2015 Annual Report
Statements in this document that are not purely historical facts or that necessarily
depend upon future events, including statements about forecasts of sales, revenue or
earnings, or other statements about anticipations, beliefs, expectations, hopes,
intentions or strategies for the future, may be forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers
are cautioned not to place undue reliance on forward-looking statements. All forward-
looking statements are based upon information available to ZixCorp on the date this
document was printed. ZixCorp undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or
otherwise. Any forward-looking statements involve risks and uncertainties that could
cause actual events or results to differ materially from the events or results described in
the forward-looking statements, including risks or uncertainties related to market
acceptance of new ZixCorp solutions and how privacy and data security laws may affect
demand for ZixCorp email data protection solutions. ZixCorp may not succeed in
addressing these and other risks. Further information regarding factors that could affect
ZixCorp financial and other results can be found in the risk factors section of the
accompanying annual report on Form 10-K.
April 29, 2016
To Our Shareholders,
In 2015, ZixCorp delivered record-breaking growth, strengthened our position in the email
encryption market and began the transition to new leadership.
Our positive financial performance included full-year new first year orders (NFYOs) of $10.2
million, an increase of 19.7% year-over-year and a new company record. We achieved full-year
revenue of $54.7 million, an increase of 8.7% year-over-year, and a backlog of $74.2 million for
contractually committed orders at year end, an increase of 7.0% from the prior year end. The
Company generated approximately $15.6 million in cash flow from operations, an increase of
17.3% year-over-year, and we met the high end of our guidance by delivering full-year Non-
GAAP fully diluted earnings per share of $0.21, an increase of 43.8% year-over-year.
Our results reflect success across all go to market channels. Our direct sales teams contributed
32% of our record-breaking NFYOs, and our program of strategic partners, value added resellers
and managed service providers contributed 65% of NFYOs.
Focusing on the growth of our strategic partners, we are pleased that the contribution from
Google has returned to more historical levels. Our relationship with Cisco continues to progress
since announcing the partnership in March 2015. Together we launched two products, and we
are excited about the level of collaboration in sales and marketing.
Our strategic relationships with global leaders Cisco and Google are a reflection of our industry-
leading email encryption. Our solutions are unrivaled in their ease of use for senders and
recipients. With proven content filters, emails are automatically scanned and encrypted,
alleviating stress for senders and providing peace of mind for companies that prioritize the
protection of sensitive information. The recipient experience is mobile-friendly and as easy as two
steps or less, enabling customers and business partners to value security without frustration.
Our ease of use has enabled us to build a customer base of more than 13,500 organizations.
Membership in the ZixDirectory has exceeded 50 million, a significant milestone for our company
but an even greater benefit to our rate of transparent email encryption.
For example, we have a New York-based legal customer that implemented ZixGateway in 2012.
Since joining the Zix community, the customer’s secure email transparency rate has reached
94%. Without any passwords or extra steps, this customer and their recipients exchange
encrypted email as easily as regular email. Our ease of use occurs automatically in the
background to protect our customer and their clients’ sensitive data.
Our solution is what email is meant to be: easy and secure. Without interference to
communication or workflow, the communities our customers serve, live in and care about can
adopt our solution and transfer information in a protected manner. For our customers, email
encryption meets data security and compliance needs, but it also enables them to safeguard their
trusted relationships.
Our commitment to easy to use, secure communication will remain the company’s focus with
David Wagner as our new chief executive officer.
We appreciate the many contributions of David’s predecessor, Rick Spurr. Rick led the company
to stability and success for more than 10 years, and he maintained an active leadership role to
ensure a smooth transition during the candidate search, as evidenced by our record-breaking
financial results in 2015. We look forward to Rick’s continued contribution as a director of the
board.
We are confident that David is the best person to lead our company in 2016 and the future.
David’s experience in the data security industry will complement the company’s leadership in
email encryption. His character will enhance the already strong culture of the company, and his
vision will enable ZixCorp to take the necessary steps for improved growth.
On behalf of ZixCorp’s board of directors and management team, I want to express appreciation
to our customers for your trust and loyalty, to our employees for your dedication, diligence and
professionalism, and to our shareholders for your continued support.
Sincerely,
Robert C. Hausmann
Chairman of the Board
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-17995
Zix Corporation
(Exact Name of Registrant as Specified in its Charter)
Texas
(State or Other Jurisdiction of
Incorporation or Organization)
75-2216818
(I.R.S. Employer
Identification Number)
2711 N. Haskell Avenue, Suite 2200, LB 36, Dallas, Texas 75204-2960
(Address of Principal Executive Offices)
(214) 370-2000
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class of stock
Common Stock
$0.01 Par Value
Name of each exchange on which registered
NASDAQ
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95)
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:95)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes (cid:95) No (cid:134)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such reports) Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
(cid:134)
Non-accelerated filer
(cid:134) (Do not check if a smaller reporting company)
Accelerated filer
(cid:95)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95)
As of March 8, 2016, there were 56,158,434 shares of Zix Corporation $0.01 par value common stock outstanding. As of June 30, 2015, the
aggregate market value of the shares of Zix Corporation common stock held by non-affiliates was $261,306,219.
Portions of the Registrant’s 2016 Proxy Statement are incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
PART I
Business .................................................................................................................................................................................
Risk Factors ...........................................................................................................................................................................
Unresolved Staff Comments ..................................................................................................................................................
Properties ...............................................................................................................................................................................
Legal Proceedings ..................................................................................................................................................................
Mine Safety Disclosures ........................................................................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .............
Selected Financial Data .........................................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................................
Quantitative and Qualitative Disclosures About Market Risk ...............................................................................................
Financial Statements and Supplementary Data ......................................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................................
Controls and Procedures ........................................................................................................................................................
Other Information ..................................................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance .....................................................................................................
Executive Compensation .......................................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .........................................
Certain Relationships and Related Transactions, and Director Independence .......................................................................
Principal Accountant Fees and Services ................................................................................................................................
PART IV
Exhibits and Financial Statement Schedules..........................................................................................................................
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2
PART I
Item 1. Business
Zix Corporation (“ZixCorp®,” the “Company,” “we,” “our,” or “us”) offers email encryption, data loss prevention and Bring-
Your-Own-Device (“BYOD”) security to meet business data protection and compliance needs. We primarily serve organizations in
the healthcare, financial services, insurance and government sectors, including significant federal financial regulators, such as the
Federal Financial Institutions Examination Council (“FFIEC”), divisions of the U.S. Treasury, the U.S. Securities and Exchange
Commission (“SEC”), one in every four U.S. banks, more than 30 Blue Cross Blue Shield organizations and one in every five U.S.
hospitals.
Zix® Email Encryption enables the secure exchange of emails that include sensitive information through a comprehensive secure
messaging service, which allows an enterprise to use policy-driven rules to determine which email messages should be sent securely to
comply with regulations or company-defined policies.
The main differentiator for Zix Email Encryption in the marketplace is its exceptional ease of use. The best example of this is its
ability to provide transparent delivery of encrypted email. Most email encryption solutions are focused on the sender. They typically
introduce an added burden on recipients, often requiring additional user authentication with the creation of a new user identity and
password. We designed our solution to alleviate the recipient’s burden by enabling the delivery of encrypted email automatically and
transparently. ZixCorp enables transparent delivery through (1) ZixDirectory®, the world’s largest email encryption community, which
is designed to share identities of our tens of millions of members (growing by approximately 140,000 members per week), (2)
ZixCorp’s patented Best Method of Delivery®, which is designed to deliver email in the most secure, most convenient method possible
for the recipient, and (3) ZixGateway®, which automatically encrypts and decrypts messages with sensitive content. The result is the
industry’s only transparent encrypted email, such that secure email can be exchanged without extra steps or passwords for both
senders and receivers. ZixCorp delivers more than 1,100,000 encrypted messages on a typical business day. Of those messages, 70%
are exchanged transparently between senders and recipients.
ZixCorp launched ZixDLP®, an email-specific data loss prevention (“DLP”) solution in early 2013. By focusing strictly on
email, ZixDLP addresses business’s greatest source of data loss – corporate email. The straightforward DLP approach decreases the
complexity and cost often associated with other DLP solutions. ZixDLP is also designed to reduce deployment time from months to
hours and minimize impact on customer resources and workflow. In addition, ZixDLP offers a convenient experience for both
employees interacting with the solution and administrators managing the system.
Leveraging the company’s leadership and expertise in email encryption, ZixDLP uses ZixCorp’s proven policy and content
scanning capabilities with new quarantine functionality. The quarantine system and its intuitive interface allow administrators to (1)
easily define policies and create custom content filters for quarantining email messages, (2) conveniently manage quarantined
messages using flexible searching and filtering options, (3) release or delete individual or multiple quarantined messages with one
click, (4) review reports that monitor quarantine activities and trends and (5) automate custom notifications informing employees of
quarantined messages.
ZixDLP is available as an add-on for existing ZixCorp customers or as a bundle with Zix Email Encryption for new customers.
ZixDLP is also available as a standalone solution that can easily integrate with most email systems and email encryption solutions.
In late 2013, ZixCorp launched ZixOne®, a unique mobile email app that solves the key IT challenge created by the BYOD trend
in the workplace. BYOD describes the increasing trend of employees using their personal devices to conduct work. ZixOne provides
access to corporate email while never allowing that data to be persistently stored on the device where it is vulnerable to loss or theft. If
the device is lost or stolen, an administrator can simply disable access to corporate email from that device through ZixOne.
Unlike other BYOD solutions, ZixOne meets employee demands of convenience, control and privacy while giving companies
the ability to secure corporate data and meet compliance needs. With seamless access to work email in a secure, simple-to-use
environment, employees can stay productive while preserving device independence. A BYOD solution that is acceptable to employees
and yet provides strong data protection for corporate data solves one of today’s greatest IT management challenges.
Our business operations and service offerings are supported by the ZixData CenterTM, a SysTrust/SOC3 certified, SOC2
accredited, PCI DSS V3.1 certified facility. The operations of the ZixData Center are independently audited annually to maintain
AICPA SysTrust/SOC3 certification in the areas of security, confidentiality, integrity and availability. Auditors also produce a SOC2
(formerly SAS70 Type II) report on the effectiveness of operational controls used over the audit period. The ZixData Center is staffed
24 hours a day with a track record that exceeds 99.99% availability.
3
Our company was incorporated in Texas in 1988. Originally named Amtech Corporation, we changed our name to ZixIt®
Corporation in 1999 when we entered the encrypted email market. In 2002, we became Zix Corporation. Our executive offices are
located at 2711 North Haskell Avenue, Suite 2200, LB 36, Dallas, Texas 75204-2960, (214) 370-2000.
Overview
Email is a mission-critical means of communication for enterprises. However, if email leaves a secure network environment in
clear text, it can be intercepted along the path between a sender and a recipient, which permits theft, redirection, manipulation or
exposure to unauthorized parties. Failure to control and manage such risks can result in enforcement penalties for noncompliance
under numerous regulations, in addition to damaged reputation, competitive disadvantage, a loss of intellectual property or other
corporate assets, exposure to negligence or liability claims, and diversion of resources to repair such damage. For example, healthcare
organizations, business associates and sub-contractors are subject to the Privacy, Security, and Enforcement Rules of the Health
Information Portability and Accountability Act (“HIPAA”) as amended by the Health Information Technology for Economic and
Clinical Health Act (“HITECH Act”). Financial institutions are subject to data privacy laws including the Gramm-Leach-Bliley Act
(“GLBA”). These federal laws help drive the use of encrypted email. In addition, individual states such as Massachusetts and Nevada
have enacted privacy laws requiring encryption of certain email messages, and almost all states encourage email encryption by
allowing exemptions from data breach notification laws.
Corporations require easy to use, cost-effective email protection that can be used on an enterprise-wide basis. They need it to be
quickly deployed and regularly updated to evolve with innovative technology practices and meet changing regulatory standards. To
satisfy these needs, our Email Encryption Service provides a comprehensive solution that analyzes and encrypts email
communications.
Our Email Encryption Service allows a user to send encrypted email to any email user anywhere and on any Internet-enabled
device. Encrypted email is delivered through the patented Best Method of Delivery protocol which automatically determines the most
direct and appropriate means of delivery, based on the sender’s and recipient’s communications environment and preferences. The
protocol supports a number of encrypted email delivery mechanisms, including S/MIME, Transport Layer Security (“TLS”), Open
Pretty Good Privacy (“PGP”), “push” delivery and secure portal “pull” delivery. These last two mechanisms enable users to send
messages securely to anyone with an email address, including those who do not have an encryption tool. Our Best Method of Delivery
makes the technology simple for end users and provides flexibility and ease of implementation for information technology
professionals. We believe the ability to send messages through different modes of delivery is one of many differentiators that makes
our Email Encryption Service superior to competitive offerings.
The deployment of our Email Encryption Service at the periphery of the customer’s network means our Email Encryption
Service encrypts outbound email for an enterprise without the need to create, deploy or manage end user encryption keys or deploy
desktop software. Our technology solutions are easy to use, easy to deploy, and can be made operational quickly.
Our service has an integrated policy management capability. This policy engine can inspect the contents of emails and apply
policies matching specific industry criteria such as HIPAA, the HITECH Act and GLBA. Customers can also build their own custom
policies. This policy driven email encryption for regulatory compliance means customers can reduce the training required of their staff
and significantly reduce the risk of inadvertently sending sensitive content by controlling the method of delivery through preset
policies.
Competition
The most significant differentiator for Zix Email Encryption Service as compared with our competition is ease of use. The best
example of our unequalled ease of use is transparent delivery of encrypted email messages. We are able to deliver transparent email
encryption as a result of our ZixDirectory, Best Method of Delivery and ZixGateway. The most critical and highly differentiated
component of our solution is the ZixDirectory which provides the ability to share user identities for encryption, which in turn provides
frictionless interoperability between users in a community of interest such as healthcare, finance or government.
Our capability to offer interoperability is particularly important when it is necessary to communicate with external networks, as
is the case with the healthcare and financial services markets. Our customers become part of the ZixDirectory, a global “white pages”
enabling transparent secure communications with other ZixGateway customers using our centralized key management system and
overall unique approach to implementing secure email. We enable secure communications with other users via TLS, Open PGP,
“push” delivery and secure portal “pull” delivery mechanisms. However, we believe our unique transparent delivery is the more
preferred delivery model.
4
Zix Email Encryption and Zix DLP focus on the secure (i.e., encrypted) delivery and data loss prevention sub-segments of the
email security market. We view our primary competitors in this space to be Proofpoint Inc., Microsoft, Barracuda Networks, and
Sophos Inc. Technically, while these companies offer “send-to-anyone” encrypted email, we believe they are unable to offer the
benefits that come from access to the ZixDirectory, use of our Best Method of Delivery protocol, and the industry’s only transparent
email encryption. Nevertheless, some of these competitors are large enterprises with substantial financial and technical resources that
exceed those we possess.
As discussed above, with the introduction of ZixOne, the Company entered the BYOD mobile device security market. In the
BYOD market, we view our primary competitors as companies that provide enterprise mobility management (“EMM”), which
includes but is not limited to mobile device management (“MDM”), containerization and app wrapping technology. EMM is premised
on storing business data on an employee’s personally owned device. In order to secure business data on personal devices, EMM
requires individual users to permit their employer access to and control over personally owned smartphones and tablet computers and
therefore can create user concerns about loss of control and privacy of their devices. In contrast, ZixOne enables Android® or IOS®
mobile devices to view remotely stored corporate email, calendar and contacts, and to interact with that data. ZixOne more effectively
protects business email data by never allowing it to be stored on the device, where it might be subjected to exposure from theft or loss
of the device. Moreover, ZixOne does not require employees to relinquish device control or personal privacy to their employer. We
believe these differentiators make ZixOne an attractive BYOD solution. Nevertheless, ZixCorp is new to the BYOD and mobile
security space, whereas competitors have an established brand in the market with substantial financial and technical resources that
exceed those we possess. We view our primary competitors in this space to be AirWatch/VMware, Citrix (with XenMobile), Good
Technology (purchased by Blackberry), IBM/Fiberlink (with MaaS360), Microsoft (with ActiveSync), and MobileIron.
Regulatory Drivers
We have been successful in securing additional market penetration for Zix Email Encryption in our target vertical markets of
healthcare, finance services and government due to regulations that address the need for email privacy and security.
