ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Form 10-K.
CAUTIONS ABOUT FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K regarding NIC Inc. and its subsidiaries (referred to herein as “the Company”, “NIC”, “we”, “our” or “us”) and its business, which are not current or historical facts, are “forward-looking statements” that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements of plans and objectives, statements of future economic performance or financial projections, statements regarding the planned implementation of new contracts and new projects under existing contracts, the expected length of contract terms, statements relating to our business plans, objectives and expected operating results, statements relating to our expected effective tax rate, statements relating to possible future dividends and share repurchases, statements regarding the expected effects of changes in accounting standards, statements of assumptions underlying such statements, statements related to the ongoing effects the COVID-19 pandemic is expected to have on our business and financial results, including statements related to the duration, profitability and unsatisfied performance obligations of our COVID-19 testing solution, 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 2020 Annual Report on Form 10-K.
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 ongoing effects the COVID-19 pandemic is expected to have on our business and financial results, including statements relating to the duration, profitability and unsatisfied performance obligations of strategic initiatives developed in response to COVID-19, as well as on our government agency partners, workforce and citizen consumers, as discussed under “CAUTIONS ABOUT FORWARD LOOKING STATEMENTS” in Part I and “RISK FACTORS” in Part I, Item 1A of this 2020 Annual Report on Form 10-K. Investors should read all of these discussions of risks carefully.
All forward-looking statements made in this Annual Report on Form 10-K speak only as of the date of this report. Except as may be required by law, we will not update the information in this 2020 Annual Report on Form 10-K 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 and payment solutions that help governments use technology to provide a higher level of service to businesses and citizens and increase efficiencies. We accomplish this through two channels: our state enterprise businesses and our software & services businesses.
In our state enterprise businesses, we generally enter into contracts with state and local governments to design, build, and operate digital government services and payment solutions on an enterprise-wide basis on their behalf. We typically enter into multi-year contracts and manage operations for each government partner through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. The digital services that we build allow businesses and citizens to access government information through multiple channels and complete secure transactions and
payments. 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 transaction fees collected from digital government services and payment 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 establish preliminary 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 transaction fees we are permitted to retain. Any changes made to the amount or percentage of transaction 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 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.
Most of our state enterprise revenues are generated from transaction-based services for interactive government services ("IGS") and driver history records ("DHR"), which represented approximately 63% and 26% of state enterprise revenues in 2020, respectively. These transaction-based revenues are highly correlated to state population but are also affected by pricing policies established by government entities for public records, the number and growth of commercial enterprises, and the government entity’s development of policy and information technology infrastructure supporting digital government. In 2020, transaction-based revenues consisted of approximately 65% business-to-government transactions and 35% citizen-to-government transactions.
The highest volume service we offer in the state enterprise business is digital access to DHRs. This service accounted for approximately 19%, 26% and 29% of our total consolidated revenues in 2020, 2019 and 2018, respectively. We currently believe that while this service will continue to be an important source of revenue, its contribution as a percentage of total consolidated revenues will decline modestly over time as other sources grow. In addition, in several of our states we offer interactive government services for online motor vehicle registration and licensing. This service accounted for approximately 11%, 11% and 14% of our total consolidated revenues in 2020, 2019 and 2018, respectively.
A primary source of revenue is derived from data resellers, such as LexisNexis Risk Solutions, which have entered into contracts with our government partners to request DHR records from the various states with which we have contracts. Under the terms of these contracts, our government partners have us provide data resellers with access to retrieve driver history records. For each state, the fee per record is the same for all entities that access DHR records. We generally earn a fixed-fee based on the number of requests processed for the government partner. LexisNexis Risk Solutions, which resells these records to the auto insurance industry, accounted for approximately 11%, 15% and 19% of our total consolidated revenues in 2020, 2019 and 2018, respectively. Data reseller contracts are generally self-renewing until canceled by one side or the other, and generally may be terminated at any time after a 30-day notice. Furthermore, these contracts are immediately terminable if the state statute allowing for the public release of these records is repealed.
We charge for digital access to government services based on usage and, depending upon government policies, also on a fixed or sliding scale bulk basis. Our fees are set by negotiation with the government agencies that control the records or services and are typically approved by a government sanctioned oversight authority. Generally, our contracts outline the total fee to be paid by the end-user consumer, as well as our share of the fee. We have limited control over the level of fees we are permitted to retain. We recognize revenues from transactions (primarily information access fees and filing fees) as we provide access to applications and process transactions initiated by end-user consumers. We bill certain end-user consumers, including high-volume DHR data resellers to the auto insurance industry, monthly. We typically receive
most payments within 25 days of billing and remit payment to governments within 30 to 45 days of the transaction. The gross fees that we collect on behalf of government agencies for data access are accrued as accounts receivable and accounts payable at the time revenue from the access of public information is recognized. We typically must remit a certain amount or percentage of these fees to government agencies regardless of whether we ultimately collect the fees. The pricing of transactions varies by the type of transaction and by state.
Our state enterprise businesses also provide non-recurring application development services for our government partners on either a time and materials or fixed-fee basis and generally recognize revenues over time as services are provided. Development services revenues represented approximately 10% of state enterprise revenues in 2020. Fixed-fee services for our government partner in the state of Indiana represented approximately 1% of state enterprise revenues in 2020.
In our software & services businesses, we provide certain payment processing services, software development and digital
government services, other than those provided on an enterprise-wide basis, to federal agencies, as well as state and local
governments. Generally, our software & services contracts include SaaS contracts, payment processing contracts and, to a lesser degree, software development contracts. In August 2020, we began offering new rapid and secure COVID-19 testing solution TourHealth, featuring digital engagement, assessment and scheduling, as well as in-person clinical testing and logistics. This service accounted for approximately 13% of our total consolidated revenues in 2020.
Our objective is to strengthen our position as the leading provider of digital government services. Key strategies to achieve this objective include:
•Renew all current contracts: First and foremost, we strive to renew all currently profitable government contracts. We currently have 11 contracts under which we provide enterprise-wide digital government services, as well as our contract with the FMCSA, that have expiration dates within the 12-month period following December 31, 2020. For additional information on our current government contracts, please refer to Note 3, Outsourced Government Contracts, of this Annual Report on Form 10-K.
•Win new contracts: A key objective of ours is to win new contracts with federal, state and local government agencies. We continue to invest heavily in business development and marketing efforts, including a combination of strategic advertising and public relations initiatives. We have responded to several procurement opportunities and realized significant benefits from our investments, including contracts with new government partners in recent years. Our goal is to continue expanding our number of government partners by leveraging our strong relationships with current government partners and our reputation for providing proven digital government services. Our expansion efforts include developing relationships and sponsors throughout an individual government entity, pursuing strategic technology alliances, making presentations at conferences of government executives with responsibility for information technology policy and developing contacts with organizations that act as forums for discussions between these executives.
•Increase transactional revenues from our existing businesses: Part of our strategy is to increase transactional revenues from our existing contracts by building new applications and services, taking successful applications and services and implementing them in other states and increasing the adoption of existing applications and services within each state where we operate. We intend to accomplish this with new service offerings, increased operational focus and expanded marketing initiatives. In addition, we will work closely with the governance authority for each of our government partners to evaluate the pricing of new and existing services to encourage higher usage and increase revenue streams. We plan to continue our development of new secure online transactional services that enable government agencies to interact more effectively and efficiently with businesses, citizens and other government agencies through multiple online channels, including mobile. We will continue to work with government agencies, professional associations and other organizations to better understand the current and future needs of end-user consumers. We will continue to work with our government partners to create awareness of the online alternatives to traditional government interactions through initiatives such as informational brochures and inclusion of website information on government communication materials. In addition, we will continue to update our partners and end-user consumers to highlight new government service information. We plan to work with professional associations to directly and indirectly communicate to their members the potential convenience, ease of use and other benefits of the services we offer on behalf of our government partners.
•Continue to grow profitability: In addition to driving revenue growth for new and existing contracts, part of our strategy is to increase profitability by driving cost efficiency efforts throughout our Company that fosters entrepreneurial decision-making and innovation and accentuates the potential financial leverage of our business model.
REVENUES
We classify our revenues into two primary categories: (1) state enterprise and (2) software & services. Each of these categories are described below:
State Enterprise Revenues: We earn revenues from our subsidiaries operating enterprise-wide state contracts to provide digital government services to multiple government agencies. We categorize our state enterprise revenues into three main sources: transaction-based fees, development services and fixed-fee services. Transaction-based revenues and fixed-fee revenues are generally recurring while development revenues are generally non-recurring. An important financial metric that we use to gauge our success in increasing revenues in our existing state enterprise businesses is same state revenue growth. We define same state revenues as revenues from states under contract and generating comparable revenues for two full comparable periods. Our long-term goal is to grow same state revenues at our historical average of more than 8% per year. Each revenue source is further described below:
•Transaction-based:
▪IGS: fees from a wide variety of interactive government services, other than digital access to motor vehicle driver history records, for transactions conducted by businesses and end-user 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 this Annual Report on Form 10-K. As IGS revenues continue to become a larger component of overall state enterprise revenues, our growth in same state IGS revenues becomes more important to our overall growth.
▪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. Absent price increases, same state DHR revenue growth has historically ranged from flat to 4% per year.
•Development Services: revenues from the performance of software development projects and other time and materials services for our government partners. While we actively market these services, they do not have the same degree of predictability as our transaction-based or fixed-fee services.
•Fixed-Fee Services: our state enterprise business in Indiana earns fixed-fees from the performance of digital government services for numerous government agencies.
Software & Services Revenues: We earn revenues from our businesses that provide 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 revenues are primarily transaction-based and classified as Payments, Federal, TourHealth and Other. Each of these revenue types is further described below:
•Payments: primarily transaction-based fees from contracts with state and local governments for payment processing-related, transaction-based services that are not part of an enterprise-wide state contract. The majority of revenues from these sources are generally recurring.
•Federal: primarily transaction-based, fees from contracts with certain Federal agencies in the United States, including the FMCSA, to manage the PSP and transaction-based revenues we earn as a subcontractor to Booz Allen Hamilton on its Recreation.gov contract. The majority of our Federal revenues are generally recurring under the respective contracts.
•TourHealth: a combination of fixed-fee and per test-based fees from contracts pertaining to our new TourHealth solution, which utilizes our citizen-engagement technology platform, Gov2Go®, to provide rapid and secure COVID-19 testing. TourHealth commenced operations and began to generate revenues in August
2020 and has contracted for testing services with certain government entities extending into the first quarter of 2021. It is possible services will continue beyond the first quarter of 2021 depending on the severity and duration of the pandemic and the testing needs of states, correctional facilities and higher education institutions across the US.
•Other: primarily implementation and SaaS subscription revenues from our RxGov prescription drug monitoring business and our recently acquired NIC Licensing Solutions regulatory licensing business. The majority of revenues from these sources are recurring.
OPERATING EXPENSES
The primary categories of operating expenses include: cost of revenues, selling & administrative, enterprise technology & product support, and depreciation & amortization. Each of these categories are described below:
Cost of Revenues: Consists of all direct costs associated with providing digital government services and payment solutions for both our state enterprise and software & services businesses and excludes depreciation & amortization. We categorize cost of revenues between fixed and variable costs:
•Fixed costs: include costs such as employee compensation and benefits (including stock-based compensation), subcontractor labor and other 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, marketing, human resource management, 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 development and security teams that support our centrally hosted data center infrastructure and centrally developed SaaS payment processing solutions, government agency SaaS products, including outdoor recreation, healthcare and regulatory licensing, and other SaaS platform solutions, including our citizen-centric Gov2Go® enterprise platform and enterprise microservices and internal development platforms.
Depreciation & Amortization: This category consists of depreciation of fixed assets and amortization of both internally developed software and intangible assets purchased as part of acquisitions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain estimates and assumptions involved in the application of generally accepted accounting principles have a material impact on our reported financial condition and operating performance and on the comparability of such reported information over different reporting periods. A critical accounting policy is one which is both important and material to the portrayal of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often because of the need to make estimates and assumptions about the effect of matters that are inherently uncertain. There are other items within our financial statements that require management to make estimates and assumptions, but are not deemed critical, that may affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Those significant accounting policies and recent accounting pronouncements not yet adopted are described in Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements.
NOVEL CORONAVIRUS DISEASE 19 ("COVID-19")
We are monitoring the ongoing COVID-19 pandemic and have been actively working with our government partners to assist them with the impact. As the outbreak progressed in the United States in 2020 and the vast majority of states issued stay-at-home orders, starting mostly in the latter part of March and continuing through April and most of May, we saw a decrease in volumes for certain services we operate on behalf of our government partners, including driver history record services and interactive government services, the federal Pre-Employment Screening Program we operate on behalf of the Department of Transportation Federal Motor Carrier Safety Administration, and the federal Recreation.gov outdoor recreation service we operate as a subcontractor in conjunction with Booz Allen Hamilton, among other services. We also saw a shift from certain in-person, over-the-counter transactions conducted in brick-and-mortar government offices, many of which were temporarily closed, to those we manage digitally online for our government agency partners. In addition, we saw several government agency partners extend deadlines 60 to 90 days for certain required filings and renewals. These actions negatively impacted the volume of transaction we processed and the amount of revenues we recognized for many services in March and throughout the second quarter of 2020. However, we saw an improvement in volumes for many services starting in late May and continuing throughout the third and fourth quarters of 2020 as stay-at-home orders were lifted, federal parks reopened and extensions for certain required filings and renewals expired. In addition, we recently launched a new service offering, TourHealth, which utilizes our technology to provide a rapid and secure solution for COVID-19 testing. In the second half of 2020, TourHealth provided testing services for the states of Florida, South Carolina and Kansas as well as the Alabama Department of Corrections and the University of Mississippi, which positively impacted our financial results for the year.
