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 ~~September 30, 2018~~March 31, 2019

Commission file number 000-26621

NIC INC.

(Exact name of registrant as specified in its charter)



Delaware	52-2077581
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

25501 West Valley Parkway, Suite 300, Olathe, Kansas 66061

(Address of principal executive offices, including Zip Code)

Registrant’s telephone number, including area code: (877) 234-3468

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	EGOV	The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~



Large accelerated filer ý	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes oNo ý

On ~~October 18, 2018,~~April 26, 2019, the registrant had ~~66,569,338~~66,913,117 shares of common stock outstanding.

NIC INC.

Form 10-Q for the Quarter Ended ~~September 30, 2018~~March 31, 2019

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

NIC INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

thousands except par value amount


	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
ASSETS
Current assets:
Cash	$	181,029	$	160,777	$	180,556	$	191,700
Trade accounts receivable, net	98,900		103,938		113,554		80,904
Prepaid expenses & other current assets	13,861		12,843		14,935		13,730
Total current assets	293,790		277,558		309,045		286,334
Property and equipment, net	10,058		10,306		10,715		10,256
Right of use lease assets, net					12,648		—
Intangible assets, net	12,149		5,214		16,368		13,604
Deferred income taxes, net	—		667
Other assets	1,916		1,986		350		332
Total assets	$	317,913	$	295,731	$	349,126	$	310,526

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	75,937	$	88,920	$	80,100	$	60,092
Accrued expenses	23,469		26,501		20,967		24,150
Lease liabilities					4,171		—
Other current liabilities	3,713		3,673		5,312		4,883
Total current liabilities	103,119		119,094		110,550		89,125

Deferred income taxes, net					1,857		781
Lease liabilities					8,866		—
Other long-term liabilities	8,922		8,395		8,958		8,931
Total liabilities	112,041		127,489		130,231		98,837

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

Stockholders' equity:
Common stock, $0.0001 par, 200,000 shares authorized, 66,567 and 66,271 shares issued and outstanding	7		7
Common stock, $0.0001 par, 200,000 shares authorized, 66,911 and 66,569 shares issued and outstanding					7		7
Additional paid-in capital	116,341		111,275		118,774		117,763
Retained earnings	89,524		56,960		100,114		93,919
Total stockholders' equity	205,872		168,242		218,895		211,689
Total liabilities and stockholders' equity	$	317,913	$	295,731	$	349,126	$	310,526

See accompanying notes to the unaudited consolidated financial statements.

NIC INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

thousands except per share amount


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
					Nine Months Ended September 30,				Three Months Ended March 31,
	Three Months Ended September 30,	2018		2017		2018		2017		2019		2018
Revenues:
Portal revenues	$	80,884	$	76,434	$	248,230	$	232,963
State enterprise revenues									$	77,255	$	80,791
Software & services revenues	6,144		8,099		18,021		20,073		7,925		5,934
Total revenues	87,028		84,533		266,251		253,036		85,180		86,725
Operating expenses:
Cost of portal revenues, exclusive of depreciation & amortization	48,224		47,377		148,577		143,326
Cost of software & services revenues, exclusive of depreciation & amortization	2,226		3,169		6,689		6,803
State enterprise cost of revenues, exclusive of depreciation & amortization									48,655		48,642
Software & services cost of revenues, exclusive of depreciation & amortization									2,720		2,228
Selling & administrative	14,690		12,091		41,844		36,882		9,964		7,503
Enterprise technology & product support									6,445		5,647
Depreciation & amortization	2,441		1,810		6,651		5,111		2,421		2,065
Total operating expenses	67,581		64,447		203,761		192,122		70,205		66,085
Operating income	19,447		20,086		62,490		60,914		14,975		20,640
Other income:
Interest income	153		—		212		—		604		—
Income before income taxes	19,600		20,086		62,702		60,914		15,579		20,640
Income tax provision	3,698		6,066		14,280		20,140		4,077		5,132
Net income	$	15,902	$	14,020	$	48,422	$	40,774	$	11,502	$	15,508

Basic net income per share	$	0.24	$	0.21	$	0.72	$	0.61	$	0.17	$	0.23
Diluted net income per share	$	0.24	$	0.21	$	0.72	$	0.61	$	0.17	$	0.23

Weighted average shares outstanding:
Basic	66,562		66,267		66,476		66,188		66,670		66,323
Diluted	66,598		66,267		66,507		66,188		66,670		66,323

See accompanying notes to the unaudited consolidated financial statements.

NIC INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(UNAUDITED)

thousands


	Common Stock				Additional Paid-in Capital				Retained Earnings						Three Months Ended March 31, 2019
	Shares		Amount					Total				Common Stock					Additional Paid-in Capital		Retained Earnings
Balance, January 1, 2018	66,271		$	7	Additional Paid-in Capital		$	111,275	Retained Earnings			$	56,960		$	168,242	Additional Paid-in Capital
Net cumulative effect of adoption of accounting standard	—		—		—				208			208
															Shares		Amount		Retained Earnings			Additional Paid-in Capital				Retained Earnings				Total
Balance, January 1, 2019															66,569		$	7			$	Additional Paid-in Capital			211,689	Retained Earnings
Net income	—		—		—				48,422			48,422			—		—		—				11,502				11,502
Restricted stock vestings	260		—		—				—			—
Dividends declared	—		—		—				(16,138		)	(16,138		)	—		—		—				(5,402		)		(5,402		)
Dividend equivalents on unvested performance-based restricted stock awards	—		—		68				(68		)	—			—		—		27				(27		)		—
Dividend equivalents cancelled upon forfeiture of performance-based restricted stock awards	—		—		(140		)		140			—			—		—		(122		)		122				—
Restricted stock vestings															364		—		—				—				—
Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings	(86	)	—		(1,209		)		—			(1,209		)	(153	)	—		(2,609		)		—				(2,609		)
Stock-based compensation	—		—		4,965				—			4,965			—				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	122		—		1,382				—			1,382			128		—		1,443				—				1,443
Balance, September 30, 2018	66,567		$	7	$	116,341			$	89,524		$	205,872
Balance, March 31, 2019															66,911		$	7	$	118,774			$	100,114			$	218,895



	Three Months Ended March 31, 2018
	Common Stock				Additional Paid-in Capital			Retained Earnings
	Shares		Amount		Additional Paid-in Capital			Retained Earnings			Total
Balance, January 1, 2018	66,271		$	7	$	111,275		$	56,960		$	168,242
Net cumulative effect of adoption of accounting standard	—		—		—			208			208
Net income	—		—		—			15,508			15,508
Dividends declared	—		—		—			(5,370		)	(5,370		)
Dividend equivalents on unvested performance-based restricted stock awards	—		—		34			(34		)	—
Dividend equivalents cancelled upon forfeiture of performance-based restricted stock awards	—		—		(140		)	140			—
Restricted stock vestings	202		—					—			—
Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings	(81	)	—		(1,132		)				(1,132		)
Stock-based compensation	—		—		1,511			—			1,511
Issuance of common stock under employee stock purchase plan	122		—		1,382			—			1,382
Balance, March 31, 2018	66,514		$	7	$	112,930		$	67,412		$	180,349

See accompanying notes to the unaudited consolidated financial statements.

NIC INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

thousands


	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Cash flows from operating activities:
Net income	$	48,422		$	40,774		$	11,502		$	15,508
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on accounts receivable	350			447
Depreciation & amortization	6,651			5,111			2,421			2,065
Stock-based compensation expense	4,965			4,295			2,272			1,511
Deferred income taxes	1,043			723			1,076			685
Loss on disposal of property and equipment	—			44
Provision for recoveries on accounts receivable							(186		)	(116		)
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable, net	4,688			(1,492		)
(Increase) decrease in prepaid expenses & other current assets	(1,018		)	3,253
Decrease (increase) in other assets	226			(1,515		)
(Decrease) in accounts payable	(12,983		)	(5,907		)
(Decrease) increase in accrued expenses	(3,032		)	1,397
Increase in other current liabilities	92			660
Increase in other long-term liabilities	151			806
Trade accounts receivable, net							(32,464		)	16,813
Prepaid expenses & other current assets							(1,205		)	(1,635		)
Other assets							1,069			258
Accounts payable							20,008			(20,131		)
Accrued expenses							(3,183		)	(6,360		)
Other current liabilities							422			295
Other long-term liabilities							(664		)	325
Net cash provided by operating activities	49,555			48,596			1,068			9,218

Cash flows from investing activities:
Purchases of property and equipment	(4,000		)	(3,319		)	(1,484		)	(873		)
Proceeds from sale of property and equipment	—			7
Asset acquisition	(3,555		)	—			(1,743		)	—
Capitalized software development costs	(5,783		)	(2,632		)	(2,417		)	(1,640		)
Net cash used in investing activities	(13,338		)	(5,944		)	(5,644		)	(2,513		)

Cash flows from financing activities:
Cash dividends on common stock	(16,138		)	(16,043		)	(5,402		)	(5,370		)
Proceeds from employee common stock purchases	1,382			1,330			1,443			1,382
Tax withholdings related to stock-based compensation awards	(1,209		)	(2,651		)	(2,609		)	(1,132		)
Net cash used in financing activities	(15,965		)	(17,364		)	(6,568		)	(5,120		)

Net increase in cash	20,252			25,288
Net (decrease) increase in cash							(11,144		)	1,585
Cash, beginning of period	160,777			127,009			191,700			160,777
Cash, end of period	$	181,029		$	152,297		$	180,556		$	162,362

Other cash flow information:
Non-cash investing activities:
Capital expenditures accrued but not yet paid	$	—		$	88
Cash payments:
Income taxes paid, net	$	13,206		$	18,490		$	3,637		$	4,418

See accompanying notes to the unaudited consolidated financial statements.

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 ~~primary outsourced portal~~state enterprise businesses and its software & services businesses.

In ~~its~~the Company's primary ~~outsourced portal~~state enterprise businesses, ~~the Company~~it generally designs, builds, and operates ~~internet-based portals~~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, including mobile devices.~~channels. These ~~portals~~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 ~~outsourced~~digital government ~~portals.~~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"~~GAAP”). The consolidated financial statements include all of the Company's direct and indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Pursuant to the rules and regulations of the Securities and Exchange Commission ~~("SEC"~~(“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, ~~2017,~~2018, including the notes thereto, set forth in the Company’s ~~2017~~2018 Annual Report on Form 10-K.