In addition to the need to protect sensitive business communication, demand for email encryption in the healthcare sector,
including business associates of healthcare providers, is augmented by regulatory requirements under HIPAA and HITECH Act. The
Privacy and Security rules under those acts provide severe penalties for violations, include strict breach notification requirements, and
allow states to pursue HIPAA violations. In the financial services industry, financial institutions and their service providers are subject
to the GLBA, which is enforced by the U.S. Federal Trade Commission (“FTC”). The FTC has issued guidance saying that businesses
that transmit sensitive data by email should be sure to encrypt the data.
In choosing an email security provider, companies are influenced by the solutions chosen by their regulators. Our customers
include all of the federal regulators who comprise the FFIEC as well as the state banking regulators in more than twenty states. Our
service is also a recommended solution of the Conference of State Bank Supervisors, whose members regulate the more than 6,000
state-chartered banks in the U.S.
Additionally, state data breach laws and privacy regulations, along with highly publicized breaches, have enhanced security
awareness in vertical markets outside of healthcare and financial services and have prompted affected organizations to consider
adopting systems that ensure data security and privacy. Even where there are no specific regulations, businesses may require email
protection to adhere to evolving industry best practices for protecting sensitive information.
Sales and Marketing
We sell our Zix Email Encryption, Zix DLP and ZixOne Services through a direct sales force that focuses on larger businesses
and a telesales force that focuses on small to medium-sized accounts. We also use a network of resellers and other distribution
partners, including other service providers seeking an email encryption offering in an original equipment manufacturing (“OEM”)-like
relationship. New first year orders (“NFYOs”), defined as the twelve month value of orders received from new customers, derived
from our value-added resellers, OEM and third party distribution channels for 2015 were 64% of the total new first year orders
compared to 58% in 2014. Google, Inc. continues to be our largest third party reseller representing approximately 7% of NFYOs in
2015. Our new partnership with Cisco resulted in approximately 5% of 2015 NFYOs. We now have more than 250 value-added
resellers and over 100 managed security service providers across the U.S.
Employees
We had 192 employees as of December 31, 2015. The majority of our employees are located in Dallas, Texas. We also have a
sales office in Burlington, Massachusetts; and a smaller office located in Ottawa, Ontario, Canada.
5
Research and Development
We incurred research and development expenses of $8.3 million, $9.1 million, and $9.6 million for the twelve-month periods
ended December 31, 2015, 2014, and 2013, respectively.
Over the course of 2015 we continued to make investments toward strengthening and expanding our service portfolio. We
assumed design control of the Cisco IEA technology, upgraded much of its underpinning technology and security framework and
delivered both a replacement for the legacy Cisco appliance and an integration of the Cisco Registered Envelope technologies into
ZixGateway. ZixGateway and ZixDLP policy frameworks were also integrated to improve flexibility and processing speed.
On the cloud services front, we added major features such as offline calendar and ZixGateway encryption access to ZixOne and
converted critical components of the ZixPort service from Unix to Linux for security evolution, cost effectiveness and scaling
purposes. We also added login credential sharing, compose flexibility and encryption key management enhancements. Improved user
management, cloud provider integration and configuration automation were added to our ZixHosted service suite.
In addition to the above, we broadened our access to the Google Apps Message Encryption marketplace specifically to handle
smaller customers, and we upgraded our portfolio of desktop client offerings to align with Microsoft technology changes (Outlook
2016, IMAP, etc.) and the evolution of various spam control mechanisms.
The following are registered trademarks of ours and certain of our subsidiaries: “ZixCorp,” “ZixGateway,” “ZixDirectory,”
ZixIt, “ZixPort,” and “PocketScript”.
Intellectual Property
We depend upon our ability to develop, maintain and protect our proprietary technology and our related intellectual property
rights. We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology and related property rights and to defend against infringement and/or misappropriation claims
from others. We own 25 U.S. patents (including U.S. pending patents) with expiration dates ranging from 2019 through 2026. We
have a program to file applications for and obtain patents and trademarks in the United States and in specific foreign countries where
we believe filing for such protection is appropriate. While intellectual property rights are generally important to our business, we do
not believe that our business is dependent on any single item of intellectual property, or that any single item of intellectual property is
material to the operation of our business. Rather, we believe that our intellectual property rights provide us with a competitive
advantage, and from time to time we have taken steps to enforce our intellectual property rights as a means of protecting that
competitive advantage.
Please see generally the risks that are more fully disclosed in “Item 1A. Risk Factors” for risks related to our intellectual
property.
Compliance with Environmental Regulations
We have not incurred, and do not expect to incur, any material expenditures or obligations related to environmental compliance
issues.
Governmental Contracts
We have contracts with many local, state and federal agencies and regulators, which in the aggregate contribute approximately 6
percent of our annual revenue.
Significant Customers
In each of 2015, 2014, and 2013, no single customer accounted for 10% or more of our total revenues.
Backlog
Our backlog is comprised of contractual commitments that we expect to recognize as revenue in the future. Our backlog was
$74.2 million at December 31, 2015, compared to $69.3 million at December 31, 2014.
As of December 31, 2015, our backlog is comprised of the following elements: $24.0 million of deferred revenue that has been
billed and paid, $7.3 million billed but unpaid, and approximately $42.9 million of unbilled contracts.
6
The backlog is recognized into revenue ratably as the services are performed. Approximately 57% of our total backlog at
December 31, 2015, is expected to be recognized as revenue during 2016.
Seasonality
The Company typically experiences lower NFYO’s in the first quarter of the calendar year. Our budget anticipates fewer
NFYO’s in the first quarter, but historically this has not resulted in a material impact to our revenue or earnings on a seasonal basis.
Geographic Information
Our operations are primarily based in the U.S., with approximately 5% of our employees located in Canada. Except for a United
Kingdom based data center, we do not operate in, or have dependencies on, any other foreign countries. Our revenues and orders to-
date are almost entirely sourced in the U.S. and all significant corporate assets at December 31, 2015, were located in the U.S.
Financial Information About Industry Segments
We have one reportable segment consisting of email encryption and security solutions. We internally evaluate all of our product
offerings and other sources of revenue as one industry segment, and, accordingly, do not report segment information.
Available Information
Our Internet address is www.zixcorp.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), are available on our website, without charge, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The information found on our website shall not be considered to be part
of this or any other report filed with or furnished to the SEC.
In addition to our website, you may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and other information statements,
and other information regarding issuers, including us, that file electronically with the SEC. The address of the website is www.sec.gov.
NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains “forward-looking statements” (including the discussion appearing under the caption “Liquidity
Summary” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,”) within the
meaning of Section 27A of the Securities Act of 1933, as amended (the “Act”) and Section 21E of the Exchange Act. All statements
other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including:
any projections of future business, market share, earnings, revenues, recognition of revenues from backlog, cash receipts, or other
financial items; any statements of the plans, strategies, and objectives of management for future operations; any statements concerning
proposed new products, services, or developments; any statements regarding future economic conditions or performance; any
statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may, but need
not, include words such as “may,” “will,” “predict,” “project,” “forecast,” “plan,” “should,” “could,” “goal,” “estimate,” “intend,”
“continue,” “believe,” “expect,” “outlook,” “anticipate,” “hope,” and other similar expressions. Any forward-looking statements
involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the
forward-looking statements, including, but not limited to, the risks and uncertainties described in the “Item 1A Risk Factors” section.
Although we believe that expectations reflected in and the assumptions underlying our forward-looking statements are
reasonable, actual results or assumptions made could differ materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change
and to inherent risks and uncertainties, including, but not limited to, those disclosed in this document. Forward-looking statements
speak only as of the date on which they are made, and we do not intend, and undertake no obligation, to update any forward-looking
statement.
7
Item 1A. Risk Factors
The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business,
financial condition and financial results. In addition to the factors discussed elsewhere in this Annual Report on Form 10-K, the
following are some of the important factors that, individually or in the aggregate, we believe could make our results differ materially
from those described in any forward-looking statements. It is impossible to predict or identify all such factors and, as a result, you
should not consider the following factors to be a complete discussion of risks, uncertainties and assumptions.
Our business depends upon customers using email to exchange confidential information, and a significant shift of those
messages to other communication channels could impair our growth prospects and negatively affect our business, financial
condition and financial results.
Our customers deploy and use our products and services to easily, securely and confidentially send and receive email messages.
Our business and revenue substantially depend on our current and potential customers using email to exchange sensitive information
electronically. New technologies, products, or business models that could support secure communications could be disruptive to our
business. If prospective or current customers were to send and receive sensitive information using technology or communication
channels other than email, our growth prospects and our business, financial condition and financial results could be materially
adversely affected.
Our business substantially depends upon the continued growth of the internet and internet-based systems, including email.
A substantial portion of our business and revenue depends on the growth and evolution of the Internet and internet-based
systems, including email, as a primary medium for commerce, communication and business applications, and on the deployment of
our products by customers who depend on such continued growth and evolution. To the extent that an economic slowdown or
uncertainty and related reduction in capital spending adversely affect spending on Internet infrastructure, we could experience material
harm to our business, operating results, and financial condition.
Our business depends on market acceptance of our products and services, and our failure to achieve and maintain influential
customers could negatively affect our business, financial condition and financial results.
In order to continue to operate profitably and grow, we must achieve and maintain broad market acceptance of our products and
services at a price that provides us with an acceptable rate of return relative to our costs. We have been successful in selling our Email
Encryption products and services to high-profile customers in the healthcare, financial services and government segments of the
market. The acceptance and use of our products and services by those significant customers facilitates our sales to other potential
customers, and an expanding base of users in the Zix Directory aids in our market penetration and expansion. The loss of an influential
customer of our existing products and services, or the failure to achieve sufficient market adoption of new products including ZixDLP
and ZixOne, could impair our ability to expand the market penetration of our products and services, or cause us to reduce or increase
prices, which could reduce our revenues and net income and materially adversely affect our business, financial condition and financial
results.
Our business relies on securing new customer subscriptions and subscription renewals from existing customers.
A large portion of our revenue is derived from customer subscriptions, and existing customers have no contractual obligations to
purchase beyond the initial subscription or contract period. We may not maintain historical subscription rates, and we may be unable
to accurately predict our customer renewal rates. Although we have historically retained approximately 90% of our recurring revenue
on an annual basis, our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including the level of their
satisfaction with our products and technical support services, customer merger or acquisition activity, customer budgets, the pricing of
our products compared with those offered by our competitors, technology trends, the prevailing regulatory regime and general market
conditions. If new subscriptions or subscription renewals decline, our revenue or revenue growth may decline, and our business may
suffer.
The security of our networks and data centers is critical to our business and an actual or perceived breach of security through
a cyber-attack or otherwise could cause us to lose customers and could negatively affect our reputation, business, financial
condition and financial results.
We are dependent on our networks and data centers to provide our products and services. Due to the nature of the products and
services we provide and the sensitive nature of the information we collect, process, store, use and transmit, we may face cyber-attacks,
data protection breaches, computer viruses and other similar disruptions from unauthorized tampering or human error that attempt to
penetrate and could harm our networks and data centers. Our business depends on customers having and maintaining confidence that
we provide effective network and security protection. To reduce the risk of a successful cyber-attack or similar event, we have
8
implemented significant physical and logical security measures to detect, identify and mitigate threats as well as to monitor for and
respond to potential breaches and incidents. Despite these security measures, our networks and data centers may remain vulnerable.
We may not be able to correct a security flaw or particular vulnerability promptly, or at all. Further efforts to limit the ability of
malicious third parties to disrupt or undermine our security efforts may be costly to implement and may not be successful. If a cyber-
attack or other breach of security occurs, or is perceived to have occurred, in our internal systems or at our data centers and networks,
it could cause negative publicity, interruption of our services, damage to our reputation, unauthorized disclosure of our customers’
confidential or proprietary information (including personally identifiable information), disclosure of our intellectual property,
disclosure, modification or removal of our confidential or sensitive information, theft or unauthorized use or publication of our trade
secrets, loss of customers, lost revenue and increased expense (including potentially indemnification or warranty costs), any of which
could have a material adverse effect on our business, financial condition and financial results.
Public key cryptography technology used in our businesses is subject to technology integrity risks that could reduce demand
for our products and services and could negatively affect our business, financial condition and financial results.
Our business employs public key cryptography technology and other encryption technologies to encrypt and decrypt messages.
The security afforded by encryption depends on the integrity of the private key, which is predicated on the assumption that it is very
difficult to mathematically derive the private key from the related public key. Successful decryption of intercepted encrypted email, or
public reports of successful decryption, whether or not true, could reduce demand for our products and services. If new methods or
technologies, such as quantum computing, make it easier to derive the private key from the related public key, the security of
encryption services using public key cryptography technology could be impaired and our products and services could become less
marketable. That could require us to make significant changes to our services, which could increase our costs, damage our reputation,
or otherwise harm our business. Any of these events could reduce our revenues, increase our expenses and materially adversely affect
our business, financial condition and financial results.
Our business depends substantially on our data center facilities, and their unreliability or unavailability for a significant
period could cause us to lose customers and could negatively affect our business, financial condition and financial results.
Much of the computer and communications hardware upon which our businesses depend is located in our data center facilities
in Dallas and Austin, Texas and in the United Kingdom. Our data centers might be damaged or interrupted by fire, flood, power loss,
telecommunications failure, break-ins, cyber-attacks, earthquakes, terrorist attacks, hostilities or war or other events. Computer
viruses, equipment failure, denial of service attacks, and similar disruptions affecting the internet or our systems might cause service
interruptions, delays and loss of critical data, and could prevent us from providing our services. Problems affecting our data center
operations or the networks on which we rely could result in loss of revenues, increased expenses, failure to achieve market acceptance,
diversion of resources, injury to our reputation, liability and increased costs. We do not carry sufficient insurance to compensate us for
all losses that may occur as a result of any of these events. The occurrence of any of these events could materially adversely affect our
business, financial condition and financial results.
Outages or problems with systems and infrastructure supplied by third parties could negatively affect our business, financial
condition and financial results.
Our business relies on third-party suppliers of the telecommunications infrastructure. We use various communications service
suppliers and the global internet to provide network access between our data centers, our customers and end-users of our services. If
those suppliers do not enable us to provide our customers with reliable, real-time access to our systems, we may be unable to gain or
retain customers. These suppliers periodically experience outages or other operational problems as a result of internal system failures
or external third party actions. Though our products generally tolerate isolated supplier failures, multiple supplier outages or problems
could materially adversely affect our business, financial condition and financial results.
The infrastructure supporting our business may suffer capacity constraints and business interruptions that could cause us to
lose customers, increase our operating costs and could negatively affect our business, financial condition and financial results.
Our business depends on our providing our customers reliable, real-time access to our data centers and networks. Customers will
not tolerate a service hampered by slow delivery times, unreliable service levels, service outages, or insufficient capacity. System
capacity limits or constraints arising from unexpected increases in our volume of business or network traffic could cause interruptions,
outages or delays in our services, or deterioration in their performance, or could impair our ability to process transactions. We may not
be able to accurately project the rate of increase in usage of our systems or to timely increase capacity to accommodate increased
traffic on our systems. System delays or interruptions may prevent us from efficiently providing services to our customers or other
third parties, which could result in our losing customers and revenues, or incurring liabilities that could have a material adverse effect
on our business, financial condition and financial results.
9
The growth of our business may require significant investment in systems and infrastructure and these investments may
achieve delayed, or lower than expected benefits, which could impair our profitability and negatively affect our business,
financial condition and financial results.
As our operations grow in size and scope, we continually need to improve and upgrade our technology offerings, systems and
infrastructure to offer an increasing number of customers enhanced products, services, features and functionality, while maintaining
the reliability and integrity of our systems and infrastructure and pursuing reduced costs per transaction. Expanding our technology
offerings, systems and infrastructure may require us to commit substantial financial, operational and technical resources, with no
assurance that the volume of our business will increase, which could reduce our net income, deplete our cash, and materially adversely
affect our business, financial condition and financial results. Developing and launching new product offerings adjacent to or outside of
our core encrypted email offerings can be particularly costly in terms of capital investments for both product development and
marketing. At the same time, these new offerings involve greater uncertainty concerning both market acceptance and our ability to
successfully execute a sales and marketing strategy that justifies our investments. Our failure to properly manage and execute new
product initiatives could materially adversely affect our business, financial condition and financial results.
Our failure to keep pace with rapid technology changes could have a negative impact on our business, financial condition and
financial results.