We currently anticipate the COVID-19 pandemic may have a prolonged negative impact on broader economic conditions in the United States, which may impact our results of operations in the future. While we have not incurred any significant disruptions to our business activities or services resulting from the pandemic, we have temporarily restricted all business travel, closed all Company offices and shifted to remote operations for an indefinite period to ensure social distancing and the health and safety of our employees. We believe we are currently operating efficiently and continue to effectively manage the overall impact of the pandemic on our business with a remote workforce. We are actively monitoring the situation and are assessing further possible implications to our business and we will continue to take aggressive actions to mitigate potential adverse consequences, such as operational contingency planning and testing, key personnel succession planning, enhanced employee and government partner communication protocols, travel restrictions and cost containment efforts to buffer potential future revenue declines. See “RISK FACTORS” in Part I, Item 1A of this 2020 Annual Report on Form 10-K for additional discussion regarding the risks associated with the COVID-19 pandemic and those risks related to a prolonged economic slowdown, among other risk factors.
RESULTS OF OPERATIONS
In this section, we are providing more detailed information about our operating results and changes in financial position over the past three years. This section should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Form 10-K.
Total Revenues
In the table below, we have categorized our revenue by the two main categories included in the consolidated statements of income, with the corresponding percentage change from the prior year period:
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2020 vs 2019
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2019 vs 2018
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(dollar amounts in thousands)
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2020
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2019
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2018
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$ Change
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%
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$ Change
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%
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State enterprise revenues
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$
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331,720
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$
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290,281
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$
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312,492
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$
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41,439
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14
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%
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$
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(22,211)
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(7)
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%
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Software & services revenues
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128,734
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63,924
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32,408
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64,810
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101
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%
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31,516
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97
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%
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Total
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460,454
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354,205
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344,900
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106,249
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30
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%
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9,305
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3
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%
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Recurring revenues as a % of total revenues
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80%
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97%
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96%
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State enterprise revenues
In the table below, we have categorized our state enterprise revenues according to the underlying source of revenue, with the corresponding percentage change from the prior year period:
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2020 vs 2019
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2019 vs 2018
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(dollar amounts in thousands)
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2020
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2019
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2018
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$ Change
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%
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$ Change
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%
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IGS transaction-based
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$
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209,903
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$
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183,987
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$
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195,155
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$
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25,916
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14
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%
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$
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(11,168)
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(6)
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%
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DHR transaction-based
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85,337
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91,059
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100,241
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(5,722)
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(6)
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%
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(9,182)
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(9)
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%
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Development services
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31,530
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10,285
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12,146
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21,245
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207
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%
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(1,861)
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(15)
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%
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Fixed-fee services
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4,950
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4,950
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4,950
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—
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—
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%
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—
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—
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%
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Total
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$
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331,720
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$
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290,281
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$
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312,492
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$
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41,439
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14
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%
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$
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(22,211)
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(7)
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%
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The following table summarizes key same-state revenue metrics for our state enterprise revenues. The results of the Illinois contract were excluded from the same-state category for all periods presented. For both 2019 and 2018, results of the legacy Texas contract were excluded from the same-state category because they did not generate comparable revenues for two full comparable periods.
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2020
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2019
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2018
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Same-state IGS revenue growth
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14
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%
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16
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%
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11
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%
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Same-state DHR revenue growth (decline)
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(6)
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%
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3
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%
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3
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%
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Same-state revenue growth - other services*
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136
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%
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1
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%
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15
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%
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Same-state revenue growth - total
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14
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%
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10
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%
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9
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%
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* Represents the combined revenue growth from development services and fixed-fee services.
State enterprise revenues for 2020 increased 14% from 2019 driven by same state growth. The 14% increase in same-state revenues for 2020 was mainly due to higher revenues in Virginia, New Jersey and Wisconsin, among other states. Same-state IGS revenues increased 14% in 2020 due, in part, to higher DMV-related revenues across several states,
including the new motor vehicle titling and registration service in Wisconsin, strong demand for hunting and fishing licensing services in several states and an increase in payment processing revenues in New Jersey, among other services. In addition, the pandemic and the need to socially distance pushed more businesses and citizens online to interact with governments digitally, instead of in government offices, which increased the usage of many digital services we manage on behalf of our government partners. Same-state DHR revenues declined 6% in 2020 due to lower revenues across several states as a result of the impact of COVID-19 on the auto insurance industry and associated data resellers. Same-state revenue growth for other services increased 136% in 2020 primarily due to pandemic unemployment services provided in the Commonwealth of Virginia, which totaled $19.6 million for the year.
State enterprise revenues for 2019 declined 7% from 2018, mainly due to a $49.0 million decrease in revenues from the legacy Texas contract, which expired on August 31, 2018, partially offset by a 10%, or $27.3 million, increase in same state revenues. The 10% increase in same-state revenues for 2019 was mainly due to higher revenues in New Jersey, Indiana and Colorado, among other states. Same-state IGS revenues increased 16% in 2019 driven in part by higher payment processing volumes in New Jersey and Indiana and higher revenues from motor vehicle renewals in Colorado, among other services. Same-state DHR revenues grew 3% in 2019, mainly due to higher volumes across several states.
Software & services revenues
In the analysis below, we have categorized our software & services revenues among Payments, Federal, TourHealth and Other, with the corresponding percentage change from the prior year period.
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2020 vs 2019
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2019 vs 2018
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(dollar amounts in thousands)
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2020
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2019
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2018
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$ Change
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%
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$ Change
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%
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Payments
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$
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41,092
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$
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37,976
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$
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10,936
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$
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3,116
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8%
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$
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27,040
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247%
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Federal
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20,799
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22,019
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19,813
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(1,220)
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|
|
(6)%
|
|
2,206
|
|
|
11%
|
|
TourHealth
|
|
61,634
|
|
|
—
|
|
|
—
|
|
|
61,634
|
|
|
N/A
|
|
—
|
|
|
N/A
|
|
Other
|
|
5,209
|
|
|
3,929
|
|
|
1,659
|
|
|
1,280
|
|
|
33%
|
|
2,270
|
|
|
137%
|
|
Total
|
|
$
|
128,734
|
|
|
$
|
63,924
|
|
|
$
|
32,408
|
|
|
$
|
64,810
|
|
|
101%
|
|
$
|
31,516
|
|
|
97%
|
Software & services revenues in 2020 increased $64.8 million, or 101%, over 2019, primarily driven by $61.6 million in revenues from our TourHealth COVID-19 testing solution, which commenced in August 2020, and provided testing services to the states of Florida, South Carolina and Kansas as well as the Alabama Department of Corrections and the University of Mississippi. The increase in software & services revenues was also driven by higher volumes in our Payments business, primarily in the state of Texas. Federal revenues decreased 6% in 2020 driven mainly by a 13% decline in revenues from our contract with the FMCSA to operate the PSP resulting from the COVID-19 pandemic, partially offset by a 45% increase in revenues from Recreation.gov as many federal parks reopened and experienced an influx of visitors after stay-at-home orders instituted in the early months of the pandemic were lifted starting in June 2020.
Software & services revenues in 2019 increased $31.5 million, or 97%, over 2018, primarily driven by our new Texas payments business, which commenced on September 1, 2018. The increase was also driven by Recreation.gov, which launched on October 1, 2018, and higher volumes from the PSP service. Other software & services revenues increased mainly due to our acquired RxGov prescription drug monitoring solution (acquired in 2018) and licensing solutions business (acquired in 2019).
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 prior year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 vs 2019
|
|
2019 vs 2018
|
|
(dollar amounts in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
$ Change
|
|
%
|
|
$ Change
|
|
%
|
|
Fixed costs
|
|
$
|
115,802
|
|
|
$
|
98,754
|
|
|
$
|
108,229
|
|
|
$
|
17,048
|
|
|
17
|
%
|
|
$
|
(9,475)
|
|
|
(9)
|
%
|
|
Variable costs
|
|
84,099
|
|
|
76,736
|
|
|
79,092
|
|
|
7,363
|
|
|
10
|
%
|
|
(2,356)
|
|
|
(3)
|
%
|
|
Total
|
|
$
|
199,901
|
|
|
$
|
175,490
|
|
|
$
|
187,321
|
|
|
$
|
24,411
|
|
|
14
|
%
|
|
$
|
(11,831)
|
|
|
(6)
|
%
|
Cost of state enterprise revenues in 2020 increased $24.4 million, or 14%, over 2019 due mainly to a 15% or approximately $24.9 million, increase in same state costs. The increase in same state costs in 2020 was primarily attributable to an increase in fixed costs in Virginia for call center subcontractors to support pandemic unemployment services totaling $14.6 million. Variable costs to process credit/debit card transactions also increased, due mainly to higher IGS transaction volumes in several states, as further discussed above.
Cost of state enterprise revenues in 2019 decreased $11.8 million, or 6%, from 2018 due mainly to a year-over-year decrease in costs from the legacy Texas contract totaling $31.0 million. This decrease was partially offset by a 12% or approximately $18.4 million, increase in same state costs.
Our state enterprise gross profit percentage was 40% in all periods presented. We carefully monitor our state enterprise gross profit percentage to strike the 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 and 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 prior year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 vs 2019
|
|
2019 vs 2018
|
|
(dollar amounts in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
$ Change
|
|
%
|
|
$ Change
|
|
%
|
|
Fixed costs
|
|
$
|
64,587
|
|
|
$
|
13,169
|
|
|
$
|
8,161
|
|
|
$
|
51,418
|
|
|
390
|
%
|
|
$
|
5,008
|
|
|
61
|
%
|
|
Variable costs
|
|
30,246
|
|
|
28,467
|
|
|
8,550
|
|
|
1,779
|
|
|
6
|
%
|
|
19,917
|
|
|
233
|
%
|
|
Total
|
|
$
|
94,833
|
|
|
$
|
41,636
|
|
|
$
|
16,711
|
|
|
$
|
53,197
|
|
|
128
|
%
|
|
$
|
24,925
|
|
|
149
|
%
|
Cost of software & services revenues in 2020 increased 128% or approximately $53.2 million, over 2019, driven primarily by higher fixed costs for subcontractors to support our TourHealth COVID-19 testing solution totaling $51.6 million. The increase in variable costs is attributable to credit/debit card interchange fees associated with higher payment processing volumes in Texas.
Our software & services gross profit percentage was 26% in 2020, compared to 35% in 2019. The lower gross profit percentage in 2020 was primarily driven by lower gross profit margins from our TourHealth COVID-19 testing solution.
Cost of software & services revenues in 2019 increased 149% or approximately $24.9 million, over 2018, driven primarily by higher variable costs to support our Texas payment operations, which commenced on September 1, 2018. The increase in fixed costs was primarily attributable to higher costs to support our recently acquired RxGov and NIC Licensing Solutions businesses.
Our software & services gross profit percentage was 35% in 2019 compared to 48% in 2018. The lower gross profit percentage in 2019 was primarily driven by lower gross profit margins for our Texas payments business.
Selling & Administrative
Selling & administrative expenses for 2020 were $34.6 million, a 2% decrease from 2019, primarily driven by executive severance costs in 2019 totaling $2.6 million, which 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 previously disclosed, and was partially offset by an increase in incentive-based compensation due to strong consolidated financial results in 2020. As a percentage of total consolidated revenues, selling & administrative expenses were 8% in 2020 compared to 10% in 2019.
Selling & administrative expenses for 2019 were $35.2 million, a 7% increase over 2018. As a percentage of total consolidated revenues, selling & administrative expenses increased to 10% in 2019 compared to 9% in 2018, primarily driven by executive severance costs in 2019, as described above.
Enterprise Technology & Product Support
Enterprise technology & product support expenses were $29.5 million, a 10% increase over 2019, primarily driven by higher personnel costs to support SaaS product development and enhance company-wide information technology. As a percentage of total consolidated revenues, enterprise technology & product support expenses were 6% in 2020 compared to 8% in 2019.
Enterprise technology & product support expenses for 2019 were $26.9 million, a 12% increase over 2018. As a percentage of total consolidated revenues, enterprise technology & product support expenses were 8% in 2019 compared to 7% in 2018, primarily driven by higher personnel costs to support SaaS product development and enhance company-wide information technology.
Depreciation & Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 vs 2019
|
|
2019 vs 2018
|
|
(dollar amounts in thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
$ Change
|
|
%
|
|
$ Change
|
|
%
|
|
Depreciation expense
|
|
$
|
4,103
|
|
|
$
|
4,336
|
|
|
$
|
5,372
|
|
|
$
|
(233)
|
|
|
(5)
|
%
|
|
$
|
(1,036)
|
|
|
(19)
|
%
|
|
Amortization expense
|
|
10,142
|
|
|
8,274
|
|
|
3,745
|
|
|
1,868
|
|
|
23
|
%
|
|
4,529
|
|
|
121
|
%
|
|
Total
|
|
$
|
14,245
|
|
|
$
|
12,610
|
|
|
$
|
9,117
|
|
|
$
|
1,635
|
|
|
13
|
%
|
|
$
|
3,493
|
|
|
38
|
%
|
Depreciation & amortization expense in 2020 increased 13%, or approximately $1.6 million, over 2019, driven primarily by intangible asset amortization related to the Complia, LLC business acquisition in May 2019 (renamed NIC Licensing Solutions), as well as amortization of capitalized software development costs related to SaaS enterprise product and vertical platform investments.
