ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NIC INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
thousands except par value amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
Cash
|
|
$
|
186,535
|
|
|
$
|
191,700
|
|
|
Trade accounts receivable, net
|
|
113,116
|
|
|
80,904
|
|
|
Prepaid expenses & other current assets
|
|
12,603
|
|
|
13,730
|
|
|
Total current assets
|
|
312,254
|
|
|
286,334
|
|
|
Property and equipment, net
|
|
10,956
|
|
|
10,256
|
|
|
Right of use lease assets, net
|
|
11,924
|
|
|
—
|
|
|
Intangible assets, net
|
|
23,195
|
|
|
13,604
|
|
|
Goodwill
|
|
5,965
|
|
|
—
|
|
|
Other assets
|
|
353
|
|
|
332
|
|
|
Total assets
|
|
$
|
364,647
|
|
|
$
|
310,526
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
83,708
|
|
|
$
|
60,092
|
|
|
Accrued expenses
|
|
22,713
|
|
|
24,150
|
|
|
Lease liabilities
|
|
4,077
|
|
|
—
|
|
|
Other current liabilities
|
|
5,441
|
|
|
4,883
|
|
|
Total current liabilities
|
|
115,939
|
|
|
89,125
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
1,757
|
|
|
781
|
|
|
Lease liabilities
|
|
8,263
|
|
|
—
|
|
|
Other long-term liabilities
|
|
9,346
|
|
|
8,931
|
|
|
Total liabilities
|
|
135,305
|
|
|
98,837
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 2, 3, 4 and 6)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
Common stock, $0.0001 par, 200,000 shares authorized, 66,956 and 66,569 shares issued and outstanding
|
|
7
|
|
|
7
|
|
|
Additional paid-in capital
|
|
120,204
|
|
|
117,763
|
|
|
Retained earnings
|
|
109,131
|
|
|
93,919
|
|
|
Total stockholders' equity
|
|
229,342
|
|
|
211,689
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
364,647
|
|
|
$
|
310,526
|
|
See accompanying notes to the unaudited consolidated financial statements.
NIC INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
thousands except per share amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
State enterprise revenues
|
|
$
|
82,829
|
|
|
$
|
86,555
|
|
|
$
|
160,085
|
|
|
$
|
167,346
|
|
|
Software & services revenues
|
|
8,737
|
|
|
5,943
|
|
|
16,662
|
|
|
11,877
|
|
|
Total revenues
|
|
91,566
|
|
|
92,498
|
|
|
176,747
|
|
|
179,223
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State enterprise cost of revenues, exclusive of depreciation & amortization
|
|
52,277
|
|
|
51,711
|
|
|
100,933
|
|
|
100,353
|
|
|
Software & services cost of revenues, exclusive of depreciation & amortization
|
|
3,329
|
|
|
2,235
|
|
|
6,049
|
|
|
4,463
|
|
|
Selling & administrative
|
|
8,356
|
|
|
8,268
|
|
|
18,320
|
|
|
15,771
|
|
|
Enterprise technology & product support
|
|
6,745
|
|
|
5,735
|
|
|
13,190
|
|
|
11,382
|
|
|
Depreciation & amortization
|
|
3,130
|
|
|
2,145
|
|
|
5,551
|
|
|
4,210
|
|
|
Total operating expenses
|
|
73,837
|
|
|
70,094
|
|
|
144,043
|
|
|
136,179
|
|
|
Operating income
|
|
17,729
|
|
|
22,404
|
|
|
32,704
|
|
|
43,044
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
577
|
|
|
57
|
|
|
1,181
|
|
|
58
|
|
|
Income before income taxes
|
|
18,306
|
|
|
22,461
|
|
|
33,885
|
|
|
43,102
|
|
|
Income tax provision
|
|
3,846
|
|
|
5,450
|
|
|
7,923
|
|
|
10,582
|
|
|
Net income
|
|
$
|
14,460
|
|
|
$
|
17,011
|
|
|
$
|
25,962
|
|
|
$
|
32,520
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.38
|
|
|
$
|
0.48
|
|
|
Diluted net income per share
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.38
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
66,940
|
|
|
66,541
|
|
|
66,806
|
|
|
66,432
|
|
|
Diluted
|
|
66,940
|
|
|
66,561
|
|
|
66,806
|
|
|
66,447
|
|
See accompanying notes to the unaudited consolidated financial statements.
NIC INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
Total
|
|
Balance, January 1, 2019
|
|
66,569
|
|
|
$
|
7
|
|
|
$
|
117,763
|
|
|
$
|
93,919
|
|
|
$
|
211,689
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,502
|
|
|
11,502
|
|
|
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,402
|
)
|
|
(5,402
|
)
|
|
Dividend equivalents on unvested performance-based restricted stock awards
|
|
—
|
|
|
—
|
|
|
27
|
|
|
(27
|
)
|
|
—
|
|
|
Dividend equivalents cancelled upon forfeiture of performance-based restricted stock awards
|
|
—
|
|
|
—
|
|
|
(122
|
)
|
|
122
|
|
|
—
|
|
|
Restricted stock vestings
|
|
364
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings
|
|
(153
|
)
|
|
—
|
|
|
(2,609
|
)
|
|
—
|
|
|
(2,609
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
|
|
2,272
|
|
|
—
|
|
|
2,272
|
|
|
Shares issuable in lieu of dividend payments on performance-based restricted stock awards
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
128
|
|
|
—
|
|
|
1,443
|
|
|
—
|
|
|
1,443
|
|
|
Balance, March 31, 2019
|
|
66,911
|
|
|
7
|
|
|
118,774
|
|
|
100,114
|
|
|
218,895
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,460
|
|
|
14,460
|
|
|
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,416
|
)
|
|
(5,416
|
)
|
|
Dividend equivalents on unvested performance-based restricted stock awards
|
|
—
|
|
|
—
|
|
|
27
|
|
|
(27
|
)
|
|
—
|
|
|
Restricted stock vestings
|
|
47
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings
|
|
(2
|
)
|
|
—
|
|
|
(28
|
)
|
|
—
|
|
|
(28
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
1,431
|
|
|
—
|
|
|
1,431
|
|
|
Balance, June 30, 2019
|
|
66,956
|
|
|
$
|
7
|
|
|
$
|
120,204
|
|
|
$
|
109,131
|
|
|
$
|
229,342
|
|
NIC INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
Total
|
|
Balance, January 1, 2018
|
|
66,271
|
|
|
$
|
7
|
|
|
$
|
111,275
|
|
|
$
|
56,960
|
|
|
$
|
168,242
|
|
|
Net cumulative effect of adoption of accounting standard
|
|
—
|
|
|
—
|
|
|
—
|
|
|
208
|
|
|
208
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,508
|
|
|
15,508
|
|
|
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,370
|
)
|
|
(5,370
|
)
|
|
Dividend equivalents on unvested performance-based restricted stock awards
|
|
—
|
|
|
—
|
|
|
34
|
|
|
(34
|
)
|
|
—
|
|
|
Dividend equivalents cancelled upon forfeiture of performance-based restricted stock awards
|
|
—
|
|
|
—
|
|
|
(140
|
)
|
|
140
|
|
|
—
|
|
|
Restricted stock vestings
|
|
202
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings
|
|
(81
|
)
|
|
—
|
|
|
(1,132
|
)
|
|
—
|
|
|
(1,132
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
1,511
|
|
|
—
|
|
|
1,511
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
122
|
|
|
—
|
|
|
1,382
|
|
|
—
|
|
|
1,382
|
|
|
Balance, March 31, 2018
|
|
66,514
|
|
|
7
|
|
|
112,930
|
|
|
67,412
|
|
|
180,349
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,011
|
|
|
17,011
|
|
|
Dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,385
|
)
|
|
(5,385
|
)
|
|
Dividend equivalents on unvested performance-based restricted stock awards
|
|
—
|
|
|
—
|
|
|
33
|
|
|
(33
|
)
|
|
—
|
|
|
Restricted stock vestings
|
|
44
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares surrendered and cancelled upon vesting of restricted stock to satisfy tax withholdings
|
|
(2
|
)
|
|
—
|
|
|
(32
|
)
|
|
—
|
|
|
(32
|
)
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
1,576
|
|
|
—
|
|
|
1,576
|
|
|
Balance, June 30, 2018
|
|
66,556
|
|
|
$
|
7
|
|
|
$
|
114,507
|
|
|
$
|
79,005
|
|
|
$
|
193,519
|
|
See accompanying notes to the unaudited consolidated financial statements.
NIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
25,962
|
|
|
$
|
32,520
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation & amortization
|
|
5,551
|
|
|
4,210
|
|
|
Stock-based compensation expense
|
|
3,703
|
|
|
3,087
|
|
|
Deferred income taxes
|
|
976
|
|
|
614
|
|
|
Provision for (recoveries) losses on accounts receivable
|
|
(148
|
)
|
|
343
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
(31,613
|
)
|
|
10,838
|
|
|
Prepaid expenses & other current assets
|
|
1,130
|
|
|
(170
|
)
|
|
Other assets
|
|
2,191
|
|
|
262
|
|
|
Accounts payable
|
|
23,616
|
|
|
(19,460
|
)
|
|
Accrued expenses
|
|
(1,439
|
)
|
|
(4,393
|
)
|
|
Other current liabilities
|
|
32
|
|
|
(209
|
)
|
|
Other long-term liabilities
|
|
(2,190
|
)
|
|
758
|
|
|
Net cash provided by operating activities
|
|
27,771
|
|
|
28,400
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(2,831
|
)
|
|
(2,411
|
)
|
|
Business combination
|
|
(10,000
|
)
|
|
—
|
|
|
Asset acquisition
|
|
(3,486
|
)
|
|
—
|
|
|
Capitalized software development costs
|
|
(4,607
|
)
|
|
(3,503
|
)
|
|
Net cash used in investing activities
|
|
(20,924
|
)
|
|
(5,914
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Cash dividends on common stock
|
|
(10,818
|
)
|
|
(10,755
|
)
|
|
Proceeds from employee common stock purchases
|
|
1,443
|
|
|
1,382
|
|
|
Tax withholdings related to stock-based compensation awards
|
|
(2,637
|
)
|
|
(1,165
|
)
|
|
Net cash used in financing activities
|
|
(12,012
|
)
|
|
(10,538
|
)
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
(5,165
|
)
|
|
11,948
|
|
|
Cash, beginning of period
|
|
191,700
|
|
|
160,777
|
|
|
Cash, end of period
|
|
$
|
186,535
|
|
|
$
|
172,725
|
|
|
|
|
|
|
|
|
Other cash flow information:
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
Contingent consideration - business combination
|
|
$
|
960
|
|
|
$
|
—
|
|
|
Capital expenditures accrued but not yet paid
|
|
—
|
|
|
166
|
|
|
Cash payments:
|
|
|
|
|
|
|
|
Income taxes paid, net
|
|
$
|
6,925
|
|
|
$
|
8,883
|
|
See accompanying notes to the unaudited consolidated financial statements.
NIC INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
NIC Inc., together with its subsidiaries (the "Company" or "NIC") is a leading provider of digital government services that help governments use technology to provide a higher level of service to businesses and citizens and increase efficiencies. The Company accomplishes this currently through
two
channels: its state enterprise businesses and its software & services businesses.
In the Company's primary state enterprise businesses, it generally designs, builds, and operates digital government services on an enterprise-wide basis on behalf of state and local governments desiring to provide access to government information and to complete secure government-based transactions through multiple online channels. These digital government services consist of websites and applications the Company has built that allow consumers, such as businesses and citizens, to access government information online and complete transactions. The Company typically manages operations for each contractual relationship through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. The Company is typically responsible for funding the up-front investments and ongoing operations and maintenance costs of the digital government services. The Company’s software & services businesses primarily include its subsidiaries that provide software development and digital government services, other than those services provided under state enterprise contracts, to federal agencies as well as state and local governments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The consolidated financial statements include all the Company's direct and indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to fairly present the consolidated financial position and the results of operations, changes in stockholders' equity and cash flows of the Company as of the dates and for the interim periods presented. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended
December 31, 2018
, including the notes thereto, set forth in the Company’s
2018
Annual Report on Form 10-K.
Certain amounts in the consolidated statements of income for the three and
six months ended
June 30, 2018
were reclassified to conform to the current year presentation. The reclassification had no impact on net income or cash flows for the period ended
June 30, 2018
.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending
December 31, 2019
.
Recently issued accounting pronouncements
Leases
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Expenses are recognized in the statement of income in a manner similar to current accounting guidance. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
On January 1, 2019, the Company adopted the standard and all the related amendments, using a modified retrospective approach at the beginning of the period of adoption. Under this approach, the comparative information was not restated and continues to
be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company not to reassess (i) whether expired or existing contracts contain a lease under the new standard, or (ii) the lease classification for expired or existing leases. In addition, the Company did not elect to use hindsight and excluded any lease contracts with terms of twelve months or less during transition.
The adoption of the standard resulted in the recognition of ROU lease assets and lease liabilities of
$12.6 million
and
$12.9 million
, respectively, as of January 1, 2019. The adoption of the standard did not have a significant impact on the Company’s consolidated earnings or cash flows for the three and six months ended
June 30, 2019
.
Credit Losses
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses
(Topic 326), to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The ASU will be effective for the Company beginning January 1, 2020, with early adoption permitted beginning January 1, 2019. Application of the standard will be through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently evaluating the new standard and the estimated impact it will have on the Company’s consolidated financial statements.
Revenue recognition
The Company accounts for revenue in accordance with
Accounting Standards Codification (“ASC”)
606,
Revenue from Contracts with Customers.
Revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration which the Company expects to receive in exchange for those goods or services.
Disaggregation of Revenue
The Company currently earns revenues from three main sources: (i) transaction-based fees, which consist of interactive government services (“IGS”), driver history records (“DHR”) and other transaction-based revenues, (ii) development services and (iii) fixed fee management services.
The following table summarizes, by reportable and operating segment, the principal activities from which the Company generates revenue
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
|
|
State Enterprise
|
|
Software
& Services
|
|
Consolidated
Total
|
|
State Enterprise
|
|
Software
& Services
|
|
Consolidated
Total
|
|
IGS
|
|
$
|
55,537
|
|
|
$
|
—
|
|
|
$
|
55,537
|
|
|
105,691
|
|
|
—
|
|
|
$
|
105,691
|
|
|
DHR
|
|
23,413
|
|
|
—
|
|
|
23,413
|
|
|
47,098
|
|
|
—
|
|
|
47,098
|
|
|
Other
|
|
—
|
|
|
8,737
|
|
|
8,737
|
|
|
—
|
|
|
16,662
|
|
|
16,662
|
|
|
Total transaction-based
|
|
78,950
|
|
|
8,737
|
|
|
87,687
|
|
|
152,789
|
|
|
16,662
|
|
|
169,451
|
|
|
Development services
|
|
2,642
|
|
|
—
|
|
|
2,642
|
|
|
4,821
|
|
|
—
|
|
|
4,821
|
|
|
Fixed fee management services
|
|
1,237
|
|
|
—
|
|
|
1,237
|
|
|
2,475
|
|
|
—
|
|
|
2,475
|
|
|
Total revenues
|
|
$
|
82,829
|
|
|
$
|
8,737
|
|
|
$
|
91,566
|
|
|
$
|
160,085
|
|
|
$
|
16,662
|
|
|
$
|
176,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2018
|
|
|
|
State Enterprise
|
|
Software
& Services
|
|
Consolidated
Total
|
|
State Enterprise
|
|
Software
& Services
|
|
Consolidated
Total
|
|
IGS
|
|
$
|
55,111
|
|
|
$
|
—
|
|
|
$
|
55,111
|
|
|
$
|
105,379
|
|
|
$
|
—
|
|
|
$
|
105,379
|
|
|
DHR
|
|
26,645
|
|
|
—
|
|
|
26,645
|
|
|
53,883
|
|
|
—
|
|
|
53,883
|
|
|
Other
|
|
—
|
|
|
5,943
|
|
|
5,943
|
|
|
—
|
|
|
11,877
|
|
|
11,877
|
|
|
Total transaction-based
|
|
81,756
|
|
|
5,943
|
|
|
87,699
|
|
|
159,262
|
|
|
11,877
|
|
|
171,139
|
|
|
Development services
|
|
3,562
|
|
|
—
|
|
|
3,562
|
|
|
5,609
|
|
|
—
|
|
|
5,609
|
|
|
Fixed fee management services
|
|
1,237
|
|
|
—
|
|
|
1,237
|
|
|
2,475
|
|
|
—
|
|
|
2,475
|
|
|
Total revenues
|
|
$
|
86,555
|
|
|
$
|
5,943
|
|
|
$
|
92,498
|
|
|
$
|
167,346
|
|
|
$
|
11,877
|
|
|
$
|
179,223
|
|
Transaction-based revenues
Under certain contracts with its government partners, the Company agrees to provide continuous access to digital government services that allow consumers to complete secure transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report. The Company satisfies its performance obligation by providing access to applications over the contractual term and by processing transactions as they are initiated by consumers. The performance obligation is satisfied when the Company provides the access and it is used by the consumer.