The markets for our products and services are characterized by rapid technological developments and frequent changes in
customer requirements. We must continually improve the performance, features and reliability of our products and services,
particularly in response to competitive offerings, to keep pace with these developments. We must ensure that our products and
services address evolving operating environments, devices, industry trends, certifications and standards. For example, we have been
required to expand our offerings for virtual computer environments and mobile environments to support a broader range of mobile
devices. We also may need to develop products that are compatible with new operating systems while remaining compatible with
existing, popular operating systems. Our business could be harmed by our competitors announcing or introducing new products and
services that could be perceived by customers as superior to ours. We spend considerable resources on technology research and
development, but our research and development resources are more limited than many of our competitors. Our failure to introduce
new or enhanced products on a timely basis, to keep pace with rapid industry, technological or market changes or to gain customer
acceptance for our new and existing products and services, such as mobile device data protection, could have a material adverse effect
on our business, financial condition and financial results.
We face strong competition, which could negatively affect our business, financial condition and financial results.
The markets in which we compete are characterized by rapid change and converging technologies and are very competitive.
With rising demand for private and secure email communications, there is strong competition for email encryption products and
services. Our Email Encryption and data loss prevention business competes with products and services offered by companies such as
Microsoft, Barracuda Networks, Inc., Proofpoint, and Sophos Inc. Our ZixOne business completes with products and services offered
by companies such as AirWatch/VMWare, Citrix (with XenMobile), Good Technology (purchased by Blackberry), IBM/Fiberlink
(with MaaS360), Microsoft (with ActiveSync), and MobileIron. Strong competition requires us to develop new technology solutions
and service offerings to expand the functionality and value that we offer to our customers. Many of our competitors bundle their
competing products and services with products and services that we do not offer, which could make our offerings less attractive by
comparison. As a result of the bundling by these competitors, it can be difficult for our customers to compare the cost of our offerings
with competing offerings. In some instances, competing products and services may seem to be offered by our competitors at little to
no additional cost to the customer. In addition, our competitors may develop products and services that are perceived by customers as
equivalent to, or having advantages over, our products and services. Competitors could capture a significant share in our markets,
causing our sales and revenue to decline or grow more slowly. Barriers to entry are relatively low, and new ventures are often formed
that create products competitive with our products. Competitive pressures could lead to price discounting or to increases in expenses
such as advertising and marketing costs. Increased competition could also decrease demand for our products and services.
Competition could reduce our revenues and net income and materially adversely affect our business, financial condition and financial
results.
Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward industry consolidation in our industry for several years. We expect this trend to continue as
companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to
continue operations. For example, some of our current and potential competitors have made acquisitions, or announced new strategic
alliances. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our
competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are
better able to compete as sole-source vendors for customers. This could have a material adverse effect on our business, financial
condition and financial results.
10
Some competitors have advantages that may allow them to compete more effectively than us, which could negatively affect our
business, financial condition and financial results.
Some of our competitors have longer operating histories, more extensive operations, greater name recognition, larger technical
staffs, bigger product development and acquisition budgets, established relationships with more distributors and hardware vendors,
and greater financial and marketing resources than we do. These advantages might enable them (independently or through alliances) to
develop and expand functionality of products and services faster than we can, to spend more money to market and distribute products
and services than we can, or to offer their products and services at prices lower than ours. These advantages could reduce our revenues
and net income and materially adversely affect our business, financial condition and financial results.
If we do not successfully manage our strategic alliances, we may not realize the expected benefits from such alliances and we
may experience increased competition or delays in product development.
We have entered into several strategic alliances with other companies to offer complementary products and services. These
arrangements are generally limited to specific projects or series of projects, and their main goal is generally to facilitate product
compatibility and adoption of industry standards. There can be no assurance that we will realize the expected benefits from these
strategic alliances. If successful, these relationships may be mutually beneficial and result in industry growth. However, alliances
carry an element of risk because, in most cases, we must compete in some business areas with a company with which we have a
strategic alliance and, at the same time, cooperate with that company in other business areas. Also, if these partner companies fail to
perform or if these relationships fail to materialize as expected, we could suffer delays in product development or other operational
difficulties.
We increasingly rely on third party distributors to market our products and services, and our failure to succeed in those
relationships could negatively affect our business, financial condition and financial results.
We distribute an increasing percentage of our products and services by entering into alliances with third parties who can offer
our products and services along with their own or our competitors’ products and services. Increased reliance on third parties to market
and distribute our products and services exposes us to a variety of risks. For example, we have limited control over and visibility into
the sales cycles of third party distributors, which could increase the length of our sales cycle, cause our revenue to fluctuate
unpredictably and make it difficult to accurately forecast our revenue. In addition, we may not succeed in developing or maintaining
marketing alliances. Companies with which we have marketing alliances may in the future discontinue their relationships with us,
form marketing alliances with our competitors, or develop and market their own products and services that compete with ours. If a
significant distributor were to discontinue its relationship with us, we could experience an interruption in the distribution of our
products and services and our revenues could decline. Our failure to develop, maintain and expand strategic distribution relationships
could reduce our revenues and net income and materially adversely affect our business, financial condition and financial results.
Unfavorable economic environments, particularly in the U.S., could negatively affect our business, financial condition and
financial results.
Challenging economic conditions worldwide have from time to time contributed, and may continue to contribute, to slowdowns
in the technology and networking industries at large, as well as in the encrypted email/data security market and in specific geographic
markets in which we operate. If economic growth in those markets, particularly in the U.S., which accounts for a substantial majority
of our revenue, slows, or credit is unavailable at a reasonable cost, current and potential customers may delay or reduce technology
purchases, including the deployment or expansion of our products and services. This could result in reduced sales of our products and
services, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, adverse economic
conditions could negatively affect the cash flow of our customers and distributors, which might result in failures or delays in payments
to us. This could increase our credit risk exposure and delay our recognition of revenue. Specific economic trends, such as declines in
the demand for cloud computing services and computing devices, or softness in corporate information technology spending, could
have a more direct impact on our business. If these conditions persist, spread or deteriorate further, our business, financial condition
and financial results could be materially adversely affected.
If our products do not work properly, our reputation, business, financial condition and financial results could be negatively
affected and we could experience negative publicity, declining sales and legal liability.
The threats facing our customers are constantly evolving and the techniques used by experienced hackers to access or sabotage
data change frequently, often are not recognized until launched against a target, and may originate from less regulated or remote areas
around the world. As a result, we must constantly update our product solutions to respond to these threats. We produce complex
solutions that incorporate leading-edge technology, including both hardware and software, that must operate in a wide variety of
technology environments. Software may contain defects or “bugs” that can interfere with expected operations. There can be no
assurance that our testing programs will be adequate to detect all defects prior to the product being introduced, which might decrease
11
customer satisfaction with our products and services. The product reengineering cost to remedy a product defect could be material to
our operating results. Our inability to cure a product defect could result in the temporary or permanent withdrawal of a product or
service from the market, a security breach, negative publicity, damage to our reputation, failure to achieve market acceptance, lost
revenue and increased expense, any of which could have a material adverse effect on our reputation, business, financial condition and
financial results.
Our usage of personal information, and inadvertent exposure of confidential or personal information, could cause us to violate
data privacy laws or lose customers and could negatively affect our business, financial condition and financial results.
We transmit and store large amounts of personally identifiable information about individuals, which may include healthcare or
financial information. Although we have established, and continue to develop and enhance, security measures and controls to help
protect against unauthorized disclosure of such personal data information, an inadvertent disclosure of, or unauthorized third-party
access to, personal data, could disrupt our operations, damage our reputation and subject us to claims or other liabilities.
In addition, our processing and storage of these types of personal data is subject to confidentiality agreements with our clients
and handling this data is increasingly subject to privacy and data security regulation around the world, such as the European Union’s
Data Protection Directive. Such laws and regulations are subject to new and differing interpretations and may be inconsistent among
jurisdictions. For example, the European Court of Justice recently invalidated the U.S.-EU Safe Harbor framework that had been in
place since 2000, which allowed companies to meet certain European legal requirements for the transfer of personal data from the
European Economic Area to the United States. While other adequate legal mechanisms to lawfully transfer such data remain, the
invalidation of the U.S.-EU Safe Harbor Framework may result in different European data protection regulators applying differing
standards for the transfer of personal data. Change in requirements under these regulations may be inconsistent with our existing data
management practices. If so, we could be required to fundamentally change our business activities and practices or modify our
software, which could have an adverse effect on our business, including increased cost of compliance and limitations on data transfer
for us and our customers.
Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection
laws, regulations and policies, could result in additional costs and liability to us, damage our reputation, inhibit sales and harm our
business. Furthermore, any inadvertent disclosure of, or unauthorized access (including due to a cyber-attack) to, personal data or
other confidential information or other failure by us to comply with data privacy requirements could subject us to significant penalties,
damages, remediation and other expenses, and damage our reputation, any of which could have a material adverse effect on our
business, financial condition and financial results.
Problems with enforcing our intellectual property rights or using third party intellectual property could negatively affect our
business, financial condition and financial results.
We rely on a combination of contractual rights, trademarks, trade secrets, patents and copyrights to establish and protect
intellectual property rights and other proprietary rights in our products and services. These intellectual property rights or other
proprietary rights might be challenged, invalidated or circumvented. The steps we have taken to protect our proprietary information
may not prevent its misuse, theft or misappropriation. Competitors may independently develop technologies or products that are
substantially equivalent or superior to our products or that inappropriately incorporate our intellectual property rights or other
proprietary technology into their products. Competitors may hire our former employees who may misappropriate our intellectual
property rights or other proprietary technology. Some jurisdictions may not provide adequate legal protection of our intellectual
property rights or other proprietary technology.
We may have to defend or assert our rights in intellectual property that we use in our services, and we could be found to
infringe the intellectual property rights of others, which could be disruptive and expensive to our business.
We may have to defend against claims that we or our customers are infringing the rights of third parties in patents, copyrights,
trademarks and other intellectual property. If we acquire technology to include in our products from third parties, our exposure to
infringement actions may increase because we must rely upon these third parties to verify the origin and ownership of such
technology. Also, we may be required to spend significant resources to monitor and protect our intellectual property rights, including
initiating claims or litigation against third parties for infringement or misappropriation. Intellectual property litigation and
controversies are disruptive and expensive, whether or not resolved in our favor. Even unmeritorious claims brought against us or our
customers may harm our reputation and customer relationships, may cause us to incur significant legal and other fees to defend, and
may have to be settled for significant amounts. Infringement claims against us could require us to develop non-infringing services or
enter into expensive royalty or licensing arrangements. Our business, financial condition and financial results could be materially
adversely affected if we are not able to develop non-infringing technology or license technology on commercially reasonable terms.
12
We may face risks from using “open source” software that could negatively affect our business, financial condition and
financial results.
Like many other software companies, we use “open source” software in order to take advantage of common industry building
blocks and to add functionality to our products quickly and inexpensively. Open source software license terms could adversely affect
our intellectual property rights in our products that include open source software. Depending upon how the open source software is
deployed, we could be required to offer products that use the open source software for no cost, or make available the source code for
modifications or derivative works. Any of these obligations could have an adverse impact on our intellectual property rights and
revenue from products incorporating the open source software. Using open source code could also cause us to inadvertently infringe
third-party intellectual property rights or require us to publicly disclose proprietary information. We have processes and controls in
place that are designed to address these risks and concerns, but we cannot be sure that our process or controls will be sufficient to
mitigate all risk in this regard.
We rely on the availability of third-party intellectual property, which may not be accessible to us on reasonable terms or at all.
Some of our products include third party intellectual property, which may require licenses from third parties. Based on past
experience and industry practice, we believe that such licenses can be obtained on reasonable terms; however, there can be no
assurance that we will be able to obtain the necessary licenses for new or current products on acceptable terms or at all. Failure to
obtain such licenses may limit our ability to sell our products, which could have a material adverse effect on our business, financial
condition and financial results.
We may fail to recruit and retain key personnel, which could impair our ability to meet key objectives.
Our success depends on our ability to attract and retain highly-skilled technical, managerial, sales, and marketing personnel.
Changes in key personnel may be disruptive to our business. It could be difficult, time consuming and expensive to replace key
personnel. Integrating new key personnel may be difficult and costly. Volatility, lack of positive performance in our stock price or
changes to our overall compensation program including our stock incentive program may adversely affect our ability to retain key
employees, many of whom are compensated, in part, based on the performance of our stock price. The loss of services of any of our
key personnel, the inability to retain and attract qualified personnel in the future or delays in hiring required personnel could make it
difficult to meet key objectives. Any of these impairments related to our key personnel could negatively affect our business, financial
condition and financial results.
Governmental restrictions on the sale of our products and services in non-U.S. markets could negatively affect our business,
financial condition and financial results.
Exports of software solutions and services using encryption technology such as ours are generally restricted by the U.S.
government. Although we have obtained U.S. government approval to export our service to almost all countries, the list of countries to
which we (and our distributors) cannot export our products and services could be expanded in the future. In addition, some countries
impose restrictions on the importation and use of encryption solutions and services such as ours. The cost of compliance with U.S. and
other export laws, or our failure to obtain governmental approvals to offer our products and services in non-U.S. markets, could affect
our ability to sell our products and services and could impair our international expansion. We face a variety of other legal and
compliance risks. If we or our distributors fail to comply with applicable law and regulations, we may become subject to penalties,
fines or restrictions that could materially adversely affect our business, financial condition and financial results.
Exercises and vesting of equity awards relating to our common stock may dilute the ownership interests of existing
shareholders and could negatively affect the value of our common stock.
Our employees hold a significant number of outstanding options and other equity awards. The vesting and exercise of these
awards, and the resulting issuance of additional shares of our common stock, dilutes the ownership interests and voting rights of our
current shareholders. Issuances and/or sales of those additional shares could cause our common stock to decline in value. In recent
years, we have completed several share repurchase programs, the effect of which has been to mitigate the dilutive effect of our
employee equity grants. There can be no assurance, however, that we will continue these share repurchase programs in the future.
Item 1B. Unresolved Staff Comments
None.
13
Item 2. Properties
We leased properties during 2015 that are considered significant to the operations of the business in the following locations:
Burlington, Massachusetts; Ottawa, Ontario, Canada; the United Kingdom; and Dallas and Austin, Texas. Our Burlington employees
perform sales and marketing activities. Our Ottawa employees perform both client services and sales support activities. The United
Kingdom facility provides data center support for our European customers. The Dallas office is our headquarters, which includes
research and development, marketing, sales and all general administrative services, and the ZixData Center. Our Austin location is
used primarily for fail-over and business continuity services and is used to some extent to support normal ongoing operations. Our
facilities are suitable for our current needs and are considered adequate to support expected near term growth.
Item 3. Legal Proceedings
We are subject to legal proceedings, claims, and litigation involving our business. While the outcome of these matters is
currently not determinable, and the costs and expenses of resolving these matters may be significant, we currently do not expect that
the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
14
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on The Nasdaq Stock Market under the symbol ZIXI. The table below shows the high and low sales
prices by quarter for fiscal 2015 and 2014.
PART II
Quarter Ended
March 31
June 30
September 30
December 31
2015
2014
High
Low
High
Low
$
$
$
$
4.41 $
5.47 $
5.40 $
5.78 $
3.31 $
3.88 $
3.98 $
4.12 $
4.94 $
4.27 $
4.08 $
3.83 $
3.88
3.10
2.90
3.03
At March 8, 2016, there were 56,158,434 shares of common stock outstanding held by 400 shareholders of record. On that date,
the last reported sales price of the common stock was $4.09.
We have not paid any cash dividends on our common stock and do not anticipate doing so in the foreseeable future.
For information regarding options and stock-based compensation awards outstanding and available for future grants, see
“Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Performance Graph
The following graph compares the cumulative total return of an investment in our common stock over the five-year period
ended December 31, 2015, as compared with the cumulative total return of an investment in (i) the Center for Research in Securities
Prices (“CRSP”) Total Return Index for Nasdaq Stock Market (U.S. companies) and (ii) the CRSP Total Return Index for Nasdaq
Computer and Data Processing Stocks. The comparison assumes $100 was invested on December 31, 2010, in our common stock and
in each of the two indices and assumes reinvestment of all dividends, if any. The stock price performance on the following graph is
not necessarily indicative of future stock price performance. A listing of the companies comprising each of the CRSP- NASDAQ
indices used in the following graph is available, without charge, upon written request.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2015
250.00
200.00
150.00
100.00
50.00
0.00
2010
2011
2012
2013
2014
2015
Zix Corp.
NASDAQ Stock Market (US Companies)
NASDAQ Computer and Data Processing Index
Sale of Unregistered Securities
None.