Depreciation & amortization expense in 2019 increased 38%, or approximately $3.5 million, over 2018, driven primarily by approximately $3.0 million of intangible asset amortization related to the Leap Orbit technology acquisition (renamed RxGov) and the Complia, LLC acquisition, compared to approximately $0.5 million of intangible asset amortization related to the Leap Orbit acquisition in 2018. The increase in amortization expense in 2019 was also driven by an increase in capitalized software development costs related to SaaS enterprise product and vertical platform investments. This increase was partially offset by lower depreciation related to the legacy Texas contract.
Interest Income
Interest income declined in 2020 compared to 2019 due to a decrease in interest earned on our investable cash balances following the Federal Reserve's emergency cuts to the federal funds rate to essentially zero in March 2020 in response to the COVID-19 pandemic.
Interest income was $2.5 million in 2019, up from $0.6 million in 2018, driven by an increase in interest rates on our investable cash balances during the period.
Income Taxes
In 2020, 2019 and 2018, our effective tax rate was approximately 21.9%, 22.3% and 23.0%, respectively. The lower effective tax rate in 2020 was primarily due to lower non-deductible expenses and a lower blended state income tax rate, which was impacted by our operations in the state of Florida for TourHealth COVID-19 testing services allowing us to utilize certain of our net operating loss carryforwards. The lower tax rate in 2019 is primarily attributable to the release of reserves for unrecognized income tax benefits resulting from the expiration of statutes of limitations for certain tax years and from the completion of an IRS examination of our 2016 federal income tax return, which resulted in no changes to our previously filed return. For additional information, see Note 11, Income Taxes, in the Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Liquidity and Capital Resources
Operating activities
Cash flows provided by operating activities were $62.8 million, $72.1 million and $69.8 million in 2020, 2019 and 2018, respectively. The changes in net cash provided by operating activities were the result of fluctuations in working capital associated with the timing of payments to and receipts from our government partners, subcontractors and end-user consumers. In 2020, these fluctuations included TourHealth COVID-19 testing services, which commenced in August 2020 and, to a lesser extent, pandemic unemployment services provided to the Commonwealth of Virginia..
Investing activities
Investing activities in 2020, 2019 and 2018 were $11.8 million, $26.4 million and $17.5 million, respectively. The change reflects the cash paid for the Complia and Leap Orbit acquisitions in 2019, totaling $13.5 million. For additional information see Note 5, Acquisitions, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Furthermore, in 2020, 2019 and 2018, we capitalized $8.5 million, $8.7 million and $8.6 million, respectively, of software development costs primarily related to ongoing investments in enterprise SaaS platform solutions and in the enhancement of our centrally managed applications for customer management, billing and payment processing that support our business operations and accounting systems. Investing activities in 2020, 2019 and 2018 also consisted of $3.4 million, $4.3 million and $5.4 million, respectively, of capital expenditures, which were for fixed asset additions in our state enterprise businesses and in our centralized operations to support and enhance corporate-wide information technology and security infrastructure, including Web servers, purchased software and office equipment.
Financing activities
Net cash used in financing activities in 2020, 2019 and 2018 primarily reflects cash dividends paid to stockholders totaling $24.4 million, $21.6 million and $21.5 million, respectively. The increase in 2020 was primarily due to the repurchase of shares in the first quarter of 2020 totaling $3.9 million and to a $2.8 million an increase in dividend payments.
Liquidity
We recognize revenues primarily from providing outsourced digital government services net of the transaction fees due to the government when the services are provided. We recognize accounts receivable at the time these services are
provided and accrue the related fees that we must remit to the government as accounts payable at such time. As a result, trade accounts receivable and accounts payable reflect the gross amounts outstanding at the balance sheet dates. We typically collect most 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 $257.6 million at December 31, 2020, from $212.1 million at December 31, 2019. The increase was primarily due to cash generated from operating activities and an increase in accounts receivable from our government partners and end-user consumers driven by higher revenues in 2020, including TourHealth COVID-19 testing services and Virginia pandemic unemployment services, offset by an increase in accounts payable to our government partners and an increase in accrued expenses for amounts owed to subcontractors. Our current ratio, defined as current assets divided by current liabilities, was 2.6 at December 31, 2020 compared to 3.1 at December 31, 2019.
As of December 31, 2020, our unrestricted cash balance was $236.5 million compared to $214.4 million at December 31, 2019. We believe that our currently available liquid resources and cash generated from operations in the future will be sufficient to meet our operating requirements, capital expenditure requirements and dividend payments for at least the next 12 months without the need for additional capital. We have a $10 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 allows 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 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 December 31, 2020 under the Credit Agreement. We were in compliance with all of the financial covenants under the Credit Agreement at December 31, 2020. For further discussion, see Note 8, Debt Obligations and Collateral Requirements, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
At December 31, 2020, we were bound by performance bond commitments totaling approximately $38.2 million on certain state enterprise contracts and other business relationships. We have never had any defaults resulting in draws on performance bonds.
We currently expect our capital expenditures to range from $4.0 million to $5.0 million in fiscal year 2021, 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 and software & services businesses including equipment upgrades and enhancements, and in our centralized operations to support and enhance corporate-wide information technology and security infrastructure, including Web servers, purchased software, and office equipment. We currently expect our capitalized internal-use software development costs to range from $9.0 million to $10.0 million. This estimate includes costs related to ongoing investments in enterprise SaaS platform solutions and the enhancement of centrally managed applications for customer management, billing and payment processing that support our business operations and accounting systems.
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 $10.0 million in cash and are eligible to receive additional consideration of up to $5.0 million. See Note 5, Acquisition, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Dividends
We paid dividends of $0.36 per common share ($0.09 per quarter) in 2020 and $0.32 per common share ($0.08 per quarter) in each of 2019 and 2018. The total cash paid for dividends in 2020, 2019 and 2018 was $24.4 million, $21.6 million and $21.5 million, respectively.
On February 1, 2021, our Board of Directors declared a regular quarterly cash dividend of $0.09 per share, payable to stockholders of record as of March 3, 2021. The dividend will be paid on March 17, 2021 out of our available cash. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and debt covenants associated with our line of credit. We do not believe any of our previously paid or declared dividends will have a significant effect on our future liquidity needs.
Share Repurchase
In March 2018, the Company's Board of Directors authorized a stock repurchase program allowing us to repurchase up to $25 million of common stock. During March 2020, we purchased an aggregate of 241,180 shares under the repurchase program at a weighted average purchase price of $16.33 for a total value of $3.9 million. The remaining $21.1 million of value authorized under the repurchase program remains available for share repurchases.
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
The following table sets forth our future contractual obligations and commercial commitments as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
Less than 1
Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
|
Operating lease obligations
|
|
$
|
12,437
|
|
|
$
|
4,692
|
|
|
$
|
5,711
|
|
|
$
|
2,034
|
|
|
$
|
—
|
|
|
Income tax uncertainties
|
|
4,358
|
|
|
—
|
|
|
4,358
|
|
|
—
|
|
|
—
|
|
|
Total contractual cash obligations
|
|
$
|
16,795
|
|
|
$
|
4,692
|
|
|
$
|
10,069
|
|
|
$
|
2,034
|
|
|
$
|
—
|
|
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 government contracts.
We have income tax uncertainties of approximately $4.4 million at December 31, 2020. These obligations are classified as noncurrent 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 as reflected in the table above. However, the ultimate timing of
resolution is uncertain. For additional information see Note 11, Income Taxes, in the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of NIC Inc.
Opinion on Internal Control Over Financial Reporting
We have audited NIC Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, NIC Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 25, 2021
Report of Independent Registered Public Accounting Firm
The Stockholders and the Board of Directors of NIC Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of NIC Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
Description of the Matter
|
Revenue Processed By Highly Automated Proprietary Applications
As more fully described in Note 2 to the consolidated financial statements, approximately 78 percent of the Company’s revenues for the year ended December 31, 2020 are derived from its transaction-based services where the Company agrees to provide continuous access to digital government services that allow consumers to complete secure transactions in exchange for transaction-based fees. The Company satisfies its performance obligation by providing customers access to applications over the contractual term and by processing transactions as they are initiated by consumers. The Company’s transaction-based services are comprised of a significant volume of low-dollar transactions processed by proprietary applications that were primarily developed by the Company. The processing of transactions, including the recording of them, is highly automated and based on contractual terms with the Company’s customers.
Given the highly automated applications utilized to process and record transaction-based revenue, auditing those transactions required a significant extent of effort and increased involvement of professionals with expertise in information technology (“IT”) necessary for us to identify, test, and evaluate the Company’s significant applications and automated controls utilized to process transaction-based revenue.
|
|
|
|
|
|
|
|
|
How We Addressed the Matter in Our Audit
|
We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s accounting for transaction-based revenue. This included involvement of audit professionals with significant experience in the use of information technology (IT) to support business operations and related controls. With the involvement of our IT professionals, we identified the relevant applications used to calculate and record transaction-based revenue, and tested the IT general controls over those applications, including testing of user access controls, change management controls, and IT operations controls as well as certain automated application controls.
Our audit procedures related to the Company’s transaction-based revenue also included, among other procedures, performing data analytical procedures to evaluate the completeness and accuracy of recorded revenue and testing disaggregated reconciliations of revenue from the significant applications to the Company’s general ledger.
|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2015
Kansas City, Missouri
February 25, 2021
NIC INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
Cash
|
$
|
236,513
|
|
|
$
|
214,380
|
|
|
Trade accounts receivable, net
|
155,484
|
|
|
85,399
|
|
|
Prepaid expenses & other current assets
|
23,638
|
|
|
12,944
|
|
|
Total current assets
|
415,635
|
|
|
312,723
|
|
|
Property and equipment, net
|
9,341
|
|
|
10,091
|
|
|
Right of use lease assets, net
|
10,809
|
|
|
10,778
|
|
|
Intangible assets, net
|
20,737
|
|
|
22,398
|
|
|
Goodwill
|
5,965
|
|
|
5,965
|
|
|
|
|
|
|
|
Other assets
|
1,862
|
|
|
404
|
|
|
Total assets
|
$
|
464,349
|
|
|
$
|
362,359
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
82,364
|
|
|
$
|
63,685
|
|
|
Accrued expenses
|
61,064
|
|
|
25,940
|
|
|
Lease liabilities
|
4,078
|
|
|
3,776
|
|
|
Other current liabilities
|
10,491
|
|
|
7,191
|
|
|
Total current liabilities
|
157,997
|
|
|
100,592
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
1,097
|
|
|
2,463
|
|
|
Lease liabilities
|
7,172
|
|
|
7,373
|
|
|
Other long-term liabilities
|
4,934
|
|
|
6,003
|
|
|
Total liabilities
|
171,200
|
|
|
116,431
|
|
|
|
|
|
|
|
Commitments and contingencies
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
Common stock, 0.0001 par, 200,000 shares authorized, 67,031 and 66,968 shares issued and outstanding
|
7
|
|
|
7
|
|
|
Additional paid-in capital
|
129,456
|
|
|
123,208
|
|
|
Retained earnings
|
163,686
|
|
|
122,713
|
|
|
Total stockholders' equity
|
293,149
|
|
|
245,928
|
|
|
Total liabilities and stockholders' equity
|
$
|
464,349
|
|
|
$
|
362,359
|
|
The accompanying notes are an integral part of these consolidated financial statements.
46
NIC INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
State enterprise revenues
|
$
|
331,720
|
|
|
$
|
290,281
|
|
|
$
|
312,492
|
|
|
Software & services revenues
|
128,734
|
|
|
63,924
|
|
|
32,408
|
|
|
Total revenues
|
460,454
|
|
|
354,205
|
|
|
344,900
|
|
|
Operating expenses:
|
|
|
|
|
|
|
State enterprise cost of revenues, exclusive of depreciation & amortization
|
199,901
|
|
|
175,490
|
|
|
187,321
|
|
|
Software & services cost of revenues, exclusive of depreciation & amortization
|
94,833
|
|
|
41,636
|
|
|
16,711
|
|
|
Selling & administrative
|
34,551
|
|
|
35,200
|
|
|
32,747
|
|
|
Enterprise technology & product support
|
29,491
|
|
|
26,850
|
|
|
23,944
|
|
|
Depreciation & amortization
|
14,245
|
|
|
12,610
|
|
|
9,117
|
|
|
Total operating expenses
|
373,021
|
|
|
291,786
|
|
|
269,840
|
|
|
Operating income
|
87,433
|
|
|
62,419
|
|
|
75,060
|
|
|
Other income:
|
|
|
|
|
|
|
Interest income
|
389
|
|
|
2,514
|
|
|
616
|
|
|
Income before income taxes
|
87,822
|
|
|
64,933
|
|
|
75,676
|
|
|
Income tax provision
|
19,228
|
|
|
14,503
|
|
|
17,407
|
|
|
Net income
|
$
|
68,594
|
|
|
$
|
50,430
|
|
|
$
|
58,269
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
1.01
|
|
|
$
|
0.75
|
|
|
$
|
0.87
|
|
|
Diluted net income per share
|
$
|
1.01
|
|
|
$
|
0.75
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
Basic
|
67,010
|
|
|
66,884
|
|
|
66,499
|
|
|
Diluted
|
67,117
|
|
|
66,884
|
|
|
66,560
|
|
The accompanying notes are an integral part of these consolidated financial statements.