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

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, ~~2018.~~2019.

Recently issued accounting pronouncements

~~Revenue from Contracts with Customers~~

~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued~~ ~~Accounting Standards Codification (“ASC”) Topic 606,~~ ~~Revenue from Contracts with Customers~~ ~~("ASC 606")~~, a new standard related to revenue recognition. Under this standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires expanded disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations.

On January 1, 2018, the Company adopted ASC 606, and all the related amendments, using the modified retrospective method for all contracts not completed as of the date of adoption. The adoption of ASC 606 represents a change in accounting principle for portal software development and services contracts that will more closely align revenue recognition with the delivery of Company’s services, which under certain contracts will result in the recognition of revenue over time as opposed to at a point in

time. Upon adoption, there was not a significant cumulative adjustment to retained earnings on the Company’s balance sheet for this change in accounting principle. Under the modified retrospective method, the comparative information was not restated and continues to be reported under the accounting standards in effect for those periods. The impact to revenues for the three and nine months ended September 30, 2018 was not significant as a result of applying ASC 606.

Leases

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which ~~will update the existing guidance on accounting for leases and require new qualitative and quantitative disclosures about the Company’s leasing activities. The new standard~~ requires the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance ~~sheet. Most prominent among the changes~~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, isdisclosures 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

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 ~~by lessees for those leases classified~~of $12.6 million and $12.9 million, respectively, as ~~operating leases under current U.S. GAAP.~~of January 1, 2019. The ~~new~~adoption of the standard ~~will become effective~~did not have an impact on the Company’s consolidated earnings or cash flows for the ~~Company beginning with the first~~ quarter 2019 and requires a modified retrospective transition approach. The Company plans on electing the package of transitional practical expedients upon adoption which, among other provisions, allows the Company to carry forward historical lease classification. The Company is currently evaluating the effects that the standard will have on its consolidated financial statements, which the Company anticipates could be significant, due mainly to its non-cancellable operating leases for office space. As further described in Note 7, Commitments and Contingencies, to the Company’s 2017 Annual Report on Form 10-K, filed with the SEC on February 22, 2018, as of Decemberended March 31, ~~2017, the Company had minimum lease commitments under non-cancellable operating leases totaling $16.0 million.~~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 ~~ASC~~Accounting Standards Codification (“ASC”) 606,, ~~which the Company adopted on January 1, 2018. In accordance~~Revenue from Contracts with ~~ASC 606, revenue~~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. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales and usage-based taxes, if applicable, are excluded from revenues.

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~~transaction-based revenues, (ii) ~~portal software~~ development & services and (iii) fixed ~~fees for portal~~fee management services. The following table summarizes, by reportable and operating segment, our principal activities from which the Company generates revenue (in thousands):



	Three Months Ended March 31, 2019
	State Enterprise		Software & Services		Consolidated Total
IGS	$	50,154	$	—	$	50,154
DHR	23,685		—		23,685
Other	—		7,925		7,925
Total transaction-based	73,839		7,925		81,764
Development services	2,178		—		2,178
Fixed fee management services	1,238		—		1,238
Total revenues	$	77,255	$	7,925	$	85,180

	Three Months Ended March 31, 2018
	State Enterprise		Software & Services		Consolidated Total
IGS	$	50,267	$	—	$	50,267
DHR	27,239		—		27,239
Other	—		5,934		5,934
Total transaction-based	77,506		5,934		83,440
Development services	2,047		—		2,047
Fixed fee management services	1,238		—		1,238
Total revenues	$	80,791	$	5,934	$	86,725

Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018

Outsourced
Portals

Other Software
& Services

Consolidated
Total

Outsourced
Portals

Other Software
& Services

Consolidated
Total
IGS $ 51,085
$ —
$ 51,085
156,463
—
$ 156,463
DHR 25,555
—
25,555
79,439
—
79,439
Other —
6,144
6,144
—
18,021
18,021
Total transaction-based 76,640
6,144
82,784
235,902
18,021
253,923
Portal software development & services 3,006
—
3,006
8,615
—
8,615
Portal management 1,238
—
1,238
3,713
—
3,713
Total revenues $ 80,884
$ 6,144
$ 87,028
$ 248,230
$ 18,021
$ 266,251

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017

Outsourced
Portals

Other Software
& Services

Consolidated
Total

Outsourced
Portals

Other Software
& Services

Consolidated
Total
IGS $ 48,089
$ —
$ 48,089
$ 144,194
$ —
$ 144,194
DHR 25,936
—
25,936
79,787
—
79,787
Other —
8,099
8,099
—
20,073
20,073
Total transaction-based 74,025
8,099
82,124
223,981
20,073
244,054
Portal software development & services 1,134
—
1,134
5,157
—
5,157
Portal management 1,275
—
1,275
3,825
—
3,825
Total revenues $ 76,434
$ 8,099
$ 84,533
$ 232,963
$ 20,073
$ 253,036

Transaction-based revenues

~~The Company recognizes revenue from providing outsourced digital services to~~Under certain contracts with its government ~~partners. Under these contracts,~~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 ~~contractual promise to provide continuous access to each of these digital government services is a single stand-ready performance obligation.~~

Transaction-based fees earned by the Company are typically usage-based and calculated based on the number of transactions processed each day at the contractual net fee earned by the Company for each transaction. These usage-based fees are deemed to be variable consideration that meets the practical expedient within ASC 606-10-50-14(a) whereby the Company is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these arrangements, the usage-based fees are fully constrained and recognized once the uncertainties associated with the constraint are resolved, which is when the related transactions occur each day.

~~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 ~~on the day in which~~when the Company provides the access and it is used by the consumer.

In most of its transaction-based revenue arrangements, the Company acts as an agent and recognizes revenue on a net basis. The gross transaction fees collected by the Company from consumers on behalf of its government partners are not recognized as

revenue but are accrued as accounts payable when the services are provided at the time of the transactions. The Company must remit a certain amount or a percentage of these fees to government agencies regardless of whether the Company ultimately collects the fees from the consumer. As a result, trade accounts receivable and accounts payable reflect the gross amounts outstanding at the balance sheet dates.

Under certain contracts, the Company’s government partners may receive consideration for a portion of the gross transaction fees. In circumstances where the Company receives a discernible benefit in the arrangement, the consideration paid to the government partner is recorded on a gross basis within costs of revenues. Otherwise, the consideration paid to the government partner is accounted for on a net basis as a reduction in the transaction-based fee recorded within net revenue.

~~Portal software development and~~Development services revenues

The ~~Company’s portal software~~Company earns development ~~and~~ services revenues primarily ~~include revenues from providing~~under contracts to provide software development and other time and materials services to ~~our~~its government partners. The Company identifies each performance obligation in its software development and services contracts at contract inception, which are generally combined into a single promise. The contract pricing is either at stated billing rates per hour or a fixed amount. These contracts are generally ~~short-term in nature and~~ not longer than one year in duration.

For services provided under ~~software~~ development ~~and services agreements that result in~~contracts the ~~transfer of control~~performance obligation is either satisfied over time the underlying deliverable is owned and controlled by the customer and does not create an asset with an alternative use to the Company. The Company recognizes revenue on rate per hour contracts based on the amount billable to the customer, as the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company’s performance to date. For fixed fee contracts, the Company utilizes the input method and recognizes revenue based on the labor expended to date relative to the total labor expected to satisfy the contract performance obligation. This input measure of progress is used because it best depicts the transfer of assets to the customer, which occurs as the Company incurs costs to deliver the promise in the contracts. Certain software development and service contracts include substantive customer acceptance provisions. In contracts that include substantive customer acceptance provisions, the Company recognizes revenueor at a point in time upon customer acceptance.

Under its ~~portal software~~ development ~~and~~ services contracts, the Company typically does not have significant future performance obligations that extend beyond one year. As of ~~September 30, 2018,~~March 31, 2019, the total transaction price allocated to unsatisfied performance obligations was approximately ~~$4.0~~$3.8 million.

~~Portal~~Fixed-fee management services revenues

~~Portal management~~Management services revenues primarily consist of revenues from providing recurring fixed fee ~~portal management~~digital government services for the Company’s government partner in Indiana. This contract has a single performance obligation to provide a broad scope of services to manage the digital government services for the state of Indiana. The Company satisfies its performance obligation by providing services to the state over time. The contract can be terminated without a penalty by the state with a 30-day notice, and accordingly, the period over which the Company performs services is commensurate with a month to month contract. Consideration consists of a fixed-monthly fee that is recognized monthly as the performance obligation is satisfied.

As of ~~September 30, 2018,~~March 31, 2019, the Company’s Indiana ~~portal management~~ contract had unsatisfied performance obligations for one month. The total transaction price allocated to the unsatisfied performance obligation is not significant.

Unearned Revenues

The Company records unearned revenues when cash payments are received or due in advance of the Company’s satisfaction of the performance obligation(s). At each balance sheet date, the Company determines the portion of unearned revenues that will be earned within one year and records that amount in other current liabilities in the consolidated balance sheets. The remainder, if any, is recorded in other long-term liabilities. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. Unearned revenues at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were approximately ~~$1.8~~$3.1 million and ~~$1.4~~$1.7 million, respectively. The change in the deferred revenue balance for the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by ~~$3.9~~$1.1 million of revenues recognized that were included in the deferred revenue at the beginning of the period.

Leases

All Company lease arrangements are considered operating leases. Operating leases are included in right of use lease assets and lease liabilities in the consolidated balance ~~during~~sheet. Leases with an initial term of 12 months or less are not recorded on the ~~current year.~~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.

~~Intangible assets, net~~

Certain of the Company's leases have both lease and non-lease components. The Company has finite-lived intangible assets that consists of capitalized software development costs and purchased software. In accordance with authoritative accounting guidance, intangible assets with finite lives are amortized over their estimated useful lives usingelected the ~~straight-line method, unless otherwise noted. The estimated economic life~~practical expedient to account for ~~finite-lived intangible assets is typically three years from the date the software is placed in production.~~these components as a single lease component for all leases.

3. ~~OUTSOURCED~~ GOVERNMENT CONTRACTS

State enterprise contracts

The Company’s ~~outsourced~~ state ~~master~~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 ~~the portal~~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 ~~investments~~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 ~~and digital government services~~ 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 ~~its~~ 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 ~~portal~~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, 1516 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 ~~45% and 44%~~58% of the Company’s total consolidated revenues for the

three ~~and nine~~ months ended ~~September 30, 2018, respectively.~~March 31, 2019. If any of these contracts is terminated without cause, the terms of the respective contract may require the government to pay the Company a fee to continue to use the Company’s ~~applications in its portal.~~applications.