15
Purchases of Equity Securities by the Issuer
Period
October 1, 2015 to October 31, 2015
November 1, 2015 to November 30, 2015
December 1, 2015 to December 31, 2015
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of Shares(cid:3)
Purchased as part of
Publically Announced
Plans or Programs (1) (cid:3)
Maximum Number (or
Appropriate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
683,470 $
— $
— $
683,470 $
4.39
—
—
4.39
683,470 $
— $
— $
683,470 $
—
—
—
—
1 The shares were repurchased under the $15 million stock repurchase program approved by our board of directors May 11, 2015. The
October activity completed the program, which expired on October 31, 2015. No shares were purchased other than through publicly
announced programs during the periods shown.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” the consolidated financial statements and notes thereto. No cash dividends were
declared in any of the five years shown below:
Statement of Operations Data:
Revenues
Cost of revenue
Gross margin
Research and development expenses
Selling, general and administrative expenses
Income tax expense (benefit)(1)(cid:3)
Net Income
Basic income per common share
Diluted income per common share
Shares used in computing basic income per common share
Shares used in computing diluted income per common
share
Statements of Cash Flows Data:
Net cash flows provided by (used for):
Operating activities
Investing activities
Financing activities
Balance Sheet Data:
Cash, Cash Equivalents and Marketable Securities
Working capital(2)(cid:3)
Total assets
Stockholders’ equity
$
$
$
$
$
2015
Year Ended December 31,
2013
2012
2014
2011
(In thousands, except per share data)
54,713 $
9,593
45,120
8,317
28,887
3,144
5,016
0.09 $
0.09 $
56,422
50,347 $
8,324
42,023
9,051
26,222
2,830
4,103
0.07 $
0.07 $
57,949
48,138 $
7,614
40,524
9,563
21,646
(1,006 )
10,453
0.17 $
0.17 $
61,139
43,356 $
7,609
35,747
7,419
19,385
(1,949)
11,003
0.18 $
0.17 $
62,211
38,145
7,211
30,934
5,229
15,128
(11,889)
22,554
0.34
0.34
65,439
57,476
58,967
62,527
62,875
67,262
15,617 $
(1,951)
(6,687)
13,317 $
(3,402)
(15,748)
13,298 $
(1,593 )
(7,175 )
12,533 $
(1,533)
(8,692)
13,219
(1,471)
(15,687)
28,664 $
3,821
87,286
56,772
21,685 $
2,249
83,724
56,270
27,518 $
12,127
90,702
66,234
22,988 $
6,626
82,849
61,245
20,680
5,497
77,552
57,757
(1) The $1.0 million, $1.9 million, and $11.9 million tax benefits in 2013, 2012, and 2011 resulted from the release of a portion of
our deferred tax asset valuation allowance. Based on analysis of both projected and current earnings excluding discontinued
operations, we have estimated these tax assets as likely to be utilized prior to expiration. See “Income Taxes” in “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2) Working capital includes deferred revenue totaling $23.2 million, $21.6 million, $19.1 million, $17.5 million, and $16.6 million
as of December 31, 2015, 2014, 2013, 2012, and 2011, respectively.
16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements about trends, uncertainties and our plans and
expectations of what may happen in the future. Forward-looking statements involve risks and uncertainties that could cause actual
events or results to differ materially from the events or results described in the forward-looking statements, including risks and
uncertainties described above in “Item 1A. Risk Factors.” Readers are cautioned not to place undue reliance on forward-looking
statements. The forward-looking statements are based upon information available to us on the date of this report. We undertake no
obligation to publicly update or revise any forward-looking statements. See “Item 1. NOTE ON FORWARD-LOOKINGS
STATEMENTS AND RISK FACTORS.”
The following discussion should be read in conjunction with the consolidated financial statements and related notes beginning
on page F-1.
Overview
We are a leader in providing secure email encryption. We provide email encryption, DLP and BYOD solutions to meet the data
protection and compliance needs of organizations primarily in the healthcare, finance, and government sectors. A core competency is
our ability to deliver this complex service offering with a high level of availability, reliability, integrity and security.
Our 2015 results included record revenues. We attribute our success to on-going efforts to build a solid and predictable business
based on our successful recurring revenue subscription business model. For 2015, we continued to benefit from growing concerns for
data security and integrity issues, which continue to make headline news, as well as the growing acceptance of cloud-based offerings
along with the growing need for regulatory compliance.
For 2015, we reported revenue of $54.7 million, an increase of $4.4 million over the prior year, driven principally by continued
growth in our Email Encryption business.
For the year ended December 31, 2015, our gross profit of $45.1 million increased 7% compared to 2014. This increase was
primarily driven by increased revenue. Our 2015 operating income of $7.9 million increased $1.2 million over the prior year, as the
gross profit increase was offset by increased general and administrative expense related to our CEO transition and other legal fees.
Our $5.0 million net income in 2015 is an increase of 22% compared to our $4.1 million net income in 2014.
Other Financial Highlights
(cid:120)
(cid:120)
(cid:120)
Backlog was $74.2 million at the end of 2015, compared with $69.3 million at the end of 2014
Total orders for 2015 were $61.0 million, an increase of 10% from the 2014 total orders of $55.4 million
Our deferred revenue at the end of 2015 was $24.0 million, compared with $22.5 million at the end of 2014
(cid:120) We generated cash flows from operations of $15.6 million during fiscal 2015. Our cash and cash equivalents were $28.7
million at the end of 2015, compared with $21.7 million at the end of 2014.
(cid:120)
Our shared, cloud-based ZixDirectory now has approximately 49 million members including some of the most respected
institutions in the country.
Our services are sold on a subscription basis with contract terms generally ranging from one to five years. We provide a
financial incentive to our customers and sales force to contract for three to five years. Historically, most of our customers contract for
three year terms, except for our large partner (i.e., “OEM”) orders which for the most part contain one year terms. At the end of the
contract term we attempt to renew the subscription, again attempting to secure a three to five year term. Our customers pay us
annually at the start of the subscription term and each succeeding year on the anniversary of the commencement of the service. We
recognize revenue ratably on a monthly basis over the term of the subscription once service commences.
We attempt to grow the business by signing new customers to subscription services and/or selling new or higher volume
services to existing customers (i.e., “upsell”) while retaining existing customers through renewal of their services.
Our total orders consist of orders from new customers, upsell to existing customers, plus renewal orders. Total orders may vary
from quarter to quarter due to the timing of renewal orders, which will fluctuate in amount due to timing and length of expiring
subscription terms. Similarly, total new orders and upsell orders will fluctuate in amount due to term length.
17
To better understand new orders, management tracks the first year value of new orders as well as the total order value for the
subscription term because total order value will exceed the first year value on multi-year orders. By segregating the first year value of
new orders, we eliminate the fluctuation in total order amount caused by the dollar impact of multi-year contracts. We refer to this
metric as New First Year Orders (“NFYOs”).
Our backlog consists of the total order value of contracted business that has not yet been recognized into revenue. Backlog is
calculated by adding to the existing contracted order value the total value of all orders booked in the period (e.g., quarterly) less the
value of revenue recognized for that period. Although orders are non-cancellable, occasionally we adjust backlog for customer
bankruptcy or change of term, but these instances are rare and do not materially impact the backlog amount. The backlog will grow if
the value of total orders added in a period exceeds the value of revenue recognized in that period. Conversely, the backlog amount will
decline if revenue recognized exceeds the total order value added for the period. Although rare, a decline in backlog may result from
fluctuations in total orders caused by timing of renewal orders described above.
We retain approximately 90% of our recurring revenue on an annual basis. We calculate this percentage by identifying the
current period revenue less revenue associated with orders for new services received in the prior twelve month period and comparing
this amount to the total revenue in the corresponding prior year period. Deferred revenue is the value of contracted business that has
been paid but has not been recognized as revenue. See description of the components of the backlog following in Item 7 of this Form
10-K under the heading, “Backlog and Orders.”
Our revenue growth is dependent on our ability to sell subscription services to new customers, upsell new services or increase
volume with existing customers and retain existing customers by renewing their subscription services. Generally, if annual NFYOs
exceed the annual value of cancelled subscriptions, revenue should grow. However, revenue growth may fluctuate due to timing of
deployment of new services and subscription cancellations. For example, a new order reported in NFYOs in one quarter may not be
deployed to the customer until the following quarter and therefore delay commencement of revenue recognition. Similarly, a
cancellation of a contract with an expiration in the first month of a quarter will have a higher negative impact on revenue in the quarter
than a contract of the same amount with an expiration in the last month of a quarter. The impact of these quarter to quarter fluctuations
tends to diminish over annual periods making year over year quarterly revenue comparisons more indicative of revenue growth than
sequential quarterly revenue comparisons.
Our operations and future prospects are further discussed throughout this “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” (“MD&A”).
There are no assurances we will be successful in our efforts to achieve continued growth. Our continued growth depends on the
timely development and market acceptance of our products and services. See “Item 1A. Risk Factors” for more information on the
risks relative to our operations and future prospects.
Revenue
Revenue increased by 9% in 2015 compared with 2014. Our revenue growth was driven by our successful subscription model
that continues to yield steady additions to the subscriber base coupled with a high rate of renewing existing customers. Revenue
growth slowed in 2014 in part due to lower orders from our largest OEM partner, Google. Google transitioned to a new ordering
platform, Google Apps Message Encryption in 2013. This transition was completed in the fourth quarter of 2014. We began to see a
pickup in Google order volume in 2015 and expect to see continued revenue improvement from Google orders in 2016.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant
impact on revenue, income from operations and net income, as well as the value of certain assets and liabilities on our consolidated
balance sheet. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant
accounting judgements by us. Management bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying
values of assets and liabilities. We evaluate our estimates on a regular basis and make changes accordingly. Senior management has
discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual
results may materially differ from these estimates under different assumptions or conditions. If actual results were to differ from these
estimates materially, the resulting changes could have a material adverse effect on our consolidated financial statements.
18
We consider accounting policies to be critical when they require us to make assumptions about matters that are highly uncertain
at the time the accounting estimate is made and when different estimates that our management reasonably has used have a material
effect on the presentation of our financial condition, changes in financial condition or results of operations. Management believes the
following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of the
consolidated financial statements.
Our critical accounting policies included the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Revenue recognition
Income taxes
Valuation of goodwill and other intangible assets
Stock-based compensation costs
For additional discussion of the Company’s significant accounting policies, refer to Note 2 to our consolidated financial
statements.
Revenue Recognition
We develop, market, and support applications that connect, protect and deliver information in a secure manner. We derive our
revenue from subscription fees for rights related to the use of our software. Software subscription terms typically range from one to
three years.
Revenue is recognized when all of the following have been met:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered,
the price is fixed and determinable, and
collectability is probable.
Discounts provided to customers are recorded as reductions in revenue.
We have determined that substantially all of our revenue arrangements are in the scope of the software revenue recognition
rules. Multiple elements in our software arrangements are sold as a single unit consisting of the following elements: (i) subscription
licensed software delivered to the customer’s site, (ii) ongoing customer support and, (iii) access to our hosted encryption network
(Zix encryption network) during the term of the agreement.
(i)
Software at the customer site performs critical functions of the email encryption process and is the predominant element in
our arrangements. Actions performed by the software at the customer site include identifying when encryption is needed
through the use of filters and lexicons, determining the best method of delivery (BMOD) by examining secure connection
options and selecting the BMOD. BMOD is a key marketing differentiator for us and is defined as the most secure and
easiest method to deliver encrypted email. Customers can install the software on their own hardware or we can deliver to
the customer site hardware that we own.
(ii) Customer support includes unspecified software upgrades, updates and bug fixes and access to live technical support
technicians and on-line knowledge resources
(iii) The Zix encryption network includes access to our central network which facilitates transparent encrypted email exchange
among all of our customers by providing public encryption keys (asymmetrical encryption requires two keys- a public key
provided by the central network and a private key generated by the software at the customer site). The delivered software
element is essential to the functionality and utility of this central network. The network also enables our customers to send
encrypted emails to non-Zix customer recipients through a portal.
A small portion of our revenue (less than 5% in 2015) is derived from hosted email encryption solutions. We apply general
revenue recognition guidance to these hosted arrangements.
In all revenue arrangements we cannot determine vendor specific objective evidence (VSOE) and we cannot establish separate
units of accounting for the multiple elements of our arrangements that are bundled and sold as one unit. All revenue arrangements are
sales of subscription based (i.e. time-based) licenses. We defer revenue until the software is delivered and the service is deployed.
19
Upon deployment, we commence revenue recognition and revenue is recognized ratably over the subscription period generally
ranging from one to three years.
Income Taxes
Deferred tax assets are recognized if it is “more likely than not” that the benefit of the deferred tax asset will be realized on
future federal or state income tax returns. At December 31, 2015, we provided a valuation allowance against a significant portion,
$46.1 million, of our accumulated U.S. deferred tax assets. This significant valuation allowance reflects our historical losses and the
uncertainty of future taxable income sufficient to utilize net operating loss carryforwards prior to their expiration. Our total deferred
tax asset not subject to a valuation allowance is valued at $48.9 million, and consists of $41.8 million for federal net operating loss
carryforwards, $4.1 million relating to temporary timing differences between U.S. generally accepted accounting principles (“GAAP”)
and tax-related expense, $1.8 million relating to U.S. state income tax credits, and $1.2 million related to Alternative Minimum Tax
credits. If U.S. taxable income increases from its current level in a future period or if the facts and circumstances on which our
estimates and assumptions are based were to change, thereby impacting the likelihood of realizing the deferred tax assets, judgement
would have to be applied in determining the amount of valuation allowance no longer required. Reversal of all or a part of this
valuation allowance could have a significant positive impact on operating results in the period that it becomes more likely than not
that certain of the Company’s deferred tax assets will be realized. Alternatively, should our future income decrease from current
levels, a resulting increase to all or a part of this valuation allowance could also have a significant negative impact on our operating
results.
Valuation of Goodwill and Other Intangible Assets
We account for the valuation of goodwill and other intangible assets after classifying intangible assets into three categories: (1)
intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3)
goodwill. For intangible assets with finite lives, tests for impairment must be performed if conditions exist that indicate that the
carrying value may not be recoverable. For intangible assets with indefinite lives and goodwill, tests for impairment must be
performed at least annually or more frequently if events or circumstances indicate that assets might be impaired.
Goodwill was $2.2 million in each of the years ended December 31, 2015 and 2014, or 2% and 3% of total assets for these
years, respectively.
Our goodwill is not being amortized, but we do evaluate the goodwill for impairment annually in the fourth quarter, or when
there is reason to believe that the value has been diminished or impaired. Evaluations for possible impairment are based upon a
comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned, versus the sum of the carrying
value of the assets and liabilities of that unit including the assigned goodwill value. The fair values used in this evaluation are
estimated based on the Company’s market capitalization, which is based on the Company’s outstanding common stock and market
price of the stock. Impairment is deemed to exist if the net book value of the unit exceeds its estimated fair value. We have evaluated
our goodwill and determined no impairment adjustment is required.
Stock-based Compensation
Our share-based awards include stock options, restricted stock and restricted stock units (“RSU’s”). We have non-qualified
stock options outstanding to employees and directors under various stock option plans. The plans require the exercise price of options
granted under these plans to equal or exceed the fair market value of the Company’s common stock on the date of grant. The options,
subject to termination of employment, generally expire ten years from the date of grant. Employee stock options typically vest pro-rata
and quarterly over three or four years. Restricted stock is issued to the employee at grant but is subject to transfer restrictions. Stock is
issued in exchange for RSUs when vesting conditions are met. The transfer restrictions and vesting conditions may be time- or
performance-based. Restricted stock and RSUs typically vest pro-rata annually over three or four years. We use the straight-line
amortization method for recognizing stock option compensation costs. The weighted average grant-date fair value of awards of
restricted stock, and RSU’s is based on quoted market price of the Company’s common stock on the date of grant. Option, restricted
stock and RSU grants to employees, officers and directors frequently contain accelerated vesting provisions upon the occurrence of a
change of control, as defined in the applicable option agreements.
20
Full Year 2015 Summary of Operations
Financial
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Revenue for 2015 was $54.7 million compared with $50.3 million in 2014 and $48.1 million in 2013.
Gross margin for 2015 was $45.1 million or 82% of revenues compared with $42.0 million or 83% of revenues in 2014
and with $40.5 million or 84% of revenues in 2013.
Net income for 2015 was $5.0 million compared with $4.1 million in 2014 and $10.5 million in 2013. Net income for
2015 and 2014 included a tax expense of $3.1 million and $2.8 million, respectively. In contrast, net income for 2013
included a decrease to our tax valuation allowance of $4.1 million. This decrease to the valuation allowance in 2013 was
recorded as a benefit to the income statement.