47
NIC INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
Total
|
|
Balance, January 1, 2018
|
66,271
|
|
|
$
|
7
|
|
|
$
|
111,275
|
|
|
$
|
56,960
|
|
|
$
|
168,242
|
|
|
Cumulative effect of adoption of accounting standard (Note 2)
|
—
|
|
|
—
|
|
|
—
|
|
|
208
|
|
|
208
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
58,269
|
|
|
58,269
|
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
(21,521)
|
|
|
(21,521)
|
|
|
Dividend equivalents on unvested performance-based restricted stock awards
|
—
|
|
|
—
|
|
|
137
|
|
|
(137)
|
|
|
—
|
|
|
Dividend equivalents canceled upon forfeiture of performance-based restricted stock awards
|
—
|
|
|
—
|
|
|
(140)
|
|
|
140
|
|
|
—
|
|
|
Restricted stock vestings
|
263
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares surrendered and canceled upon vesting of restricted stock to satisfy tax withholdings
|
(87)
|
|
|
—
|
|
|
(1,229)
|
|
|
—
|
|
|
(1,229)
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
6,338
|
|
|
—
|
|
|
6,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
122
|
|
|
—
|
|
|
1,382
|
|
|
—
|
|
|
1,382
|
|
|
Balance, December 31, 2018
|
66,569
|
|
|
7
|
|
|
117,763
|
|
|
93,919
|
|
|
211,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
50,430
|
|
|
50,430
|
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
(21,649)
|
|
|
(21,649)
|
|
|
Dividend equivalents on unvested performance-based restricted stock awards
|
—
|
|
|
—
|
|
|
109
|
|
|
(109)
|
|
|
—
|
|
|
Dividend equivalents canceled upon forfeiture of performance-based restricted stock awards
|
—
|
|
|
—
|
|
|
(122)
|
|
|
122
|
|
|
—
|
|
|
Restricted stock vestings
|
427
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares surrendered and canceled upon vesting of restricted stock to satisfy tax withholdings
|
(159)
|
|
|
—
|
|
|
(2,754)
|
|
|
—
|
|
|
(2,754)
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
6,769
|
|
|
—
|
|
|
6,769
|
|
|
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, December 31, 2019
|
66,968
|
|
|
7
|
|
|
123,208
|
|
|
122,713
|
|
|
245,928
|
|
|
Cumulative effect of adoption of accounting standard (Note 2)
|
—
|
|
|
—
|
|
|
—
|
|
|
339
|
|
|
339
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
68,594
|
|
|
68,594
|
|
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,398)
|
|
|
(24,398)
|
|
|
Dividend equivalents on unvested performance-based restricted stock awards
|
—
|
|
|
—
|
|
|
141
|
|
|
(141)
|
|
|
—
|
|
|
Dividend equivalents canceled upon forfeiture of performance-based restricted stock awards
|
—
|
|
|
—
|
|
|
(84)
|
|
|
84
|
|
|
—
|
|
|
Restricted stock vestings
|
299
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares surrendered and canceled upon vesting of restricted stock to satisfy tax withholdings
|
(99)
|
|
|
—
|
|
|
(2,037)
|
|
|
—
|
|
|
(2,037)
|
|
|
Repurchase of shares
|
(241)
|
|
|
—
|
|
|
(439)
|
|
|
(3,505)
|
|
|
(3,944)
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
7,158
|
|
|
—
|
|
|
7,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
104
|
|
|
—
|
|
|
1,509
|
|
|
—
|
|
|
1,509
|
|
|
Balance, December 31, 2020
|
67,031
|
|
|
$
|
7
|
|
|
$
|
129,456
|
|
|
$
|
163,686
|
|
|
$
|
293,149
|
|
The accompanying notes are an integral part of these consolidated financial statements.
48
NIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
$
|
68,594
|
|
|
$
|
50,430
|
|
|
$
|
58,269
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation & amortization
|
14,245
|
|
|
12,610
|
|
|
9,117
|
|
|
Stock-based compensation expense
|
7,158
|
|
|
6,769
|
|
|
6,338
|
|
|
Deferred income taxes
|
(1,483)
|
|
|
1,682
|
|
|
1,448
|
|
|
Provision for losses on accounts receivable
|
1,505
|
|
|
782
|
|
|
852
|
|
|
Loss on disposal of property and equipment
|
—
|
|
|
89
|
|
|
88
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Trade accounts receivable, net
|
(71,134)
|
|
|
(4,826)
|
|
|
22,182
|
|
|
Prepaid expenses & other current assets
|
(10,694)
|
|
|
789
|
|
|
(887)
|
|
|
Other assets
|
2,940
|
|
|
4,430
|
|
|
1,810
|
|
|
Accounts payable
|
18,679
|
|
|
3,593
|
|
|
(28,828)
|
|
|
Accrued expenses
|
35,124
|
|
|
1,788
|
|
|
(2,351)
|
|
|
Other current liabilities
|
2,084
|
|
|
1,132
|
|
|
1,262
|
|
|
Other long-term liabilities
|
(4,181)
|
|
|
(7,218)
|
|
|
536
|
|
|
Net cash provided by operating activities
|
62,837
|
|
|
72,050
|
|
|
69,836
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Purchases of property and equipment
|
(3,354)
|
|
|
(4,253)
|
|
|
(5,410)
|
|
|
Capitalized software development costs
|
(8,481)
|
|
|
(8,671)
|
|
|
(8,580)
|
|
|
Business combination
|
—
|
|
|
(10,000)
|
|
|
—
|
|
|
Asset acquisition
|
—
|
|
|
(3,486)
|
|
|
(3,555)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
(11,835)
|
|
|
(26,410)
|
|
|
(17,545)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Cash dividends on common stock
|
(24,398)
|
|
|
(21,649)
|
|
|
(21,521)
|
|
|
|
|
|
|
|
|
|
Proceeds from employee common stock purchases
|
1,509
|
|
|
1,443
|
|
|
1,382
|
|
|
Shares surrendered upon vesting of restricted stock to satisfy tax withholdings
|
(2,036)
|
|
|
(2,754)
|
|
|
(1,229)
|
|
|
Repurchase of shares
|
(3,944)
|
|
|
—
|
|
|
—
|
|
|
Net cash used in financing activities
|
(28,869)
|
|
|
(22,960)
|
|
|
(21,368)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
22,133
|
|
|
22,680
|
|
|
30,923
|
|
|
Cash, beginning of period
|
214,380
|
|
|
191,700
|
|
|
160,777
|
|
|
Cash, end of period
|
$
|
236,513
|
|
|
$
|
214,380
|
|
|
$
|
191,700
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
Contingent consideration - business combination
|
$
|
—
|
|
|
$
|
960
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Cash payments:
|
|
|
|
|
|
|
Income taxes paid, net of refunds
|
$
|
19,649
|
|
|
$
|
16,035
|
|
|
$
|
13,707
|
|
The accompanying notes are an integral part of these consolidated financial statements.
49
NIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
NIC Inc. (the “Company” or “NIC”) is a leading provider of digital government services and payment solutions that help governments use technology to provide a higher level of service to businesses and citizens and increase efficiencies. The Company accomplishes this currently through two channels: its state enterprise businesses and its software & services businesses.
In the Company's state enterprise businesses, it generally provides services to design, build, and operate 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 end-user consumers, such as businesses and citizens, to access government information online, complete transactions, such as applying for a permit, retrieving government records, filing a government-mandated form or report and making digital payments. The Company typically manages operations for each contractual relationship through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. The Company is typically responsible for funding the up-front investments and ongoing operations and maintenance costs of the digital government services.
The Company’s software & services businesses primarily include its subsidiaries that provide certain standalone SaaS solutions relating to payment processing, healthcare and licensing, COVID-19 testing solutions, software development and other digital government services, other than those services provided under state enterprise contracts, to federal, state and local governments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Company classifies its revenues and cost of revenues into two categories: (1) state enterprise and (2) software & services. The state enterprise category generally includes revenues and cost of revenues from the Company’s subsidiaries operating enterprise-wide digital government services on behalf of state and local governments. The software & services category primarily includes revenues and cost of revenues from the Company’s subsidiaries that provide digital government services, other than those services provided on an enterprise-wide basis, to federal, state and local governments. The primary categories of operating expenses include: state enterprise cost of revenues, software & services cost of revenues, selling & administrative, enterprise technology & product support and depreciation & amortization. State enterprise cost of revenues consists of all direct costs associated with operating digital government services including employee compensation and benefits (including stock-based compensation), payment processing fees required to process credit/debit card and automated clearinghouse transactions, subcontractor labor costs, telecommunications, provision for losses on accounts receivable, and all other costs associated with the provision of dedicated client service such as dedicated facilities. Software & services cost of revenues consists of all direct project costs to provide services such as employee compensation and benefits (including stock-based compensation), payment processing fees required to process credit/debit card and automated clearinghouse transactions, 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 market development and sales, marketing, human resource management, corporate communications and public relations, administration, legal, finance and accounting, internal audit and all non-customer service-related costs. Enterprise technology & product support consist primarily of corporate-level expenses relating to information technology, product and security teams that support the centrally hosted infrastructure and platforms and SaaS payment processing and vertical platform solutions.
Certain amounts in the consolidated statements of income for December 31, 2019 and 2018 were reclassified to conform to the current year presentation. In 2020, the Company began classifying the current Texas payment processing contract in the software & services category. The Company reclassified $30.4 million and $8.1 million of revenues and $28.2 million and $7.7 million of cost of revenues from this contract from the state enterprise category to the software & services category for the years ended December 31, 2019 and 2018, respectively. The reclassification had no impact on net income or cash flows for the years ended December 31, 2019 and 2018.
Basis of consolidation
The consolidated financial statements include all the Company's direct and indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Segment reporting
The Company reports segment information in accordance with authoritative accounting guidance for segment disclosures based upon the “management” approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s segments. In 2019, the Company had only one reportable segment, State Enterprise. During the first quarter of 2020, the Company made a change from one to two reportable segments, State Enterprise and Payments, which was based on quantitative and qualitative considerations, and was a result of recent changes in the Company's reporting structure to reclassify the Texas payment processing contract from the state enterprise category to the software & services category. In August 2020, the Company launched TourHealth services for rapid and secure COVID-19 testing, which during the fourth quarter of 2020, based on quantitative considerations, was included as a third reportable segment. Currently, the Company operates with three reportable segments: State Enterprise, Payments and TourHealth. All prior year amounts have been restated to conform to the current year presentation. See Note 13, Reportable Segments and Related Information, for additional information regarding the Company's segment reporting.
Cash and cash equivalents
Cash and cash equivalents primarily include cash on hand in the form of bank deposits. For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all non-restricted highly liquid instruments purchased with an original maturity of one month or less to be cash equivalents.
Trade accounts receivable
The Company records trade accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts. The Company calculates this allowance based on its history of write-offs, and its relationship with, and the expected future economic status of, its customers. Trade accounts receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. The Company’s allowance for doubtful accounts at December 31, 2020 and 2019 was approximately $2.2 million and $1.2 million, respectively.
Property and equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated useful lives of 8 years for furniture and fixtures, 3-10 years for equipment, 3-5 years for purchased software, and the lesser of the term of the lease or 5 years for leasehold improvements. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in results of operations for the period. The cost of maintenance and repairs is charged to expense as incurred. Significant betterments are capitalized.
The Company periodically evaluates the carrying value of property and equipment to be held and used when events and circumstances indicate the carrying value may not be fully recoverable. The carrying value of property and equipment is considered impaired when the anticipated undiscounted cash flow from the asset group is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined primarily using the anticipated cash flow discounted at a rate commensurate with the risk involved. Losses on assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose. The Company did not record any impairment losses on property and equipment during the periods presented.
Software development costs and intangible assets, net
The Company has finite-lived intangible assets that consist of capitalized software development costs and acquired software. Intangible assets with finite lives are amortized over their estimated useful lives using the straight-line method, unless another method of amortization is more appropriate. Such costs are included in depreciation & amortization in the consolidated statements of income. The estimated economic life for finite-lived intangible assets is typically 3 to 5 years from the date the software is placed in production.
Intangible assets are recorded at cost, less accumulated amortization and are evaluated for recoverability of possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts of the asset group to the future undiscounted cash flows the assets are expected to generate. If such review indicated that the carrying amount of an intangible asset group was not recoverable, an impairment loss would be recognized for the amount by which the carrying value of the intangible asset group exceeds its estimated fair value. The Company has not recorded any impairment losses on intangible assets during the periods presented.
The majority of the costs incurred by the Company to obtain a contract, which consist primarily of salaries of business development employees working to obtain the contract, are fixed in nature, occur regardless of whether a contract is obtained and are expensed as incurred. The Company expenses as incurred all employee costs to start up, operate and maintain digital government services on an enterprise-wide basis as costs of performance under the contracts because, after the completion of a defined contract term, the government entity with which the Company contracts typically receives a perpetual, royalty-free license to the applications the Company developed, excluding applications provided on a SaaS basis. Such costs are included in state enterprise cost of revenues in the consolidated statements of income. Other costs to fulfill a contract, such as the procurement of property and equipment and certain software development costs, are accounted for under other authoritative guidance.
Goodwill and intangible assets
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company evaluates the carrying value of goodwill, at least annually or more frequently whenever events or changes in circumstances indicate that the fair value of the reporting unit may be less than its carrying amount. Impairment tests are performed annually during the fourth quarter and are performed at the reporting unit level. As of December 31, 2020, the Company did not identify any impairment of goodwill.