Development services revenues
The Company earns development services revenues primarily under contracts to provide software development and other time and materials services to its government partners. These contracts are generally not longer than one year in duration. For services provided under development contracts, the performance obligation is either satisfied over time or at a point in time upon customer acceptance.
Under its development services contracts, the Company typically does not have significant future performance obligations that extend beyond one year. As of
June 30, 2019
, the total transaction price allocated to unsatisfied performance obligations was approximately
$6.2 million
.
Fixed-fee management services revenues
Fixed-fee management services revenues primarily consist of revenues from providing recurring fixed fee digital government services for the Company’s government partner in Indiana. As of
June 30, 2019
, the Company’s Indiana contract had unsatisfied
performance obligations for one month. The total transaction price allocated to the unsatisfied performance obligation is not significant.
Unearned Revenues
Unearned revenues at
June 30, 2019
and
December 31, 2018
were approximately
$2.6 million
and
$1.7 million
, respectively. The change in the deferred revenue balance for the
six months ended
June 30, 2019
is primarily driven by cash payments received or due in advance of satisfying the Company's performance obligations, offset by
$4.7 million
of revenues recognized that were included in the deferred revenue during the period.
Leases
All of the Company's lease arrangements are considered operating leases and are included in right of use lease assets and lease liabilities in the consolidated balance sheet. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the term of the lease.
On the commencement date of a lease, the Company recognizes a lease liability and corresponding right of use lease asset based on the present value of lease payments over the lease term. Lease agreements generally do not provide an implicit rate and therefore the Company's incremental borrowing rate at the commencement date is used to determine the present value of lease payments. Accretion of the discount on the lease liability is calculated under the effective interest method and included in operating lease cost. The right of use asset also includes any initial direct costs and prepaid lease payments and excludes any lease incentives received by the lessor. The right of use asset is amortized over the lease term and is included in operating lease cost. The result is a single operating lease cost recognized on a straight-line basis over the term of the lease.
Certain of the Company's leases have both lease and non-lease components. The Company has elected the practical expedient to account for these components as a single lease component for all leases.
Business Combinations
Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires the Company to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.
The Company anticipates that its annual goodwill impairment test will be performed during the fourth quarter of its fiscal year.
3. GOVERNMENT CONTRACTS
State enterprise contracts
The Company’s state enterprise contracts generally have an initial multi-year term with provisions for renewals for various periods at the option of the government. The Company’s primary business obligation under these contracts is generally to design, build, and operate digital government services on an enterprise-wide basis on behalf of governments desiring to provide access to government information and to digitally complete government-based transactions. NIC typically markets the services and solicits consumers to complete government-based transactions and to enter into subscriber contracts permitting the user to access online applications and the government information contained therein in exchange for transactional and/or subscription user fees. The Company enters into statements of work with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These statements of work preliminarily establish the pricing of the online transactions and data access services the Company provides and the division of revenues between the Company and the government agency. The government oversight authority must approve prices and revenue sharing agreements. The Company has limited control over the level of fees it is permitted to retain.
The Company is typically responsible for funding the up-front development and ongoing operations and maintenance costs of digital government services and generally owns all the intellectual property in connection with the applications developed under these contracts. After completion of a defined contract term or upon termination for cause, the government partner typically receives a perpetual, royalty-free license to use the applications built by the Company only in its own state. However, certain enterprise applications, proprietary customer management, billing, payment processing and other software applications that the Company has developed and standardized centrally are provided to government partners on a software-as-a-service (“SaaS”) basis, and thus would not be included in any royalty-free license. If the Company’s contract expires after a defined term or if its contract is
terminated by a government partner for cause, the government agency would be entitled to take over the applications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.
Any renewal of these contracts beyond the initial term by the government is optional and a government may terminate its contract prior to the expiration date if the Company breaches a material contractual obligation and fails to cure such breach within a specified period or upon the occurrence of other events or circumstances specified in the contract. In addition,
16
contracts under which the Company provides enterprise-wide digital government services, as well as the Company’s contract with the Federal Motor Carrier Safety Administration (“FMCSA”), can be terminated by the other party without cause on a specified period of notice. Collectively, revenues generated from these contracts represented approximately
59%
of the Company’s total consolidated revenues for both the three and
six months ended
June 30, 2019
. If any of these contracts is terminated without cause, the terms of the respective contract may require the government to pay the Company a fee to continue to use the Company’s applications.
Under a typical state enterprise contract, the Company is required to fully indemnify its government partners against claims that the Company’s services infringe upon the intellectual property rights of others and against claims arising from the Company’s performance or the performance of the Company’s subcontractors under the contract. At
June 30, 2019
, the Company was bound by performance bond commitments totaling approximately
$10.8 million
on certain state enterprise contracts.
Software & services contract
The Company’s subsidiary NIC Federal, LLC has a contract with the FMCSA to develop and manage the FMCSA’s Pre-Employment Screening Program (“PSP”) for motor carriers nationwide, using a transaction-based business model.
Expiring contracts
There are currently
13
state enterprise contracts, as well as the Company's contract with the FMCSA, that have expiration dates within the
12
-month period following
June 30, 2019
. Collectively, revenues generated from these contracts represented approximately
38%
and
39%
of the Company’s total consolidated revenues for the three and
six months ended
June 30, 2019
. Although
four
of these state enterprise contracts have renewal provisions, any renewal is at the option of the Company’s government partner. As described above, if a contract is not renewed after a defined term, the government partner would be entitled to take over the applications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.
The contract under which the Company managed digital government services for the state of Texas expired on August 31, 2018. The Texas contract accounted for approximately
20%
of the Company's total consolidated revenue for both the
three
and six months ended
June 30, 2018
. For the
six months ended June 30, 2018
revenues from the Texas contract were
$35.8 million
.
4. ACQUISITIONS
Complia, LLC
On May 1, 2019, the Company completed the stock acquisition of Complia, LLC ("Complia"), a regulatory licensing platform business, which the Company rebranded as NIC Licensing Solutions. The Company acquired all outstanding equity of Complia, LLC for initial consideration of
$10 million
in cash. The sellers are eligible to earn additional cash consideration, up to
$5 million
, on new contracts that utilize the licensing platform through April 2022. The Company has recorded a liability of
$1.0 million
for the fair value of this contingent consideration at the date of acquisition as part of the consideration transferred. The fair value of the contingent consideration was determined using a scenario-based model, which includes inputs such as actual and projected earnings‑based measures, probability of achievement and a discount rate, that are not observable in the market. At each reporting period, the contingent consideration liability is recorded at fair value with any changes reflected in selling & administrative expenses. As of June 30, 2019, the Company estimated the total purchase consideration was
$11.0 million
.
This transaction was accounted for as a business combination, and the purchase price was allocated to the assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective fair values at the date of acquisition. The valuation of the acquired net assets remains preliminary while management completes its valuation, particularly the valuation of acquired intangible assets. The consolidated financial statements include the results of Complia's operations from the date of acquisition. Pro-forma results of operations, assuming this acquisition was made at the beginning of the earliest period presented, have not been presented because the effect of this acquisition was not material to the Company's results.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands).
|
|
|
|
|
|
|
|
|
|
|
As of May 1, 2019
|
|
Current assets
|
|
$
|
451
|
|
|
Software
|
|
4,200
|
|
|
Customer relationships
|
|
425
|
|
|
Non-compete agreements
|
|
250
|
|
|
Trade name
|
|
35
|
|
|
Goodwill
|
|
5,965
|
|
|
Other assets
|
|
11
|
|
|
Total assets acquired
|
|
11,337
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
(377
|
)
|
|
Net assets acquired
|
|
$
|
10,960
|
|
The goodwill was included within the Software & Services category, which is further described in Note 12,
and
represents future economic benefits that the Company expects to achieve as a result of the acquisition. The acquired capitalized software has an estimated amortization period of
five years
. The acquired customer relationships have an estimated amortization period of
seven years
. The non-compete and trade names each have an estimated amortization period of
three years
. The goodwill and intangible assets associated with this acquisition are deductible for tax purposes.
