 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 CODM. Accordingly, the Company has not presented information relating to segment assets.

The table below reflects summarized financial information for the Company’s reportable segments for the three months ended March 31, (in thousands):
 State EnterprisePaymentsAll OtherOther Reconciling ItemsConsolidated
Total
2020    
Revenues$74,411  $10,016  $6,692  $  $91,119  
Costs & expenses46,271  7,948  2,776  15,318  72,313  
Depreciation & amortization699  1  1,073  1,709  3,482  
Operating income (loss)$27,441  $2,067  $2,843  $(17,027) $15,324  
2019    
Revenues$69,853  $9,352  $5,975  $  $85,180  
Costs & expenses41,978  7,357  2,040  16,409  67,784  
Depreciation & amortization636  1  20  1,764  2,421  
Operating income (loss)$27,239  $1,994  $3,915  $(18,173) $14,975  


The Company's 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 customer accounted for more than 10% of the Company's total consolidated revenues for any period presented.

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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 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, statements related to the ongoing impact of the COVID-19 pandemic 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 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 20, 2020.

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; the impact of the COVID-19 pandemic as discussed under “RISK FACTORS” in Part II, Item IA of this Quarterly Report on Form 10-Q, and the other factors 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 2019 Annual Report on Form 10-K filed on February 20, 2020 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 state enterprise businesses, we generally enter into contracts 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 digital services that we build allow businesses and citizens to access government information through multiple channels and complete billions of dollars of secure transactions and payments annually. We are typically responsible for funding 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, avoid costs, 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.

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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 the services we provide (i.e. data access, transaction processing and payment processing services) 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. In our state enterprise business, we also enter into contracts to provide software development and management services to governments in exchange for an agreed-upon fee.

In our software & services businesses, we provide certain payment processing services, software development and digital government services, other than those provided on an enterprise-wide basis, to federal agencies, as well as state and local governments. Generally, our software & services contracts include transaction processing contracts, SaaS contracts and, to a lesser degree, software development contracts.

In fiscal year 2019, businesses and citizens completed over $22 billion in secure transactions and payments through the digital services we operate on behalf of our government partners in our state enterprise and software & services businesses.

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. 

SEGMENT INFORMATION

Beginning in the first quarter of 2020, the Company determined that it has two reportable segments: 1) State Enterprise and 2) Payments. Previously, we had one reportable segment, State Enterprise. The change from one to two reportable segments was based on quantitative and qualitative considerations, and was a result of recent changes in our reporting structure to reclassify the current Texas payment processing contract from the state enterprise category to the software & services category. The revised segments reflect the way the Company evaluates its business performance and manages its operations. All prior year amounts have been restated to conform to the current year presentation.

Our State Enterprise reportable segment generally includes our subsidiaries that provide digital government services and payment processing on an enterprise-wide basis for state and local governments. Our Payments reportable segment includes our subsidiaries that provide certain payment processing-related, transaction-based services to state and local agencies in states where we do not maintain an enterprise-wide contract and to a few private sector entities. The All Other category primarily includes our subsidiaries that provide software development and digital government services, other than those provided on an enterprise-wide basis, to federal agencies, as well as state and local governments.

For financial information about our reportable segments, please refer to Note 8, Reportable Segment and Related Information, in the Notes to Unaudited Consolidated Financial Statements.

REVENUES

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

State Enterprise Revenues: We earn 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 services. Transaction-based revenues and fixed-fee services
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revenues are generally recurring while development services revenues are generally non-recurring. Each revenue source is 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 2019 Annual Report on Form 10-K, filed with the SEC on February 20, 2020.
DHR: fees from 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 services.
Fixed-Fee Services: our state enterprise business in Indiana earns fixed fees from the performance of digital government services for numerous government agencies.