Accrued expenses
As of each balance sheet date, the Company estimates expenses which have been incurred but not yet paid or for which invoices have not yet been received. Significant components of accrued expenses consist primarily of payment processing fees, subcontractor costs, employee compensation and benefits (including incentive compensation, bonuses, vacation, health insurance and employer 401(k) contributions) and third-party professional service fees.
Revenue recognition
The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers. In accordance with ASC 606, 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 IGS, DHR and other transaction-based revenues, (ii) development services and (iii) fixed-fee services. The following table summarizes, by reportable segment, the principal activities from which the Company generates revenue (in thousands):
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Reportable Segments
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State Enterprise
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Payments
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TourHealth
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All Other
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Consolidated
Total
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December 31, 2020
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IGS
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$
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209,903
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$
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—
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|
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$
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—
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|
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$
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—
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|
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$
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209,903
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DHR
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85,337
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|
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—
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|
|
—
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|
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—
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|
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85,337
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Other
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—
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|
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41,092
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22,415
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20,799
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84,306
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Total transaction-based
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295,240
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41,092
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22,415
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20,799
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379,546
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Development services
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31,530
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—
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—
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—
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31,530
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Fixed-fee services
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4,950
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—
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39,219
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5,209
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49,378
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Total revenues
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$
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331,720
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$
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41,092
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$
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61,634
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$
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26,008
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$
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460,454
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December 31, 2019
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IGS
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$
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183,987
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$
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—
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$
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—
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|
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$
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—
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$
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183,987
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DHR
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91,059
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—
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—
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—
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91,059
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Other
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—
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37,976
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—
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22,019
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59,995
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Total transaction-based
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275,046
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37,976
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—
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22,019
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335,041
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Development services
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10,285
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—
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—
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—
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10,285
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Fixed-fee services
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4,950
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—
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|
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—
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|
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3,929
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8,879
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Total revenues
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$
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290,281
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$
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37,976
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$
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—
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$
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25,948
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$
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354,205
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December 31, 2018
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IGS
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$
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195,155
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$
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—
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|
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$
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—
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|
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$
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—
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$
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195,155
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DHR
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100,241
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|
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—
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|
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—
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|
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—
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100,241
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Other
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—
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10,936
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—
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19,813
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30,749
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Total transaction-based
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295,396
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10,936
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—
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19,813
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326,145
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Development services
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12,146
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—
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|
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—
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|
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—
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12,146
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Fixed-fee services
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4,950
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—
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|
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—
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|
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1,659
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6,609
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Total revenues
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$
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312,492
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|
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$
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10,936
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$
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—
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$
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21,472
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|
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$
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344,900
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Transaction-based Revenues
The Company recognizes revenue from providing outsourced digital services to its government partners primarily utilizing the Company's internally developed proprietary applications. Under these contracts, the Company agrees to provide continuous access to digital government services that allow end-user 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. The processing of transactions is highly automated based on contractual terms with the Company's government partners.
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 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 digital solutions over the contractual term and by processing transactions as they are initiated by end-user consumers. The performance obligation is satisfied when the Company provides the access and it is used by the end-user 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 end-user 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 transaction fee remitted to the Company. In circumstances where the Company receives a discernible benefit equal to or greater than the fair value of the consideration 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 revenue.
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. 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 development contracts that result in the transfer of control 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 development contracts include substantive customer acceptance provisions. In contracts that include substantive customer acceptance provisions, the Company recognizes revenue at a point in time upon customer acceptance.
Under its development contracts, the Company typically does not have significant future performance obligations that extend beyond one year. As of December 31, 2020, the total transaction price allocated to unsatisfied performance obligations was approximately $7.2 million.
Fixed-fee Services Revenues
Fixed-fee services revenues primarily consist of revenues from providing recurring fixed-fee services for the Company’s government partner in Indiana and other contracts for SaaS subscription-based services in the Company's software & services businesses. The Indiana 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 December 31, 2020, the Company’s Indiana state enterprise contract had unsatisfied performance
obligations for one month. The total transaction price allocated to the unsatisfied performance obligation is not significant.
The SaaS subscription-based service contracts in the Company's software & services businesses are a fixed-fee single performance obligation to provide government partners continuous access to digital services. The Company satisfies its performance obligation by providing access to digital services over the contractual term. The Company recognizes revenue for the fixed subscription fees ratably over the non-cancelable term of the contract, commencing on the date the customer has access to the solution. As of December 31, 2020, the unsatisfied performance obligations related to these subscription obligations was $17.3 million, which will be recognized over the term of such contracts, generally 1 - 5 years.
TourHealth Services Revenues
In August 2020, the Company began providing a rapid and secure COVID-19 testing solution referred to as TourHealth, featuring digital engagement, assessment and scheduling, as well as in-person clinical testing and logistics. TourHealth service contracts are either a transaction-based (per test) or fixed-fee single performance obligation to provide continuous access to COVID-19 testing services over a specified period of time. The Company satisfies its performance obligation by providing services to the government partners over time.
For TourHealth transaction-based fee contracts, the fees earned by the Company are typically usage-based and calculated based on the number of tests processed each day at the contractual fee earned by the Company for each test. These usage-based fees are deemed to be variable consideration that meets the practical expedient within ASC 606, which are fully constrained and recognized once the uncertainties associated with the constraint are resolved, which is when the related testing service occurs each day. For TourHealth fixed-fee contracts, consideration consists of a fee that is recognized monthly as the performance obligation is satisfied. As of December 31, 2020, the unsatisfied performance obligations related to these fixed-fee contracts was $2.0 million which is expected to be recognized during the first quarter of 2021.
Unearned and Unbilled 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 December 31, 2020 and 2019 were approximately $6.7 million and $3.8 million, respectively. The change in the deferred revenue balance for the year primarily reflects $31.4 million of cash payments received or due in advance of satisfying performance obligations, offset by $28.5 million of revenues recognized that were previously included in deferred revenue.
Unbilled revenues is recorded when revenue is recognized in advance of the amounts invoiced to the customer and is recorded in other current assets in the consolidated balance sheets. Unbilled revenues at December 31, 2020 and 2019 were approximately $13.2 million and $3.4 million, respectively. The change in the unbilled revenue balance for the year primarily reflects additions to the unbilled revenue balance of $41.1 million and $31.3 million of amounts billed during the period.
Contract Costs
Costs incurred to obtain customer contracts, such as sales commissions, are deferred and recorded within other current assets and other assets when such costs are determined to be incremental to obtaining a contract, would not have been incurred otherwise and the Company expects to recover those costs. For the years ended December 31, 2020 and 2019, the incremental costs incurred to obtain contracts with customers were insignificant.
Costs incurred to fulfill customer contracts, are deferred and recorded within other current assets and other assets when such costs relate directly to a contract, generate or enhance resources of the Company that will be used in satisfying performance obligations in the future and the Company expects to recover those costs. Contract fulfillment costs may include software implementation costs and setup costs for certain SaaS solutions. These costs are recognized as assets and amortized over the expected term of the contract to which the implementation relates, which is the period over which services are expected to be provided to the customer. For the years ended December 31, 2020 and 2019, the costs incurred to fulfill contracts with customers were insignificant.
Leases
All of the Company's lease arrangements are considered operating leases and are included in right of use lease assets and lease liabilities on the consolidated balance sheet. Leases with an initial term of 12 months or less are not recorded in 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.
Stock-based compensation
The Company measures stock-based compensation cost for service-based restricted stock awards at the grant date based on the fair value of the award and recognizes expense on a straight-line basis over the employee’s requisite service period for the entire award (generally the vesting period of the grant). The Company measures stock-based compensation cost for performance-based restricted stock awards at the date of grant, based on the fair value of shares expected to be earned at the end of the performance period and recognizes expense ratably over the performance period based upon the probable number of shares expected to vest. See Note 12, Stock-based Compensation and Employee Benefit Plans, for additional information.
Income taxes
The Company, along with its wholly owned subsidiaries, files a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.
The Company does not recognize a tax benefit for uncertain tax positions unless management’s assessment concludes that it is “more likely than not” that the position is sustainable based on its technical merits. If the recognition threshold is met, the Company recognizes a tax benefit based upon the largest amount of the tax benefit that is more likely than not probable, determined by cumulative probability, of being realized upon settlement with the taxing authority. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of income.
Earnings per share
The Company applies the two-class method of computing earnings per share as the Company's service-based restricted stock awards are entitled to non-forfeitable dividends and are therefore considered to be participating securities. 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. 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.
Business combinations
The Company accounts for the acquisition of a business in accordance with ASC 805, Business Combinations, which requires the identifiable assets acquired, the liabilities assumed and any noncontrolling interests in an acquired business to be recorded at their fair values as of the date of acquisition. The excess of the fair value of purchase consideration over the fair values of identifiable assets and liabilities is recorded as goodwill. Fair value measurements require extensive use of estimates and assumptions, particularly with respect to intangible assets, which are based on all available information at the date of acquisition, including estimates of future cash flows to be generated by the acquired assets, useful lives and discount rates. The use of different valuation techniques and assumptions could change the amounts and useful lives assigned to the assets and liabilities acquired and related amortization expense. During the measurement period, which is not to exceed one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Comprehensive income
The Company has no components of other comprehensive income or loss and, accordingly, the Company’s comprehensive income is the same as its net income for all periods presented.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. At December 31, 2020, there were no customers that accounted for 10% or more of the Company's total accounts receivable. At December 31, 2019, LexisNexis Risk Solutions accounted for approximately 14% of the Company’s total accounts receivable.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently issued accounting pronouncements
Credit Losses
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326), to replace the incurred loss impairment methodology in 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, companies 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. On January 1, 2020, the Company adopted the standard and all the related amendments, using a modified retrospective
approach. The adoption of the standard resulted in a cumulative-effect adjustment to retained earnings of approximately $0.3 million. The adoption of the standard did not have a significant impact on the Company’s consolidated earnings or cash flows.
3. OUTSOURCED 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 to design, build, and operate digital government services on an enterprise-wide basis on behalf of governments desiring to provide access to government information and to digitally complete government-based transactions and payments. NIC typically markets the services and solicits end-user consumers to complete government-based transactions and to enter into subscriber contracts permitting the user to access digital 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 digital 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 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 as platforms are provided to government partners on a 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.
Under a typical state master contract, the Company is required to fully indemnify its government clients against claims that the Company’s services infringe upon the intellectual property rights of others and against claims arising from the Company’s performance or the performance of the Company’s subcontractors under the contract.
Software & services contract
The Company's software & services contracts generally consist of SaaS solutions relating to payment processing, healthcare and licensing, software development, COVID-19 testing solutions and other digital government services, other than those provided on an enterprise-wide basis, to federal, state and local governments. The Company has contracts with certain Federal agencies, including 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. The Company also has contracts with certain government and government-related entities for TourHealth rapid and secure COVID-19 testing services which launched in August 2020.
Termination without cause contracts
There are 14 state enterprise contracts and three software & services contracts under which the Company provides digital government services that can be terminated by the other party without cause on a specified period of notice. Collectively, revenues generated from these contracts represented approximately 48% of the Company’s total consolidated revenues for the year ended December 31, 2020. If any of these contracts is terminated without cause, the terms of the respective contract may require the government to pay the Company a fee to continue to use the Company’s applications.
Expiring contracts
There are currently 11 state enterprise contracts, as well as the Company’s contract with the FMCSA, that have expiration dates within the 12-month period following December 31, 2020. Collectively, revenues generated from these contracts represented approximately 28% of the Company’s total consolidated revenues for the year ended December 31, 2020. Although five of these contracts have renewal provisions, any renewal is at the option of the Company’s government partners. 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. In addition, TourHealth's contracts for COVID-19 testing services currently only extend into the first quarter of 2021.
The contract under which the Company managed enterprise-wide digital government services for the state of Texas expired on August 31, 2018. The contract accounted for approximately 14% of the Company's total consolidated revenues for the year ended December 31, 2018. For the year ended December 31, 2018, revenues from the contract were approximately $49.0 million.
In connection with the completion of the legacy Texas contract, the Company substantially reduced its workforce in Texas. Total one-time severance-related and transition costs, which have been recognized in state enterprise cost of revenues in the consolidated statement of income in the state enterprise segment, were approximately $1.0 million in 2018.
Contract developments
During the fourth quarter of 2020, the Company was awarded a five-year contract with the state of Florida to provide payment processing services, which includes an option for the state to extend the contract for one five-year period. Under this transaction-funded contract, the Company has the ability to provide payment processing services to all state agencies and local governments in the state of Florida.
During the fourth quarter of 2020, the Company was awarded a five-year contract with the state of Iowa to provide enterprise-wide digital government services, which includes an option for the state to extend the contract up to an additional five years.
As previously discussed, during the second half 2020, the Company was awarded contracts with the state of Florida, South Carolina and Kansas, the Alabama Department of Corrections and the University of Mississippi, to provide TourHealth rapid and secure COVID-19 testing services.
Performance bond commitments
At December 31, 2020, the Company was bound by performance bond commitments totaling approximately $38.2 million on certain government contracts and other business relationships.