Leap Orbit LLC
During 2018, the Company entered into a purchase agreement to acquire certain prescription drug monitoring software technology assets of a Maryland-based, privately held company, Leap Orbit LLC ("Leap Orbit"). The purchase price consisted of initial cash consideration of approximately
$3.6 million
and potential additional consideration of approximately
$3.5 million
if certain conditions under the agreement were met. The transaction was accounted for as an asset acquisition, as substantially all the value related to the prescription drug monitoring software technology acquired. The Company paid the additional consideration of
$3.5 million
in the first half of 2019, which was included in the cost of the acquired assets in the consolidated balance sheet. The acquired software has an estimated amortization period of
three years
. The Company rebranded its prescription drug monitoring platform as RxGov.
5. GOODWILL AND INTANGIBLE ASSETS, NET
The Company recognized goodwill of
$6.0 million
as a result of the acquisition of Complia. See Note 4, Asset Acquisition, for additional information.
Excluding goodwill, intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Software development cost
|
|
$
|
26,767
|
|
|
$
|
(13,931
|
)
|
|
$
|
12,836
|
|
|
$
|
22,190
|
|
|
$
|
(11,647
|
)
|
|
$
|
10,543
|
|
|
Purchased software
|
|
11,271
|
|
|
(1,589
|
)
|
|
9,682
|
|
|
$
|
3,555
|
|
|
$
|
(494
|
)
|
|
3,061
|
|
|
Customer relationships
|
|
425
|
|
|
(17
|
)
|
|
408
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Non-compete agreements
|
|
250
|
|
|
(14
|
)
|
|
236
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Trade name
|
|
35
|
|
|
(2
|
)
|
|
33
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
38,748
|
|
|
$
|
(15,553
|
)
|
|
$
|
23,195
|
|
|
$
|
25,745
|
|
|
$
|
(12,141
|
)
|
|
$
|
13,604
|
|
During the six months ended June 30, 2019, the Company recorded approximately
$7.7 million
of intangible asset software purchases in connection with the Complia and Leap Orbit acquisitions, as further discussed in Note 4, Asset Acquisition.
Amortization expense for intangible assets with finite lives was
$2.0 million
and
$3.4 million
for the three and
six months ended
June 30, 2019
, respectively, and
$0.6 million
and
$1.3 million
for the three and
six months ended
June 30, 2018
, respectively. Intangible asset amortization expense is currently expected to total
$5.0 million
for the remainder of 2019,
$8.9 million
for fiscal year 2020,
$6.1 million
for fiscal year 2021,
$1.8 million
for fiscal year 2022 and
$0.9 million
for fiscal year 2023.
6. DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS
The Company has a revolving bank credit facility with Bank of America, N.A. Under the Amended and Restated Credit Agreement ("Credit Agreement"), the credit facility provides
$10 million
of unsecured financings available to finance working capital, issue letters of credit and finance general corporate purposes. The Credit Agreement also includes an accordion feature that allows the Company to increase the available capacity under the Credit Agreement to
$50 million
, subject to securing additional commitments from the bank. The Company can obtain letters of credit in an aggregate amount of
$5 million
, which reduces the maximum amount available for borrowing under the Credit Agreement.
On May 1, 2019, the Company entered into Amendment No. 4 to Amended and Restated Credit Agreement (the “Amendment’), which amended the Credit Agreement, dated as of August 6, 2014, as previously amended, between the Company and Bank of America, N.A. The Amendment extended the maturity date of the Credit Agreement to May 1, 2021, and increased the purchase price of a permitted acquisition, as well as the aggregate purchase price of all such permitted acquisitions during the term of the Credit Agreement. Additionally, the Amendment removed the previous two-tier structure on interest rates and provided that the interest rate on any amounts borrowed by the Company under the Credit Agreement will be at (i) an annual rate adjusted daily and benchmarked to one-month LIBOR, plus a margin of
1.15%
per annum, or (ii) an annual rate benchmarked to LIBOR with a term equivalent to such borrowing, plus a margin of
1.15%
per annum. The other material terms of the Credit Agreement remain unchanged, including customary representations and warranties, affirmative and negative covenants and events of default.
7. LEASES
The Company leases office space and certain equipment under noncancelable operating leases. Leases have terms which range from
one year
to
nine years
, some of which include options to renew the lease. The exercise of lease renewal options are at the Company’s sole discretion and are included in the lease term when it is reasonably certain the Company will exercise the option based on economic factors. The weighted average remaining lease term for operating leases as of
June 30, 2019
was
3.7 years
.
The aggregate future lease payments for operating leases as of
June 30, 2019
and December 31, 2018 (which is under previous accounting standards), are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Fiscal Year
|
|
|
|
|
|
2019
(1)
|
|
$
|
2,384
|
|
|
$
|
4,673
|
|
|
2020
|
|
3,770
|
|
|
3,403
|
|
|
2021
|
|
2,913
|
|
|
2,604
|
|
|
2022
|
|
2,389
|
|
|
2,082
|
|
|
2023
|
|
1,008
|
|
|
698
|
|
|
Thereafter
|
|
752
|
|
|
690
|
|
|
Total future minimum lease payments
|
|
13,216
|
|
|
14,150
|
|
|
Less: interest
|
|
(876
|
)
|
|
N/A
|
|
|
Total lease liabilities
|
|
$
|
12,340
|
|
|
N/A
|
|
(1) The June 30, 2019 column excludes the
six months ended
June 30, 2019
.
Other information related to operating leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Operating lease cost
(1)
|
|
$
|
2,871
|
|
|
Weighted-average discount rate
|
|
3.7
|
%
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
2,247
|
|
|
Right of use assets obtained in exchange for new lease liabilities
(2)
|
|
14,136
|
|
(1) Includes short-term and variable lease costs, which are not significant.
(2) Includes
$12.6 million
for operating leases existing on January 1, 2019 and
$1.5 million
for operating leases that commenced in the
six months ended
June 30, 2019
.
8. EARNINGS PER SHARE
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method for all periods presented. The two-class method is an earnings allocation formula that treats a participating security as having rights to undistributed earnings that would otherwise have been available to common stockholders. The Company’s service-based restricted stock awards contain non-forfeitable rights to dividends and are participating securities. Accordingly, service-based restricted stock awards were included in the calculation of earnings per share using the two-class method for all periods presented. Unvested service-based restricted shares totaled
0.7 million
for both the three and
six months ended
June 30, 2019
and 2018. Basic earnings per share is calculated by first allocating earnings between common stockholders and participating securities. Earnings attributable to common stockholders are divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by giving effect to dilutive potential common shares outstanding during the period. The dilutive effect of shares related to the Company’s employee stock purchase plan is determined based on the treasury stock method. The dilutive effect of service-based restricted stock awards is based on the more dilutive of the treasury stock method or the two-class method assuming a reallocation of undistributed earnings to common stockholders after considering the dilutive effect of potential common shares other than the participating unvested restricted stock awards. The dilutive effect of performance-based restricted stock awards is based on the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,460
|
|
|
$
|
17,011
|
|
|
$
|
25,962
|
|
|
$
|
32,520
|
|
|
Less: Income allocated to participating securities
|
|
(160
|
)
|
|
(187
|
)
|
|
(286
|
)
|
|
(355
|
)
|
|
Net income available to common stockholders
|
|
$
|
14,300
|
|
|
$
|
16,824
|
|
|
$
|
25,676
|
|
|
$
|
32,165
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
66,940
|
|
|
66,541
|
|
|
66,806
|
|
|
66,432
|
|
|
Performance-based restricted stock awards
|
|
—
|
|
|
20
|
|
|
—
|
|
|
15
|
|
|
Weighted average shares - diluted
|
|
66,940
|
|
|
66,561
|
|
|
66,806
|
|
|
66,447
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.38
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.38
|
|
|
$
|
0.48
|
|
9. STOCKHOLDERS’ EQUITY
The Company's Board of Directors declared and paid the following dividends (payment in millions):
|
|
|
|
|
|
|
|
|
Declaration Date
|
Dividend per Share
|
Record Date
|
Payment Date
|
Payment
|
|
May 7, 2019
|
$0.08
|
June 11, 2019
|
June 25, 2019
|
$5.4
|
|
January 28, 2019
|
$0.08
|
March 5, 2019
|
March 19, 2019
|
$5.4
|
|
May 1, 2018
|
$0.08
|
June 5, 2018
|
June 19, 2018
|
$5.4
|
|
January 29, 2018
|
$0.08
|
March 6, 2018
|
March 20, 2018
|
$5.4
|
On
July 29, 2019
, the Company’s Board of Directors declared a regular quarterly cash dividend of
$0.08
per share, payable to stockholders of record as of
September 6, 2019
. The dividend, which is expected to total approximately
$5.4 million
, will be paid on
September 20, 2019
, out of the Company’s available cash.
