Zix Annual Report 2016 | Quarterlytics

FY2016 Annual Report · Zix

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2016 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 Zix on the date this
document was printed. Zix 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 Zix solutions and how privacy and data security laws may affect
demand for Zix email data protection solutions. Zix may not succeed in addressing these
and other risks. Further information regarding factors that could affect Zix financial and
other results can be found in the risk factors section of the accompanying annual report
on Form 10-K.

April 27, 2017

To Our Shareholders,

Zix has become a leader in email data protection by remaining steadfast in our commitments to customers,
employees and shareholders. As part of our brand promise, we promise to deliver the premier solution in
email encryption and evolve our products to meet the increasing demands of our customers. We create
opportunities for employees to make a difference in an ever-challenging world of data threats and
compliance complexities. In achieving these goals, we remain competitive in our market, increase market
share and maintain profitable growth for our shareholders.

Our 2016 results reflect our success in meeting our commitments – visible in our financial performance for
the year and in strategic changes that position us to grow our business in the future.

In 2016, Zix delivered records in revenue and annual contract value (ACV) and double-digit growth in total
orders, backlog and net income.

We achieved full-year revenue of $60.1 million, an increase of 10% year-over-year, and $68.6 million in total
orders, an increase of 12% year-over-year. At year-end, we increased annual contract value to $61.7 million
and grew our backlog to $81.7 million for contractually committed orders, an increase of 8% and 10% from
the prior year end, respectively. Net income was $5.8 million for the full year, 16.4% higher than full-year
2015.

The Company generated approximately $15.3 million in cash flow from operations, and we achieved the
high-end of our guidance by delivering full-year GAAP fully diluted earnings per share of $0.11, an increase
of 23% year-over-year and full-year Non-GAAP fully diluted earnings per share of $0.26, an increase of 21%
year-over-year.1

In 2016, Zix experienced a smooth transition in leadership with Dave Wagner joining as our President and
Chief Executive Officer. We also added Dave Rockvam as Chief Financial Officer and Kelly Haggerty as
Vice President of Product Management and Strategy. Their strengths and experience in the data security
market, coupled with those of our existing management team, have enabled us to focus on the core purpose
of Zix – protecting business communication for our customers and their communities – and develop a
strategic plan that takes our company to the next level of growth.

1 NOTE REGARDING NON-GAAP FINANCIAL MEASURES: This letter contains references to certain non-
GAAP financial measures that Zix management considers important and relevant in understanding the
Company’s financial performance. A discussion of the Company’s use of non-GAAP financial measures together
with a reconciliation of such measures to their respective GAAP counterparts are set forth in the Company’s full
year 2016 and Q4 earnings release dated February 9, 2017, which is available on the Company’s investor
relations web page at http://investor.zixcorp.com. This earnings release also was included as Exhibit 99.1 to a
Current Report on Form 8-K dated February 9, 2017 filed with the SEC and available through its web site at
www.sec.gov.

Our strategy is rooted in executing seven key growth pillars that increase customer acquisition, customer
retention and upsell and cross-sell opportunities, including:

1. Win new customers through the direct sales force and by expanding focus on our network of VARs

and MSSPs

2. Accelerate growth through key OEM partnerships
3. Expand user licenses within existing customers
4. Upsell more products to increase average revenue per user
5.
6.
7. Explore adjacent markets and English-speaking international market opportunities

Increase our high renewal rate with existing customers to 90% and above
Invest in our core email encryption solutions

With a sharpened focus on our purpose and strategy, we began to execute these initiatives in 2016. Aligned
with pillar five, we added a customer success team to foster and build on our relationships with the
thousands of businesses that trust Zix. In support of pillar six, we increased features and capabilities for
hosted email encryption customers that extend our superior ease of use and security. The leadership team
is committed to executing across all seven pillars to continue developing profitable growth for our
shareholders.

In addition, we laid the foundation for critical milestones in early 2017, including the acquisition of Greenview
Data and our unveiling of the company’s rebrand. We are excited to enter 2017 with increased capabilities,
an expanded total addressable market and a modern brand that prepares our company to achieve our
strategic goals and maintain our strength as a profitable growth company.