Software & Services Revenues: We earn revenues from our businesses that provide payment processing services, 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 as payments, federal and other. Each of these revenue types is further described below:

Payments: primarily transaction-based fees from contracts with state and local governments for payment processing-related, transaction-based services that are not part of an enterprise-wide state contract. The majority of revenues from these sources are recurring.
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 transaction-based revenues we earn as a subcontractor to Booz Allen Hamilton on its Recreation.gov contract. The majority of our Federal revenues are generally recurring under the respective contracts.
Other: primarily implementation and SaaS subscription revenues from our RxGov prescription drug monitoring business and our recently acquired NIC Licensing Solutions regulatory licensing business. 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 for both the state enterprise and software & services 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 office 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 and cash flow 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.
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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, healthcare and regulatory licensing, and other platform solutions, including our citizen-centric Gov2Go enterprise platform and enterprise microservices and internal development platforms.

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

NOVEL CORONAVIRUS DISEASE 19 ("COVID-19")

We are monitoring the ongoing COVID-19 pandemic and have been actively working with our government partners to assist them with the impact. As the outbreak progressed in the United States and the vast majority of states issued stay-at-home orders, mostly in the latter part of March, we have seen a decrease in volumes for certain services we operate on behalf of our government partners, including driver history record services we operate in the vast majority of our enterprise states, the federal Pre-Employment Screening Program we operate on behalf of the Department of Transportation Federal Motor Carrier Safety Administration, and the federal Recreation.gov outdoor recreation service we operate as a subcontractor in conjunction with Booz Allen Hamilton, among other services. We have also seen a shift from certain in-person, over-the-counter transactions conducted in brick-and-mortar government offices, many of which are temporarily closed, to those we manage digitally online for our government agency partners. In addition, we have seen several government agency partners allow citizens 60 to 90 day extensions for certain required filings and renewals. The actions have impacted the amount and timing of the revenues we recognize for these services, and we expect these trends to continue for at least the next several months. While historically our revenues and earnings have been relatively predictable as a result of our recurring transaction-based business model, we believe the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. Further, we believe the COVID-19 pandemic may have a prolonged negative impact on broader economic conditions in the United States, which may impact our results of operations in the future. While we have not incurred any significant disruptions to our business activities or services, we have temporarily closed all our offices and shifted to remote operations to ensure social distancing and the health and safety of our employees. We continue to actively monitor the situation and assess further possible implications to our business and are taking aggressive actions to mitigate potential adverse consequences, such as operational contingency planning and testing, key personnel succession planning, enhanced employee and government partner communication protocols, and cost containment efforts to buffer potential revenue declines. See “Risk Factors” in Part II, Item 1A of this report for additional discussion of the risks associated with the COVID-19 pandemic and those "Risk Factors" described in Part I, Item 1A in our Annual Report on Form 10-K filed on February 20, 2020 with the SEC for those risks related to a prolonged economic slowdown, among other risk factors.

RESULTS OF OPERATIONS

The discussion below focuses on our consolidated results of operations for the three months ended March 31, 2020, compared to the three months ended March 31, 2019.

Total Revenues

In the table below, we have categorized our revenue by the two main categories included in the consolidated statements of income with the corresponding percentage change from the comparative prior year period:

 Three Months Ended March 31,
(dollar amounts in thousands)20202019Change% Change
State enterprise revenues$74,411  $69,853  $4,558  7%
Software & services revenues16,708  15,327  1,381  9%
Total$91,119  $85,180  $5,939  7%
Recurring revenues as % of total revenues98 %97 %

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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:

 Three Months Ended March 31,
(dollar amounts in thousands)20202019Change% Change
IGS transaction-based$48,187  $42,751  $5,436  13%
DHR transaction-based22,849  23,685  (836) (4)%
Development services2,137  2,179  (42) (2)%
Fixed-fee services1,238  1,238  —  —%
Total$74,411  $69,853  $4,558  7%

The following table summarizes key financial metrics for state enterprise revenues. For the three months ended March 31, 2020, the results of the Illinois contract were excluded from the same-state category because it did not generate comparable revenues for two full comparable periods.
Three Months Ended March 31,
20202019
Same-state IGS revenue growth 13 %15 %
Same-state DHR revenue growth (decline)(4)%%
Same-state revenue growth (decline) - other services*(1)%(4)%
Same-state revenue growth - total%10 %
* Represents the combined growth of development services and fixed-fee services revenues.

State enterprise revenues for the three months ended March 31, 2020 increased 7% from the comparable prior year period driven by a 7% increase in same-state revenues.