Net income per diluted share was $0.09 for 2015 compared with $0.07 for 2014 and $0.17 for 2013.
Unrestricted cash was $28.7 million on December 31, 2015.
Results of Operations
Revenue
The following table sets forth a year-over-year comparison of our total revenues:
(In thousands)
Revenues
Year Ended December 31,
2014
$ 54,713 $ 50,347 $ 48,138 $
2015
2013
Variance
2015 vs. 2014
$
%
4,366
Variance
2014 vs. 2013
$
9 % $ 2,209
%
5%
Our growth model seeks to continually add new users to the subscriber base, while at the same time retaining a high percentage
of existing subscribers whose subscriptions are up for renewal. Across all periods presented, revenue increases were driven primarily
by sales in our three core vertical sales markets: healthcare, finance and government and other non-core markets. Additionally, sales
continued from a wide base of distributors – new first year orders (“NFYO’s”) derived from our value-added resellers, OEM and other
third party distribution channels for 2015 were 64% of the total NFYOs compared to 58% in 2014 and 59% in 2013. We measure
additions to the subscriber base by NFYOs, which is defined as the portion of new orders that are expected to be recognized into
revenue in the first twelve months of the contract. NFYOs are summarized in the table below:
(In thousands)
New first year order value
Year Ended December 31,
2014
2013
2015
$
10,158 $
8,489 $
9,020
Our go-to-market selling strategy promotes multiple-year subscription contracts with the fees paid annually at the inception of
each year of service. As a result, a high percentage of customers subscribe for a three-year term versus a one-year term. We expect this
preference for a longer contract term by a relatively high percentage of our customers to continue in 2016, as we have priced our
services in a manner that encourages these longer-term contracts.
Our list pricing has remained generally consistent during the periods shown above. However, there are no assurances that
potential increased competition in this market or other factors, including inflation, will not result in future price erosion. Price erosion,
should it occur, could have a dampening effect on order growth and the revenue derived from our new orders.
Revenue Outlook:
We expect continued growth in our core Email Encryption offering and in our new products, along with increased sales from
our indirect OEM distribution and value-added reseller channels to increase our NFYOs in 2016 and increase our year-over-year
revenue.
Backlog and Orders
Backlog — Our backlog was $74.2 million at December 31, 2015 compared with $69.3 million at December 31, 2014. The
backlog is comprised of contractual commitments that we expect to amortize into revenue. As of December 31, 2015, the backlog was
comprised of the following elements: $24.0 million of deferred revenue that has been billed and paid, $7.3 million billed but unpaid,
and approximately $42.9 million of unbilled contracts.
21
The backlog is recognized into revenue ratably as the services are performed. Approximately 57% of the total backlog is
expected to be recognized as revenue during the next twelve months.
Orders — Total orders in 2015 were $61.0 million compared with $55.4 million in 2014. Total orders are comprised of contract
renewals, NFYOs, and in the case of new multi-year contracts, the years beyond the first year of service.
Cost of Revenue
The following table sets forth a year-over-year comparison of the cost of revenue.
(In thousands)
Cost of revenue
Year Ended December 31,
2014
8,324 $
2015
$ 9,593 $
2013
7,614 $
Variance
2015 vs. 2014
%
$
1,269
Variance
2014 vs. 2013
$
%
15 % $
710
9%
Cost of revenue is comprised of expenses related to operating and maintaining the ZixData Center, a field deployment team,
customer service and support and the amortization of Company-owned, customer-based computer appliances. The 15% increase in
cost of revenue in 2015 compared with 2014 resulted primarily from increases in average headcount, software maintenance and
license support, as well as depreciation expense related to networking equipment. These investments support growth in customers and
users and positions us for these expected increases associated with our Cisco partnership.
The 9% increase in cost of revenue in 2014 compared with 2013 resulted primarily from increases in average headcount and
depreciation expense relating to investments in ZixOne networking infrastructure. In 2014, we increased customer support and
deployment resources to support growth in the number of reseller and managed service provider channel partners, and support of our
new products, ZixOne and ZixDLP.
Research and Development Expenses
The following table sets forth a year-over-year comparison of our research and development expenses:
(In thousands)
Research and development expenses
Year Ended December 31,
2014
$ 8,317 $ 9,051 $ 9,563 $
2013
2015
Variance
2015 vs. 2014
$
%
(734)
(8 )% $
Variance
2014 vs. 2013
$
(512)
%
(5)%
Research and development expenses consist primarily of salary, benefits and stock-based compensation for our development
staff, independent contractor expense, and other direct and indirect costs associated with enhancing our existing products and services
and developing new products and services.
The 8% decrease in research and development expense in 2015 compared with 2014 reflected in the table above resulted
primarily from reduction in average headcount and outside contractor expense, partially offset by increases in depreciation expense.
The decrease in headcount and contractor expense reflects lower required investment in 2015 following the launch of the ZixOne
product in 2014. Depreciation expense increased in 2015 due to upgrades to our development facilities and fixtures in our Dallas
office.
The 5% decrease in research and development expense in 2014 compared with 2013 resulted primarily from reduction in
contractor headcount, partially offset by increases related to hiring research and development personnel.
Selling and Marketing Expenses
The following table sets forth a year-over-year comparison of our selling and marketing expenses:
(In thousands)
Selling and marketing expenses
Year Ended December 31,
2014
$ 18,075 $ 18,284 $ 13,416 $
2015
2013
Variance
2015 vs. 2014
$
%
(209)
Variance
2014 vs. 2013
$
%
(1 )% $ 4,868
36%
Selling and marketing expenses consist primarily of salary, commissions, travel, stock-based compensation and employee
benefits for selling and marketing personnel as well as costs associated with promotional activities and advertising.
22
The slight decrease in selling and marketing expense in 2015 compared with 2014 resulted primarily from decreases in
advertising expense partially offset by increases in commission and bonus expense. Commission and bonus expenses were higher in
2015 as a result of improved performance compared to 2014, primarily in NFYO and earnings metrics.
The $4.9 million increase in selling and marketing expense in 2014 compared with 2013 resulted primarily from increases in
average headcount and advertising and promotional expense associated with the launch of our ZixOne product. The increase was split
approximately evenly between increases in sales average headcount and in advertising/ promotional expense.
General and Administrative Expenses
The following table sets forth a year-over-year comparison of our general and administrative expenses:
(In thousands)
General and administrative expenses
Year Ended December 31,
2014
2013
2015
Variance
2015 vs. 2014
%
$
$ 10,812 $ 7,938 $ 8,230 $ 2,874
36 % $
Variance
2014 vs. 2013
$
(292)
%
(4)%
General and administrative expenses consist primarily of salary and bonuses, travel, stock-based compensation and benefits for
administrative and executive personnel as well as fees for professional services and other general corporate activities.
The $2.9 million increase in general and administrative expense in 2015 compared with 2014 resulted primarily from CEO
transition related severance costs, higher variable compensation bonus expense, and higher legal and consulting fees. These increases
were partially offset by lower depreciation and facilities expense, including a utility true-up credit from our Dallas landlord.
The $0.3 million decrease in general and administrative expense from 2013 to 2014 resulted primarily from lower outside legal
counsel fees associated with litigation partially offset by higher average headcount costs.
Income Taxes
Our Company or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and in the
Canadian federal and provincial jurisdictions. We recognize and measure uncertain tax positions using a two-step approach. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Our Company incurred a tax expense of $3.1 million for 2015 and $2.8 million for 2014. This contrasts to an income tax benefit
of $1.0 million for 2013. For all years presented, tax expense represented refundable U.S. Alternative Minimum Tax, U.S. research
and development credits, non-U.S. taxes payable related to the operations of the Company’s Canadian subsidiary established in late
2002, and state income taxes. For 2013, tax benefit also included reversals of a portion of the Company's historical valuation
allowance.
Significant judgement is required in determining any valuation allowance recorded against deferred tax assets. In assessing the
need for a valuation allowance, we consider available evidence, including past earnings, estimates of future taxable income, and the
feasibility of tax planning strategies. At December 31, 2015, the Company partially reserved its U.S. net deferred tax assets due to the
uncertainty of future taxable income sufficient to utilize net loss carryforwards prior to their expiration. The portion of the Company’s
deferred tax asset not reserved was $48.9 million. The majority of this unreserved portion related to $41.8 million U.S. net operating
losses (“NOLs”) because we believe the Company will generate sufficient taxable income in future years to utilize these NOLs prior
to their expiration. The remaining balance consists of $4.1 million relating to temporary timing differences between GAAP and tax-
related expense, $1.8 million relating to U.S. state tax income credits, and $1.2 million related to Alternative Minimum Tax credits.
We have determined that utilization of existing NOLs against future taxable income is not limited by Section 382 of the Internal
Revenue Code. Future ownership changes, however, may limit the company's ability to fully utilize its existing net operating loss
carryforwards against any future taxable income.
If we begin to generate additional U.S. taxable income in a future period or if the facts and circumstances on which our current
estimates and assumptions are based were to change, thereby impacting the likelihood of realizing a greater or lesser amount of our
deferred tax assets, judgement would have to be applied in determining the amount of valuation allowance required. Adjusting our
valuation allowance could have a significant impact on operating results in the period that it becomes more likely than not that an
additional portion of our deferred tax assets will or will not be realized.
23
Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower or higher than
anticipated; by tax effects of nondeductible compensation; or by changes in tax laws, regulations, or accounting principles, including
accounting for uncertain tax positions or interpretations. Significant judgment is required to determine the recognition and
measurement applicable to all income tax positions. This includes the potential recovery of previously paid taxes, which if settled
unfavorably could adversely affect our provision for income taxes or additional paid-in capital. In addition, our income tax returns are
subject to examination by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the adequacy of our provision for income.
Net Income
Net Income – The Company generated net income of $5.0 million in 2015 compared with $4.1 million in 2014 and $10.5 million
in 2013. The net income in 2013 included a decrease to our tax valuation allowance of $4.1 million, of which $2.7 million was due to
2013 operations and offset current tax expense. The remaining $1.4 million was due to a partial reversal of the remaining tax valuation
allowance and recorded as a tax benefit
Liquidity and Capital Resources
Overview
Based on our 2015 financial results and current expectations, we believe our cash and cash equivalents, and cash generated from
operations, will satisfy our working capital needs, capital expenditures, investment requirements, contractual obligations,
commitments, future customer financings, and other liquidity requirements associated with our operations through at least the next
twelve months. We plan for and measure our liquidity and capital resources through an annual budgeting process. During 2015, our
cash flow from operations was $15.6 million, which represents a 17% increase over cash flow from operations during 2014. At
December 31, 2015, our cash and cash equivalents totaled $28.7 million and we had no debt. This represents a $7.0 million increase
over our cash balance as of December 31, 2014, which occurred notwithstanding our expenditure of $15 million during 2015 under a
share repurchase program that completed in October 2015.
For the year ended December 31, 2015, we achieved 9% growth in revenue, 82% gross margin and strong cash collections.
While future results cannot be guaranteed, we expect these trends to continue in the foreseeable future, and believe a significant
portion of our spending is discretionary and flexible and that we have the ability to adjust overall cash spending to react, as needed, to
any shortfalls in projected cash.
Sources and Uses of Cash
(In thousands)
Net cash provided by operations
Net cash used in investing activities
Net cash used in financing activities
Years Ended December 31,
2014
2013
2015
$
$
$
15,617 $
(1,951) $
(6,687) $
13,317 $
(3,402 ) $
(15,748 ) $
13,298
(1,593)
(7,175)
Our primary source of liquidity from operations was the collection of revenue in advance from our customers, accounts
receivable from our customers, and the management of the timing of payments to our vendors and service providers.
Cash used in our investing activities for 2015 consisted of $1.5 million computing equipment purchases primarily to satisfy
customer contracts. Approximately 25% of these capital purchases were for computer servers, which are required to deliver our
services. The remaining purchases consisted primarily of leasehold improvements. Our 2014 investing activities consist of $1.9
million in computer and networking equipment purchases and $1.5 million in furniture and leasehold improvements associated with
the lease renewal for our Dallas headquarters in 2013.
Cash used in financing activities in 2015 included $15.0 million used to repurchase our common stock and $361 thousand used
in the repurchase of common stock related to the tax impact of vesting restricted awards offset by $8.7 million received from the
exercise of stock options. The stock repurchases were made pursuant to a stock repurchase program authorized by our board of
directors, which was completed in October 2015. Cash used in financing activities in 2014 included $16.2 million used to repurchase
our common stock and $257 thousand used in the repurchase of common stock related to the tax impact of vesting restricted awards
offset by $748 thousand received from the exercise of stock options.
24
Options of ZixCorp Common Stock
We have significant options outstanding that are currently vested. There is no assurance that any of these options will be
exercised; therefore the extent of future cash inflow and related dilution from additional option activity is not certain. The following
table summarizes the options that were outstanding as of December 31, 2015. The vested options are a subset of the outstanding
options. The value of the options is the number of options exercisable into shares multiplied by the exercise price for each share.
Exercise Price Range
Summary of Outstanding Options
Total Value of
Outstanding
Options
(In thousands)
Vested
Options
(included in
outstanding
options)
Outstanding
Options
Total Value of
Vested
Options
(In thousands)
287
1,091
4,730
6,108
204,050 $
287
1,467
428,828
4,730 1,003,360
6,484 1,636,238 $
$1.11 - $1.99
$2.00 - $3.49
$3.50 - $4.99
Total
Liquidity Summary
204,050 $
567,142
1,003,360
1,774,552 $
Based on our current 2016 budget plans, we believe we have adequate resources and liquidity to sustain operations for at least
the next twelve months.
Off-Balance Sheet Arrangements
None.
Contractual Obligations and Contingent Liabilities and Commitments
We have total contractual obligations over the next year of $1.4 million and $3.5 million over the next three years primarily
consisting of various operating office lease agreements. The lease of our headquarters facility in Dallas expires in 2024.
A summary of our fixed contractual obligations and commitments at December 31, 2015, is as follows:
(In thousands)
Operating leases
Total
1 Year
Payments Due by Period
2-3 Years
4-5 Years
> 5 Years
$
9,717 $
1,369 $
2,158 $
2,065 $
4,125
We have severance agreements with certain employees which would require us to pay up to approximately $4.3 million if all
such employees separated from employment with our Company following a triggering event (e.g., change of control) as defined in the
severance agreements.
New Accounting Standards
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-
09), which supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity
expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so,
more judgement and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for us beginning in 2018, and requires using either of the following transition methods: (i) a full
retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical
expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of
adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-
09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2018.
25
Classification of Deferred Taxes
In November 2015, the FASB issued guidance that requires entities to present deferred tax assets and deferred tax liabilities as
noncurrent in a classified balance sheet. The standard will be effective for annual periods beginning after December 15, 2016, but may be
adopted early. This new guidance does not have a material impact on our consolidated financial statements. We have chosen to
prospectively apply the guidance to our 2015 balance sheet. Prior year balance sheets were not retroactively adjusted.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not believe that we face exposure to material market risk with respect to our cash, cash equivalents and restricted cash
investments, which totaled $28.7 and $21.7 million at December 31, 2015 and 2014, respectively. We held no marketable securities
and no debt as of December 31, 2015 and 2014.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 begins on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Effectiveness of Disclosure Controls and Procedure
In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-
K, management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of
the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).
Based on their evaluation of these disclosure controls and procedures, they have concluded that our disclosure controls and procedures
were effective as of the date of such evaluation.
Certifications of our principal executive officer and our principal accounting officer, which are required in accordance with Rule
13a- 14 of the Exchange Act, are attached as exhibits to this Annual Report. This “Controls and Procedures” section includes the
information concerning controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications
for a more complete understanding of the topics presented.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). 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 risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this
assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway
Commission in “Internal Control—Integrated Framework”. Based on this assessment, our management concluded that, as of
December 31, 2015, our internal control over financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2015, has been audited by Whitley Penn
LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Controls over Financial Reporting
During the three months ended December 31, 2015, there have been no changes in our internal control over financial reporting
identified in connection with the evaluation described above that have materially affected or are reasonably likely to materially affect
internal control over financial reporting.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Zix Corporation
We have audited Zix Corporation and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2015
based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). 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 Annual 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of December 31, 2015 and 2014, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated
March 10, 2016, expressed an unqualified opinion on those consolidated financial statements.
/s/ WHITLEY PENN LLP
Dallas, Texas
March 10, 2016
27
Item 9B. Other Information
None.
