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

 

On October 18, 2018,July 26, 2019, the registrant had 66,569,33866,959,777 shares of common stock outstanding.

NIC Inc., together with its subsidiaries (the "Company" or "NIC") is a leading provider of digital government services that help governments use technology to provide a higher level of service to businesses and citizens and increase efficiencies. The Company accomplishes this currently through two channels: its primary outsourced portalstate enterprise businesses and its software & services businesses.

In itsthe Company's primary outsourced portalstate enterprise businesses, the Companyit generally designs, builds, and operates internet-based portalsdigital government services on an enterprise-wide basis on behalf of state and local governments desiring to provide access to government information and to complete secure government-based transactions through multiple online channels, including mobile devices.channels. These portalsdigital government services consist of websites and applications the Company has built that allow consumers, such as businesses and citizens, to access government information online and complete transactions. The Company typically manages operations for each contractual relationship through separate local subsidiaries that operate as decentralized businesses with a high degree of autonomy. The Company is typically responsible for funding the up-front investments and ongoing operations and maintenance costs of the outsourceddigital government portals.services. The Company’s software & services businesses primarily include its subsidiaries that provide software development and digital government services, other than those services provided under state enterprise contracts, to federal agencies as well as state and local governments.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. ("(“U.S. GAAP"GAAP”). The consolidated financial statements include all of the Company's direct and indirect wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"(“SEC”), certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to fairly present the consolidated financial position and the results of operations, changes in stockholders' equity and cash flows of the Company as of the dates and for the interim periods presented. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2017,2018, including the notes thereto, set forth in the Company’s 20172018 Annual Report on Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.2019.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which will update the existing guidance on accounting for leases and require new qualitative and quantitative disclosures about the Company’s leasing activities. The new standard requires the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changessheet for all leases with terms longer than 12 months. Expenses are recognized in the statement of income in a manner similar to current accounting guidance. Under the standard, isdisclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The adoption of the standard resulted in the recognition of ROU lease assets and lease liabilities by lessees for those leases classifiedof $12.6 million and $12.9 million, respectively, as operating leases under current U.S. GAAP.of January 1, 2019. The newadoption of the standard will become effectivedid not have a significant impact on the Company’s consolidated earnings or cash flows for the Company beginning with the first quarter 2019three and requires a modified retrospective transition approach. The Company plans on electing the package of transitional practical expedients upon adoption which, among other provisions, allows the Company to carry forward historical lease classification. The Company is currently evaluating the effects that the standard will have on its consolidated financial statements, which the Company anticipates could be significant, due mainly to its non-cancellable operating leases for office space. As further described in Note 7, Commitments and Contingencies, to the Company’s 2017 Annual Report on Form 10-K, filed with the SEC on February 22, 2018, as of December 31, 2017, the Company had minimum lease commitments under non-cancellable operating leases totaling $16.0 million.six months ended June 30, 2019.

The Company recognizes revenue from providing outsourced digital services toUnder certain contracts with its government partners. Under these contracts,partners, the Company agrees to provide continuous access to digital government services that allow consumers to complete secure transactions, such as applying for a permit, retrieving government records, or filing a government-mandated form or report. The contractual promise to provide continuous access to each of these digital government services is a single stand-ready performance obligation.

The Company’s portal softwareCompany earns development and services revenues primarily include revenues from providingunder contracts to provide software development and other time and materials services to ourits 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.

Under its portal software development and services contracts, the Company typically does not have significant future performance obligations that extend beyond one year. As of SeptemberJune 30, 2018,2019, the total transaction price allocated to unsatisfied performance obligations was approximately $4.0$6.2 million.

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

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

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 SeptemberJune 30, 20182019 and December 31, 20172018 were approximately $1.8$2.6 million and $1.4$1.7 million, respectively. The change in the deferred revenue balance for the ninesix months ended SeptemberJune 30, 20182019 is primarily driven by cash payments received or due in advance of satisfying ourthe Company's performance obligations, offset by $3.9$4.7 million of revenues recognized that were included in the deferred revenue balance during the current year.period.

The Company’s outsourced state masterenterprise contracts generally have an initial multi-year term with provisions for renewals for various periods at the option of the government. The Company’s primary business obligation under these contracts is generally to design, build, and operate digital government services on an enterprise-wide basis on behalf of governments desiring to provide access to government information and to digitally complete government-based transactions. NIC typically markets the services and solicits consumers to complete government-based transactions and to enter into subscriber contracts permitting the user to access the portalonline applications and the government information contained therein in exchange for transactional and/or subscription user fees. The Company enters into statements of work with various agencies and divisions of the government to provide specific services and to conduct specific transactions. These statements of work preliminarily establish the pricing of the online transactions and data access services the Company provides and the division of revenues between the Company and the government agency. The government oversight authority must approve prices and revenue sharing agreements. The Company has limited control over the level of fees it is permitted to retain.

The Company is typically responsible for funding the up-front investmentsdevelopment and ongoing operations and maintenance costs of digital government services and generally owns all the intellectual property in connection with the applications developed under these contracts. After completion of a defined contract term or upon termination for cause, the government partner typically receives a perpetual, royalty-free license to use the applications and digital government services built by the Company only in its own state. However, certain enterprise applications, proprietary customer management, billing, payment processing and other software applications that the Company has developed and standardized centrally are provided to its government partners on a software-as-a-service (“SaaS”) basis, and thus would not be included in any royalty-free license. If the Company’s contract expires after a defined term or if its contract is

terminated by a government partner for cause, the government agency would be entitled to take over the portalapplications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.