Under a typical state ~~master~~enterprise contract, the Company is required to fully indemnify its government ~~clients~~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 ~~September 30, 2018,~~March 31, 2019, the Company was bound by performance bond commitments totaling approximately ~~$5.8~~$10.8 million on certain ~~outsourced portal~~state enterprise contracts.

~~The following is a summary of the government contracts through which the Company currently generates significant revenue and has the ability to provide enterprise-wide outsourced digital government~~Software & services ~~to multiple government agencies:~~



~~NIC Enterprise Contract~~	~~State~~	~~Year Services~~ ~~Commenced~~	~~Contract Expiration Date~~	~~Renewal Options Through~~
~~NICUSA, IL Division~~	~~Illinois~~	~~2017~~	~~6/29/2023~~	~~6/29/2027~~
~~Louisiana Interactive, LLC~~	~~Louisiana~~	~~2015~~	~~1/28/2020~~
~~Connecticut Interactive, LLC~~	~~Connecticut~~	~~2014~~	~~1/9/2020~~
~~Wisconsin Interactive Network, LLC~~	~~Wisconsin~~	~~2013~~	~~5/12/2021~~	~~5/13/2023~~
~~Pennsylvania Interactive, LLC~~	~~Pennsylvania~~	~~2012~~	~~11/30/2019~~	~~11/30/2022~~
~~NICUSA, OR Division~~	~~Oregon~~	~~2011~~	~~11/22/2021~~
~~NICUSA, MD Division~~	~~Maryland~~	~~2011~~	~~8/10/2019~~
~~Mississippi Interactive, LLC~~	~~Mississippi~~	~~2011~~	~~12/31/2019~~	~~12/31/2021~~
~~NICUSA, NJ Division~~	~~New Jersey~~	~~2009~~	~~4/30/2020~~	~~4/30/2022~~
~~West Virginia Interactive, LLC~~	~~West Virginia~~	~~2007~~	~~6/30/2021~~	~~6/30/2024~~
~~Vermont Information Consortium, LLC~~	~~Vermont~~	~~2006~~	~~6/8/2019~~
~~Colorado Interactive, LLC~~	~~Colorado~~	~~2005~~	~~4/30/2019~~	~~4/30/2023~~
~~South Carolina Interactive, LLC~~	~~South Carolina~~	~~2005~~	~~7/15/2019~~	~~7/15/2021~~
~~Kentucky Interactive, LLC~~	~~Kentucky~~	~~2003~~	~~8/31/2020~~
~~Alabama Interactive, LLC~~	~~Alabama~~	~~2002~~	~~3/19/2020~~	~~3/19/2022~~
~~Rhode Island Interactive, LLC~~	~~Rhode Island~~	~~2001~~	~~7/1/2019~~
~~Oklahoma Interactive, LLC~~	~~Oklahoma~~	~~2001~~	~~3/31/2019~~	~~3/31/2020~~
~~Montana Interactive, LLC~~	~~Montana~~	~~2001~~	~~12/31/2019~~	~~12/31/2020~~
~~Hawaii Information Consortium, LLC~~	~~Hawaii~~	~~2000~~	~~1/3/2020~~
~~Idaho Information Consortium, LLC~~	~~Idaho~~	~~2000~~	~~6/30/2019~~
~~Utah Interactive, LLC~~	~~Utah~~	~~1999~~	~~6/5/2019~~
~~Maine Information Network, LLC~~	~~Maine~~	~~1999~~	~~6/30/2020~~
~~Arkansas Information Consortium, LLC~~	~~Arkansas~~	~~1997~~	~~6/30/2019~~
~~Indiana Interactive, LLC~~	~~Indiana~~	~~1995~~	~~10/24/2021~~
~~Nebraska Interactive, LLC~~	~~Nebraska~~	~~1995~~	~~3/31/2019~~	~~3/31/2021~~
~~Kansas Information Consortium, LLC~~	~~Kansas~~	~~1992~~	~~12/31/2022~~	~~12/31/2026~~

~~Outsourced federal~~ contract

The Company’s subsidiary NIC Federal, LLC has a contract with the FMCSA to develop and manage the FMCSA’s Pre-Employment Screening Program (“PSP”) for motor carriers nationwide, using a transaction-based business model. In ~~2018,~~February 2019, the FMCSA extended the current contract through ~~February 28, 2019.~~August 27, 2019, and included three six-month renewal options. The contract can be terminated by the FMCSA without cause on a specified period of notice.

Expiring contracts

There are currently 1015 state enterprise contracts, ~~under which~~as well as the ~~Company provides state enterprise-wide outsourced digital government services~~Company's contract with the FMCSA, that have expiration dates within the 12-month period following ~~September 30, 2018.~~March 31, 2019. Collectively, revenues generated from these contracts represented approximately ~~34% and 33%~~46% of the Company’s total consolidated revenues for the three ~~and nine~~ months ended ~~September 30, 2018, respectively.~~March 31, 2019. Although certain of these contracts have renewal provisions, any renewal is at the option of the Company’s government partner. As described above, if a contract is not renewed after a defined term, the government partner would be entitled to take over the ~~portal~~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.

~~As previously disclosed, Texas NICUSA, LLC (“Texas NICUSA”) was selected to provide payment processing~~The contract under which the Company managed digital government services ~~set forth in the Texas.gov 3.0 Procurement RFO (the “Texas RFO”), but was not selected to provide the portal operations, maintenance and~~

~~development services set forth in the Texas RFO. The legacy portal agreement between~~for the state of Texas ~~and Texas NICUSA~~ expired on August 31, 2018. For the three months ended March 31, 2018 and the new payment processing services contract commenced on September 1, 2018. In April 2018, Texas NICUSA submitted a protest with the Texas Department of Information Resources (the "DIR") of the DIR's decision to awardrevenues from the contract relating to the portal operations, maintenance and development services to another vendor. In the protest, Texas NICUSA cited flaws in the procurement process and award decision. The protest was initially denied by the procurement department and appealed by Texas NICUSA to the DIR in May 2018. The appeal was denied, and Texas NICUSA's transition obligations concluded in September 2018. Our legacy Texas portal contractwere $17.5 million, which accounted for approximately ~~15%~~20% of the Company's total consolidated revenue for the three months ended ~~September 30, 2018, and 18% of the Company's total consolidated revenue for the nine months ended September 30, 2018, and 20% for the three and nine months ended September 30, 2017.~~March 31, 2018.

In connection with the completion of the legacy Texas enterprise contract, the Company substantially reduced its workforce in Texas. Total one-time severance-related and transition costs, which have been recognized in cost of portal revenues in the unaudited consolidated statement of income in the outsourced portal segment, were approximately $0.4 million and $1.0 million in the three and nine months ended September 30, 2018, respectively.

4. ~~ASSET~~ ACQUISITION

During ~~the third quarter of~~ 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 ~~the~~ potential ~~of deferred~~additional consideration of approximately $3.5 million if certain conditions under the agreement are met. The transaction was accounted for as an asset acquisition, as substantially all of the value related to the prescription drug monitoring ~~program~~ software technology acquired. ~~See Note 5, Intangible Assets, Net~~The Company paid additional consideration of $1.7 million in the first quarter of 2019, which was included in the cost of the acquired assets in the consolidated balance sheet. The Company currently expects to make a final payment for additional ~~information.~~consideration of $1.7 million in the second quarter of 2019.

5. ~~INTANGIBLE ASSETS, NET~~DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS

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

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

6. LEASES

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

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

September 30, 2018 December 31, 2017

Gross Carrying
Value

Accumulated
Amortization

Net Book
Value

Gross Carrying
Value

Accumulated
Amortization

Net Book
Value
Software development cost $ 19,393
$ (10,602 ) $ 8,791
$ 13,610
$ (8,396 ) $ 5,214
Purchased software 3,555
(197 ) 3,358
—
—
—
Total $ 22,948
$ (10,799 ) $ 12,149
$ 13,610
$ (8,396 ) $ 5,214



	March 31, 2019			December 31, 2018
Fiscal Year
2019⁽¹⁾	$	3,572		$	4,673
2020	3,703			3,403
2021	2,844			2,604
2022	2,318			2,082
2023	940			698
Thereafter	730			690
Total future minimum lease payments	14,107			14,150
Less: interest	(1,070		)	N/A
Total lease liabilities	$	13,037		N/A

~~During~~(1) The March 31, 2019 column excludes the ~~nine~~three months ended ~~September 30, 2018, the Company recorded approximately $3.6~~March 31, 2019.

Other information related to operating leases is as follows (in thousands):



	March 31, 2019
Operating lease cost⁽¹⁾	$	1,463
Weighted-average discount rate	3.8		%

Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities	1,089
Right of use assets obtained in exchange for new lease liabilities ⁽²⁾	13,735

(1) Includes short-term and variable lease costs, which are not significant.

(2) Includes $12.6 million ~~of intangible asset software purchases~~for operating leases existing on January 1, 2019 and ~~related costs in connection with the Leap Orbit asset acquisition, as further discussed in Note 4, Asset Acquisition.~~

~~Amortization expense for intangible assets with finite lives was~~ $1.1 million ~~and $2.4 million~~ for operating leases that commenced in the three ~~and nine~~ months ended September 30, 2018, respectively, and $0.6 million and $1.4 million for the three and nine months ended September 30, 2017, respectively. Intangible asset amortization expense is currently expected to total $1.4 million for the remainder of 2018, $5.1 million for fiscal year 2019, $4.0 million for fiscal year 2020 and $1.8 million for fiscal year 2021.March 31, 2019.

6.7. EARNINGS PER SHARE

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method for all periods presented. The two-class method is an earnings allocation formula that treats a participating security as having rights to undistributed earnings that would otherwise have been available to common stockholders. The Company’s service-based restricted stock awards contain non-forfeitable rights to dividends and are participating securities. Accordingly, service-based restricted stock awards were included in the calculation of earnings per share using the two-class method for all periods presented. Unvested service-based restricted shares totaled ~~0.6 million for three and nine months ended September 30, 2017 and~~ 0.7 million for both of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018. Basic earnings per share is calculated by first allocating earnings between common stockholders and participating securities. Earnings attributable to common stockholders are divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by giving effect to dilutive potential common shares outstanding during the period. The dilutive effect of shares related to the Company’s employee

stock purchase plan is determined based on the treasury stock method. The dilutive effect of service-based restricted stock awards is based on the more dilutive of the treasury stock method or the two-class method assuming a reallocation of undistributed earnings to common stockholders after considering the dilutive effect of potential common shares other than the participating unvested restricted stock awards. The dilutive effect of performance-based restricted stock awards is based on the treasury stock method.