4. EARNINGS PER SHARE
The Company calculates earnings per share under the two-class method, as unvested service-based restricted stock awards contain non-forfeitable rights to dividends, and thus are considered securities that participate in the earnings of the Company. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net income
|
$
|
68,594
|
|
|
$
|
50,430
|
|
|
$
|
58,269
|
|
|
Less: Income allocated to participating securities
|
(736)
|
|
|
(546)
|
|
|
(629)
|
|
|
Net income available to common stockholders
|
$
|
67,858
|
|
|
$
|
49,884
|
|
|
$
|
57,640
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average shares - basic
|
67,010
|
|
|
66,884
|
|
|
66,499
|
|
|
Performance-based restricted stock awards
|
107
|
|
|
—
|
|
|
61
|
|
|
Weighted average shares - diluted
|
67,117
|
|
|
66,884
|
|
|
66,560
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
$
|
1.01
|
|
|
$
|
0.75
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
$
|
1.01
|
|
|
$
|
0.75
|
|
|
$
|
0.87
|
|
5. 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 for initial consideration of $10.0 million in cash. The sellers are eligible to earn additional cash consideration up to $5.0 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 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 earnings. The total purchase consideration for this acquisition 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 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 13, 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 and 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
In 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 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.
6. INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross Carrying
Value
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Software development cost
|
|
$
|
39,342
|
|
|
$
|
(23,417)
|
|
|
$
|
15,925
|
|
|
$
|
30,861
|
|
|
$
|
(16,951)
|
|
|
$
|
13,910
|
|
|
Acquired software
|
|
11,241
|
|
|
(6,880)
|
|
|
4,361
|
|
|
11,241
|
|
|
(3,359)
|
|
|
7,882
|
|
|
Customer relationships
|
|
425
|
|
|
(101)
|
|
|
324
|
|
|
425
|
|
|
(40)
|
|
|
385
|
|
|
Non-compete agreements
|
|
250
|
|
|
(139)
|
|
|
111
|
|
|
250
|
|
|
(56)
|
|
|
194
|
|
|
Trade name
|
|
35
|
|
|
(19)
|
|
|
16
|
|
|
35
|
|
|
(8)
|
|
|
27
|
|
|
Total
|
|
$
|
51,293
|
|
|
$
|
(30,556)
|
|
|
$
|
20,737
|
|
|
$
|
42,812
|
|
|
$
|
(20,414)
|
|
|
$
|
22,398
|
|
During 2019, the Company recorded approximately $8.4 million of intangible assets in connection with the Complia and Leap Orbit acquisitions, as further discussed in Note 5, Acquisitions.
Amortization expense for intangible assets with finite lives was $10.1 million, $8.3 million and $3.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. The total estimated intangible asset amortization expense in future years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2021
|
|
$
|
10,293
|
|
|
2022
|
|
6,168
|
|
|
2023
|
|
3,854
|
|
|
2024
|
|
341
|
|
|
2025
|
|
61
|
|
|
Thereafter
|
|
20
|
|
|
|
|
$
|
20,737
|
|
7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Equipment
|
$
|
23,808
|
|
|
$
|
24,936
|
|
|
Purchased software
|
8,566
|
|
|
8,769
|
|
|
Furniture and fixtures
|
6,016
|
|
|
5,922
|
|
|
Leasehold improvements
|
2,071
|
|
|
2,181
|
|
|
|
40,461
|
|
|
41,808
|
|
|
Less accumulated depreciation
|
(31,120)
|
|
|
(31,717)
|
|
|
Property and equipment, net
|
$
|
9,341
|
|
|
$
|
10,091
|
|
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $4.1 million, $4.3 million and $5.4 million, respectively.
8. DEBT OBLIGATIONS AND COLLATERAL REQUIREMENTS
The Company has a revolving 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 the bank. 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. The Credit Agreement requires the Company to maintain compliance with the following financial covenants (in each case, as defined in the Credit Agreement):
•Consolidated tangible net worth of at least $36 million (plus the amount of net proceeds from equity issued, or debt converted to equity, in each case after the date of the Credit Agreement); and
•Consolidated maximum leverage ratio of 1.50:1 (the ratio of total funded debt to EBITDA, as defined in the Credit Agreement).
The Company was in compliance with each of these covenants at December 31, 2020. The Company has issued a letter of credit as collateral for performance on one of its state enterprise contracts. Irrevocable letters of credit are generally in force for one year. In total, the Company and its subsidiaries had unused outstanding letters of credit of approximately $0.2 million at December 31, 2020. The Company was not required to cash collateralize these letters of credit at December 31, 2020. The Company had $4.8 million in available capacity to issue additional letters of credit and $9.8 million of unused borrowing capacity at December 31, 2020 under the Credit Agreement. Letters of credit may have an expiration date of up to one year beyond the expiration date of the Credit Agreement.
At December 31, 2020, the Company has a $1.0 million line of credit with a bank in conjunction with a corporate credit card agreement.
9. COMMITMENTS AND CONTINGENCIES
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 a lease renewal option is at the Company’s sole discretion and is 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 December 31, 2020 was 3.2 years.
Operating lease costs for the years ended December 31, 2020, 2019 and 2018 was approximately $6.0 million, $5.8 million and $5.3 million, respectively. Operating lease costs include short-term and variable lease costs, which are not significant. The aggregate future lease payments for operating leases as of December 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
2020
|
|
Fiscal Year
|
|
|
2021
|
$
|
4,692
|
|
|
2022
|
3,638
|
|
|
2023
|
2,073
|
|
|
2024
|
1,345
|
|
|
2025
|
689
|
|
|
|
|
|
Total minimum lease payments
|
12,437
|
|
|
Less: interest
|
(1,187)
|
|
|
Total lease liabilities
|
$
|
11,250
|
|
Other information related to operating leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
2020
|
|
Weighted-average discount rate
|
2.4
|
%
|
|
|
|
|
Supplement cash flow information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
4,328
|
|
|
Right of use assets obtained in exchange for new lease liabilities
|
$
|
4,429
|
|
Litigation
From time to time, the Company is involved in legal proceedings and litigation arising in the ordinary course of business. However, the Company is not currently a party to any material legal proceedings.
10. STOCKHOLDERS’ EQUITY
Dividend policy
The Company’s Board of Directors approved a dividend policy pursuant to which it plans to make, subject to subsequent declaration, regular quarterly cash dividends. For each dividend paid, a dividend equivalent is paid simultaneously on unvested shares of service-based restricted stock. All dividends on unvested shares of service-based restricted stock have been paid out of the Company's available cash. In addition, holders of performance-based restricted stock accrue dividend equivalents for each dividend declared that could be earned and become payable in the form of additional shares of common stock at the end of the respective performance period to the extent that the underlying shares of performance-based restricted stock were earned.
Dividends
The Company's Board of Directors declared and paid the following dividends during the years ended December 31, 2020 and 2019 (payment amount in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
Dividend per Share
|
Record Date
|
Payment Date
|
Amount
|
|
October 26, 2020
|
$0.09
|
December 4, 2020
|
December 18, 2020
|
$6.1
|
|
July 27, 2020
|
0.09
|
September 8, 2020
|
September 22, 2020
|
6.1
|
|
April 23, 2020
|
0.09
|
June 11, 2020
|
June 25, 2020
|
6.1
|
|
January 27, 2020
|
0.09
|
March 4, 2020
|
March 18, 2020
|
6.1
|
|
October 28, 2019
|
0.08
|
December 4, 2019
|
December 18, 2019
|
5.4
|
|
July 29, 2019
|
0.08
|
September 6, 2019
|
September 20, 2019
|
5.4
|
|
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
|
On February 1, 2021, the Company's Board of Directors declared a regular quarterly cash dividend of $0.09 per share, payable to stockholders of record as of March 3, 2021. The dividend, which is expected to total approximately $6.1 million, will be paid on March 17, 2021.
Share Repurchase
In March 2018, the Company's Board of Directors authorized a stock repurchase program allowing the Company to repurchase up to $25 million of common stock. During March 2020, the Company repurchased and retired 241,180 shares at a weighted average purchase price of $16.33 for a total value of $3.9 million under the repurchase program. The Company has made no other repurchases under its share repurchase program.
11. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Current income taxes:
|
|
|
|
|
|
|
Federal
|
$
|
17,150
|
|
|
$
|
10,343
|
|
|
$
|
13,704
|
|
|
State
|
3,561
|
|
|
2,478
|
|
|
2,255
|
|
|
Total
|
20,711
|
|
|
12,821
|
|
|
15,959
|
|
|
Deferred income taxes:
|
|
|
|
|
|
|
Federal
|
(946)
|
|
|
1,182
|
|
|
1,466
|
|
|
State
|
(537)
|
|
|
500
|
|
|
(18)
|
|
|
Total
|
(1,483)
|
|
|
1,682
|
|
|
1,448
|
|
|
Total income tax provision
|
$
|
19,228
|
|
|
$
|
14,503
|
|
|
$
|
17,407
|
|
The tax effects of the temporary differences that gave rise to significant components of the Company’s deferred tax assets and liabilities were as follows at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
Stock-based compensation
|
$
|
1,330
|
|
|
$
|
983
|
|
|
Federal benefit of state uncertain tax positions
|
563
|
|
|
746
|
|
|
Accrued vacation
|
618
|
|
|
521
|
|
|
Deferred rent
|
112
|
|
|
95
|
|
|
Deferred payroll tax
|
947
|
|
|
—
|
|
|
State net operating loss carryforwards
|
53
|
|
|
228
|
|
|
Allowance for doubtful accounts
|
552
|
|
|
311
|
|
|
Right of use lease liability
|
2,851
|
|
|
2,840
|
|
|
Other
|
873
|
|
|
465
|
|
|
Gross deferred tax assets
|
7,899
|
|
|
6,189
|
|
|
Less: Valuation allowance
|
(4)
|
|
|
(335)
|
|
|
Total deferred tax assets
|
7,895
|
|
|
5,854
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Property and equipment
|
(1,830)
|
|
|
(2,027)
|
|
|
Capitalized software development costs
|
(4,423)
|
|
|
(3,544)
|
|
|
Right of use lease asset
|
(2,739)
|
|
|
(2,746)
|
|
|
Total deferred tax liabilities
|
(8,992)
|
|
|
(8,317)
|
|
|
Net deferred tax liability
|
$
|
(1,097)
|
|
|
$
|
(2,463)
|
|
Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. In assessing the realizability of deferred tax assets, management determines if it is probable the Company will have sufficient taxable income in certain state jurisdictions to fully utilize available tax credits and other components. Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized. In 2020, the Company identified certain state net operating loss (“NOL”) carryforwards that it had previously identified as unable to use and concluded that it would be able to realize the full amount of these NOL carryforwards. As a result, the Company reduced its deferred tax asset valuation allowance by $0.3 million.
The following table reconciles the statutory federal income tax rate and the effective income tax rate indicated by the consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
|
State income taxes
|
3.5
|
%
|
|
5.0
|
%
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
Federal and state tax credits
|
(2.1)
|
%
|
|
(0.8)
|
%
|
|
(2.3)
|
%
|
|
Tax deficit (benefit) from restricted stock vestings
|
(0.3)
|
%
|
|
(0.1)
|
%
|
|
0.3
|
%
|
|
Uncertain tax positions (release)
|
(0.6)
|
%
|
|
(5.2)
|
%
|
|
0.8
|
%
|
|
Nondeductible expenses
|
0.7
|
%
|
|
2.2
|
%
|
|
0.8
|
%
|
|
Other, net
|
(0.3)
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
|
Effective federal and state income tax rate
|
21.9
|
%
|
|
22.3
|
%
|
|
23.0
|
%
|
The Company’s effective tax rate in 2020 was higher than the statutory federal income tax rate due to the effect of state income taxes and nondeductible expenses, partially offset by favorable benefits related to return to the federal research and development credit and other tax adjustments recognized upon filing the Company's 2019 tax return.
The Company’s effective tax rate in 2019 was higher than the statutory federal income tax rate due to the effect of state income taxes and nondeductible expenses, partially offset by the favorable impact of the release of reserves for unrecognized income tax benefits resulting from the expiration of the statutes of limitations for certain tax years and from the completion of an IRS tax 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 effective tax rate was also impacted by approximately $2.6 million of executive severance costs, a significant portion of which was not deductible for income tax purposes.
The Company’s effective tax rate in 2018 was higher than the statutory federal income tax rate due to the effect of state income taxes, uncertain tax positions, and nondeductible expenses, partially offset by favorable benefits related to the federal research and development credit.
The Company recognized $0.4 million in excess tax benefits and $0.1 million and $0.3 million in tax deficits from restricted stock vestings within income tax expense for the years ended December 31, 2020, 2019 and 2018, respectively.
The following table provides a reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits (included in other long-term liabilities in the consolidated balance sheets) for the years ended December 31, 2020, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Balance at January 1
|
$
|
5,048
|
|
|
$
|
8,651
|
|
|
$
|
8,020
|
|
|
Additions for tax positions of prior years
|
247
|
|
|
208
|
|
|
459
|
|
|
Additions for tax positions of current years
|
368
|
|
|
393
|
|
|
1,248
|
|
|
Expiration of the statute of limitations
|
(1,202)
|
|
|
(3,182)
|
|
|
(1,024)
|
|
|
Reductions for tax positions of prior years
|
(103)
|
|
|
(217)
|
|
|
(52)
|
|
|
Settlements
|
—
|
|
|
(805)
|
|
|
—
|
|
|
Balance at December 31
|
$
|
4,358
|
|
|
$
|
5,048
|
|
|
$
|
8,651
|
|
At December 31, 2020 and 2019, there were approximately $3.8 million and $4.3 million, respectively, of unrecognized tax benefits that if recognized would affect the Company’s annual effective tax rate. It is reasonably possible that events will occur during the next 12 months that would cause the total amount of unrecognized tax benefits to increase or decrease. However, the Company does not expect such increases or decreases to be material to its financial condition or results of operations.