10. INCOME TAXES
The Company's effective tax rate was
21.0%
and
23.4%
for the
three and six
months ended
June 30, 2019
, respectively, compared to
24.3%
and
24.6%
three and six
months ended
June 30, 2018
, respectively. The decrease in the Company's effective tax rate for the three months ended June 30, 2019 was primarily driven by the release of uncertain tax positions as a result of the completion of an IRS examination of the Company's 2016 consolidated U.S. federal income tax return, which resulted in no changes to the Company's previously filed return. The Company remains subject to U.S. federal examination for amended tax returns filed in 2016 and the tax years ending after December 31, 2016. For the six months ended June 30, 2019, the effective tax rate was impacted by approximately
$2.6 million
of executive severance costs incurred in the first quarter of 2019, as previously disclosed, a significant portion of which is not deductible for income tax purposes.
11. STOCK BASED COMPENSATION
During the
six months ended
June 30, 2019
, the Compensation Committee of the Board of Directors of the Company granted to certain management-level employees and executive officers, service-based restricted stock awards totaling
305,743
shares with a grant-date fair value totaling approximately
$5.2 million
. Such restricted stock awards vest beginning
one
year from the date of grant in annual installments of
25%
. In addition, during the first half of 2019, non-employee directors of the Company were granted service-based restricted stock awards totaling
47,560
shares with a grant-date fair value of approximately
$0.8 million
. Such restricted stock awards vest one year from the date of grant. Restricted stock is valued at the date of grant, based on the closing market price of the Company’s common stock, and expensed using the straight-line method over the requisite service period (generally the vesting period of the award). The Company records forfeitures when they occur.
During the
six months ended
June 30, 2019
, the Compensation Committee of the Board of Directors of the Company granted performance-based restricted stock awards to certain executive officers pursuant to the terms of the Company’s executive compensation program totaling
111,135
shares with a grant-date fair value totaling approximately
$1.9 million
. This represents the maximum number of shares the executive officers can earn at the end of a
three
-year performance period ending
December 31, 2021
. The actual number of shares earned will be based on the Company’s performance related to the following performance criteria over the performance period:
|
|
|
|
•
|
Operating income growth (three-year compound annual growth rate); and
|
|
|
|
|
•
|
Total consolidated revenue growth (three-year compound annual growth rate).
|
At the end of the
three
-year period, the executive officers are eligible to receive up to a specified number of shares based on the Company’s performance relative to these performance criteria over the performance period. In addition, the executive officers will accrue dividend equivalents for any cash dividends declared during the performance period, payable in the form of additional shares of Company common stock, based on the maximum number of shares to be earned by the executive officers for each performance-based restricted stock award. Such hypothetical cash dividend payment shall be divided by the fair value of the Company’s common stock on the dividend payment date to determine the maximum number of notional shares to be awarded. At the end of the
three
-year performance period and on the date some or all the shares are paid under the agreement, a pro rata number of notional dividend shares will be converted into an equivalent number of dividend shares paid and granted to the executive officers based on the actual number of underlying shares earned during the performance period.
At
December 31, 2018
, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on
February 22, 2016
ended. Based on the Company’s actual financial results from
2016
through
2018
,
64,846
of the shares and
4,226
of dividend equivalent shares were earned. The remaining
73,345
shares subject to the awards were forfeited in the first quarter of
2019
.
Stock-based compensation cost for performance-based restricted stock awards is measured at the grant date based on the fair value of shares expected to be earned at the end of the performance period and is recognized as expense over the performance period based on the probable number of shares expected to vest.
The following table presents stock-based compensation expense included in the Company’s unaudited consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
State enterprise cost of revenues, exclusive of depreciation & amortization
|
|
$
|
395
|
|
|
$
|
362
|
|
|
$
|
757
|
|
|
$
|
805
|
|
|
Software & services cost of revenues, exclusive of depreciation & amortization
|
|
21
|
|
|
36
|
|
|
56
|
|
|
76
|
|
|
Selling & administrative
|
|
857
|
|
|
1,021
|
|
|
2,572
|
|
|
1,858
|
|
|
Enterprise technology & product support
|
|
158
|
|
|
157
|
|
|
318
|
|
|
348
|
|
|
Stock-based compensation expense
|
|
$
|
1,431
|
|
|
$
|
1,576
|
|
|
$
|
3,703
|
|
|
$
|
3,087
|
|
12. REPORTABLE SEGMENT AND RELATED INFORMATION
The State Enterprise segment is the Company’s only reportable segment and generally includes the Company’s subsidiaries operating digital government services on an enterprise-wide basis for state and local governments. The Software & Services category primarily includes the Company’s subsidiaries that provide software development and digital government services, other than those provided on an enterprise-wide basis, to federal agencies as well as other state and local governments. Each of the Company’s businesses within the Software & Services category is an operating segment and has been grouped together to form the Software & Services category, as none of the operating segments meets the quantitative threshold of a separately reportable segment. There have been no significant intersegment transactions for the periods reported. The summary of significant accounting policies applies to all operating segments.
The measure of profitability by which management, including the Company’s chief operating decision maker, evaluates the performance of its segments and allocates resources to them is operating income (loss). Segment assets or other segment balance sheet information is not presented to the Company’s chief operating decision maker. Accordingly, the Company has not presented information relating to segment assets.
The table below reflects summarized financial information for the Company’s reportable and operating segments for the
three months ended
June 30,
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Enterprise
|
|
Software
& Services
|
|
Other Reconciling Items
|
|
Consolidated
Total
|
|
2019
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
82,829
|
|
|
$
|
8,737
|
|
|
$
|
—
|
|
|
$
|
91,566
|
|
|
Costs & expenses
|
|
52,277
|
|
|
3,329
|
|
|
15,101
|
|
|
70,707
|
|
|
Depreciation & amortization
|
|
647
|
|
|
196
|
|
|
2,287
|
|
|
3,130
|
|
|
Operating income (loss)
|
|
$
|
29,905
|
|
|
$
|
5,212
|
|
|
$
|
(17,388
|
)
|
|
$
|
17,729
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
86,555
|
|
|
$
|
5,943
|
|
|
$
|
—
|
|
|
$
|
92,498
|
|
|
Costs & expenses
|
|
51,711
|
|
|
2,235
|
|
|
14,003
|
|
|
67,949
|
|
|
Depreciation & amortization
|
|
930
|
|
|
28
|
|
|
1,187
|
|
|
2,145
|
|
|
Operating income (loss)
|
|
$
|
33,914
|
|
|
$
|
3,680
|
|
|
$
|
(15,190
|
)
|
|
$
|
22,404
|
|
The table below reflects summarized financial information for the Company’s reportable and operating segments for the six months ended June 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Enterprise
|
|
Software
& Services
|
|
Other Reconciling Items
|
|
Consolidated
Total
|
|
2019
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
160,085
|
|
|
$
|
16,662
|
|
|
$
|
—
|
|
|
$
|
176,747
|
|
|
Costs & expenses
|
|
100,933
|
|
|
6,049
|
|
|
31,510
|
|
|
138,492
|
|
|
Depreciation & amortization
|
|
1,283
|
|
|
217
|
|
|
4,051
|
|
|
5,551
|
|
|
Operating income (loss)
|
|
$
|
57,869
|
|
|
$
|
10,396
|
|
|
$
|
(35,561
|
)
|
|
$
|
32,704
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
167,346
|
|
|
$
|
11,877
|
|
|
$
|
—
|
|
|
$
|
179,223
|
|
|
Costs & expenses
|
|
100,353
|
|
|
4,463
|
|
|
27,153
|
|
|
131,969
|
|
|
Depreciation & amortization
|
|
1,807
|
|
|
55
|
|
|
2,348
|
|
|
4,210
|
|
|
Operating income (loss)
|
|
$
|
65,186
|
|
|
$
|
7,359
|
|
|
$
|
(29,501
|
)
|
|
$
|
43,044
|
|
The legacy contract under which the Company managed digital government services for the state of Texas expired on August 31, 2018 and accounted for approximately
20%
of the Company's total consolidated revenues for the
three
and six months ended
June 30, 2018
. The Company's enterprise contract with the state of Colorado accounted for approximately
10%
of the Company's total consolidated revenues for the
three
and six months ended
June 30, 2019
. No other government partner accounted for more than 10% of the Company's total consolidated revenues for any period presented.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with our Unaudited Consolidated Financial Statements and the related Notes included in this Quarterly Report on Form 10-Q.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q regarding NIC Inc. and its subsidiaries (referred to herein as “the Company”, “NIC”, “we”, “our” or “us”) and its business, which are not current or historical facts, are “forward-looking statements” that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements of plans and objectives, statements of future economic performance or financial projections, statements regarding the planned implementation of new contracts and new projects under existing contracts, the expected length of contract terms, statements relating to the our business plans, objectives and expected operating results, statements relating to our expected effective tax rate, statements relating to possible future dividends and share repurchases, statements regarding the expected effects of changes in accounting standards, statements of assumptions underlying such statements, and statements of our intentions, hopes, beliefs, expectations, or predictions of the future. For example, statements like we “expect,” we “believe,” we “plan,” we “intend,” or we “anticipate” are forward-looking statements. Investors should be aware that our actual operating results and financial performance may differ materially from our expressed expectations because of risks and uncertainties about the future including those risks discussed in this Quarterly Report on Form 10-Q and in our
2018
Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on
February 21, 2019
.