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



	Three Months Ended March 31,
	2019			2018
Numerator:
Net income	$	11,502		$	15,508
Less: Income allocated to participating securities	(127		)	(171		)
Net income available to common stockholders	$	11,375		$	15,337
Denominator:
Weighted average shares - basic	66,670			66,323
Performance-based restricted stock awards	—			—
Weighted average shares - diluted	66,670			66,323

Basic net income per share:	$	0.17		$	0.23

Diluted net income per share:	$	0.17		$	0.23

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Numerator:
Net income $ 15,902
$ 14,020
$ 48,422
$ 40,774
Less: Income allocated to participating securities (172 ) (129 ) (525 ) (381 )
Net income available to common stockholders $ 15,730
$ 13,891
$ 47,897
$ 40,393
Denominator:

Weighted average shares - basic 66,562
66,267
66,476
66,188
Performance-based restricted stock awards 36
—
31
—
Weighted average shares - diluted 66,598
66,267
66,507
66,188

Basic net income per share:

Net income $ 0.24
$ 0.21
$ 0.72
$ 0.61

Diluted net income per share:

Net income $ 0.24
$ 0.21
$ 0.72
$ 0.61

7.8. STOCKHOLDERS’ EQUITY

The Company's Board of Directors declared and paid the following dividends (payment in millions) ~~during the periods presented:~~:



Declaration Date	Dividend per Share	Record Date	Payment Date	Payment
January 28, 2019	$0.08	March 5, 2019	March 19, 2019	$5.4
January 29, 2018	$0.08	March 6, 2018	March 20, 2018	$5.4

Declaration Date Dividend per Share Record Date Payment Date Payment
July 30, 2018 $0.08 September 5, 2018 September 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
July 31, 2017 $0.08 September 6, 2017 September 20, 2017 $5.3
May 2, 2017 $0.08 June 6, 2017 June 20, 2017 $5.4
January 30, 2017 $0.08 March 7, 2017 March 21, 2017 $5.3

On ~~October 28, 2018,~~May 7, 2019, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.08 per share, payable to stockholders of record as of ~~December 4, 2018.~~June 11, 2019. The dividend, which is expected to total approximately $5.4 million, will be paid on ~~December 18, 2018,~~June 25, 2019, out of the Company’s available cash.

8.9. INCOME TAXES

As previously disclosed, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017. The Tax Act, among other changes, reduced the statutory federal corporate income tax rate from 35.0% to 21.0%. The Company received the benefit of the reduced statutory federal corporate income tax rate starting January 1, 2018, which is partially offset by changes in certain deductions (most notably the elimination of the domestic production activities deduction). The Company has completed the assessment of the impact of the new tax legislation and no significant measurement period adjustments were recorded during the nine months ended September 30, 2018.

~~The following table reconciles the statutory federal tax rate and the Company's effective tax rate for the periods indicated:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Statutory federal income tax rate 21.0 % 35.0 % 21.0 % 35.0 %
Tax deficit (benefit) from restricted stock vestings — % (0.1 )% 0.4 % (0.8 )%
Domestic production activities deductions — % (2.6 )% — % (2.7 )%
Federal and state tax credits (4.5 )% (3.8 )% (2.5 )% (2.1 )%
State income taxes 3.2 % 1.6 % 2.6 % 1.7 %
Uncertain tax positions (2.1 )% (0.2 )% 0.4 % 1.4 %
Nondeductible and other expenses 1.3 % 0.3 % 0.9 % 0.6 %
Effective federal and state income tax rate 18.9 % 30.2 % 22.8 % 33.1 %

The Company's effective tax rate was 26.2% and 24.9% for the three ~~and nine~~ months ended September 30, 2018 reflects the release of reserves for the Company's liability for unrecognized income tax benefits due to the expiration of the statute of limitations for certain tax years and, to a lesser extent, an increase in the previously estimated research and development tax credit for the 2017March 31, 2019 and 2018, ~~tax years upon the filing of the Company’s 2017 federal tax return during the current quarter.~~

respectively. The Company's effective tax rate was higher than the applicable federal statutory income tax rate of 21.0% primarily because of state income taxes and non-deductible expenses. The increase in the effective tax rate was mainly due to approximately $2.6 million of executive severance costs for the three months ended ~~September 30, 2017 reflects an increase in the~~March 31, 2019, as previously ~~estimated research and development tax credit for the 2016 and 2017 tax years upon the filing~~disclosed, a significant portion of the Company's 2016 federal tax return during the prior year quarter. For the nine months ended September 30, 2017, the Company's effective tax rate was also favorably impacted by benefits related to excess tax deductions for the vesting of restricted stock awards, which ~~the Company began recognizing in the provision~~is not deductible for income ~~taxes in the first quarter of 2017 upon the adoption of ASU 2016-09.~~tax purposes.

9.10. STOCK BASED COMPENSATION

During the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Compensation Committee of the Board of Directors of the Company granted to certain management-level employees and executive officers, service-based restricted stock awards totaling ~~342,809~~291,935 shares with a grant-date fair value totaling approximately ~~$4.8~~$5.0 million. Such restricted stock awards vest beginning one year from the date of grant in annual installments of 25%. In addition, during the nine months ended September 30, 2018, non-employee directors of the Company were granted service-based restricted stock awards totaling 54,584 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 ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the Compensation Committee of the Board of Directors of the Company granted performance-based restricted stock awards to certain executive officers ~~performance-based restricted stock awards~~ pursuant to the terms of the Company’s executive compensation program totaling ~~177,730~~111,135 shares with a grant-date fair value totaling approximately ~~$2.4~~$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, ~~2020.~~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)~~; and~~

~~Return on invested capital (three-year average)~~.

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

At December 31, ~~2017,~~2018, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February ~~23, 2015~~22, 2016 ended. Based on the Company’s actual financial results from ~~2015~~2016 through ~~2017, no~~2018, 64,846 of the shares orand 4,226 of dividend equivalent shares were earned. The ~~91,820~~remaining 73,345 shares subject to the awards were forfeited in the first quarter of ~~2018.~~2019.

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

The following table presents stock-based compensation expense included in the Company’s unaudited consolidated statements of income (in thousands):



	Three Months Ended March 31,
	2019		2018
State enterprise cost of revenues, exclusive of depreciation & amortization	$	361	$	443
Software & services cost of revenues, exclusive of depreciation & amortization	35		39
Selling & administrative	1,716		838
Enterprise technology & product support	160		191
Stock-based compensation expense	$	2,272	$	1,511

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Cost of portal revenues, exclusive of depreciation & amortization $ 365
$ 319
$ 1,166
$ 976
Cost of software & services revenues, exclusive of depreciation & amortization 36
22
112
66
Selling & administrative 1,480
776
3,686
3,253
Stock-based compensation expense $ 1,881
$ 1,117
$ 4,964
$ 4,295

~~10.~~11. REPORTABLE SEGMENT AND RELATED INFORMATION

The ~~Outsourced Portals~~state enterprise segment is the Company’s only reportable segment and generally includes the Company’s subsidiaries operating ~~outsourced~~digital government services on an enterprise-wide basis for state and local ~~government portals under state enterprise contracts.~~governments. The ~~Other Software~~software & ~~Services~~services category primarily includes the Company’s subsidiaries that provide software development and digital government services, other than those ~~services~~ provided ~~under state enterprise contracts,~~on an enterprise-wide basis, to federal agencies as well as other state and local governments. Each of the Company’s businesses within the ~~Other~~ Software & Services category is an operating segment and has been grouped together to form the ~~Other~~ 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) ~~before income taxes.~~. 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 ~~September 30,~~March 31, (in thousands):

Outsourced
Portals

Other Software
& Services
Other Reconciling Items
Consolidated
Total
2018
Revenues $ 80,884
$ 6,144
$ —
$ 87,028
Costs & expenses 48,224
2,226
14,690
65,140
Depreciation & amortization 683
22
1,736
2,441
Operating income (loss) $ 31,977
$ 3,896
$ (16,426 ) $ 19,447

2017

Revenues $ 76,434
$ 8,099
$ —
$ 84,533
Costs & expenses 47,377
3,169
12,091
62,637
Depreciation & amortization 670
25
1,115
1,810
Operating income (loss) $ 28,387
$ 4,905
$ (13,206 ) $ 20,086

~~The table below reflects summarized financial information for the Company’s reportable and operating segments for the nine months ended September 30, (in thousands):~~


										State Enterprise		Software & Services		Other Reconciling Items			Consolidated Total
2019
Revenues										$	77,255	$	7,925	$	—		$	85,180
Costs & expenses										48,655		2,720		16,409			67,784
Depreciation & amortization										636		21		1,764			2,421
Operating income (loss)										$	27,964	$	5,184	$	(18,173	)	$	14,975
	Outsourced Portals		Other Software & Services		Other Reconciling Items			Consolidated Total
2018
Revenues	$	248,230	$	18,021	$	—		$	266,251	$	80,791	$	5,934	$	—		$	86,725
Costs & expenses	148,577		6,689		41,844			197,110		48,642		2,228		13,150			64,020
Depreciation & amortization	2,490		78		4,083			6,651		877		27		1,161			2,065
Operating income (loss)	$	97,163	$	11,254	$	(45,927	)	$	62,490	$	31,272	$	3,679	$	(14,311	)	$	20,640

2017
Revenues	$	232,963	$	20,073	$	—		$	253,036
Costs & expenses	143,326		6,803		36,882			187,011
Depreciation & amortization	2,023		72		3,016			5,111
Operating income (loss)	$	87,614	$	13,198	$	(39,898	)	$	60,914

The ~~Company's contracts with~~legacy contract under which the Company managed digital government services for the state of Texas ~~which consist of the legacy portal contract that~~ expired on August 31, 2018 and the new payment processing contract that commenced on September 1, 2018, combined, accounted for approximately 18% of the Company's total consolidated revenues for the three months ended September 30, 2018 and 19% of the Company's total consolidated

~~revenues for the nine months ended September 30, 2018. The Company's legacy Texas portal contract~~ accounted for approximately 20% of the Company's total consolidated revenues for the three ~~and nine~~ months ended ~~September 30, 2017.~~March 31, 2018. The Company's ~~portal~~state enterprise contract with the state of Colorado accounted for approximately 10% of the Company's total consolidated revenues for the three months ended ~~September 30, 2018.~~March 31, 2019. No other government partner accounted for more than 10% of the Company's total consolidated revenues for any period presented.