On behalf of Zix’s board of directors and management team, thank you 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)(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, 2016
(cid:134)(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.

a
e
Act. (Check one):
f
See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange

Large accelerated filer

Non-accelerated filer

(cid:134)
(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 2, 2017, there were 54,367,481 shares of Zix Corporation $0.01 par value common stock outstanding. As of June 30, 2016, the

aggregate market value of the shares of Zix Corporation common stock held by non-affiliates was $199,047,593.

Portions of the Registrant’s 2017 Proxy Statement are incorporated by reference into Part III of this Form 10-K.

DOCUMENTS INCORPORATED BY REFERENCE

TABLE OF CONTENTS

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 ...............................................................................................
k
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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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.

Item 1. Business

Zix Corporation (“Zix®,” the “Company,” “we,” “our,” or “us”) offers email encryption, data loss prevention (“DLP”) and

PART I

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 all members of the Federal Financial Institutions Examination Council (“FFIEC”), divisions of the U.S. Treasury, the U.S.
Securities and Exchange Commission (“SEC”), 30 percent of U.S. banks, more than 30 Blue Cross
Blue Shield organizations and
more than 1,200 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 steps and passwords. We designed our solution to alleviate the
recipient’s burden by enabling the delivery of encrypted email automatically and transparently. Zix enables transparent delivery r
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 170,000 members per week), (2) Zix’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
email, such that secure email can be exchanged without extra steps or passwords for both senders and receivers. Zix delivers more
than 1.5 million encrypted messages on a typical business day. On average, 70% of those encrypted messages are exchanged
transparently between senders and recipients.

most advanced transparent encrypted

Zix launched ZixQuarantineSM, formerly ZixDLP®, an email-specific solution in early 2013. By focusing strictly on email,
ZixQuarantine 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. ZixQuarantine is also designed to reduce deployment time from
months to hours and minimize impact on customer resources and workflow. In addition, ZixQuarantine 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, ZixQuarantine uses Zi

x’s proven policy and content
scanning capabilities with quarantine functionality and an intuitive interface, which 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.

ZixQuarantine is available as an add-on for existing Zix customers or as a bundle with Zix Email Encryption for new customers.

ZixQuarantine is also available as a standalone solution that can easily integrate with most email systems and email encryption
solutions.

In late 2013, Zix 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 SOC3 certified, SOC2 accredited, PCI

DSS V3.2 certified facility. The operations of the ZixData Center are independently audited annually to maintain AICPA SOC3
certification in the areas of security, confidentiality, integrity and availability. Auditors also produce a SOC2 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.

Our company was incorporated in Texas in 1988. Originally named Amtech Corporation, we changed our name to ZixIt®t
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 Healt
htt
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 the safeguard of personal data, 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 depl
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, and 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”
y
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.

Zix Email Encryption and ZixQuarantine 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. 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 data privacy and security.

In addition to the need to protect personal data and 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 that 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 4,800
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 2016 were 57% of the total new first year orders
compared to 64% in 2015. Google, Inc. continues to be our largest third party reseller representing approximately 5% of NFYOs in
2016. As of December 31, 2016, we had 270 value-added resellers and 139 managed security service providers across the U.S.

Employees

We had 201 employees as of December 31, 2016. 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.

Research and Development

We incurred research and development expenses of $9.6 million, $8.3 million, and $9.1 million for the twelve-month periods

ended December 31, 2016, 2015, and 2014, respectively.

Over the course of 2016 we continued to make investments toward strengthening and expanding our service portfolio. We added

new external sender capabilities, web authorization options, access security features and SIEM (Security Information and Event
Monitoring) data feeds to ZixPort and invested in capacity and performance enhancements across our core suite of hosted services.
We also migrated the Cisco SMIME and PGP capabilities from their legacy code base into our ZCT (ZixGateway with Cisco
Technology) and enhanced the foreign language handling capabilities of that system. ZixOne was upgraded to align with the iPhone
and Android evolutions and benefited from a number of stability enhancements.

On the ZixHosted front, we advanced deployment and upgrade automation capabilities for ZixGateway cloud instances and
added ZixQuarantine functionality into our SMB (Small and Medium Business) product environment. We laid the foundation for
better feature alignment between our premises and hosted ZixGateways, which will be leveraged as we move into 2017.

The following are registered trademarks of ours and certain of our subsidiaries: “Zix,” “ZixGateway,” “ZixDirectory,” “ZixIt,”

and “ZixPort”.