There are a number of important factors that could cause actual results to differ materially from those suggested or indicated by such forward-looking statements. These include, among others, our success in renewing existing contracts and in signing contracts with new states and with federal and state government agencies; our ability to successfully increase the adoption and use of digital government services; the possibility of security breaches or disruptions through cyber-attacks or other events and any resulting liability; our ability to implement new contracts and any related technology enhancements in a timely and cost-effective manner; the possibility of reductions in fees or revenues as a result of budget deficits, government shutdowns, or changes in government policy; continued favorable government legislation; acceptance of digital government services by businesses and citizens; our ability to identify and acquire suitable acquisition candidates and to successfully integrate any acquired businesses; competition; general economic conditions; and the other factors discussed under “RISK FACTORS” in Part I, Item 1A and “Cautions About Forward Looking Statements" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, of NIC’s
2018
Annual Report on Form 10-K filed on
February 21, 2019
with the SEC. Investors should read all of these discussions of risks carefully.
All forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date of this report. Except as may be required by applicable law, we will not update the information in this Quarterly Report on Form 10-Q if any forward-looking statement later turns out to be inaccurate. Investors are cautioned not to put undue reliance on any forward-looking statement.
OVERVIEW OF OUR BUSINESS MODEL
We are a leading provider of digital government services that help governments use technology to provide a higher level of service to businesses and citizens and increase efficiencies. We accomplish this through two channels: our state enterprise businesses and our software & services businesses.
In our primary state enterprise businesses, we generally enter into contracts with state and local governments to design, build, and operate digital government services on an enterprise-wide basis on their behalf. We typically enter into multi-year contracts and manage operations for each government partner through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. The internet-based services that we build, allow businesses and citizens to access government information through multiple digital channels and complete secure transactions. We are typically responsible for funding the up-front development and ongoing operations and maintenance costs of the digital government services. Our unique business model allows us to generate revenues by sharing in the fees collected from digital government transactions. Our government partners benefit because they reduce their financial and technological risks, increase their operational efficiencies, and gain a centralized, customer-focused presence on the internet, while businesses and citizens gain a faster, more convenient, and more cost-effective means to interact with governments.
On behalf of our government partners, we enter into statements of work with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These statements of work preliminarily establish the pricing of the online transactions and data access services we provide and the division of revenues between us and the government agency. The government oversight authority must approve prices and revenue sharing agreements. We have limited control over the level of fees we are permitted to retain. Any changes made to the amount or percentage of fees retained by us, or to the amounts charged for the services offered, could materially affect the profitability of the respective contract. We typically own all the intellectual property related to the applications developed under these contracts. After completion of a defined contract term or upon termination for cause, the government partner typically receives a perpetual, royalty-free license to use the applications and digital government services we built only in its own state. However, certain enterprise applications and proprietary customer management, billing, payment processing or other applications that we have developed and standardized centrally are provided to our government partners on a software-as-a-service (“SaaS”) basis, and thus would not be included in any royalty-free license. If our contract expires after a defined term or if our contract is terminated by our government partner for cause, the government agency would be entitled to take over the owned or licensed applications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.
We also provide certain payment processing services to state and local agencies in states where we do not maintain an enterprise-wide contract and to a few private sector entities and will continue to market these services to other entities in the future. In some cases, we enter into contracts to provide software development and management services to governments in exchange for an agreed-upon fee.
For additional information on our government contracts, refer to Note 3, Government Contracts, in Part I, Item 1 of this Quarterly Report on Form 10-Q. The loss of a contract due to the expiration, termination or failure to renew the contract, if not replaced, could significantly reduce our revenues and profitability. In addition, any changes made to the amount or percentage of fees retained by us, or to the amounts charged for the services offered, could materially affect the profitability of our contracts.
REVENUES
We classify our revenues into two primary categories based on our reporting segments: (1) state enterprise and (2) software & services. Each of these categories are described below:
State Enterprise Revenues:
We earn state enterprise revenues from our subsidiaries operating enterprise-wide state contracts that provide digital government services to multiple government agencies. We categorize our state enterprise revenues into three main sources: transaction-based fees, development services and fixed fee management services. Transaction-based revenues and
fixed fee management services revenues are generally recurring while development services revenues are generally non-recurring. Each of these revenue sources are further described below:
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 agencies.
|
Software & Services Revenues:
We earn revenues from our businesses that provide software development and digital government services, other than those services provided under state enterprise contracts, to federal agencies as well as state and local governments. Our Software & Services revenue is mainly transaction-based and classified by two types of contracts: NIC Federal and Other. Each of these revenue types is further described below:
|
|
|
|
•
|
NIC Federal
: primarily transaction-based, fees from contracts with certain Federal agencies in the United States, including the Department of Transportation's Federal Motor Carrier Safety Administration ("FMCSA") to manage the Pre-Employment Screening Program ("PSP") and the United States National Park Service to manage the YourPassNow electronic park pass service. We also earn transaction-based revenues as a subcontractor to Booz Allen Hamilton on its Recreation.gov contract. NIC Federal revenues are generally recurring under the 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 revenues, selling & administrative, enterprise technology & product support, and depreciation & amortization. Each of these categories are described below:
Cost of Revenues:
This consists of all direct costs associated with providing digital government services for both state enterprise and software & services and excludes depreciation and amortization. We categorize costs of revenues between fixed and variable costs:
|
|
|
|
•
|
Fixed costs include costs such as employee compensation and benefits (including stock-based compensation), subcontractor labor costs, telecommunications costs, provision for losses on accounts receivable, and all other costs associated with the provision of dedicated client service such as dedicated office facilities.
|
|
|
|
|
•
|
Variable costs fluctuate with the level of revenues and primarily include interchange fees required to process credit/debit card transactions, bank fees to process automated clearinghouse transactions and, to a much lesser extent, costs associated with revenue share arrangements with certain state partners. A significant percentage of our transaction-based revenues are generated from online applications whereby users pay for information or transactions via credit/debit cards. We typically earn a portion of the credit/debit card transaction amount, but also must pay an associated interchange fee to the financial institution that processes the credit/debit card transaction. We earn a lower incremental gross profit percentage on these transactions as compared to our DHR and other IGS transactions. However, we plan to continue to implement these services because they are needed by our government partners and they contribute favorably to our operating income 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, healthcare and regulatory licensing, 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 assets purchased as part of acquisitions.
RESULTS OF OPERATIONS
The discussion below focuses on our consolidated results of operations for the
three and six
months ended
June 30, 2019
compared to the
three and six
months ended
June 30, 2018
.
Total Revenues
Total revenues for the
three and six
months ended
June 30, 2019
were
$91.6 million
and
$176.7 million
, respectively, both of which are a 1% decrease from the
three and six
months ended
June 30, 2018
. Recurring revenues as a percentage of total revenues for both the
three and six
months ended
June 30, 2019
were
97%
compared to
96%
for the three months ended
June 30, 2018
and
97%
for the six months ended
June 30, 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 June 30,
|
|
Six Months Ended June 30,
|
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
IGS transaction-based
|
|
$
|
55,537
|
|
|
$
|
55,111
|
|
|
$
|
426
|
|
1%
|
|
$
|
105,691
|
|
|
$
|
105,379
|
|
|
$
|
312
|
|
—%
|
|
DHR transaction-based
|
|
23,413
|
|
|
26,645
|
|
|
(3,232
|
)
|
(12)%
|
|
47,098
|
|
|
53,883
|
|
|
(6,785
|
)
|
(13)%
|
|
Development services
|
|
2,642
|
|
|
3,562
|
|
|
(920
|
)
|
(26)%
|
|
4,821
|
|
|
5,609
|
|
|
(788
|
)
|
(14)%
|
|
Fixed fee management services
|
|
1,237
|
|
|
1,237
|
|
|
—
|
|
—%
|
|
2,475
|
|
|
2,475
|
|
|
—
|
|
—%
|
|
Total
|
|
$
|
82,829
|
|
|
$
|
86,555
|
|
|
$
|
(3,726
|
)
|
(4)%
|
|
$
|
160,085
|
|
|
$
|
167,346
|
|
|
$
|
(7,261
|
)
|
(4)%
|
The following table summarizes key financial metrics for state enterprise revenues. For the
three and six
months ended
June 30, 2019
, the results of the legacy Texas contract, the new Texas payment processing contract and the Illinois contract were excluded from the same-state enterprise category because they did not generate revenues for two full comparable periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Same-state IGS revenue growth
|
|
14
|
%
|
|
10
|
%
|
|
15
|
%
|
|
10
|
%
|
|
Same-state DHR revenue growth
|
|
4
|
%
|
|
4
|
%
|
|
4
|
%
|
|
2
|
%
|
|
Same-state revenue growth - other services*
|
|
3
|
%
|
|
23
|
%
|
|
—
|
%
|
|
19
|
%
|
|
Same-state revenue growth - total
|
|
10
|
%
|
|
8
|
%
|
|
10
|
%
|
|
8
|
%
|
* Represents the combined growth of development services and fixed fee management services revenues.