12. Subsequent Event

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

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 ~~portal~~ contracts and new projects under existing ~~portal~~ contracts, the expected length of contract terms, statements relating to the our business plans, objectives and expected operating results, statements relating to our expected effective tax rate, ~~and the potential effect of tax law changes,~~ statements relating to possible future dividends and share repurchases, ~~statements relating to the Texas procurement process,~~ statements regarding the expected effects of changes in accounting standards, statements of assumptions underlying such statements, and statements of our intentions, hopes, beliefs, expectations, or predictions of the future. For example, statements like we “expect,” we “believe,” we “plan,” we “intend,” or we “anticipate” are forward-looking statements. Investors should be aware that our actual operating results and financial performance may differ materially from our expressed expectations because of risks and uncertainties about the future including those risks discussed in this Quarterly Report on Form 10-Q and in our ~~2017~~2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February ~~22, 2018.~~21, 2019.

There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward-looking statements. These include, among others, our success in renewing existing contracts and in signing contracts with new states and with federal and state government agencies; our ability to successfully increase the adoption and use of digital government services; the possibility of security breaches or disruptions through cyber-attacks or other events and any resulting liability; our ability to implement new contracts and any related technology enhancements in a timely and cost-effective manner; the possibility of reductions in fees or revenues as a result of budget deficits, government shutdowns, or changes in government policy; continued favorable government legislation; acceptance of digital government services by businesses and citizens; our ability to identify and acquire suitable acquisition candidates and to successfully integrate any acquired businesses; ~~risks related to the outcome of the Texas procurement process;~~ competition; general economic conditions; and the other factors discussed under “RISK FACTORS” in Part I, Item 1A and “Cautions About Forward Looking Statements" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of NIC’s ~~2017~~2018 Annual Report on Form 10-K filed on February ~~22, 2018~~21, 2019 with the SEC. Investors should read all of these discussions of risks carefully.

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

~~WHAT WE DO – AN EXECUTIVE SUMMARY~~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 ~~currently~~ through two channels: our ~~primary outsourced portal~~state enterprise businesses and our software & services businesses.

In our primary ~~outsourced portal~~state enterprise businesses, we generally enter into contracts primarily with state and local governments to design, build, and operate digital government services on an enterprise-wide basis on their behalf. We typically enter into multi-year contracts and manage operations for each government partner through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. ~~Our portals consist of websites and applications~~The internet-based services that we build, ~~which~~ allow businesses and citizens to access government information through multiple ~~online~~digital channels ~~including mobile,~~ and complete secure transactions. These transactions include applying for a permit, retrieving government records, or filing a government-mandated form or report. We help increase our government partners’ revenues by expanding the distribution of their information assets and increasing the number of financial transactions conducted with governments. We do this by marketing digital government services and soliciting users to complete government-based transactions and to enter into subscriber contracts that permit users to access the portal and the government information contained therein in exchange for transactional and/or subscription user fees. We are

typically responsible for funding the up-front ~~investments~~development and ongoing operations and maintenance costs of the digital government ~~portals.~~services. Our unique business model allows us to generate revenues by sharing in the fees collected from digital government transactions. Our government partners benefit because they reduce their financial and technological risks, increase their operational efficiencies, and gain a centralized, customer-focused presence on the internet, while businesses and citizens gain a faster, more convenient, and more cost-effective means to interact with governments.

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

the online transactions and data access services we provide and the division of revenues between us and the government agency. The government oversight authority must approve prices and revenue sharing agreements. We have limited control over the level of fees we are permitted to retain. Any changes made to the amount or percentage of fees retained by us, or to the amounts charged for the services offered, could materially affect the profitability of the respective contract. We typically own all the intellectual property related to the applications developed under these contracts. After completion of a defined contract term or upon termination for cause, the government partner typically receives a perpetual, royalty-free license to use the applications and digital government services we built only in its own state. However, certain enterprise applications and proprietary customer management, billing, payment processing ~~and~~or other ~~software~~ applications that we have developed and standardized centrally are provided to our government partners on a ~~SaaS~~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 ~~portal~~owned or licensed applications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.

We also provide certain payment processing services ~~on a SaaS basis to a few private sector entities and~~ to state and local agencies in states where we do not maintain an enterprise-wide ~~outsourced portal~~ contract and ~~may~~to a few private sector entities and will continue to market these services to other entities in the future. ~~Historically, revenues from these services have not been significant, but have grown in recent years.~~ In some cases, we enter into contracts to provide consulting, software development and ~~portal~~ management services to governments in exchange for an agreed-upon fee.

For additional information on our ~~key~~government contracts, refer to Note 3, ~~Outsourced~~ 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.

As previously disclosed, Texas NICUSA was selected to provide payment processing services set forth in the Texas RFO, but was not selected to provide the portal operations, maintenance and development services set forth in the Texas RFO. The legacy portal agreement between the state of Texas and Texas NICUSA expired on August 31, 2018, and the new payment processing services contract commenced on September 1, 2018. In April 2018, Texas NICUSA submitted a protest with the Texas Department of Information Resources (the "DIR") of the DIR's decision to award the contract relating to the portal operations, maintenance and development services to another vendor. In the protest, Texas NICUSA cited flaws in the procurement process and award decision. The protest was initially denied by the procurement department in May 2018 and appealed by Texas NICUSA to the DIR in May 2018. The appeal was denied, and Texas NICUSA's transition obligations concluded in September 2018.

The contract under which our subsidiary, NICUSA Inc. (“NICUSA”), managed digital government services for the state of Tennessee expired on March 31, 2017. For the nine-month period ended September 30, 2017, revenues from the Tennessee portal contract were approximately $1.8 million.

~~OVERVIEW OF BUSINESS MODELS~~REVENUES

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

State Enterprise Revenues: We earn state enterprise revenues ~~and cost of revenues primarily~~ from our subsidiaries operating enterprise-wide state ~~and local~~contracts that provide digital government ~~portals on an outsourced basis under~~services to multiple government agencies. We categorize our state enterprise ~~contracts. The software &~~revenues into three main sources: transaction-based fees, development services ~~category primarily includes~~and fixed fee management services. Transaction-based revenues and ~~cost~~fixed fee management services revenues are generally recurring while development services revenues are generally non-recurring. Each of these revenue sources are further described below:

Transaction-based:

IGS: fees from a wide variety of interactive government services, other than digital access to motor vehicle driver history records, for transactions conducted by business users and consumers. For a representative listing of the IGS applications we currently offer through our state enterprise businesses in conjunction with our government partners, refer to Part I, Item 1 in our 2018 Annual Report on Form 10-K, filed with the SEC on February 21, 2019.

DHR: fees from driver history records for providing data resellers, insurance companies, and other pre-authorized customers digital access to state motor vehicle driver history records on behalf of our state partners.


•	Development Services: revenues from the performance of software development projects and other time and materials services for our government partners. While we actively market these services, they do not have the same degree of predictability as our transaction-based or fixed fee management services and are generally non-recurring.


•	Fixed Fee Management Services: our state enterprise business in Indiana earns fixed fees from the performance of digital government services for numerous government partners.

Software & Services Revenues: We earn revenues from our ~~subsidiaries~~businesses that provide software development and digital government services, other than those services provided under state enterprise contracts, to federal agencies as well as state and local governments. Our Software & Services revenue is mainly transaction-based and classified by two types of contracts: NIC Federal and Other. Each of these revenue types is further described below:

•

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


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

OPERATING EXPENSES

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

Cost of ~~portal revenues~~Revenues: This consists of all direct costs associated with ~~operating~~providing digital government ~~portals~~services both on ~~an outsourced~~a state enterprise basis ~~including employee compensation~~ and benefits (including stock-based compensation), fees required to process credit/debit card and automated clearinghouse transactions, subcontractor labor costs, communication costs, provision for losses on accounts receivable, and all other costs associated with the provision of dedicated client service such as dedicated facilities. Cost ofa software & services ~~revenues consists~~basis and excludes depreciation and amortization. We categorize costs of all direct project costs to provide software development and services such as employee compensation and benefits (including stock-based compensation), subcontractor labor costs, and all other direct project costs including hardware, software, materials, travel and other out-of-pocket expenses. Selling & administrative expenses consist primarily of corporate-level expenses relating to human resource management, administration, information technology, security, legal, finance and

accounting, internal audit and all non-customer service related costs from the Company’s software & services businesses, including compensation and benefits, information systems and office rent. Selling & administrative expenses also consist of management incentive compensation, including stock-based compensation, and corporate-level expenses for market development and public relations.

~~We currently earn revenues from three main sources: transaction-based fees, portal software development and services and portal management. Each of these revenue types are further described below.~~

~~Transaction-based:~~

▪

~~IGS~~: our portal business earns transaction-based fees from interactive government services, referred to as IGS, from sources other than digital access to motor vehicle driver history records, for transactions conducted by business users and consumer users through our portals and which are generally recurring. For a representative listing of the IGS applications we currently offer through our portals, refer to Part I, Item 1 in our 2017 Annual Report on Form 10-K, filed with the SEC on February 22, 2018.


▪	~~DHR~~: our portal business earns transaction-based fees from driver history records, referred to as DHR, for providing digital access to motor vehicle driver history records from our state portals to data resellers, insurance companies, and other pre-authorized customers on behalf of our state partners, and which are generally recurring.


▪	~~Other~~: our software & services business earns a significant portion of its revenues from transaction-based fee contracts, most notably is NIC Federal's contract with the FMCSA to develop and manage the PSP for motor carriers nationwide.

~~Portal software development and services~~: these are 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 portal management revenues and are not generally recurring. As a result, these revenues are excluded from our recurring portal revenue percentage.