The Company, along with its wholly owned subsidiaries, files a consolidated U.S. federal income tax return and separate income tax returns in many states throughout the U.S. The Company remains subject to U.S. federal examination for the tax years ended on or after December 31, 2017. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return.
The Company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense in the consolidated statements of income. Accrued interest and penalty amounts were not significant at December 31, 2020, 2019 and 2018.
12. STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
The following table presents stock-based compensation expense included in the Company’s consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
State enterprise cost of revenues, exclusive of depreciation & amortization
|
$
|
1,585
|
|
|
$
|
1,499
|
|
|
$
|
1,516
|
|
|
Software & services cost of revenues, exclusive of depreciation & amortization
|
162
|
|
|
101
|
|
|
151
|
|
|
Selling & administrative
|
4,599
|
|
|
4,495
|
|
|
3,994
|
|
|
Enterprise technology & product support
|
812
|
|
|
674
|
|
|
677
|
|
|
Stock-based compensation expense before income taxes
|
$
|
7,158
|
|
|
$
|
6,769
|
|
|
$
|
6,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option and restricted stock plans
The Company has a stock compensation plan (the “NIC Plan”) to provide for the granting of restricted stock awards, incentive stock options or non-qualified stock options to encourage certain employees of the Company and its subsidiaries and directors of the Company to participate in the ownership of the Company and to provide additional incentive for such employees and directors to promote the success of its business through sharing in the future growth of such business. The Company did not grant any stock options in 2020, 2019, or 2018 and has no stock options currently outstanding.
As approved by the Company’s Board of Directors and stockholders, the Company is authorized to grant 15,825,223 common shares under the NIC Plan. At December 31, 2020, a total of 2,776,440 shares were available for future grants under the NIC Plan.
Restricted stock
During 2020, the Compensation Committee of the Board of Directors of the Company (the “Committee”) granted to certain management-level employees and executive officers, service-based restricted stock awards totaling 297,410 shares with a grant-date fair value totaling approximately $6.3 million. Such restricted stock awards vest beginning one year from the date of grant in annual installments of 25%. During 2020, certain management-level employees were granted service-based restricted stock awards totaling 9,256 shares with a grant-date fair value totaling approximately $0.2 million, which vest over two years in 50% installments. In addition, non-employee directors of the Company were granted service-based restricted stock awards totaling 34,607 shares with a grant-date fair value totaling approximately $0.7 million. Such restricted stock awards vest one year from the date of grant.
During the first quarter of 2020, the Committee also granted to certain executive officers performance-based restricted stock awards pursuant to the terms of the Company’s executive compensation program totaling 137,052 shares with a grant-date fair value totaling approximately $2.8 million, which represents the maximum number of shares the executive officers can earn at the end of a three-year performance period ending December 31, 2022.
The actual number of shares earned will be based on the Company’s performance related to the following performance criteria over the performance period:
•Operating income growth (three-year compound annual growth rate); and
•Total consolidated revenue growth (three-year compound annual growth rate).
At the end of the three-year period, the executive officers are eligible to receive up to a specified number of shares based 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 vest 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, 2020, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 22, 2018 ended. Based on the Company’s actual financial results from
2018 through 2020, 33,715 of the shares and 1,905 dividend shares were earned. The remaining 106,379 shares subject to the awards will be forfeited in the first quarter of 2021.
At December 31, 2019, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 22, 2017 ended. Based on the Company’s actual financial results from 2017 through 2019, no shares or dividend equivalent shares were earned, and the 87,241 shares subject to the awards were forfeited.
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 dividend shares were earned. The remaining 73,345 shares subject to the awards were forfeited.
During 2019, the Company's former Chief Operating Officer departed the Company. Pursuant to the terms of his employment agreement, the Company provided severance and other related benefits. The Company incurred a total one-time cost of $2.6 million, which 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. Included in stock-based compensation expense was the acceleration of 44,507 service-based restricted stock awards and 37,463 performance-based restricted stock awards.
A summary of service-based restricted stock activity for the year ended December 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-based Restricted
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at January 1, 2020
|
712,162
|
|
|
$
|
16.81
|
|
|
Granted
|
341,273
|
|
|
$
|
21.12
|
|
|
Vested
|
(298,479)
|
|
|
$
|
17.20
|
|
|
Canceled
|
(23,830)
|
|
|
$
|
17.53
|
|
|
Outstanding at December 31, 2020
|
731,126
|
|
|
$
|
18.64
|
|
|
Expected to vest at December 31, 2020
|
731,126
|
|
|
$
|
18.64
|
|
The fair value of service-based restricted stock vested during the years ended December 31, 2020, 2019 and 2018 was approximately $5.1 million, $5.5 million and $5.1 million, respectively. The weighted average grant date fair value per share of service-based restricted stock granted during the years ended December 31, 2020, 2019 and 2018 was $21.12, $16.96 and $14.15, respectively.
A summary of performance-based restricted stock activity for the year ended December 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-
based
Restricted
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at January 1, 2020
|
338,470
|
|
|
$
|
17.01
|
|
|
Granted
|
137,052
|
|
|
$
|
20.55
|
|
|
Vested
|
—
|
|
|
$
|
22.00
|
|
|
Canceled
|
(87,241)
|
|
|
$
|
22.00
|
|
|
Outstanding at December 31, 2020
|
388,281
|
|
|
$
|
17.14
|
|
|
Expected to vest at December 31, 2020
|
149,801
|
|
|
$
|
18.48
|
|
During the years with performance periods ended December 31, 2020 and 2018, no shares of performance-based restricted stock awards vested. The fair value of performance-based restricted stock vested with the performance period ended December 31, 2019 was approximately $1.8 million. The weighted average grant date fair value per share of performance-based restricted stock granted during the years ended December 31, 2020, 2019 and 2018 was $20.55, $17.27 and $13.70, respectively.
At December 31, 2020, the total intrinsic value of unvested restricted stock awards expected to vest was approximately $22.8 million. At December 31, 2020, the Company had approximately $10.7 million of total unrecognized compensation cost related to unvested restricted stock awards. The Company expects to recognize this cost over a weighted average period of approximately two years from December 31, 2020.
Employee stock purchase plan
In 1999, the Company’s Board of Directors approved an employee stock purchase plan (“ESPP”) intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. A total of 2,321,688 shares of NIC common stock have been reserved for issuance under this plan. Terms of the plan permit eligible employees to purchase NIC common stock through payroll deductions up to the lesser of 15% of each employee’s compensation or $25,000. Amounts deducted and accumulated by the participant are used to purchase shares of NIC’s common stock at 85% of the
lower of the fair value of the common stock at the beginning or the end of the offering period, as defined in the plan. At December 31, 2020, a total of 787,353 shares were available for future grants under the ESPP.
The current offering period under this plan commenced on April 1, 2020. The closing fair market value of NIC common stock on the first day of the current offering period was $21.27 per share. In the offering period commencing on April 1, 2019 and ending on March 31, 2020, 103,628 shares were purchased at a price of $14.56 per share, resulting in total cash proceeds to the Company of approximately $1.5 million. In the offering period commencing on April 1, 2018 and ending on March 31, 2019, 127,600 shares were purchased at a price of $11.31 per share, resulting in total cash proceeds to the Company of approximately $1.4 million. In the offering period commencing on April 1, 2017 and ending on March 31, 2018, 122,152 shares were purchased at a price of $11.31 per share, resulting in total cash proceeds to the Company of approximately $1.4 million.
The fair values of the offerings were estimated on the dates of grant using the Black-Scholes model using the assumptions in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering Ending March 31, 2021
|
|
Offering Ending March 31, 2020
|
|
Offering Ending March 31, 2019
|
|
Risk-free interest rate
|
0.16
|
%
|
|
2.41
|
%
|
|
2.08
|
%
|
|
Expected dividend yield
|
1.90
|
%
|
|
1.93
|
%
|
|
2.06
|
%
|
|
Expected life
|
1.0 year
|
|
1.0 year
|
|
1.0 year
|
|
Expected stock price volatility
|
41.09
|
%
|
|
29.94
|
%
|
|
35.51
|
%
|
|
Weighted average fair value of ESPP rights
|
$
|
6.37
|
|
|
$
|
4.49
|
|
|
$
|
3.75
|
|
The Black-Scholes option-pricing model was not developed for use in valuing ESPP rights but was developed for use in estimating the fair value of traded stock options that have no vesting restrictions and are fully transferable. In addition, it requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation or should not be used to predict the value ultimately realized by employees who receive equity awards. Because changes in the subjective assumptions can materially affect the fair value estimate and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option-pricing model may not provide a reliable estimate of the fair value of ESPP rights.
Defined contribution 401(k) profit sharing plan
The Company and its subsidiaries sponsor a defined contribution 401(k) profit sharing plan. In accordance with the plan, all full-time employees are eligible immediately upon employment and non full-time employees are eligible upon reaching 1,000 hours of service in the relevant period. A discretionary match by the Company of an employee’s contribution of up to 5% of base salary and a discretionary contribution may be made to the plan as determined by the Board of Directors. Expense related to Company matching contributions totaled approximately $3.3 million, $2.9 million and $2.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
13. REPORTABLE SEGMENTS AND RELATED INFORMATION
The Company currently operates in three reportable segments: State Enterprise, Payments and TourHealth. The State Enterprise reportable segment generally includes the Company’s subsidiaries operating digital government services on an enterprise-wide basis for state and local governments. The Payments reportable segment includes the Company's subsidiaries in the software & services category that provide certain payment processing-related, transaction-based services mainly to state and local government agencies in states where the Company does not maintain an enterprise-wide contract. The TourHealth reportable segment includes the Company's TourHealth rapid and secure COVID-19 testing solution, which commenced in August 2020. The All Other category primarily includes the Company's subsidiaries in the software & services category that provide software development and digital government services, other than those provided on an enterprise-wide basis, to federal agencies, including the Company's contract with the FMCSA to operate the Federal PSP and the Company's subcontract for the Recreation.gov outdoor recreation service, as well as to other state and local governments and government-related entities, including the Company's RxGov prescription drug monitoring business and NIC Licensing Solutions regulatory licensing business. Each of the Company’s businesses within the All Other category is an operating segment and have been grouped together to form the All Other category, as none of the operating segments meets the quantitative threshold of a separately reportable segment. These services are not directly identifiable with the Company’s reportable operating segments. In addition, the Company accounts for non-operating activity and the costs of providing corporate and other administrative services in the Other Reconciling Items category. There have been no significant intersegment transactions for the periods reported. The summary of significant accounting policies applies to all operating segments.
The Company’s Chief Executive Officer has been identified as the chief operating decision maker ("CODM"). The measure of profitability by which management, including the CODM, 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 CODM. Accordingly, the Company has not presented information relating to segment assets.