28
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Certain information required by this Item 10 is incorporated by reference from our Proxy Statement related to the 2016 Annual
Meeting of Shareholders under the sections “OTHER INFORMATION YOU NEED TO MAKE AN INFORMED DECISION —
Directors, Executive Officers and Significant Employees” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and
“CORPORATE GOVERNANCE — Code of Ethics,” and “Nominating and Corporate Governance Committee, Selection of Director
Nominees,” and “Audit Committee.”
The board of directors has adopted a Code of Conduct and Code of Ethics that applies to all directors, officers and employees of
the Company. A copy of this document is available on our website at www.zixcorp.com under “Corporate Governance.” Any waiver
or amendment of the Code of Ethics with respect to our chief executive officer and senior financial officers will be publicly disclosed
as required by applicable law and regulation, including by posting the waiver on our website.
Item 11. Executive Compensation
The information required by this Item 11, including certain information pertaining to Company securities authorized for
issuance under equity compensation plans, is incorporated by reference from our Proxy Statement related to the 2016 Annual Meeting
of Shareholders under the section “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated by reference from our Proxy Statement related to the 2016 Annual
Meeting of Shareholders under the section “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT” and “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS — Equity Compensation Plan
Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference from our Proxy Statement related to the 2016 Annual
Meeting of Shareholders under the section “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS — Certain
Relationships and Related Transactions” and “CORPORATE GOVERNANCE — Corporate Governance Requirements and Board
Member Independence.”
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated by reference from our Proxy Statement related to the 2016 Annual
Meeting of Shareholders under the section “INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS.”
29
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
See Index to Consolidated Financial Statements on page F-1 hereof.
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because of the
absence of the conditions under which they are required or because the information required is included in the consolidated financial
statements or notes thereto.
(a)(3) Exhibits
Exhibit
Number
3.1
— Restated Articles of Incorporation of Zix Corporation, as filed with the Texas Secretary of State on November 10, 2005.
Filed as Exhibit 3.1 to Zix Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005, and
incorporated herein by reference.
Description
3.2
— Amended and Restated Bylaws of Zix Corporation dated March 12, 2014. Filed as Exhibit 3.2 to Zix Corporation’s Form
10-K for the year ended December 31, 2013, and incorporated herein by reference.
10.1†
10.2†
— 1995 Long-Term Incentive Plan of Zix Corporation (Amended and Restated as of September 20, 2000). Filed as Exhibit
10.3 to Zix Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, and
incorporated herein by reference.
— Zix Corporation 1999 Directors’ Stock Option Plan (Amended and Restated as of August 1, 2002). Filed as Exhibit 10.1
to Zix Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002, and incorporated
herein by reference.
10.3†
— Zix Corporation 2001 Employee Stock Option Plan (Amended and Restated as of June 7, 2007). Filed as Exhibit 10.6 to
Zix Corporation’s Report on Form 8-K, filed June 12, 2007, and incorporated herein by reference.
10.4†
— Zix Corporation’s 2001 Stock Option Plan (Amended and Restated as of June 7, 2007). Filed as Exhibit 10.5 to Zix
Corporation’s Report on Form 8-K, filed June 12, 2007, and incorporated herein by reference.
10.5†
— Zix Corporation’s 2003 New Employee Stock Option Plan (Amended and Restated as of June 7, 2007). Filed as Exhibit
10.4 to Zix Corporation’s Report on Form 8-K, filed June 12, 2007, and incorporated herein by reference.
10.6†
— Zix Corporation 2004 Stock Option Plan (Amended and Restated as of June 7, 2007). Filed as Exhibit 10.3 to Zix
Corporation’s Report on Form 8-K, filed June 12, 2007, and incorporated herein by reference.
10.7†
— Zix Corporation 2004 Stock Option Plan (Amended and Restated as of May 25, 2005). Filed as Exhibit 10.1 to Zix
Corporation’s Registration Statement on Form S-8 (Registration No. 333-126576), dated July 13, 2005, and incorporated
herein by reference.
10.8†
— Zix Corporation 2004 Directors’ Stock Option Plan, dated May 6, 2004. Filed as Exhibit 10.2 to Zix Corporation’s
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, and incorporated herein by reference.
10.9†
— Zix Corporation 2006 Directors’ Stock Option Plan (Amended and Restated as of June 7, 2007) Filed as Exhibit 10.1 to
Zix Corporation’s Current Report on Form 8-K, filed June 12, 2007, and incorporated herein by reference.
10.10†
— Form of Stock Option Agreement (with no “change in control” provision) for Zix Corporation Stock Option Plans. Filed
as Exhibit 10.2 to Zix Corporation’s Registration Statement on Form S-8 (Registration No. 333-126576), dated July 13,
2005, and incorporated herein by reference.
10.11†
— Form of Stock Option Agreement (with “change in control” provision) for Zix Corporation Stock Option Plans. Filed as
Exhibit 10.3 to Zix Corporation’s Registration Statement on Form S-8 (Registration No. 333-126576), dated July 13,
2005, and incorporated herein by reference.
10.12†
— Form of Stock Option Agreement (with “acceleration event” provision) for Zix Corporation Stock Option Plans and
applicable to option agreements held by the Company’s chief executive officer and direct reports. Filed as Exhibit 10.17
30
Exhibit
Number
Description
to Zix Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007, and incorporated herein by
reference.
10.13
— Zix Corporation 401(k) Retirement Plan. Filed as Exhibit 10.10 to Zix Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2003, and incorporated herein by reference.
10.14
— Adoption Agreement relating to Zix Corporation 401(k) Retirement Plan. Filed as Exhibit 10.11 to Zix Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference.
10.15†
— Form of Zix Corporation Outside Director Stock Option Agreement. Filed as Exhibit 10.3 to Zix Corporation’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004, and incorporated herein by reference.
10.16†
— Form of Zix Corporation Outside Director Stock Option Agreement. Filed as Exhibit 10.1 to Zix Corporation's Quarterly
Report on Form 10-Q for the period ended June 30, 2010, and incorporated herein by reference.
10.17†
— Form of Zix Corporation Employee Stock Option Agreement. Filed as Exhibit 10.2 to Zix Corporation's Quarterly
Report on Form 10-Q for the period ended June 30, 2010, and incorporated herein by reference.
10.18†
— Form of Director Indemnification Agreement. Filed as Exhibit 10.1 to Zix Corporation’s Current Report on Form 8-K
dated December 20, 2010, and incorporated herein by reference.
10.19†
— Form of Executive Termination Benefits Agreement. Filed as Exhibit 10.1 to Zix Corporation's Quarterly Report on
Form 10-Q for the period ended June 30, 2011, and incorporated herein by reference.
10.20†
— Zix Corporation 2012 Incentive Plan. Filed as Appendix A of Schedule 14A on April 27, 2012, and incorporated herein
by reference.
10.21†
— Form of Executive Termination Benefits Agreement. Filed as Exhibit 10.1 to Zix Corporation’s Quarterly Report on
Form 10-Q for the period ended September 30, 2012, and incorporated herein by reference.
10.22
— Shareholder’s Agreement dated December 28, 2012, among Zix Corporation, and Rockall Emerging Markets Master
Fund Limited, Meldrum Asset Management, LLC, Fulvio Dobrich, Con Egan, Conor O’Driscoll, Michael E. Dailey, and
Mark J. Bonney. Filed as Exhibit 10.1 to Zix Corporation’s Current Report on Form 8-K dated December 31, 2012, and
incorporated herein by reference.
10.23
— Form of Amended and Restated Employment Termination Benefits Agreement. Filed as Exhibit 10.1 to Zix
Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2015, and incorporated herein by reference.
10.24
— Zix Corporation Amended and Restated 2012 Incentive Plan. Filed as Appendix A of Schedule 14A on May 13, 2015,
and incorporated herein by reference.
10.25
— Letter Agreement Concerning Transition Matters, dated as of July 21, 2015, by and between Zix Corporation and
Richard D. Spurr. Filed as exhibit 10.3 to Zix Corporation’s Quarterly report on Form 10-Q for the period ended June
30, 2015, and incorporated herein by reference.
10.26
— Second Amended and Restated Employment Termination Benefits Agreement, dated as of July 21, 2015, by and
between Zix Corporation and Richard D. Spurr. Filed as Exhibit 10.4 to Zix Corporation’s Quarterly Report on Form 10-
Q for the period ended June 30, 2015, and incorporated herein by reference.
10.27*
— Amendment No. One to Zix Corporation Amended and Restated 2012 Incentive Plan.
10.28** — Amendment No. One to Zix Corporation Stock Option Agreement, dated as of January 18, 2016, between Richard D.
Spurr and Zix Corporation.
10.29** — Amendment No. One to Zix Corporation Employee Stock Option Agreement, dated as of January 18, 2016, between
Richard D. Spurr and Zix Corporation.
10.30** — Amendment No. One to Zix Corporation Employee Stock Option Agreement, dated as of January 18, 2016, between
Richard D. Spurr and Zix Corporation.
21.1
— Subsidiaries of Zix Corporation. Filed as Exhibit 21.1 to Zix Corporation's Annual Report on Form 10-K dated
December 31, 2009, and incorporated herein by reference.
31
Exhibit
Number
Description
23.1*
— Consent of Independent Registered Public Accounting Firm (Whitley Penn LLP).
31.1*
— Certification of David J. Wagner, President and Chief Executive Officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2*
— Certification of Michael W. English, Chief Financial Officer (Principal Financial Officer and Principal Accounting
Officer) of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
— Certification of David J. Wagner and Michael W. English, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.1*
— 101. INS (XBRL Instance Document)
101. SCH (XBRL Taxonomy Extension Schema Document)
101. CAL (XBRL Calculation Linkbase Document)
101. LAB (XBRL Taxonomy Label Linkbase Document)
101. DEF (XBRL Taxonomy Linkbase Document)
101. PRE (XBRL Taxonomy Presentation Linkbase Document)
Filed herewith.
Furnished herewith.
*
**
† Management contract or compensatory plan or arrangement.
32
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Dallas, state of Texas, on March 10, 2016.
SIGNATURES
ZIX CORPORATION
By: /s/ MICHAEL W. ENGLISH
Michael W. English
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on March 10, 2016.
Signature
Title
/s/ DAVID J. WAGNER
(David J. Wagner)
/s/ MICHAEL W. ENGLISH
(Michael W. English)
/s/ MARK J. BONNEY
(Mark J. Bonney)
/s/ TAHER A. ELGAMAL
(Taher A. Elgamal)
/s/ ROBERT C. HAUSMANN
(Robert C. Hausmann)
/s/ MARIBESS L. MILLER
(Maribess L. Miller)
/s/ RICHARD D. SPURR
(Richard D. Spurr)
Chief Executive Officer, President and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Chairman, Director
Director
Director
33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm .............................................................................................................. F-2
Consolidated Balance Sheets at December 31, 2015 and 2014 ......................................................................................................... F-3
Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013 ......................................................... F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014, and 2013 ................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013 .................................................. F-6
Notes to Consolidated Financial Statements ...................................................................................................................................... F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Zix Corporation
We have audited the accompanying consolidated balance sheets of Zix Corporation and subsidiaries ( the “Company”), as of
December 31, 2015 and 2014, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2015. The Company’s management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company, as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 10, 2016 expressed an unqualified opinion.
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting related to classification of
deferred tax asset and liabilities as noncurrent on the balance sheet in 2015 due to the adoption of Accounting Standards Update No.
2015-17, Income Taxes. The accounting change has been prospectively applied.
/s/ WHITLEY PENN LLP
Dallas, Texas
March 10, 2016
F-2
ZIX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value data)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Prepaid and other current assets
Deferred tax assets
Total current assets
Property and equipment, net
Goodwill
Deferred tax assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Total current liabilities
Long-term liabilities:
Deferred revenue
Deferred rent
Total long-term liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $1 par value, 10,000,000 shares authorized; none issued
and outstanding
Common stock, $0.01 par value, 175,000,000 shares authorized; 77,852,453 issued
and 56,546,879 outstanding in 2015 and 75,017,775 issued and 56,980,789
outstanding in 2014
Additional paid-in capital
Treasury stock, at cost; 21,305,574 common shares in 2015 and 18,036,986
common shares in 2014
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2015
2014
28,664 $
498
2,908
—
32,070
4,143
2,161
48,912
87,286 $
370 $
4,697
23,182
28,249
839
1,426
2,265
30,514
21,685
1,452
2,372
1,763
27,272
4,399
2,161
49,892
83,724
506
2,930
21,587
25,023
898
1,533
2,431
27,454
—
—
767
372,400
(82,243 )
(234,152 )
56,772
87,286 $
741
361,579
(66,882)
(239,168)
56,270
83,724
$
$
$
$
See notes to consolidated financial statements.
F-3
ZIX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
Revenues
Cost of revenue
Gross margin
Research and development expenses
Selling, general and administrative expenses
Operating income
Other income (expense):
Investment and other income
Total other income
Income before income taxes
Income tax (expense) benefit
Net income
Basic income per common share
Diluted income per common share
Weighted average shares outstanding
Basic common shares outstanding
Diluted common shares outstanding
2015
Year Ended December 31,
2014
2013
$
$
$
$
54,713 $
9,593
45,120
8,317
28,887
7,916
244
244
8,160
(3,144)
5,016 $
0.09 $
0.09 $
50,347 $
8,324
42,023
9,051
26,222
6,750
183
183
6,933
(2,830)
4,103 $
0.07 $
0.07 $
48,138
7,614
40,524
9,563
21,646
9,315
132
132
9,447
1,006
10,453
0.17
0.17
56,421,833
57,476,006
57,948,864
58,966,625
61,139,035
62,526,507
See notes to consolidated financial statements.
F-4
ZIX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Paid-In
Treasury Accumulated
Stockholders’ Equity
Additional
(In thousands, except share data)
Balance, December 31, 2012
Issuance of common stock upon exercise of stock
options
Issuance of common stock upon vesting of
restricted stock units
Issuance of restricted common stock
Employee stock-based compensation costs
Treasury repurchase program
Net income
Balance, December 31, 2013
Issuance of common stock upon exercise of stock
options
Issuance of common stock upon vesting of
restricted stock units
Issuance of restricted common stock
Employee stock-based compensation costs
Treasury repurchase program
Net income
Balance, December 31, 2014
Issuance of common stock upon exercise of stock
options
Issuance of common stock upon vesting of
restricted stock units
Issuance of restricted common stock
Employee stock-based compensation costs
Treasury repurchase program
Net income
Balance, December 31, 2015
Total
Stockholders’
Equity
Shares
73,165,433 $
Amount
Capital
Stock
Deficit
728 $ 355,747 $ (41,506 ) $ (253,724)
61,245
839,263
9
1,696
—
—
1,705
28,250
385,000
—
—
—
74,417,946
—
—
—
—
—
1,711
—
—
—
—
737 359,154
—
—
(120 )
(8,760 )
—
—
—
—
—
10,453
(50,386 ) (243,271)
—
—
1,591
(8,760)
10,453
66,234
407,829
4
744
—
—
748
52,000
140,000
—
—
—
75,017,775
—
—
—
—
1,681
—
—
—
—
—
741 361,579
—
—
(257 )
(16,239 )
—
—
—
—
—
4,103
(66,882 ) (239,168)
—
—
1,424
(16,239)
4,103
56,270
2,668,928
26
8,648
—
—
8,674
65,750
100,000
—
—
—
77,852,453 $
—
—
—
—
—
—
—
—
—
5,016
767 $ 372,400 $ (82,243 ) $ (234,152) $
—
—
(361 )
(15,000 )
—
—
—
2,173
—
—
—
—
1,812
(15,000)
5,016
56,772
See notes to consolidated financial statements.
F-5
ZIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income
Non-cash items in net income:
Depreciation and amortization
Employee stock-based compensation expense
Changes in deferred taxes
Changes in operating assets and liabilities:
Receivables
Prepaid and other assets
Accounts payable
Deferred revenue
Accrued and other liabilities
Net cash provided by operating activities
Investing activities:
Purchases of property and equipment
Net cash used in investing activities
Financing activities:
Proceeds from exercise of stock options
Treasury stock
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2015
Year Ended December 31,
2014
2013
$
5,016 $
4,103 $
10,453
2,152
2,173
2,743
954
(536)
(81)
1,536
1,660
15,617
(1,951)
(1,951)
8,674
(15,361)
(6,687)
6,979
21,685
28,664 $
1,623
1,681
2,398
872
(334)
(1)
2,127
848
13,317
(3,402)
(3,402)
748
(16,496)
(15,748)
(5,833)
27,518
21,685 $
1,466
1,711
(1,401)
(1,357)
(341)
(103)
1,986
884
13,298
(1,593)
(1,593)
1,705
(8,880)
(7,175)
4,530
22,988
27,518
$
See notes to consolidated financial statements.