Any renewal of these contracts beyond the initial term by the government is optional and a government may terminate its contract prior to the expiration date if the Company breaches a material contractual obligation and fails to cure such breach within a specified period or upon the occurrence of other events or circumstances specified in the contract. In addition, 1516 contracts under which the Company provides enterprise-wide digital government services, as well as the Company’s contract with the Federal Motor Carrier Safety Administration (“FMCSA”), can be terminated by the other party without cause on a specified period of notice. Collectively, revenues generated from these contracts represented approximately 45% and 44%59% of the Company’s total consolidated revenues for both the three and ninesix months ended SeptemberJune 30, 2018, respectively.2019. If any of these contracts is terminated without cause, the terms of the respective contract may require the government to pay the Company a fee to continue to use the Company’s applications in its portal.applications.

Under a typical state masterenterprise contract, the Company is required to fully indemnify its government clientspartners against claims that the Company’s services infringe upon the intellectual property rights of others and against claims arising from the Company’s performance or the performance of the Company’s subcontractors under the contract. At SeptemberJune 30, 2018,2019, the Company was bound by performance bond commitments totaling approximately $5.8$10.8 million on certain outsourced portalstate enterprise contracts.

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

There are currently 1013 state enterprise contracts, under whichas well as the Company provides state enterprise-wide outsourced digital government servicesCompany's contract with the FMCSA, that have expiration dates within the 12-month period following SeptemberJune 30, 2018.2019. Collectively, revenues generated from these contracts represented approximately 34%38% and 33%39% of the Company’s total consolidated revenues for the three and ninesix months ended SeptemberJune 30, 2018, respectively.2019. Although certainfour of these state enterprise contracts have renewal provisions, any renewal is at the option of the Company’s government partner. As described above, if a contract is not renewed after a defined term, the government partner would be entitled to take over the portalapplications in place, and NIC would have no future revenue from, or obligation to, such former government partner, except as otherwise provided in the contract.

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

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

During 2018, the Company entered into a purchase agreement to acquire certain prescription drug monitoring software technology assets of a Maryland-based, privately held company, Leap Orbit LLC ("Leap Orbit"). The purchase price consisted of initial cash consideration of approximately $3.6 million and the potential of deferredadditional consideration of approximately $3.5 million if certain conditions under the agreement arewere met. The transaction was accounted for as an asset acquisition, as substantially all of the value related to the prescription drug monitoring program software technology acquired. See Note 5, Intangible Assets, Net forThe Company paid the additional information.consideration of $3.5 million in the first half of 2019, which was included in the cost of the acquired assets in the consolidated balance sheet. The acquired software has an estimated amortization period of three years. The Company rebranded its prescription drug monitoring platform as RxGov.

During the ninesix months ended SeptemberJune 30, 2018,2019, the Company recorded approximately $3.6$7.7 million of intangible asset software purchases and related costs in connection with the Complia and Leap Orbit asset acquisition,acquisitions, as further discussed in Note 4, Asset Acquisition.

Amortization expense for intangible assets with finite lives was $1.1$2.0 million and $2.4$3.4 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, and $0.6 million and $1.4$1.3 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively. Intangible asset amortization expense is currently expected to total $1.4$5.0 million for the remainder of 2018, $5.1 million for fiscal year 2019, $4.0$8.9 million for fiscal year 2020, and$6.1 million for fiscal year 2021, $1.8 million for fiscal year 2021.2022 and $0.9 million for fiscal year 2023.

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

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

On October 28, 2018,July 29, 2019, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.08 per share, payable to stockholders of record as of December 4, 2018.September 6, 2019. The dividend, which is expected to total approximately $5.4 million, will be paid on December 18, 2018,September 20, 2019, out of the Company’s available cash.

The Company's effective tax rate was 21.0% and 23.4% for the three and ninesix months ended SeptemberJune 30, 2019, respectively, compared to 24.3% and 24.6% three and six months ended June 30, 2018, reflects the release of reserves for the Company's liability for unrecognized income tax benefits due to the expiration of the statute of limitations for certain tax years and, to a lesser extent, an increaserespectively. The decrease in the previously estimated research and development tax credit for the 2017 and 2018 tax years upon the filing of the Company’s 2017 federal tax return during the current quarter.

During the ninesix months ended SeptemberJune 30, 2018,2019, the Compensation Committee of the Board of Directors of the Company granted to certain management-level employees and executive officers, service-based restricted stock awards totaling 342,809305,743 shares with a grant-date fair value totaling approximately $4.8$5.2 million. Such restricted stock awards vest beginning one year from the date of grant in annual installments of 25%. In addition, during the nine months ended September 30, 2018,first half of 2019, non-employee directors of the Company were granted service-based restricted stock awards totaling 54,58447,560 shares with a grant-date fair value of approximately $0.8 million. Such restricted stock awards vest one year from the date of grant. Restricted stock is valued at the date of grant, based on the closing market price of the Company’s common stock, and expensed using the straight-line method over the requisite service period (generally the vesting period of the award). The Company records forfeitures when they occur.

During the ninesix months ended SeptemberJune 30, 2018,2019, the Compensation Committee of the Board of Directors of the Company granted performance-based restricted stock awards to certain executive officers performance-based restricted stock awards pursuant to the terms of the Company’s executive compensation program totaling 177,730111,135 shares with a grant-date fair value totaling approximately $2.4$1.9 million. This represents the maximum number of shares the executive officers can earn at the end of a three-year performance period ending December 31, 2020.2021. The actual number of shares earned will be based on the Company’s performance related to the following performance criteria over the performance period:

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

At December 31, 2017,2018, the three-year performance period related to the performance-based restricted stock awards granted to certain executive officers on February 23, 201522, 2016 ended. Based on the Company’s actual financial results from 20152016 through 2017, no2018,

64,846 of the shares orand 4,226 of dividend equivalent shares were earned. The 91,820remaining 73,345 shares subject to the awards were forfeited in the first quarter of 2018.2019.

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

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