State enterprise revenues for the
three
months ended
June 30, 2019
decreased
4%
, or approximately
$3.7 million
, from the comparable prior year period largely due to an $18.3 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 $6.9 million, increase in same-state enterprise revenues and a $8.0 million increase in revenues from the Texas payment processing contract, which commenced on September 1, 2018.
The
10%
increase in same-state revenues for the
three
months ended
June 30, 2019
was mainly due to higher revenues in Indiana, New Jersey and Colorado, among other states. Same-state IGS revenues increased
14%
for the
three
months ended
June 30, 2019
due, in part, to higher payment processing volumes in Indiana and New Jersey and higher motor vehicle renewals in Colorado, among other services. Same-state DHR revenues grew
4%
for the
three
months ended
June 30, 2019
mainly due to higher volumes
across several states. Same-state revenue growth for other services grew
3%
for the
three
months ended
June 30, 2019
primarily due to the timing of projects for development services in certain states.
State enterprise revenues for the
six
months ended
June 30, 2019
decreased
4%
, or approximately
$7.3 million
, from the comparable prior year period largely due to a $35.8 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 $13.2 million, increase in same-state enterprise revenues and a $15.4 million increase in revenues from the Texas payment processing contract, which commenced on September 1, 2018.
The
10%
increase in same-state revenues for the
six
months ended
June 30, 2019
was mainly due to higher revenues in Indiana, New Jersey and South Carolina, among other states. Same-state IGS revenues increased
15%
for the
six
months ended
June 30, 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
4%
for the
six
months ended
June 30, 2019
mainly due to a prior period price increase in one state and higher volumes across several 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 June 30,
|
|
Six Months Ended June 30,
|
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
NIC Federal
|
|
$
|
6,417
|
|
|
$
|
4,207
|
|
|
$
|
2,210
|
|
53%
|
|
$
|
12,368
|
|
|
$
|
8,304
|
|
|
$
|
4,064
|
|
49%
|
|
Other
|
|
2,320
|
|
|
1,736
|
|
|
584
|
|
34%
|
|
4,294
|
|
|
3,573
|
|
|
721
|
|
20%
|
|
Total
|
|
$
|
8,737
|
|
|
$
|
5,943
|
|
|
$
|
2,794
|
|
47%
|
|
$
|
16,662
|
|
|
$
|
11,877
|
|
|
$
|
4,785
|
|
40%
|
Software & services revenues for the
three
months ended
June 30, 2019
increased
47%
, or approximately
$2.8 million
, over the comparable prior year period mainly driven by growth in transactions from our NIC Federal business. This includes our subcontracting relationship with Booz Allen Hamilton on its Recreation.gov contract, which launched on October 1, 2018 and our contract with the FMCSA due to increased demand for the PSP service offering. To a lesser extent, our Other software and services revenue increased due to new RxGov prescription drug monitoring contracts in Maryland and Nebraska.
Software & services revenues for the
six
months ended
June 30, 2019
increased
40%
or approximately
$4.8 million
, over the comparable prior year period driven mainly by growth in transactions from our NIC Federal business. This includes our subcontracting relationship with Booz Allen Hamilton on its Recreation.gov contract, which launched on October 1, 2018 and our contract with the FMCSA due to increased demand for the PSP service offering. To a lesser extent, our Other software and services revenue increased due to new RxGov prescription drug monitoring contracts in Maryland and Nebraska.
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 June 30,
|
|
Six Months Ended June 30,
|
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
Fixed costs
|
|
$
|
25,656
|
|
|
$
|
29,153
|
|
|
$
|
(3,497
|
)
|
(12)%
|
|
$
|
49,979
|
|
|
$
|
57,281
|
|
|
$
|
(7,302
|
)
|
(13)%
|
|
Variable costs
|
|
26,621
|
|
|
22,558
|
|
|
4,063
|
|
18%
|
|
50,954
|
|
|
43,072
|
|
|
7,882
|
|
18%
|
|
Total
|
|
$
|
52,277
|
|
|
$
|
51,711
|
|
|
$
|
566
|
|
1%
|
|
$
|
100,933
|
|
|
$
|
100,353
|
|
|
$
|
580
|
|
1%
|
State enterprise cost of revenues for the
three and six
months ended
June 30, 2019
were relatively flat compared to the corresponding comparable prior year period as the increase in same-state costs and costs associated with the new Texas payment processing contract were offset by decreases in costs from the legacy Texas contract. The increase in variable costs was primarily attributable to an increase in credit card interchange fees associated with higher IGS payment processing revenues in Texas, Indiana and New Jersey. The decrease in fixed costs was primarily attributable to lower employee compensation related costs associated with the expiration of the legacy Texas contract on August 31, 2018.
State enterprise gross profit percentage was
37%
for the
three and six
months ended
June 30, 2019
compared to
40%
for the
three and six
months ended
June 30, 2018
. The decrease was largely attributable to lower profit margins from the new Texas payment processing contract compared to the legacy Texas contract. We carefully monitor our state enterprise gross profit percentage to strike a balance between generating a solid return for our stockholders and delivering value to our government partners through ongoing investment in our state enterprise operations (which we believe also benefits our stockholders).
Software & Services Cost of Revenues
In the table below, we have categorized our software & services cost of revenues between fixed and variable costs, with the corresponding percentage change from the comparative prior year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
Fixed costs
|
|
$
|
2,949
|
|
|
$
|
1,850
|
|
|
$
|
1,099
|
|
59%
|
|
$
|
5,267
|
|
|
$
|
3,652
|
|
|
$
|
1,615
|
|
44%
|
|
Variable costs
|
|
380
|
|
|
385
|
|
|
(5
|
)
|
(1)%
|
|
782
|
|
|
811
|
|
|
(29
|
)
|
(4)%
|
|
Total
|
|
$
|
3,329
|
|
|
$
|
2,235
|
|
|
$
|
1,094
|
|
49%
|
|
$
|
6,049
|
|
|
$
|
4,463
|
|
|
$
|
1,586
|
|
36%
|
Software & services cost of revenues in the
three and six
months ended
June 30, 2019
increased
49%
and
36%
, respectively, over the comparable prior year periods. This increase was largely driven by higher fixed costs to support our new RxGov and NIC Licensing Solutions businesses.
Our software & services gross profit percentage was
62%
and
64%
in the
three and six
months ended
June 30, 2019
compared to
62%
for the three and six months ended June 30, 2018. The decrease in the current quarter gross margin percentage was largely driven by higher costs to support our new RxGov and NIC Licensing Solutions businesses.
Selling & Administrative
Selling & administrative expenses for the
three
months ended
June 30, 2019
were
$8.4 million
, essentially flat to the same period in the prior year. As a percentage of total consolidated revenues, selling & administrative expenses were
9%
for both the
three
months ended
June 30, 2019
and
June 30, 2018
.
Selling & administrative expenses for the
six months ended
June 30, 2019
were
$18.3 million
, a
$2.5 million
, or
16%
increase, compared to the same period in the prior year, driven by executive severance costs totaling $2.6 million in the first quarter of 2019, as previously disclosed. These severance costs consisted of a one-time cash payment of $1.5 million and $1.1 million of stock-based compensation expense associated with the accelerated vesting of certain restricted stock awards. As a percentage of total consolidated revenues, selling & administrative expenses were
10%
for the
six months ended
June 30, 2019
compared to
9%
for the
six months ended
June 30, 2018
.