F-6
ZIX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Overview
Zix Corporation (“ZixCorp,” the “Company,” “we,” “our,” “us”) provides email encryption, data loss prevention (“DLP”) and
Bring-Your-Own-Device (“BYOD”) solutions to meet the data protection and compliance needs of organizations primarily in the
healthcare, financial services, and government sectors.
2. Summary of Significant Accounting Policies
Basis of Presentation — The accompanying consolidated financial statements include the accounts of all our wholly-owned
subsidiaries and are prepared in accordance with accounting principles generally accepted in the United States of America. All inter-
company accounts and transactions have been eliminated in consolidation.
Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reported period. Our significant estimates include primarily those required in the
valuation or impairment analysis of goodwill, property and equipment, revenue recognition, allowances for doubtful accounts, stock-
based compensation, litigation accruals, valuation allowances for deferred tax assets and tax accruals. Although we believe that
adequate accruals have been made for unsettled issues, additional gains or losses could occur in future years from resolutions of
outstanding matters. Actual results could differ materially from original estimates.
Cash Equivalents — Cash investments with maturities of three months or less when purchased are considered cash equivalents.
Fair Value of Financial Instruments —The Company does not measure the fair value of any financial instrument other than cash
equivalents, options, and other equity awards. The carrying values of other financial instruments (receivables and accounts payable)
are not recorded at fair value but approximate fair values primarily due to their short-term nature. The carrying values of other current
assets and accrued expenses are also not recorded at fair value, but approximate fair values primarily due to their short-term nature.
Valuation of Property and Equipment — The accounting policies and estimates relating to property and equipment are
considered significant because of the potential impact that impairment, obsolescence, or change in an asset’s useful life could have on
the Company’s operating results.
We record an impairment charge on the assets to be held and used when we determine based upon certain triggering events that
the carrying value of property and equipment may not be recoverable based on expected undiscounted cash flows attributable to such
assets. The amount of a potential impairment is determined by comparing the carrying amount of the asset to either the value
determined from a projected discounted cash flow method, using a discount rate that is considered to be commensurate with the risk
inherent in the Company’s current business model or the estimated fair market value. Assumptions are made with respect to future net
cash flows expected to be generated by the related asset. An impairment charge would be recorded for an amount by which the
carrying value of the asset exceeded the discounted projected net cash flows or estimated fair market value. Also, even where a current
impairment charge is not necessary, the remaining useful lives are evaluated. No impairment was recorded for any of the periods
presented.
Property and equipment are recorded at cost and depreciated or amortized using the straight-line method over their estimated
useful lives as follows: computer and office equipment and software — three years; leasehold improvements — the shorter of five
years or the lease term; and furniture and fixtures — five years.
Goodwill — We account for the valuation of goodwill and other intangible assets after classifying intangible assets into three
categories: (1) intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite lives not subject to
amortization; and (3) goodwill. For intangible assets with finite lives, tests for impairment must be performed if conditions exist that
indicate the carrying value may not be recoverable. For intangible assets with indefinite lives and goodwill, tests for impairment must
be performed at least annually or more frequently if events or circumstances indicate that assets might be impaired.
Goodwill was $2.2 million, or 2% and 3% of total assets for the years ended December 31, 2015 and 2014, respectively.
Our goodwill is not being amortized, but we do evaluate the goodwill for impairment annually in the fourth quarter, or when
there is reason to believe that the value has been diminished or impaired. Evaluations for possible impairment are based upon a
F-7
comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned, versus the sum of the carrying
value of the assets and liabilities of that unit including the assigned goodwill value. The fair values used in this evaluation are
estimated based on the Company’s market capitalization, which is based on the outstanding stock and market price of the stock.
Impairment is deemed to exist if the net book value of the unit exceeds its estimated fair value. No impairment was recorded for any
of the periods presented.
Deferred Tax Assets — Deferred tax assets are recognized if it is “more likely than not” that the benefit of the deferred tax asset
will be realized on future federal or state income tax returns. At December 31, 2015, we provided a valuation allowance against a
significant portion, $46.1 million, of our accumulated U.S. deferred tax assets, reflecting our historical losses and the uncertainty of
future taxable income sufficient to utilize net operating loss carryforwards prior to their expiration. Our total deferred tax asset not
subject to a valuation allowance is valued at $48.9 million, and consists of $41.8 million for federal net operating loss carryforwards,
$4.1 million relating to temporary timing differences between GAAP and tax-related expense, $1.8 million relating to U.S. state
income tax credits and $1.2 million related to Alternative Minimum Tax credits. If U.S. taxable income increases from its current level
in a future period or if the facts and circumstances on which our estimates and assumptions are based were to change, thereby
impacting the likelihood of realizing the deferred tax assets, judgment would have to be applied in determining the amount of
valuation allowance no longer required. Reversal of all or a part of this valuation allowance could have a significant positive impact
on operating results in the period that it becomes more likely than not that certain of the Company’s deferred tax assets will be
realized. Alternatively, should our future income decrease from current levels, a resulting increase to all or a part of this valuation
allowance could also have a significant negative impact on our operating results.
Leases — A leased asset whose lease terms meet the criteria for capitalization is recorded as an asset and depreciated. If a lease
does not meet the criteria for capitalization, it is classified as an operating lease and payments are recorded as rent expense. For 2015
and 2014 we had no leases that qualified as capital leases. Lease renewal options which we are “reasonably assured” of using and the
related payments are taken into account when initially classifying and recording the lease as a capital lease obligation or as straight-
line rent if an operating lease. Funds provided by the lessor for leasehold improvements are recorded as a deferred lease incentive and
amortized as a reduction of rent expense over the lease term.
Revenue Recognition — We develop, market, and support applications that connect, protect and deliver information in a secure
manner. We generate our sales through both a direct sales team and, increasingly, through our channel partners. We derive our
revenue from subscription fees for rights related to the use of our software. Software subscription terms typically range from one to
three years.
Revenue is recognized when all of the following criteria have been met:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered,
the price is fixed and determinable, and
collectability is probable.
We record our revenue net of any value added or sales tax. Discounts provided to customers are recorded as reductions in
revenue.
We have determined that substantially all of our revenue arrangements are in the scope of the software revenue recognition
rules. Multiple elements in our software arrangements are sold as a single unit consisting of the following elements: (i) subscription
licensed software delivered to the customer’s site, (ii) ongoing customer support and, (iii) access to our hosted encryption network
(Zix encryption network) during the term of the agreement.
(i)
Software at the customer site performs critical functions of the email encryption process and is the predominant element in
our arrangements. Actions performed by the software at the customer site include identifying when encryption is needed
through the use of filters and lexicons, determining the best method of delivery (BMOD) by examining secure connection
options and selecting the BMOD. BMOD is a key marketing differentiator for us and is defined as the most secure and
easiest method to deliver encrypted email. Customers can install the software on their own hardware or we can deliver to
the customer site hardware that we own. In recent years more customers have opted to have the software installed on their
own hardware, and as a result the number of Zix supplied hardware devices has declined. Any hardware provided as part
of our services primarily included manufacturer provided warranty provisions. We recorded no warranty expense in any
of the presented periods.
(ii) Customer support includes unspecified software upgrades, updates and bug fixes and access to live technical support
technicians and on-line knowledge resources
F-8
(iii) The Zix encryption network includes access to our central network which facilitates transparent encrypted email exchange
among all of our customers by providing public encryption keys (asymmetrical encryption requires two keys- a public key
provided by the central network and a private key generated by the software at the customer site). The delivered software
element is essential to the functionality and utility of this central network. The network also enables our customers to send
encrypted emails to non-Zix customer recipients through a portal.
A small portion of our revenue (less than 5% in 2015) is derived from hosted email encryption solutions. We apply general
revenue recognition guidance to these hosted arrangements.
In all revenue arrangements we cannot determine vendor specific objective evidence (VSOE) and we cannot establish separate
units of accounting for the multiple elements of our arrangements that are bundled and sold as one unit. All revenue arrangements are
sales of subscription based (i.e. time-based) licenses. We defer revenue until the software is delivered and the service is deployed.
Upon deployment, we commence revenue recognition and revenue is recognized ratably over the subscription period generally
ranging from one to three years.
Software Development Costs —Costs incurred in the development and testing of subscription software products related to
research, project planning, training, maintenance and general and administrative activities, and overhead costs are expensed as
incurred. The costs of relatively minor upgrades and enhancements to the software are also expensed as incurred.
Costs for the development of new software solutions and substantial enhancements to existing software solutions are expensed
as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. No research
and development costs have been capitalized because we believe that technological feasibility is established concurrent with general
release to customers.
Research and development costs associated with software developed for internal use on behalf of our customers are capitalized.
To date, capitalized costs for software developed for internal use on behalf of our customers were not material.
Advertising Expense — Advertising costs are expensed as incurred. Our operations include advertising expense of $2.1 million,
$2.9 million, and $959 thousand in 2015, 2014, and 2013, respectively.
Stock-Based Compensation — We currently use the straight-line amortization method for recognizing stock option and
restricted stock compensation costs. The measurement and recognition of compensation expense for all share-based payment awards
made to our employees and directors are based on the estimated fair value of the awards on the grant dates. The grant date fair value is
estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a
price exists. Such cost is recognized over the period during which an employee or director is required to provide service in exchange
for the award, i.e., “the requisite service period” (which is usually the vesting period). We also estimate the number of instruments that
will ultimately be earned, rather than accounting for forfeitures as they occur.
Earnings Per Share (“EPS”) — Basic EPS is based on the weighted average number of common shares outstanding during
each period. Diluted EPS adjusts Basic EPS for the effects of dilutive common stock equivalents outstanding during each period using
the treasury stock method.
New Accounting Standards
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU
2014-09), which supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to
recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which
an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and,
in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing
U.S. GAAP.
The standard is effective for us beginning 2018, and requires using either of the following transition methods: (i) a full
retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical
expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of
adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU
2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in
2018.
F-9
Classification of Deferred Taxes
In November 2015, the FASB issued guidance that requires entities to present deferred tax assets and deferred tax liabilities as
noncurrent on the balance sheet. The standard will be effective for annual periods beginning after December 15, 2016, but may be
adopted early. This new guidance did not have a material impact on our consolidated financial statements. We have chosen to
prospectively apply the guidance to our 2015 balance sheet. Prior year balances were not retroactively adjusted.
3. Stock Options and Stock-based Employee Compensation
Below is a summary of common stock options outstanding at December 31, 2015:
Authorized
Shares
Options
Outstanding
Options
Vested
Available
for Grant
Employee and Director Stock Option Plans:
2001 Stock Option Plan
2001 Employee Stock Option Plan
2004 Stock Option Plan
2006 Director’s Stock Option Plan
2012 Incentive Plan
Total
11,400
4,020
2,525,000
300,000
—
11,400
—
4,020
—
5,000,000 1,258,069 1,258,069
209,500
1,100,000
—
6,300,000
153,249 3,751,308
15,225,000 1,774,552 1,636,238 3,751,308
209,500
291,563
Under all of our stock option plans, new shares are issued when options are exercised.
Employee and Director Stock Option Plans
We have non-qualified stock options outstanding to employees and directors under various stock option plans. The plans require
the exercise price of options granted under these plans to equal or exceed the fair market value of the Company’s common stock on
the date of grant. The options, subject to termination of employment, generally expire ten years from the date of grant. Historically,
our employee options typically vested pro-rata and quarterly over three years. Option grants to employees, officers and directors
frequently contain accelerated vesting provisions upon the occurrence of a change of control, as defined in the applicable option
agreements.
Under the terms of the 2012 Incentive Plan adopted by the Company’s Board of Directors on April 13, 2012 (the “2012 Plan”),
2,700,000 shares are available for issuance, plus a number of additional shares (not to exceed 1,327,000) underlying options
outstanding under certain of the Company’s prior equity plans that thereafter terminate or expire unexercised, or are cancelled,
forfeited, or lapse for any reason. Our shareholders approved an Amended and Restated 2012 Incentive Plan during our annual
meeting held June 24, 2015, increasing the number of shares available for grant by 3,600,000. Awards issued under the 2012 Plan
typically vest pro-rata and quarterly over four years.
Accounting Treatment
We use the straight-line amortization method for recognizing stock option compensation costs. Our share-based awards include
stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance units (“PUs”).
For the twelve months ended December 31, 2015, 2014, and 2013, respectively, the total stock-based compensation expense
resulting from stock options, RSAs, RSUs, and PUs was recorded to the following line items of our consolidated statements of
income:
(In thousands)
Cost of revenue
Research and development expenses
Selling, general and administrative expenses
Stock-based compensation expense
Year Ended December 31,
2014
2013
2015
$
$
182 $
242
1,749
2,173 $
180 $
237
1,264
1,681 $
172
212
1,327
1,711
Our 2015 stock-based compensation expense includes $540 thousand related to the accelerated vesting of awards related to our
CEO departure. A deferred tax asset of $625 thousand, $462 thousand and $483 thousand, resulting from stock-based compensation
expense associated with awards relating to the Company’s U.S. operations, was recorded for the twelve months ended December 31,
2015, 2014 and 2013, respectively. As of December 31, 2015, there was $2.1 million of total unrecognized stock-based compensation
F-10
related to non-vested share-based compensation awards granted under the stock option plans. This cost is expected to be recognized
over a weighted average period of 1.5 years.
We used the Black-Scholes Option Pricing Model (“BSOPM”) to determine the fair value of option grants made during 2013.
No options were granted in 2014 or 2015. On January 1, 2006, we elected to use the “simplified” method to calculate the estimated
life of options granted to employees. The Company continued to use the “simplified” method for all options granted through 2013.
The Company has elected to use the “historical” method to calculate the estimated life of any options that may be granted in the
future. The expected stock price volatility was calculated by averaging the historical volatility of the Company’s common stock over a
term equal to the expected life of the options.
The following weighted average assumptions were applied in determining the fair value of options granted during the respective
periods:
Risk-free interest rate
Expected option life (years)
Expected stock price volatility
Expected dividend yield
Fair value of options granted
Year Ended December 31,
2014
2013
2015
—
—
—
—
—
—
—
—
—
— $
1.05%
5.8
69%
—
1.99
The assumptions used in the BSOPM valuation are critical as a change in any given factor could have a material impact on the
financial results of the Company. The weighted average grant-date fair value of awards of restricted stock and RSU’s is based on
quoted market price of the Company’s common stock on the date of grant.
Stock Option Activity
There were 2,668,928 stock options exercised for the twelve months ended December 31, 2015. As a result of these stock option
exercises, there was $19 thousand in excess tax benefits recorded in 2015. For the comparative period in 2014, there were 407,829
stock option exercises.
The following is a summary of all stock option transactions for the three years ended December 31, 2015:
Outstanding at January 1, 2013
Granted at market price
Cancelled or expired
Exercised
Outstanding at December 31, 2013
Granted at market price
Cancelled or expired
Exercised
Outstanding at December 31, 2014
Granted at market price
Cancelled or expired
Exercised
Outstanding at December 31, 2015
Options exercisable at December 31, 2015
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Yrs)
4.28
3.27
5.15
2.03
4.50
—
7.71
1.83
3.42
—
4.69
3.25
3.65
3.73
3.41
3.13
Shares
7,684,776 $
150,000 $
(247,139) $
(839,263) $
6,748,374 $
—
(1,850,036) $
(407,829) $
4,490,509 $
—
(47,029) $
(2,668,928) $
1,774,552 $
1,636,238 $
At December 31, 2015, all 1,774,552 options outstanding and all 1,636,238 options exercisable had an exercise price lower than
the market value of the Company’s common stock. The aggregate intrinsic value of these options was $2.5 million and $2.2 million,
respectively. At December 31, 2014, we had 2,207,201 options outstanding and 1,852,423 options exercisable in which the exercise
price was lower than the market value of the Company’s common stock. The aggregate intrinsic value of these options was $2.4
million and $2.1 million, respectively.
F-11
The total intrinsic value of options exercised during the years ended December 31, 2015 and 2014, was $4.4 million and $716
thousand, respectively.