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 26 U.S. patents (including U.S. pending patents) with expiration dates ranging from 2019 through 2036. 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 aggreg

ate contribute approximately 7

percent of our annual revenue.

Significant Customers

In each of 2016, 2015, and 2014, 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

$81.7 million at December 31, 2016, compared to $74.2 million at December 31, 2015.

As of December 31, 2016, our backlog is comprised of the following elements: $27.2 million of deferred revenue that has been

billed and paid, $7.1 million billed but unpaid, and approximately $47.4 million of unbilled contracts.

The backlog is recognized into revenue ratably as the services are performed. Approximately 57% of our total backlog at

December 31, 2016, is expected to be recognized as revenue during 2017.

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, 2016, 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
d
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 Re
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 co
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.

sults of Operations,”) within the

ncerning

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.

Item 1A. Risk Factors

The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business, ss

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
should not consider the following factors to be a complete discussion of risks, uncertainties and assumptions.

or identify all such factors and, as a result, you

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 secu
re 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 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, financia
tial
market. The acceptance and use of our products and services by those significant customers facilitates our sales to other poten
nn
y
customers, and an expanding base of users in the Zix Directory aids in our market penetration and expansion. The loss of an influential
ff
customer of our existing products and services, or the failure to achieve sufficient market adoption of new products including
o
ZixQuarantine and ZixOne, could impair our ability to expand the market penetration of our products and services, or cause us t
reduce or increase prices, which could reduce our revenues and net income and materially adversely affect our business, financial
condition and financial results.

l services and government segments of the

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
r of factors, including the level of their
on an annual basis, our customers’ renewal rates may decline or fluctuate as a result of a numbe
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 aa
we provide effective network and security protection. To reduce the risk of a successful cyber-attack or similar event, we have
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 reputatio
confidential or proprietary information (including personally identifiable information), disclosure of our intellectual property,

n, unauthorized disclosure of our customers’

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
t
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.

center

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 outag
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.

es, or insufficient capacity. System

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 ma
to
a
rket acceptance and our ability
r
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
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 custom
er
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.

been

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, Virtru, HP (Voltage), and Sophos Inc. Our ZixOne business completes with products
and services offered by companies such as AirWatch/VMWare, Citrix (with XenMobile), 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 ex
x
penses
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
a
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
competitors, thereby reducing their business with us. We believe that industry co
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.

nsolidation may result in stronger competitors that are

may acquire or form alliances with our

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
al is generally to facilitate product

arrangements are generally limited to specific projects or series of projects, and their main go
f
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 enlist 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.

r
We distribute a significant 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.

We may acquire product lines or businesses, which could impact our business, financial condition and financial results.

As part of our business strategy, we may periodically seek to acquire products lines or businesses from third parties that

complement our current product lines and businesses. Acquisitions involve numerous risks, including difficulties in the assimilation of
the operations, technologies, services and products of the acquired product lines or businesses, estimation and assumption of liabilities
and contingencies, personnel turnover and the diversion of management’s attention from other business concerns. We may be unable
to successfully integrate and manage product lines or businesses that we acquire in the future, or be unable to achieve anticipated
benefits or costs savings from acquisitions in the timeframe we anticipate, or at all. The inability to effectively and efficiently manage
acquisitions with the results we expect or in the timeframe we anticipate could 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
lly, as we continue our corporate strategy of
a
purchases, including the deployment or expansion of our products and services. Additiona
exploring additional international markets, we may become more susceptible to unfavorable economic environments outside the U.S.
and that could compound the negative effects of unfavorable economic environments in markets in which we currently operate. This
could result in reduced sales of our products and services, longer sales cycles, slower adoption of new technologies and increa
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 softne
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.

ss in

sed

If our products do not work properly or have security vulnerabilities, 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 or introduce security
vulnerabilities that can lead to unauthorized use or data loss. 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 customer satisfaction with our products and services.
The product reengineering cost to remedy a product defect or mitigate vulnerabilities
y
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 resul

could be material to our operating results. Our

ts.