The 7% increase in same-state revenues for the three months ended March 31, 2020 was mainly due to higher revenues in New Jersey and Wisconsin, among other states. Same-state IGS revenues increased 13% for the three months ended March 31, 2020 due, in part, to higher payment processing volumes in New Jersey and the new motor vehicle titling and registration service in Wisconsin, among other services. Same-state DHR revenues declined 4% for the three months ended March 31, 2020 due to lower revenues across several states, mainly occurring in the second half of March 2020 as a result of the impact of COVID-19 on the auto insurance industry and associated data resellers, resulting in lower volumes from these entities, who are the primary customers of state motor vehicle driving records. Same-state revenue growth for other services declined 1% for the three months ended March 31, 2020 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 key business categories, with the corresponding percentage change from the comparative prior year period:

 Three Months Ended March 31,
(dollar amounts in thousands)20202019Change% Change
Payments$10,016  $9,352  $664  7%
Federal5,464  5,534  (70) (1)%
Other1,228  441  787  178%
Total$16,708  $15,327  $1,381  9%

Software & services revenues for the three months ended March 31, 2020 increased 9%, or approximately $1.4 million, over the comparable prior year period. Other revenue increased due mainly to the recently-acquired NIC Licensing Solutions regulatory licensing business (acquired in May 2019) and higher revenues from RxGov prescription drug monitoring contracts in Maryland and Nebraska. The increase in our payments business was mainly driven by transaction growth in the state of Texas.
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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)20202019Change% Change
Fixed costs$25,591  $23,987  $1,604  7%
Variable costs20,680  17,991  2,689  15%
Total$46,271  $41,978  $4,293  10%

State enterprise cost of revenues for the three months ended March 31, 2020 were higher than the corresponding comparable prior year period as the increase in same-state costs drove an increase in both fixed and variable costs. The increase in fixed costs was primarily attributable to higher employee compensation and related costs to support the development and implementation of our outdoor recreation platform in Pennsylvania and Illinois, as well as higher costs in other states. The increase in variable costs was primarily attributable to an increase in credit card interchange fees associated with higher IGS payment processing revenues in New Jersey, among other states.

State enterprise gross profit percentage was 38% for the three months ended March 31, 2020 compared to 40% for the three months ended March 31, 2019. The decrease in the current quarter gross profit percentage was largely attributable to costs to support the development and implementation of our outdoor recreation platform in Pennsylvania and Illinois, and to a decrease in DHR revenues, as further discussed above. 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 businesses (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)20202019Change% Change
Fixed costs$3,248  $2,653  $595  22%
Variable costs7,476  6,744  732  11%
Total$10,724  $9,397  $1,327  14%

Software & services cost of revenues for the three months ended March 31, 2020 increased 14% over the comparable prior year period, largely driven by higher fixed costs to support our RxGov and recently-acquired NIC Licensing Solutions businesses and higher variable costs attributable to credit card interchange fees associated with higher payment processing revenues in Texas, which are a part of our payments segment.

Our software & services gross profit percentage was 36% for the three months ended March 31, 2020 compared to 39% for the three months ended March 31, 2019, respectively. The decrease in the current quarter gross margin percentage was largely driven by higher costs to support our RxGov and recently-acquired NIC Licensing Solutions businesses.

Selling & Administrative

Selling & administrative expenses for the three months ended March 31, 2020 were $8.1 million, a $1.9 million or 19%, decrease from the comparable prior year period. As a percentage of total consolidated revenues, selling & administrative expenses were 9% for the three months ended March 31, 2020 compared to 12% for the three months ended March 31, 2019. The decrease in the current year, in both dollars and as a percentage of revenue, was primarily driven by executive severance in the prior year totaling $2.6 million. The 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.

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Enterprise Technology & Product Support

Enterprise technology & product support expenses for the three months ended March 31, 2020 were $7.3 million, an increase of $0.8 million, or 13%, compared to the same period in the prior year, primarily driven by higher personnel costs to support product development and enhance Company-wide information technology. As a percentage of total consolidated revenues, enterprise technology & product support expenses were 8% for all periods presented.

Depreciation & Amortization
Three Months Ended March 31,