Enterprise Technology & Product Support
Enterprise technology & product support expenses for the
three
months ended
June 30, 2019
were
$6.7 million
, an increase of
$1.0 million
, or
18%
, compared to the same period in the prior year. Enterprise technology & product support expenses for the
six months ended
June 30, 2019
were
$13.2 million
, an increase of
$1.8 million
, or
16%
, compared to the same period in the prior year. These increases were primarily driven by higher personnel costs to support product development and enhance company-wide information technology, including the continued development of the Company's citizen-centric Gov2Go® enterprise platform and enterprise microservices platform.
As a percentage of total consolidated revenues, enterprise technology and product support expenses were
7%
for both the
three and six
months ended
June 30, 2019
compared to
6%
for both the
three and six
months ended
June 30, 2018
. The increase was driven by the increase in costs as described above.
Depreciation & Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
(dollar amounts in thousands)
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
2019
|
|
2018
|
|
Change
|
% Change
|
|
Depreciation
|
|
$
|
1,114
|
|
|
$
|
1,505
|
|
|
$
|
(391
|
)
|
(26)%
|
|
$
|
2,139
|
|
|
$
|
2,953
|
|
|
$
|
(814
|
)
|
(28)%
|
|
Amortization
|
|
2,016
|
|
|
640
|
|
|
1,376
|
|
215%
|
|
3,412
|
|
|
1,257
|
|
|
2,155
|
|
171%
|
|
Depreciation & amortization
|
|
$
|
3,130
|
|
|
$
|
2,145
|
|
|
$
|
985
|
|
46%
|
|
$
|
5,551
|
|
|
$
|
4,210
|
|
|
$
|
1,341
|
|
32%
|
Depreciation & amortization expenses increased
46%
, or
$1.0 million
for the three months ended
June 30, 2019
compared to the same period in the prior year and increased
32%
, or
$1.3 million
for the
six months ended
June 30, 2019
compared to the same period in the prior year. These increases were driven primarily by intangible asset amortization related to the Leap Orbit asset acquisition as well as the amortization of capitalized software development costs related to enterprise product and platform investments made in prior periods. This increase was partially offset by lower depreciation related to the legacy Texas contract.
As a percentage of total consolidated revenues, depreciation & amortization expenses were
3%
for both the
three and six
months ended
June 30, 2019
compared to
2%
for both the
three and six
months ended
June 30, 2018
. The increase was driven by the increase in amortization expense as described above.
Interest Income
Interest income was
$0.6 million
for the three months ended
June 30, 2019
and
$1.2 million
for the
six months ended
June 30, 2019
. These increases from the comparative prior year periods were primarily driven by an increase in interest rates on our average cash balance during the periods.
Income Taxes
Our effective tax rate was approximately
21.0%
and
23.4%
for the three and
six months ended
June 30, 2019
, respectively, compared to
24.3%
and
24.6%
for the three and
six months ended
June 30, 2018
. The lower effective tax rate for the three and
six months ended
June 30, 2019
was primarily driven by the release of uncertain tax positions as a result of the completion of our IRS examination of our 2016 consolidated U.S. federal income tax return, which resulted in no change to the previously filed return. See Note 10, Income Taxes, in the Notes to Unaudited Consolidated Financial Statements.
Liquidity and Capital Resources
Operating Activities
Cash flows provided by operating activities were
$27.8 million
in the first half of 2019 compared to
$28.4 million
in the first half of 2018. The decrease was mainly the result of a decrease in net income and fluctuations in working capital mainly associated with the timing of payments to and receipts from our government partners.
Investing Activities
Cash flows used in investing activities were
$20.9 million
in the first half of 2019 compared to
$5.9 million
in the first half 2018. The increase was primarily due to the Complia and Leap Orbit acquisitions totaling approximately
$13.5 million
and an increase in capitalized software development costs of
$1.1 million
.
Financing Activities
Cash flows used in financing activities were
$12.0 million
for the first half of 2019 compared to
$10.5 million
for the first half 2018. The increase was primarily due to a
$1.5 million
increase in tax withholdings related to the vesting of employee stock-based compensation awards.
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, was
$196.3 million
at
June 30, 2019
, compared to
$197.2 million
at
December 31, 2018
. The decrease in our working capital was primarily due to cash used for the Complia acquisition and Leap Orbit asset acquisition, offset by cash generated from operations in the period. Our current ratio, defined as current assets divided by current liabilities, was
2.7
and
3.2
at
June 30, 2019
and
December 31, 2018
, respectively.
At
June 30, 2019
, our cash balance was
$186.5 million
compared to
$191.7 million
at
December 31, 2018
. We believe that our currently available liquid resources and cash generated from operations will be sufficient to meet our operating requirements, capital expenditure requirements and potential dividend payments for at least the next 12 months without the need for additional capital. We have a
$10.0 million
unsecured revolving credit facility (the “Credit Agreement”) with a bank that is available to finance working capital, issue letters of credit and finance general corporate purposes. The Credit Agreement also includes an accordion feature that will allow us to increase the available capacity under the Credit Agreement to $50 million, subject to securing additional commitments from the bank. We can obtain letters of credit in an aggregate amount of
$5.0 million
, which reduces the maximum amount available for borrowing under the Credit Agreement. In total, we had
$4.8 million
in available capacity to issue additional letters of credit and
$9.8 million
of unused borrowing capacity at
June 30, 2019
under the Credit Agreement. We were in compliance with all of our covenants under the Credit Agreement at
June 30, 2019
. As further discussed in Note 6 of the Notes to the Unaudited Consolidated Financial Statements on this Form 10-Q, on May 1, 2019, we entered into an amendment to our Credit Agreement that, among other things, amended and extended our Credit Agreement from May 1, 2019 to May 1, 2021.
At
June 30, 2019
, we were bound by performance bond commitments totaling approximately
$10.8 million
on certain government contracts.
We currently expect our capital expenditures to range from approximately
$4.5 million
to
$5.5 million
in the fiscal year
2019
, which we intend to fund from our cash flows from operations and existing cash reserves. This estimate includes capital expenditures for normal fixed asset additions in our state enterprise businesses including equipment upgrades and enhancements, and in our centralized hosting environment to support and enhance corporate-wide information technology and security infrastructure, including Web servers, software licenses, and office equipment. We currently expect our capitalized internal-use software development costs to range from approximately
$8.0 million
to
$9.0 million
. This estimate includes costs related to the enhancement of centralized customer management, billing and payment processing solutions that support our business operations and accounting
systems in addition to our citizen-centric Gov2Go enterprise platform, enterprise microservices platform and enterprise licensing and permitting platform.
Acquisitions
On May 1, 2019, we completed the stock acquisition of Complia, a regulatory licensing platform business. Under the terms of the purchase agreement, the selling shareholders received purchase consideration of $10 million in cash and are eligible to receive additional consideration of up to $5 million. See Note 4, Acquisitions, in the Notes to Unaudited Consolidated Financial Statements.
Dividends
We paid dividends of $0.16 per common share ($0.08 per quarter) during the first half of
2019
and
2018
. The total cash dividends paid for both the
three
and
six months ended June 30, 2019
and 2018 were
$5.4 million
and
$10.8 million
, respectively.
On
July 29, 2019
, the Company’s Board of Directors declared a regular quarterly cash dividend of
$0.08
per share, payable to stockholders of record as of
September 6, 2019
. The dividend, which is expected to total approximately
$5.4 million
, will be paid on
September 20, 2019
, out of the Company’s available cash.
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;
|
|
|
|
|
•
|
respond to unforeseen competitive pressures; and
|
|
|
|
|
•
|
acquire technologies beyond what is contemplated.
|
Any projections of future earnings and cash flows are subject to substantial uncertainty. If our cash generated from operations and the unused portion of our line of credit are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or issue debt securities. If we need to obtain new debt or equity financing in the future, the terms and availability of such financing may be impacted by economic and financial market conditions, as well as our financial condition and results of operations at the time we seek additional financing. The sale of additional equity securities could result in dilution to our stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
Off-Balance Sheet Arrangements and Contractual Obligations
We had unused outstanding letters of credit totaling approximately
$0.2 million
at
June 30, 2019
.
As of
June 30, 2019
, there have been no material changes outside the ordinary course of business from the disclosures relating to contractual obligations contained under “Off-Balance Sheet Arrangements and Contractual Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended
December 31, 2018
, filed with the SEC on
February 21, 2019
. While we have significant operating lease commitments for office space, except for our headquarters, those commitments are generally tied to the period of performance under related contracts. We have income tax uncertainties of approximately
$8.4 million
at
June 30, 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 well as for business combinations in conjunction with our recent acquisition 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
.