~~Portal management: these are revenues from the performance of fixed fee portal management services for our government partner in the state of Indiana which are generally recurring.~~

~~CRITICAL ACCOUNTING POLICIES~~

We have updated our revenue recognition policies in conjunction with the adoption of ASC 606 as further described in Note 2 in the Notes to the Unaudited Financial Statements in Part I, Item 1 of this Form 10-Q. There have been no other material changes in our critical accounting policies from the information provided under “Critical Accounting Policies” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 22, 2018.

~~RESULTS OF OPERATIONS~~

The following discussion summarizes the significant factors affecting operating results for the three and nine months ended September 30, 2018 and 2017. This discussion and analysis should be read in conjunction with our Unaudited Consolidated Financial Statements and the related Notes included in this Form 10-Q.

Our legacy Tennessee portal contract expired on March 31, 2017 and our legacy portal contract with the state of Texas expired on August 30, 2018. As a result, the operating results for these contracts have been removed from the same state category (portals in operation and generating comparable revenues for two full periods) for the three and nine months ended September 30, 2018. The operating results for our current Illinois contract and our Texas payment processing contract, which commenced on September 1, 2018, have also been removed from the same state category as they both did not generate revenues for two full comparable periods.

Three Months Ended September 30, Nine Months Ended
September 30,
Key Financial Metrics 2018 2017 2018 2017
Revenue growth - outsourced portals 6 % 2 % 7 % 4 %
Same state revenue growth - outsourced portals 9 % 5 % 9 % 5 %
Recurring portal revenue as a % of total portal revenues 96 % 99 % 97 % 98 %
Gross profit % - outsourced portals 40 % 38 % 40 % 38 %
Revenue growth - software & services (24 )% 51 % (10 )% 27 %
Gross profit % - software & services 64 % 61 % 63 % 66 %
Selling & administrative expenses as a % of total revenues 17 % 14 % 16 % 15 %
Operating income margin % (operating income as a % of total revenues) 22 % 24 % 23 % 24 %

~~Portal Revenues~~

In the analysis below, we have categorized our portal revenues according to the underlying source of revenue (in thousands), with the corresponding percentage increase or decrease from the prior year period.

Three Months Ended September 30, Nine Months Ended September 30,
Portal Revenue Analysis 2018 2017 % Change 2018 2017 % Change
IGS transaction-based $ 51,085
$ 48,089
6 % $ 156,463
$ 144,194
9 %
DHR transaction-based 25,555
25,936
(1 )% 79,439
79,787
— %
Portal software development and services 3,006
1,134
165 % 8,615
5,157
67 %
Portal management 1,238
1,275
(3 )% 3,713
3,825
(3 )%
Total $ 80,884
$ 76,434
6 % $ 248,230

$ 232,963
7 %

Portal revenues in the current quarter increased 6%, or approximately $4.5 million, over the prior year quarter mainly due to an 9%, or approximately $5.6 million, increase in same state portal revenues and a $2.0 million increase in revenues from our Texas payment processing contract, partially offset by a $3.2 million decrease in revenues from our legacy Texas portal contract due to the contract expiration on August 31, 2018.

Same state portal revenues grew 9% in the current quarter compared to 5% in the prior year quarter. The increase in same state portal revenues in the current quarter was primarily attributable to higher revenues from our South Carolina and Oklahoma portals, among others. Same state IGS revenues grew 11% in the current quarter compared to 10% in the prior year quarter. The growth in the current quarter was driven by several key services, including driver's license renewals in South Carolina and motor vehicle and income tax services in Oklahoma. Same state DHR revenues grew 4% in the current quarter compared to 1% in the prior year quarter. The increase in the current quarter was driven by a price increase in one of our states in addition to higher volumes across several states. Same state portal software development and services revenues increased 74% in the current quarter, due to higher project-based revenues mainly from our Indiana portal, among others.

Portal revenues in the current year-to-date period increased 7%, or approximately $15.3 million, over the prior year-to-date period mainly due to an 9%, or approximately $15.7 million, increase in same state portal revenues, an increase in revenues from our Texas payment processing contract of approximately $2.0 million, and an increase in revenues from our Illinois contract of approximately $0.6 million. These increases were partially offset by a $1.8 million decrease in revenues from our legacy Tennessee portal contract due to the contract expiration on March 31, 2017 and a $1.2 million decrease in revenues from our legacy Texas portal contract due to the contract expiration on August 31, 2018.

Same state portal revenues grew 9% in the current year-to-date period compared to 5% in the prior year-to-date period. The increase in same state portal revenues in the current year-to-date period was primarily attributable to higher revenues from our South Carolina and Colorado portals, among others. Same state IGS revenues grew 11% in the current year-to-date period compared to 10% in the prior year-to-date period. The growth in the current year-to-date period was driven by several key services, including driver's license renewals in South Carolina and motor vehicle and business registration filings in Colorado. Same state DHR revenues grew 3% in the current year-to-date period compared to 1% in the prior year-to-date period due mainly to a price increase in one of our states in addition to higher volumes across several states. Same state portal software development and services

~~revenues increased 29% in the current year-to-date period, due to higher project-based revenues mainly from our Indiana portal, among others.~~

~~Cost of Portal Revenues~~

~~In the analysis below, we have categorized our cost of portal~~ revenues between fixed and variable ~~costs (in thousands), with the corresponding percentage increase from the prior year period.~~costs:

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

Variable costs ~~consist of costs that vary~~fluctuate with ~~our~~the level of ~~portal~~ revenues and primarily include interchange fees required to process credit/debit card ~~and~~transactions, bank fees to process automated clearinghouse transactions and, to a much lesser extent, costs associated with revenue share arrangements with ~~our~~certain state partners. A significant percentage of our ~~IGS~~ 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 ~~bank~~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 asbecause they are needed by our government partners and they contribute favorably to our operating ~~income.~~income growth.

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

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

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

RESULTS OF OPERATIONS

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

Total Revenues

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

State Enterprise Revenues

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

Three Months Ended September 30, Nine Months Ended September 30,
Cost of Portal Revenue Analysis 2018 2017 % Change 2018 2017 % Change
Fixed costs $ 27,121
$ 27,852
(3 )% $ 84,402
$ 83,780
1 %
Variable costs 21,103
19,525
8 % 64,175
59,546
8 %
Total $ 48,224
$ 47,377
2 % $ 148,577
$ 143,326
4 %



	Three Months Ended March 31,
(dollar amounts in thousands)	2019		2018		Change			% Change
IGS transaction-based	$	50,154	$	50,267	$	(113	)	—	%
DHR transaction-based	23,685		27,239		(3,554		)	(13	)%
Development services	2,178		2,047		131			6	%
Fixed fee management services	1,238		1,238		—			—	%
Total	$	77,255	$	80,791	$	(3,536	)	(4	)%

~~Cost~~The following table summarizes key financial metrics for state enterprise revenues. For the three months ended March 31, 2019, the results of ~~portal~~the legacy Texas contract, the new Texas payment processing contract and the Illinois contract were excluded from the same-state enterprise category as they both did not generate revenues for two full comparable periods.



	Three Months Ended March 31,
	2019		2018
Same-state IGS revenue growth	15	%	10	%
Same-state DHR revenue growth	3	%	1	%
Same-state revenue growth - other services*	(4	)%	14	%
Same-state revenue growth - total	10	%	7	%

* Represents the combined growth of development services and fixed fee management services revenues.

State enterprise revenues in the current quarter ~~increased 2%~~decreased 4%, or approximately ~~$0.8~~$3.5 million, from the prior year quarter largely due to a $17.5 million decrease in revenues from the legacy Texas contract, which expired on August 31, 2018. This decrease was partially offset by a 10%, or approximately $6.3 million, increase in same-state enterprise revenues and a $7.4 million increase in revenues from the Texas payment processing contract, which commenced on September 1, 2018.

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

Software & Services Revenues

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



	Three Months Ended March 31,
(dollar amounts in thousands)	2019		2018		Change		% Change
NIC Federal	$	5,951	$	4,096	$	1,855	45%
Other	1,974		1,838		136		7%
Total	$	7,925	$	5,934	$	1,991	34%

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

State Enterprise Cost of Revenues

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



	Three Months Ended March 31,
(dollar amounts in thousands)	2019		2018		Change			% Change
Fixed costs	$	24,323	$	28,128	$	(3,805	)	(14	)%
Variable costs	24,332		20,514		3,818			19	%
Total	$	48,655	$	48,642	$	13		—	%

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

~~Our portal~~State enterprise gross profit percentage was ~~40%~~37% in the ~~current quarter, up from 38%~~three months ended March 31, 2019 compared to 40% in the prior year ~~quarter.~~period. The ~~increase in portal gross~~decrease was largely attributable to significantly lower revenues and profit ~~percentage was mostly driven by higher revenues.~~margins from the new Texas payment processing contract compared to the legacy Texas contract. We carefully monitor our ~~portal~~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 ~~portal~~state enterprise operations (which, we believe, also benefits our stockholders).

Software & Services Cost of portal revenues in the current year-to-date period increased 4%, or approximately $5.3 million, over the prior year-to-date period due mainly to an increase in variable fees to process credit/debit card transactions, which was mainly due to higher IGS transaction volumes, as further discussed above.

Our portal gross profit percentage was 40% in the current year-to-date period, up from 38% in the prior year-to-date period. The increase in portal gross profit percentage was mostly driven by higher revenues.

~~Software and Services~~ Revenues

In the ~~analysis~~table below, we have categorized our software & services cost of revenues ~~by business (in thousands),~~between fixed and variable costs, with the corresponding percentage ~~increase or decrease~~change from the comparative prior year ~~period.~~period:

Three Months Ended September 30, Nine Months Ended September 30,
Software & Services Revenue Analysis 2018 2017 % Change 2018 2017 % Change
NIC Federal $ 4,492
$ 6,671
(33)% $ 12,796
$ 14,872
(14)%
Other 1,652
1,428
16% 5,225
5,201
—%
Total $ 6,144
$ 8,099
(24)% $ 18,021
$ 20,073
(10)%



	Three Months Ended March 31,
(dollar amounts in thousands)	2019		2018		Change			% Change
Fixed costs	$	2,318	$	1,801	$	517		29	%
Variable costs	402		427		(25		)	(6	)%
Total	$	2,720	$	2,228	$	492		22	%

Software & services cost of revenues ~~declined 24%~~ in the ~~current quarter largely due~~three months ended March 31, 2019 increased 22% compared to ~~a significant one-time spike in revenues from the Senior Park Pass program with the United States National Park Service in~~ the prior year quarter, which did not recur at the same level. Revenues from the Senior Park Pass program totaled approximately $2.8 million in the prior year quarter. This also contributed to the 10% decrease in software & services revenues in the current year-to-date period.