The table below reflects summarized financial information for the Company’s reportable segments for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Enterprise
|
|
Payments
|
|
TourHealth
|
|
All Other
|
|
Other
Reconciling
Items
|
|
Consolidated
Total
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
331,720
|
|
|
$
|
41,092
|
|
|
$
|
61,634
|
|
|
$
|
26,008
|
|
|
$
|
—
|
|
|
$
|
460,454
|
|
|
Costs & expenses
|
199,901
|
|
|
32,314
|
|
|
51,606
|
|
|
10,913
|
|
|
64,042
|
|
|
358,776
|
|
Depreciation &
amortization
|
2,682
|
|
|
6
|
|
|
—
|
|
|
4,516
|
|
|
7,041
|
|
|
14,245
|
|
|
Operating income (loss)
|
$
|
129,137
|
|
|
$
|
8,772
|
|
|
$
|
10,028
|
|
|
$
|
10,579
|
|
|
$
|
(71,083)
|
|
|
$
|
87,433
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
290,281
|
|
|
$
|
37,976
|
|
|
$
|
—
|
|
|
$
|
25,948
|
|
|
$
|
—
|
|
|
$
|
354,205
|
|
|
Costs & expenses
|
175,490
|
|
|
30,922
|
|
|
—
|
|
|
10,714
|
|
|
62,050
|
|
|
279,176
|
|
|
Depreciation & amortization
|
2,723
|
|
|
3
|
|
|
—
|
|
|
1,619
|
|
|
8,265
|
|
|
12,610
|
|
|
Operating income (loss)
|
$
|
112,068
|
|
|
$
|
7,051
|
|
|
$
|
—
|
|
|
$
|
13,615
|
|
|
$
|
(70,315)
|
|
|
$
|
62,419
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
312,492
|
|
|
$
|
10,936
|
|
|
$
|
—
|
|
|
$
|
21,472
|
|
|
$
|
—
|
|
|
$
|
344,900
|
|
|
Costs & expenses
|
187,321
|
|
|
8,536
|
|
|
—
|
|
|
8,175
|
|
|
56,691
|
|
|
260,723
|
|
|
Depreciation & amortization
|
2,985
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
6,032
|
|
|
9,117
|
|
|
Operating income (loss)
|
$
|
122,186
|
|
|
$
|
2,400
|
|
|
$
|
—
|
|
|
$
|
13,197
|
|
|
$
|
(62,723)
|
|
|
$
|
75,060
|
|
The following table identifies each type of service, end-user consumer and state government that accounted for 10% or more of the Company’s total consolidated revenues for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Revenues
|
|
|
2020
|
|
2019
|
|
2018
|
|
Type of Service
|
|
|
|
|
|
|
Motor Vehicle Driver History Record Retrieval
|
19
|
%
|
|
26
|
%
|
|
29
|
%
|
|
Motor Vehicle Registrations
|
11
|
%
|
|
11
|
%
|
|
14
|
%
|
|
TourHealth COVID-19 Services
|
13
|
%
|
|
N/A
|
|
N/A
|
|
Consumer
|
|
|
|
|
|
|
LexisNexis Risk Solutions
|
11
|
%
|
|
15
|
%
|
|
19
|
%
|
|
(provides motor vehicle driver history records to the insurance industry)
|
|
|
|
|
|
|
State Partner
|
|
|
|
|
|
|
Colorado
|
N/A
|
|
10
|
%
|
|
N/A
|
|
Texas
|
N/A
|
|
N/A
|
|
17
|
%
|
|
(2018 consists of the legacy and payment processing contracts)
|
|
|
|
|
|
14. UNAUDITED QUARTERLY OPERATING RESULTS
The unaudited quarterly information below is subject to seasonal fluctuations resulting in lower revenues in the fourth quarter of each calendar year due to the lower number of business days in the quarter and a lower volume of business-to-government and citizen-to-government transactions during the holiday periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
(in thousands, except per share amount)
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Revenues:
|
|
|
|
|
|
|
|
|
State enterprise revenues
|
$
|
74,411
|
|
|
$
|
77,804
|
|
|
$
|
91,475
|
|
|
$
|
88,030
|
|
|
Software & services revenues
|
16,708
|
|
|
15,785
|
|
|
43,115
|
|
|
53,126
|
|
|
Total revenues
|
91,119
|
|
|
93,589
|
|
|
134,590
|
|
|
141,156
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
State enterprise cost of revenues, exclusive of depreciation & amortization
|
46,271
|
|
|
45,876
|
|
|
53,807
|
|
|
53,947
|
|
|
Software & services cost of revenues, exclusive of depreciation & amortization
|
10,724
|
|
|
10,344
|
|
|
31,290
|
|
|
42,475
|
|
|
Selling & administrative
|
8,064
|
|
|
8,316
|
|
|
8,817
|
|
|
9,354
|
|
|
Enterprise technology & product support
|
7,254
|
|
|
7,201
|
|
|
7,342
|
|
|
7,694
|
|
|
Depreciation & amortization
|
3,482
|
|
|
3,473
|
|
|
3,528
|
|
|
3,762
|
|
|
Total operating expenses
|
75,795
|
|
|
75,210
|
|
|
104,784
|
|
|
117,232
|
|
|
Operating income
|
15,324
|
|
|
18,379
|
|
|
29,806
|
|
|
23,924
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
Interest income
|
389
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Income before income taxes
|
15,713
|
|
|
18,379
|
|
|
29,806
|
|
|
23,924
|
|
|
Income tax provision
|
3,850
|
|
|
4,583
|
|
|
4,715
|
|
|
6,080
|
|
|
Net income
|
$
|
11,863
|
|
|
$
|
13,796
|
|
|
$
|
25,091
|
|
|
$
|
17,844
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
0.18
|
|
|
$
|
0.20
|
|
|
$
|
0.37
|
|
|
$
|
0.26
|
|
|
Diluted net income per share
|
$
|
0.18
|
|
|
$
|
0.20
|
|
|
$
|
0.37
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
66,987
|
|
|
66,999
|
|
|
67,025
|
|
|
67,030
|
|
|
Diluted
|
66,987
|
|
|
66,999
|
|
|
67,025
|
|
|
67,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
(in thousands, except per share amount)
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Revenues:
|
|
|
|
|
|
|
|
|
State enterprise revenues
|
$
|
69,853
|
|
|
$
|
74,871
|
|
|
$
|
73,257
|
|
|
$
|
72,300
|
|
|
Software & services revenues
|
15,327
|
|
|
16,695
|
|
|
17,128
|
|
|
14,774
|
|
|
Total revenues
|
85,180
|
|
|
91,566
|
|
|
90,385
|
|
|
87,074
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
State enterprise cost of revenues, exclusive of depreciation & amortization
|
41,978
|
|
|
45,081
|
|
|
43,821
|
|
|
44,610
|
|
|
Software & services cost of revenues, exclusive of depreciation & amortization
|
9,397
|
|
|
10,525
|
|
|
10,173
|
|
|
11,541
|
|
|
Selling & administrative
|
9,964
|
|
|
8,356
|
|
|
8,153
|
|
|
8,727
|
|
|
Enterprise technology & product support
|
6,445
|
|
|
6,745
|
|
|
6,743
|
|
|
6,917
|
|
|
Depreciation & amortization
|
2,421
|
|
|
3,130
|
|
|
3,524
|
|
|
3,535
|
|
|
Total operating expenses
|
70,205
|
|
|
73,837
|
|
|
72,414
|
|
|
75,330
|
|
|
Operating income
|
14,975
|
|
|
17,729
|
|
|
17,971
|
|
|
11,744
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
Interest income
|
604
|
|
|
577
|
|
|
729
|
|
|
604
|
|
|
Income before income taxes
|
15,579
|
|
|
18,306
|
|
|
18,700
|
|
|
12,348
|
|
|
Income tax provision
|
4,077
|
|
|
3,846
|
|
|
4,190
|
|
|
2,390
|
|
|
Net income
|
$
|
11,502
|
|
|
$
|
14,460
|
|
|
$
|
14,510
|
|
|
$
|
9,958
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
0.17
|
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.15
|
|
|
Diluted net income per share
|
$
|
0.17
|
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
66,670
|
|
|
66,940
|
|
|
66,960
|
|
|
66,967
|
|
|
Diluted
|
66,670
|
|
|
66,940
|
|
|
66,960
|
|
|
66,967
|
|
15. SUBSEQUENT EVENT
Merger Agreement
On February 9, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Tyler Technologies, Inc., a Delaware corporation (“Tyler Technologies”), and Topos Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of Tyler Technologies (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with the Company (the “Merger” and, collectively with the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of Tyler Technologies.
Consideration to the Company's Stockholders
At the effective time of the Merger (“Effective Time”), each share of common stock of the Company (the “Common Stock”), issued and outstanding immediately prior to the Effective Time (other than shares of Common Stock (i) owned by Tyler Technologies, Merger Sub or any of their respective subsidiaries, (ii) owned by the Company or any of its subsidiaries, including shares held as treasury stock, (iii) for which appraisal rights have been demanded properly in
accordance with Section 262 of the General Corporation Law of the State of Delaware or (iv) that are subject to Assumed RSAs (as defined below)), shall be converted into the right to receive $34.00 per share in cash, without interest (the “Merger Consideration”).
Treatment of NIC Equity Awards and NIC Employee Stock Purchase Plan
Immediately prior to the Effective Time, each outstanding restricted stock award granted under the Company’s equity compensation plan (each, a “NIC Restricted Stock Award”) that is fully vested and not subject to any restrictions (or that, pursuant to its terms as in effect on the date of the Merger Agreement or the terms of the Merger Agreement, will accelerate in full and no longer be subject to any further vesting as a result of or in connection with the consummation of the Transactions), will be released to the holder of such NIC Restricted Stock Award, to the extent not previously released, and converted into the right to receive, with respect to each share of Common Stock subject to such NIC Restricted Stock Award (as determined in accordance with the applicable award agreement), the Merger Consideration, less all applicable withholding and other authorized deductions.
At the Effective Time, each NIC Restricted Stock Award that is outstanding immediately prior to the Effective Time and that vests solely based on the achievement of performance goals will automatically vest in full and be cancelled and converted into the right to receive, with respect to each share of Common Stock subject to such NIC Restricted Stock Award (as determined in accordance with the applicable award agreement), the Merger Consideration, less all applicable withholding and other authorized deductions.
At the Effective Time, each outstanding NIC Restricted Stock Award that vests solely based on the passage of time (other than NIC Restricted Stock Awards that are converted into the right to receive the Merger Consideration pursuant to the Merger Agreement) (each, an “Assumed RSA”), will be assumed by Tyler Technologies and converted automatically into a Tyler Technologies restricted stock award on the same terms and conditions (including any terms and conditions relating to accelerated vesting upon a termination of employment in connection with or following the Effective Time) as applicable to such Assumed RSA immediately prior to the Effective Time, except that the number of shares of Tyler Technologies common stock subject to such Assumed RSA will equal the product obtained by multiplying the total number of shares of Common Stock subject to the Assumed RSA immediately prior to the Effective Time (as determined in accordance with the applicable award agreement) by the Restricted Stock Conversion Ratio, rounded up to the nearest whole share. Each Assumed RSA shall otherwise be subject to Tyler Technologies’ equity compensation plan. For purposes of the Merger Agreement, the “Restricted Stock Conversion Ratio” means the quotient, rounded (with simple rounding) to the fourth decimal place, obtained by dividing (i) the Merger Consideration by (ii) the volume weighted average closing sale price of one share of Tyler Technologies common stock as reported on the New York Stock Exchange for the 10 consecutive trading days ending on the trading day immediately preceding the date on which the Closing occurs (as adjusted as appropriate to reflect any stock splits, stock dividends, combinations, reorganizations, reclassifications, or similar events).
Pursuant to the Merger Agreement, the Company will take all actions necessary with respect to the Company's employee stock purchase plan (the “ESPP”), to provide that, among other things, participation in the ESPP after the date of the Merger Agreement will be limited to the Company's employees who participate in the offering period currently in progress as of the date of the Merger Agreement, no new offering periods under the ESPP will commence after the date of the Merger Agreement and, subject to the consummation of the Merger, the ESPP will terminate as of immediately prior to the Effective Time.
Board Approval
The Company's Board of Directors (the “Board”) has unanimously (i) determined that the terms of the Merger Agreement and the Transactions, including the Merger, are fair to, and in the best interests of, the Company and its stockholders, (ii) approved the execution and delivery by the Company of the Merger Agreement, the performance by the Company of its covenants and agreements contained in the Merger Agreement and the consummation of the Merger and other Transactions upon the terms and subject to the conditions set forth in the Merger Agreement, (iii) recommended that the stockholders of the Company adopt the Merger Agreement, and (iv) directed that the adoption of the Merger Agreement be submitted to a vote of the Company’s stockholders.
Conditions to Closing
The consummation of the Merger (the “Closing”) is subject to certain conditions, including (i) the affirmative vote of the holders of a majority of the outstanding shares of Common Stock to adopt the Merger Agreement (the “Stockholder Approval”), (ii) the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder, and (iii) the absence of any order or law enjoining or otherwise prohibiting the Merger. Each of Tyler Technologies’ and the Company’s obligation to consummate the Merger is also subject to additional customary conditions, including (x) the accuracy of the representations and warranties of the other party, subject to specified materiality qualifications, and (y) performance and compliance in all material respects by the other party with its obligations, covenants and agreements under the Merger Agreement. Consummation of the Merger is not subject to a financing condition.
Representations, Warranties and Covenants
The Merger Agreement contains customary representations, warranties and covenants made by each of the Company, Tyler Technologies and Merger Sub, including, among others, covenants by the Company regarding the conduct of its business during the pendency of the Transactions, public disclosures and other matters. Tyler Technologies has agreed to customary covenants related to treatment of employees and their compensation and benefits after Closing, including commitments to honor compensatory arrangements in connection with the Transactions. The Company is required, among other things, not to solicit alternative business combination transactions and, subject to certain exceptions, not to engage in discussions or negotiations regarding an alternative business combination transaction. The Company is required to convene a meeting of its stockholders to vote on the adoption of the Merger Agreement.
The Company and Tyler Technologies are required to (i) use their respective reasonable best efforts to take all actions to consummate the Transactions, including taking all actions necessary to obtain antitrust approval, subject to certain limitations, and (ii) cooperate in connection with their efforts to obtain antitrust approval.
Termination Rights
Both Tyler Technologies and the Company may terminate the Merger Agreement under certain specified circumstances, including (a) if the Merger is not consummated by June 30, 2021, subject to one three month extension in order to obtain required regulatory approvals, (b) if the approval of the the Company's stockholders is not obtained, or (c) if the Company’s Board of Directors makes an adverse recommendation change with respect to the proposed transaction or to enter into a superior acquisition proposal.
In certain circumstances in connection with the termination of the Merger Agreement, including if the Company's Board of Directors changes or withdraws its recommendation of the Merger to its stockholders or terminates the Merger Agreement to enter into an agreement with respect to a “superior proposal,” the Company will be required to pay Tyler Technologies a termination fee equal to $55.0 million in cash.
The Merger Agreement and the above description have been included to provide investors and security holders with information regarding the terms of the agreement. They are not intended to provide any other factual information about Tyler Technologies, the Company or their respective subsidiaries or affiliates or stockholders.
The representations, warranties, and covenants of the Company contained in the Merger Agreement were made solely for the benefit of Tyler Technologies and Merger Sub.
The assertions embodied in those representations and warranties were made solely for purposes of allocating risk among the Company, Tyler Technologies and Merger Sub rather than establishing matters of fact and may be subject to important qualifications and limitations agreed to by the Company, Tyler Technologies, and Merger Sub in connection with the negotiated terms. Moreover, some of those representations and warranties may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”) or may have been used for purposes of allocating risk among the Company, Tyler Technologies, and Merger Sub rather than establishing matters as facts.
Investors should not rely on the representations, warranties, and covenants or any description thereof as characterizations of the actual state of facts of the Company or any of its subsidiaries or affiliates.
If the Merger is consummated, the Company's Common Stock will be delisted from Nasdaq and deregistered under the Securities Exchange Act of 1934.