Summarized information about stock options outstanding at December 31, 2015, is as follows:
Range of
Exercise Prices
$1.11 - $1.99
$2.00 - $3.49
$3.50 - $4.99
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
Options Exercisable
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
2.15 $
5.61 $
2.37 $
3.41 $
204,050 $
1.41
428,828 $
2.59
4.71 1,003,360 $
3.65 1,636,238 $
1.41
2.54
4.71
3.73
Number
Outstanding
204,050
567,142
1,003,360
1,774,552
There were 4,135,731 and 5,908,498 exercisable options at December 31, 2014 and 2013, respectively.
Restricted Stock Activity
The following is a summary of all restricted stock activity during the three years ended December 31, 2015:
Non-vested at January 1, 2013
Granted at market price
Vested
Cancelled
Non-vested restricted stock at December 31, 2013
Granted at market price
Vested
Cancelled
Non-vested restricted stock at December 31, 2014
Granted at market price
Vested
Cancelled
Non-vested restricted stock at December 31, 2015
Restricted
Shares
351,000 $
385,000 $
(87,750) $
—
648,250 $
140,000 $
(184,000) $
—
604,250 $
100,000 $
(240,750) $
(40,250) $
423,250 (cid:3)(cid:3) $
Weighted
Average
Fair Value
2.49
3.45
2.49
—
3.06
4.66
2.99
—
3.45
5.18
3.35
3.57
3.91
As a result of these vesting RSA’s $84 thousand in excess tax benefits was recorded in 2015.
F-12
Restricted Stock Unit Activity
The following is a summary of all RSU activity during the three years ended December 31, 2015:
Non-vested at January 1, 2013
Granted at market price
Vested
Cancelled
Non-vested restricted stock units at December 31, 2013
Granted at market price
Vested
Cancelled
Non-vested restricted stock units at December 31, 2014
Granted at market price
Vested
Cancelled
Non-vested restricted stock units at December 31, 2015
Restricted
Stock Units
Weighted
Average
Fair Value
113,000 $
95,000 $
(28,250) $
—
179,750 $
55,000 $
(52,000) $
—
182,750 $
215,000 $
(65,750) $
(32,500) $
299,500 $
2.49
3.45
2.49
—
3.00
4.66
2.93
—
3.52
3.88
3.29
3.88
3.79
Performance Unit Activity
The following is a summary of all PU activity during the two years ended December 31, 2015:
Non-vested at January 1, 2014
Granted at market price
Vested
Forfeited
Non-vested restricted stock units at December 31, 2014
Granted at market price
Vested
Forfeited
Non-vested restricted stock units at December 31, 2015
Restricted
Stock Units
Weighted
Average
Fair Value
—
100,000 $
—
(100,000) $
—
215,000 $
—
(32,500) $
182,500 $
—
4.66
—
4.66
—
3.88
—
3.88
3.88
In February 2016 the Compensation Committee of our board of directors approved the achievement of certain 2015 performance
metrics, resulting in the vesting of 27,428 PUs during the first quarter 2016. An additional 10,350 PU’s vested in the first quarter 2016
related to our CEO separation.
The weighted average grant-date fair value of awards of restricted stock and RSUs (collectively “restricted stock”) and PUs is
based on the quoted market price of the Company’s common stock on the date of grant.
4. Supplemental Cash Flow Information
Supplemental information relating to taxes and noncash activities:
(In thousands)
Income tax payments
Payables related to purchases of capitalized assets
Excess tax benefit on exercise and vesting of employee
equity awards
$
$
$
Year Ended December 31,
2014
2013
2015
332 $
55 $
426 $
(12 ) $
217
(97)
103 $
168 $
427
F-13
5. Receivables, net
(In thousands)
Gross accounts receivables
Allowance for returns and doubtful accounts
Unpaid portion of deferred revenue
Note receivable
Allowance for note receivable
Receivables, net
December 31,
2015
2014
7,882 $
(59)
(7,325)
458
(458)
498 $
8,116
(108 )
(6,556 )
458
(458 )
1,452
$
$
Our gross accounts receivables for the year ended 2014 included $318 thousand associated with a tenant improvement
allowance received as an incentive when we renewed the lease for our Dallas headquarters in 2013. The tenant improvement
receivable was collected in full in the first quarter 2015.
The allowance for doubtful accounts includes all specific accounts receivable which we believe are likely not collectable based
on known information. In addition, we record 2.5% of all accounts receivable greater than 90 days past due, net of those accounts
specifically reserved, as a general allowance against accounts that could potentially become uncollectible.
The reduction for deferred revenue represents future customer service or maintenance obligations which have been billed to
customers, but remain unpaid as of the respective balance sheet dates. Deferred revenue on our consolidated balance sheets represents
future customer service or maintenance obligations which have been billed and collected as of the respective balance sheet dates.
The note receivable represents the remaining outstanding balance of an original note related to the sale of a product line in 2005
in the amount of $540 thousand. This was fully reserved at the time of the sale as the note’s collectability was not assured. The note
receivable is fully reserved at December 31, 2015.
6. Prepaid and other current assets
(In thousands)
Prepaid insurance, maintenance, software licenses and other
Deferred commissions
Tax-related
Prepaid and other current assets
7. Property and Equipment
(In thousands)
Computer and office equipment and software
Leasehold improvements
Furniture and fixtures
Less accumulated depreciation and amortization
Total Property and Equipment
December 31,
2015
2014
2,596 $
364
(52)
2,908 $
1,954
443
(25 )
2,372
December 31,
2015
2014
23,797 $
6,663
1,969
32,429
(28,286)
4,143 $
23,013
6,398
1,916
31,327
(26,928 )
4,399
$
$
$
$
Our operations include depreciation and amortization expense related to property and equipment of $2.2 million, $1.6 million,
and $1.5 million in 2015, 2014, and 2013, respectfully.
8. Goodwill
At December 31, 2015 and 2014, we had goodwill totaling $2.2 million. We evaluate goodwill for impairment annually in the
fourth quarter, or when there is reason to believe that the value has been diminished or impaired. There were no impairment indicators
to the goodwill recorded as of December 31, 2015.
F-14
9. Accrued Expenses
(In thousands)
Employee compensation and benefits
Professional fees
Taxes
Other
Total accrued expenses
December 31,
2015
2014
3,028 $
467
399
803
4,697 $
1,061
473
378
1,018
2,930
$
$
10. Fair Value Measurements
FASB guidance regarding fair value measurement establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical
assets or liabilities; Level 2, defined as inputs other than quoted prices for similar assets and liabilities in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
11. Earnings Per Share and Potential Dilution
Basic earnings per share are computed using the weighted average number of common shares outstanding for the period. The
dilutive effect of potential common shares outstanding is included in diluted earnings per share. The computations for basic and
diluted earnings per share for the years ended December 31, 2015, 2014, and 2013, are as follows:
Basic weighted average shares
Effect of dilutive securities:
Employee and director stock options
Restricted Stock
RSUs
PUs
Potential dilutive common shares
2015
56,421,833
Year Ended December 31,
2014
(cid:3)(cid:3)
57,948,864 61,139,035
2013
741,002
172,126
100,353
40,692
57,476,006
782,659 1,095,227
225,741
181,219
66,504
53,832
—
51
58,966,625 62,526,507
For the years ended December 31, 2015, 2014, and 2013, weighted average shares related to certain stock options of 1,005,328,
3,240,594, and 4,054,261 respectively, were excluded from the calculation of diluted earnings per share because the stock options
were anti-dilutive. Anti-dilutive restricted stock, RSUs, and PUs of 56,542, 33,512, and 24,486, respectively, were also excluded from
the calculation for the year ended December 31, 2015. Anti-dilutive restricted stock, RSUs, and PUs of 147,292, 50,833, and 33,333,
respectively, were excluded from the calculation for the year ended December 31, 2014. Anti-dilutive restricted stock and RSUs of
31,281, and 7,719, respectively, were excluded from the calculation for the year ended December 31, 2013.
12. Significant Customers
In 2015, 2014, and 2013, no single customer accounted for 10% or more of our revenues.
13. Commitments and Contingencies
Leases
We lease office facilities under non-cancelable operating lease agreements. Our operations include rent expense for these
operating leases of $1.4 million in each of 2015 and 2014, and $1.3 million in 2013. The lease of our headquarters facility in Dallas
expires in 2024.
A summary of our fixed contractual obligations and commitments at December 31, 2015, is as follows:
(In thousands)
Operating leases
2016
$ 1,369 $
2017
1,131 $
2018
1,027 $
F-15
2019
1,030 $ 1,035 $ 4,125 $
Thereafter
2020
Total
9,717
Claims and Proceedings
We are subject to legal proceedings, claims, and litigation against our business. While the outcome of these matters is currently
not determinable and the costs and expenses of defending these matters may be significant, we currently do not expect that the
ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial statements.
14. Income Taxes
Components of the income taxes are as follows:
(In thousands)
Current:
U.S.
State
Foreign
Deferred
Federal
State
Foreign
Income tax expense (benefit)
2015
2014
2013
$
$
58 $
196
146
2,744
—
—
3,144 $
67 $
240
125
2,396
—
2
2,830 $
124
148
123
(1,400)
—
(1)
(1,006)
A reconciliation of the expected U.S. tax expense (benefit) to income taxes is as follows:
(In thousands)
Expected tax (benefit) expense at U.S. statutory rate
Decrease in valuations allowance- Operations
Decrease in valuations allowance- Other
Nondeductible expense and nontaxable income
State income taxes
Foreign income taxes
Other
Income tax expense (benefit)
2015
2014
2013
2,775 $
—
—
133
129
146
(39)
3,144 $
2,357 $
—
—
127
224
127
(5 )
2,830 $
3,212
(2,650)
(1,400)
(370)
98
122
(18)
(1,006)
$
$
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Components of our U.S. deferred income taxes as of
December 31, 2015 and 2014 are as follows:
(In thousands)
Deferred tax assets:
Reserves- Other
U.S. net operating loss carryforwards
State net operating loss carryforwards
Tax credit carryforwards
Stock-based compensation
Intangible assets
Depreciable assets
Other assets
Total deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
$
2015
2014
156 $
84,591
281
6,030
1,767
98
1,518
1,272
95,713
325
86,382
281
5,863
2,623
538
1,461
712
98,185
(671)
95,042
(46,134)
48,908 $
(496 )
97,689
(46,038 )
51,651
$
The Company has partially reserved its U.S. net deferred tax assets in 2015 and 2014 due to the uncertainty of future taxable
income. The Company has U.S. net operating loss carryforwards of approximately $249 million which begin to expire in 2020. The
Company has state credits that net of federal tax expense total $1.7 million which can be utilized through 2027 and state net operating
F-16
losses that have various expiration dates. The Company also has tax credit carryforwards of approximately $4.3 million consisting of
business tax credits which begin to expire in 2016 and alternative minimum tax credits which do not expire.
In 2010, the Company achieved positive earnings and successfully discontinued operations of its e-Prescribing segment. Based
on the weight of available objective evidence, including the Company’s history of positive earnings from continuing operations and
successful exit from e-Prescribing, management believed that it was more likely than not that a portion of the deferred tax asset would
be realized. Accordingly, the Company reduced its valuation allowance by $4.1 million in 2013.
We have determined that utilization of existing net operating losses against future taxable income is not limited by Section 382
of the Internal Revenue Code. Future ownership changes, however, may limit the company's ability to fully utilize its existing net
operating loss carryforwards against any future taxable income.
The Company or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and in the
Canadian federal and provincial jurisdictions. We have not taken a tax position that, if challenged, would have a material effect on the
financial statements or the effective tax rate for the twelve-months ended December 31, 2015, or during the prior three years. We have
determined it is not reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the
next twelve months. We are currently subject to a three-year statute of limitations by major tax jurisdictions.
15. Employee Benefit Plan
401(k) Plan — We have a retirement savings plan structured under Section 401(k) of the Internal Revenue Code covering
substantially all of our U.S. employees. Under the plan, contributions are voluntarily made by employees, and we may provide
contributions based on the employees’ contributions. Our operating income includes $389 thousand, $354 thousand, and $297
thousand, in 2015, 2014, and 2013, respectively, for net contributions from operations to this plan.
16. ZixCorp Repurchase Program
During the year ended December 31, 2015, the Company repurchased 3,185,340 shares at an aggregate cost of $15.0 million.
This completed the $15 million share repurchase authorized by our board of directors in May 2015. On May 11, 2015, the board of
directors also approved the termination of the $10 million share repurchase program announced in January 2015. No shares were
repurchased under that program.
During the year ended December 31, 2014, we repurchased a total of 4,070,195 shares at an aggregate cost of $16.2 million, as
authorized by our board of directors under a $15 million share repurchase program announced November 6, 2013, and a $10 million
repurchase program announced July 30, 2014. The 2014 repurchase activity completed both programs.
During the year ended December 31, 2013, we repurchased 1,976,900 shares at an aggregate cost of $8.8 million under the $15
million repurchase program announced November 2013.
F-17
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended December 31, 2015 and 2014:
(In thousands except per share data)
2015
Revenues
Gross margin
Net income
Basic net income per common share*
Diluted net income per common share*
2014
Revenues
Gross margin
Net income
Basic net income per common share*
Diluted net income per common share*
March 31
June 30
September 30 December 31
Quarter Ended
$
$
13,073 $
10,860
1,176
0.02
0.02
12,162 $
10,137
1,059
0.02
0.02
13,302 $
10,873
1,115
0.02
0.02
12,615 $
10,583
977
0.02
0.02
14,011 $
11,582
1,927
0.03
0.03
12,705 $
10,643
1,163
0.02
0.02
14,327
11,805
798
0.01
0.01
12,865
10,660
904
0.02
0.02
*
Net income per share is calculated independently for each quarter. The sum of Net income per share for each quarter may not
equal the total Net income per share for the year due to rounding differences.
18. Subsequent Events
On January 5, 2016, the Company’s board of directors approved a share repurchase program that enables the Company to
purchase up to $15 million of its shares of common stock. The amount and timing of specific repurchases are subject to market
conditions, applicable to legal requirements and other factors. Any share purchases would be funded from existing cash resources and
may be suspended or discontinued at any time. The share repurchase program will expire on September 30, 2016.
On January 19, 2016, the Company’s board of directors appointed David J. Wagner to the positions of Chief Executive Officer
and President of Zix Corporation and elected Mr. Wagner to the board. Former CEO and President Richard D. Spurr stepped down
from those positions, effective January 19, 2016. The severance costs related to our CEO transition were recorded to general and
administrative expense during the year ended December 31, 2015. No additional charges associated with this transition are expected in
2016. Mr. Spurr remains a member of the board of directors, the size of which has increased from five to six members. Both Mr.
Wagner and Mr. Spurr will serve on the board for terms that will expire at the 2016 annual meeting of the Company’s shareholders.
F-18
Zix Corporation
Corporate Information*
Board of Directors
Robert C. Hausmann
Chairman of the Board
Mark J. Bonney
President and Chief Executive Officer,
MVR Communications, Inc.
Taher A. Elgamal
Chief Technology Officer of Security,
Salesforce.com Inc.
Stock Listing
The NASDAQ Global Market
Symbol: ZIXI
Investor Relations
Zix Corporation
2711 N. Haskell Avenue
Suite 2200, LB 36
Dallas, TX 75204-2960
Tel: (214) 515-7357
Fax: (214) 370-2295
Email: invest@zixcorp.com
Maribess L. Miller
Consultant
Richard D. Spurr
Consultant
David J. Wagner
Chief Executive Officer
Executive Officers
David J. Wagner
Chief Executive Officer
Justin K. Ferguson
Vice President, General Counsel,
Corporate Secretary
Michael W. English
Vice President, Chief Financial Officer
Russell J. Morgan
Vice President, Client Services
David J. Robertson
Vice President, Engineering
Corporate Headquarters
Zix Corporation
2711 N. Haskell Avenue
Suite 2200, LB 36
Dallas, TX 75204-2960
Tel: (214) 370-2000
Fax: (214) 370-2070
* Information current as of April 29, 2016.
Shareholder Services
Visit our Web site: investor.zixcorp.com
where you may request an investor
packet, listen to quarterly conference
calls, access recent SEC filings, learn
about upcoming investor events, and
sign up for email alerts.
Stock Transfer Agent and Registrar
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
Tel: (800) 942-5909
Auditors
Whitley Penn LLP
Dallas, Texas
Form 10-K
Additional copies of the Company’s Annual
Report on Form 10-K (including exhibits) to the
Securities and Exchange Commission for the
year ended December 31, 2015, are available
without charge at www.zixcorp.com/investors or
upon written request by email to
invest@zixcorp.com or from ZixCorp Investor
Relations at 2711 N. Haskell Ave., Suite 2200,
LB 36, Dallas, Texas 75204.