~~Cost of Software and Services Revenues~~

Cost of software & services revenues in the current quarter decreased 30%, or approximately $0.9 million, from the prior year quarter and decreased 2%, or approximately $0.1 million, in the current year-to-date period ~~from the prior year-to-date period. These decreases were due mainly to higher prior year~~largely driven by compensation related costs to support the Senior Park Pass program, as described above, partially offset by higher employee compensation and benefit costs in the current year periods for our NIC Federal business related to start-up costs associated with subcontracting work for Booz Allen Hamilton on its Recreation.gov contract.

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

Selling & Administrative

Selling & administrative expenses for the three months ended March 31, 2019 were $10.0 million, an increase of $2.5 million, or 33%, compared to the same period in the prior year, driven by executive severance costs totaling $2.6 million in the current quarter, ~~increased to 64% compared to 61% in~~as previously disclosed. These severance costs consisted of a one-time cash payment of $1.5 million and $1.1 million of stock-based compensation expense associated with the prior year quarter, which was driven by the higher costs to support the Senior Park Pass program in the prior year quarter. Our software & services gross profit percentage in the current year-to-date period decreased to 63% from 66% in the prior year-to-date period largely driven by higher employee compensation and benefit costs for our NIC Federal business related to the Recreation.gov subcontract work described above.

~~Selling & Administrative~~

accelerated vesting of certain restricted stock awards. As a percentage of total consolidated revenues, selling & administrative expenses were ~~17% in~~12% for the ~~current~~first quarter of 2019 compared to 9% for the first quarter of 2018.

Enterprise Technology & Product Support

Enterprise technology & product support expenses for the three months ended March 31, 2019 were $6.4 million, an increase of $0.8 million, or 14%, compared to the same period in the prior year quarter and 16% in the current year-to-date period compared to 15% in the prior year-to-date period. Selling & administrative expenses increased 21%, or approximately $2.6 million, in the current quarter over the prior year quarter and increased 13%, or approximately $5.0 million, in the current year-to-date period compared to the prior year-to-date period.year. The ~~increases in both the current quarter and year-to-date periods were mainly~~increase was primarily driven by higher personnel costs to support ~~business~~product development and enhance company-wide information technology, including the continued development of the Company's citizen-centric Gov2Go® enterprise platform and enterprise microservices ~~platform,~~platform. As a percentage of total consolidated revenues, enterprise technology and ~~by higher incentive-based compensation.~~product support expenses were 8% for the first quarter of 2019 compared to 7% for the first quarter of 2018.

Depreciation & Amortization



	Three Months Ended March 31,
(dollar amounts in thousands)	2019		2018		Change			% Change
Depreciation	$	1,025	$	1,448	$	(423	)	(29	)%
Amortization	1,396		617		779			126	%
Depreciation & amortization	$	2,421	$	2,065	$	356		17	%

Depreciation & amortization expense inincreased 17%, or $0.4 million for the ~~current quarter increased approximately $0.6 million, or 35%,~~three months ended March 31, 2019 compared to the ~~prior year quarter, and approximately $1.5 million, or 30%,~~same period in the ~~current year-to-date period compared to the~~ prior ~~year-to-date period. These increases were~~year. The increase was driven primarily by ~~the amortization of capitalized software development costs and technology investments made in prior periods and $0.2 million of~~ intangible asset amortization related to the Leap Orbit asset acquisition as well as the amortization of capitalized software development costs related to enterprise product and platform investments made in ~~the current quarter. See Notes 4 & 5 in the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. We anticipate the intangible asset amortization~~prior periods. This increase was partially offset by lower depreciation related to the ~~Leap Orbit acquisition~~legacy Texas contract. As a percentage of total consolidated revenues, depreciation & amortization expense was 3% for the first quarter of 2019 compared to ~~total approximately $0.3~~2% for the same period in the prior year.

Interest Income

Interest income was $0.6 million for the ~~remainder of 2018. In~~three months ended March 31, 2019. The increase from the ~~event that we pay~~comparative prior year period was primarily driven by an increase in interest rates on our average cash balance for the ~~additional deferred consideration of $3.5 million, we currently anticipate amortization for this acquisition will be approximately $2.3 million for fiscal year 2019.~~current period.

Income Taxes

Our effective tax rate was approximately ~~18.9%~~26.2% and 24.9% for the ~~current quarter compared to 30.2% in the prior year quarter. Our effective tax rate was 22.8% for the current year-to-date period compared to 33.1% in the prior year-to-date period.~~three months ended March 31, 2019 and 2018, respectively. The lower effective tax rate in both the current quarter and year-to-date periods was driven mainly by a decrease in the statutory federal corporate income tax rate from 35% to 21% resulting from Tax Cut and Jobs Act (the "Tax Act"), which was signed into law in December 2017. The reduction in the statutory federal corporate income tax rate was partially offset by the elimination of certain deductions resulting from the Tax Act (most notably the domestic production activities deduction). Also contributing to the lowerhigher effective tax rate for the ~~quarter and year-to-date periods~~three months ended March 31, 2019 was primarily driven by executive severance costs in the ~~release~~current period, a significant portion of ~~reserves to our liability~~which is not deductible for ~~unrecognized~~ income tax benefits due to the expiration of the statute of limitations for certain tax years and, to a lesser extent, an increase in the previously estimated research and development tax credit for the 2017 and 2018 tax years upon the filing of our 2017 federal tax return during the current quarter. See Note 8, Income Taxes, in the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for additional information.purposes.

Liquidity and Capital Resources

Operating Activities

~~Net cash~~Cash flows provided by operating activities ~~was $49.6~~were $1.1 million infor the first ~~nine months~~quarter of ~~2018~~2019 compared to ~~$48.6~~$9.2 million infor the first ~~nine months~~quarter of ~~2017.~~2018. The ~~increase~~decrease was mainly the result of ~~an increase~~a decrease in net income ~~partially offset by~~and fluctuations in working capital mainly associated with the timing of payments to and receipts from our government partners.

Investing Activities

~~Net cash~~Cash flows used in investing activities ~~was $13.3~~were $5.6 million infor the first ~~nine months~~quarter of ~~2018~~2019 compared to ~~$5.9~~$2.5 million infor the first ~~nine months~~quarter of ~~2017.~~2018. The increase ~~in the current year-to-date period~~ was primarily due to the additional consideration of $1.7 million paid during the first quarter of 2019 for the software technology acquired in the Leap Orbit asset acquisition, ~~totaling approximately $3.6 million. See Note 4, Asset Acquisition, in the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for additional information. The~~and by a $0.6 million and $0.8 million increase in ~~net cash used in investing activities was also driven by a $3.2 million increase in~~purchases of property and equipment and capitalized software development costs, ~~relating mainly to our citizen-centric Gov2Go® enterprise platform, enterprise microservices platform and enterprise licensing and permitting platform.~~respectively.

Financing Activities

~~Net cash~~Cash flows used in financing activities ~~was $16.0~~were $6.6 million infor the first ~~nine months~~quarter of ~~2018~~2019 compared to ~~$17.4~~$5.1 million infor the first ~~nine months~~quarter of ~~2017.~~2018. The ~~decrease in the current year-to-date period~~increase was primarily due to a ~~$1.4~~$1.5 million ~~decrease~~increase in tax withholdings related to the vesting of employee stock-based compensation awards.

Liquidity

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

We believe our working capital and current ratio are important measures of our short-term liquidity. Working capital, defined as current assets minus current liabilities, increased to ~~$190.7~~$198.5 million at ~~September 30, 2018,~~March 31, 2019, from ~~$158.5~~$197.2 million at December 31, ~~2017.~~2018. The increase in our working capital was primarily due to cash generated from operations in the period. Our current ratio, defined as current assets divided by current liabilities, was 2.8 and ~~2.3~~3.2 at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively.

At ~~September 30, 2018,~~March 31, 2019, our cash balance was ~~$181.0~~$180.6 million compared to ~~$160.8~~$191.7 million at December 31, ~~2017.~~2018. We believe that our currently available liquid resources and cash generated from operations will be sufficient to meet our operating requirements, capital expenditure requirements and potential dividend payments ~~(if any)~~ for at least the next 12 months without the need for additional capital. We have a $10.0 million unsecured revolving credit facility (the “Credit Agreement”) with a bank that is available to finance working capital, issue letters of credit and finance general corporate purposes. The Credit Agreement also includes an accordion feature that will allow us to increase the available capacity under the Credit Agreement to $50 million, subject to securing additional commitments from the bank. We can obtain letters of credit in an aggregate amount of $5.0 million, which reduces the maximum amount available for borrowing under the Credit Agreement. In total, we had ~~$4.1~~$4.8 million in available capacity to issue additional letters of credit and ~~$9.1~~$9.8 million of unused borrowing capacity at ~~September 30, 2018~~March 31, 2019 under the Credit Agreement. We were in compliance with all of our covenants under the Credit Agreement at ~~September 30, 2018.~~

We have issued letters of credit as collateral for office leases, and to a much lesser extent, as collateral for performance on our outsourced government portal contracts. These irrevocable letters of credit are generallyMarch 31, 2019. As further discussed in ~~force for one year. Letters of credit may have an expiration date of up to one year beyond the expiration date~~Note 5 of the Credit Agreement. We had unused outstanding letters of credit totaling approximately $0.9 million at September 30, 2018, consisting of one letter of credit issued as collateral for an office lease and one letter of credit issued as collateral for performanceNotes to the Unaudited Consolidated Financial Statements on ~~one of our outsourced government portal contracts. We are not currently required to cash collateralize these letters of credit. Our Credit Agreement matures~~this Form 10-Q, on May 1, ~~2019.~~2019, we entered into an amendment to our Credit Agreement that, among other things, amended and extended our Credit Agreement from May 1, 2019 to May 1, 2021.

At ~~September 30, 2018,~~March 31, 2019, we were bound by performance bond commitments totaling approximately ~~$5.8~~$10.8 million on certain ~~outsourced~~ government ~~portal~~ contracts.

We currently expect our capital expenditures to range from approximately ~~$5.0~~$4.5 million to ~~$6.0~~$5.5 million in the fiscal year ~~2018,~~2019, which we intend to fund from our cash flows from operations and existing cash reserves. This estimate includes capital expenditures for normal fixed asset additions in our ~~outsourced portal~~state enterprise businesses including equipment upgrades and enhancements, and in our centralized hosting environment to support and enhance corporate-wide information technology and security infrastructure, including Web servers, software licenses, and office equipment. We currently expect our capitalized internal-use software development costs to range from approximately ~~$6.0~~$7.0 million to ~~$7.0~~$8.0 million. This estimate includes costs related to the enhancement of centralized customer management, billing and payment processing ~~systems~~solutions that support our business operations and accounting

systems in addition to our citizen-centric Gov2Go enterprise platform, enterprise microservices platform and enterprise licensing and permitting platform.

Dividends

We paid dividends ~~totaling $0.24~~of $0.08 per common share ~~($0.08 per quarter)~~ during the first ~~nine months~~quarter of ~~2018~~2019 and ~~2017.~~2018. The total cash dividends paid during the ~~three~~first quarter of 2019 and ~~nine months ended September 30,~~ 2018 ~~was~~were $5.4 million and ~~$16.1 million, respectively, as compared to~~ $5.4 million, ~~and~~ ~~$16.0 million, respectively, for the same periods in 2017.~~respectively.

~~Share Buyback Program~~

In March 2018, we announced that our Board of Directors had authorized a stock buyback program allowing the Company to repurchase up to $25 million of our common stock. Share repurchases may be funded using our existing cash balance, future cash flows, or available line of credit. The number of shares purchased under the program and the timing of any purchases would be based on many factors, including the level our available cash, general business conditions, and pricing. The stock buyback program does not obligate us to acquire a specific number of shares and may be suspended, modified, or terminated at any time. Repurchases under the program may take place in the open market or in privately negotiated transactions, and may be made under a Rule 10b5-1 plan. No purchases have been made under this program.

Future Financing

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

fund operations if unforeseen costs arise;

support our expansion into other federal, state and local government agencies beyond what is contemplated if unforeseen opportunities arise;

expand our product and service offerings beyond what is contemplated if unforeseen opportunities arise;

fund acquisitions;

respond to unforeseen competitive pressures; and

acquire technologies beyond what is contemplated.

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

Off-Balance Sheet Arrangements and Contractual Obligations

We had unused outstanding letters of credit totaling approximately ~~$0.9~~$0.2 million at ~~September 30, 2018.~~March 31, 2019.

As of ~~September 30, 2018,~~March 31, 2019, there have been no material changes outside the ordinary course of business from the disclosures relating to contractual obligations contained under “Off-Balance Sheet Arrangements and Contractual Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC on February ~~22, 2018.~~21, 2019. While we have significant operating lease commitments for office space, except for our headquarters, those commitments are generally tied to the period of performance under related ~~portal~~ contracts. We have income tax uncertainties of approximately ~~$8.2~~$9.0 million at ~~September 30, 2018.~~March 31, 2019. These obligations are classified as non-current on our consolidated balance sheet, as resolution is expected to take more than a year. We estimate that these matters could be resolved in one to three years. However, the ultimate timing of resolution is uncertain.

CRITICAL ACCOUNTING POLICIES

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk.

Our ~~cash is~~results of operations are exposed to financial market risks due primarily ~~held~~to changes in ~~domestic non-interest bearing transaction bank~~interest rates on our interest-bearing cash accounts. We currently have no principal amounts of indebtedness outstanding under our line of ~~credit.~~ credit, the terms of which are discussed in Note 5 to the Unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Changes in interest rates affect the interest income we earn, and therefore impact our cash flows and results of operations. Based on our cash balances as of March 31, 2019, a one percent change in interest rates would not have a significant impact on our cash flows or results of operations.

We do not use derivative financial instruments.

ITEM 4. CONTROLS AND PROCEDURES

a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting that occurred during the ~~third~~first quarter of ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC on February ~~22, 2018.~~21, 2019.

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

Share Repurchases

During the ~~third~~first quarter of ~~2018,~~2019, we acquired and cancelled shares of common stock surrendered by employees to pay income taxes due upon the vesting of restricted stock as follows:

Period Total Number of Shares Purchased
Average Price
Paid Per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the Plans
or Programs (1)
July 17, 2018 929
$ 15.95
N/A N/A
July 19, 2018 1,483
16.30
N/A N/A
July 31, 2018 284
16.40
N/A N/A
Total 2,696
16.19



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 15, 2019	2,568	$	13.65	N/A	N/A
January 18, 2019	665	13.81		N/A	N/A
January 20, 2019	2,421	13.81		N/A	N/A
January 28, 2019	1,502	14.13		N/A	N/A
January 30, 2019	881	14.16		N/A	N/A
February 6, 2019	42,726	17.31		N/A	N/A
February 22, 2019	86,252	17.26		N/A	N/A
February 23, 2019	15,542	17.26		N/A	N/A
Total	152,557	17.01

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

ITEM 5. OTHER INFORMATION

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

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

Proposal 1

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



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

Proposal 2

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

Proposal 3

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

ITEM 6. EXHIBITS



~~10.1~~10.1*	~~Employment agreement~~Amendment No. 4 to Amended and Restated Credit Agreement, dated May 1, 2019 between ~~the Registrant~~NIC Inc., as Borrower, and ~~William Van Asselt, dated July 29, 2018 (incorporated by reference to Exhibit 10.1 to Form 10-Q (File No. 000-26621) filed with the SEC on August 1, 2018.~~Bank of America, N.A., as Lender and L/C Issuer

31.1*	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**	Section 906 Certifications of Chief Executive Officer and Chief Financial Officer

101	The following financial information from NIC’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2018,~~March 31, 2019, formatted in XBRL (Extensible Business Reporting Language) includes (i) Consolidated Balance Sheets at ~~September 30, 2018~~March 31, 2019 (unaudited) and December 31, ~~2017,~~2018, (ii) Consolidated Statements of Income (unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ (iii) Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, (iv) Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ and (v) the Notes to the Unaudited Consolidated Financial Statements (submitted electronically herewith).

* Filed herewith.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		NIC INC.

Dated:	~~November 1, 2018~~May 7, 2019	/s/ Stephen M. Kovzan
		Stephen M. Kovzan
		Chief Financial Officer

2928



		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statement of Changes in Stockholders' Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1816
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2624
Item 4.	Controls and Procedures	2624
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	2725
Item 1A.	Risk Factors	2725
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 5.	Other Information	25
Item 6.	Exhibits	27
~~Item 6.~~	~~Exhibits~~Signatures	28
	~~Signatures~~	29



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	Outsourced Portals		Other Software & Services		Consolidated Total		Outsourced Portals		Other Software & Services		Consolidated Total
IGS	$	51,085	$	—	$	51,085	156,463		—		$	156,463
DHR	25,555		—		25,555		79,439		—		79,439
Other	—		6,144		6,144		—		18,021		18,021
Total transaction-based	76,640		6,144		82,784		235,902		18,021		253,923
Portal software development & services	3,006		—		3,006		8,615		—		8,615
Portal management	1,238		—		1,238		3,713		—		3,713
Total revenues	$	80,884	$	6,144	$	87,028	$	248,230	$	18,021	$	266,251

	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017
	Outsourced Portals		Other Software & Services		Consolidated Total		Outsourced Portals		Other Software & Services		Consolidated Total
IGS	$	48,089	$	—	$	48,089	$	144,194	$	—	$	144,194
DHR	25,936		—		25,936		79,787		—		79,787
Other	—		8,099		8,099		—		20,073		20,073
Total transaction-based	74,025		8,099		82,124		223,981		20,073		244,054
Portal software development & services	1,134		—		1,134		5,157		—		5,157
Portal management	1,275		—		1,275		3,825		—		3,825
Total revenues	$	76,434	$	8,099	$	84,533	$	232,963	$	20,073	$	253,036



	September 30, 2018							December 31, 2017
	Gross Carrying Value		Accumulated Amortization			Net Book Value		Gross Carrying Value		Accumulated Amortization			Net Book Value
Software development cost	$	19,393	$	(10,602	)	$	8,791	$	13,610	$	(8,396	)	$	5,214
Purchased software	3,555		(197		)	3,358		—		—			—
Total	$	22,948	$	(10,799	)	$	12,149	$	13,610	$	(8,396	)	$	5,214



	Three Months Ended September 30,				Nine Months Ended September 30,
Key Financial Metrics	2018		2017		2018		2017
Revenue growth - outsourced portals	6	%	2	%	7	%	4	%
Same state revenue growth - outsourced portals	9	%	5	%	9	%	5	%
Recurring portal revenue as a % of total portal revenues	96	%	99	%	97	%	98	%
Gross profit % - outsourced portals	40	%	38	%	40	%	38	%
Revenue growth - software & services	(24	)%	51	%	(10	)%	27	%
Gross profit % - software & services	64	%	61	%	63	%	66	%
Selling & administrative expenses as a % of total revenues	17	%	14	%	16	%	15	%
Operating income margin % (operating income as a % of total revenues)	22	%	24	%	23	%	24	%



	Three Months Ended September 30,						Nine Months Ended September 30,
Portal Revenue Analysis	2018		2017		% Change		2018		2017		% Change
IGS transaction-based	$	51,085	$	48,089	6	%	$	156,463	$	144,194	9	%
DHR transaction-based	25,555		25,936		(1	)%	79,439		79,787		—	%
Portal software development and services	3,006		1,134		165	%	8,615		5,157		67	%
Portal management	1,238		1,275		(3	)%	3,713		3,825		(3	)%
Total	$	80,884	$	76,434	6	%	$	248,230	$	232,963	7	%



	Three Months Ended September 30,						Nine Months Ended September 30,
Cost of Portal Revenue Analysis	2018		2017		% Change		2018		2017		% Change
Fixed costs	$	27,121	$	27,852	(3	)%	$	84,402	$	83,780	1	%
Variable costs	21,103		19,525		8	%	64,175		59,546		8	%
Total	$	48,224	$	47,377	2	%	$	148,577	$	143,326	4	%



	Three Months Ended September 30,					Nine Months Ended September 30,
Software & Services Revenue Analysis	2018		2017		% Change	2018		2017		% Change
NIC Federal	$	4,492	$	6,671	(33)%	$	12,796	$	14,872	(14)%
Other	1,652		1,428		16%	5,225		5,201		—%
Total	$	6,144	$	8,099	(24)%	$	18,021	$	20,073	(10)%

Abstentions

Broker Non-Votes