Our transmission and storage of personally identifiable information including the personal data of European data subjects
and other confidential information, and inadvertent exposure of PII or CI, 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 (“PII”) about individuals, which may include
healthcare or financial information, and other confidential information (“CI”). Although we have established, and continue to develop
and enhance, security measures and controls to help protect against unauthorized disclosure of such PII and other CI, an inadvertent
disclosure of, or unauthorized third-party access to, PII or CI, could disrupt our operations, damage our reputation and subject us to
claims or other liabilities.

In addition, our processing and storage of certain types of data is subject to confidentiality agreements with our clients and

handling PII is increasingly subject to a variety of changing privacy and data security regulations around the world, such as the
European Union’s Data Protection Directive and the forthcoming European Union Data Protection Regulation. Such laws and
regulations are subject to new and differing interpretations and may be inconsistent among jurisdictions. For example, in October
2015, the European Court of Justice invalidated the U.S.-EU Safe Harbor framework that had been in place since 2000, which allowed
companies including us to meet certain European legal requirements for the transfer of personal data from the European Economic
Area to the United States. In the wake of that decision, we decided to participate in the new EU-U.S. Privacy Shield framework
n
established by the U.S. Department of Commerce and the European Commission and opened for participation on August 1, 2016. We
applied for and were approved for certification and are now an
Active Participant in the Privacy Shield program. Our Privacy Shield
self-certification was finalized by the Department of Commerce and became effective as of November 9, 2016. This will allow us to
transfer personal data of European data subjects that we receive from customers to the United States, in compliance with the Privacy
Shield principles. While our Privacy Shield certification and other mechanisms (such as Model Clauses) to lawfully transfer such data
remain, Privacy Shield and other transfer mechanisms are also subject to pending legal challenges and these legal challenges may
result in different European data protection regulators applying differing standards for the transfer of personal data. Future changes 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, PII or other CI 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
aa
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 incorp
uu
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.

orate our intellectual property rights or other

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.

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 advant

age 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
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 cont
tt
rols 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. Open source software might also introduce security vulnerabilities or defective functionality. The open
source community may not always respond with adequate urgency to mitigate the impacts of such defects.

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.
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.

In addition, some countries

tt
nn

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.

Item 2. Properties

We leased properties during 2016 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
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.

support activities. The United

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 expec
the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial statements.

t that

Item 4. Mine Safety Disclosures

Not applicable.

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 2016 and 2015.

PART II

Quarter Ended
March 31
June 30
September 30
December 31

2016

2015

High

Low

High

Low

$
$
$
$

5.09 $
4.18 $
4.28 $
5.08 $

3.23 $
3.61 $
3.65 $
3.91 $

4.41 $
5.47 $
5.40 $
5.78 $

3.31
3.88
3.98
4.12

At March 2, 2017, there were 54,367,481 shares of common stock outstanding held by 426 shareholders of record. On that date,

the last reported sales price of the common stock was $5.19.

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, 2016, 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, 2011, 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 2016

300.00
300 00

250.00

200.00

150.00

100.00
100 00

50.00

0.00
0.00

2011

2012

2013

2014

2015

2016

Zix Corp.

NASDAQ Stock Market (US Companies)

NASDAQ Computer and Data Processing Index

Sale of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer

Period

October 1, 2016 to October 31, 2016
November 1, 2016 to November 30, 2016
December 1, 2016 to December 31, 2016
Total

Total Number of
Shares Purchased(1)

Average Price
Paid per Share
——
4.08
——
4.08

—— $
6,838 $
—— $
6,838 $

Total Number of Shares
Purchased as part of
Publically Announced
Plans or Programs

Maximum Number (or
Appropriate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

—— $
—— $
—— $
—— $

——
——
——
——

1 The shares repurchased for the one month period ended November 30, 2016, represent shares of Restricted Stock withheld by us
upon the vesting of outstanding Restricted Stock. These shares were withheld by us to satisfy the minimum statutory tax withholding
for the employee for whom the Restricted Stock vested during the period, which is required once the Restricted Stock is vested.

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)
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)
Total assets
Stockholders’ equity

2016

2015

Year Ended December 31,
2013
2014
(In thousands, except per share data)

2012

$
$

60,144
10,533
49,611
9,553
30,742
3,692
5,837
0.11
0.11
53,820

54,395

15,251
(2,136)
(15,322)

26,457
2
82,358
49,070

$
$

54,713
9,593
45,120
8,317
28,887
3,144
5,016
0.09
0.09
56,422

57,476

15,617
(1,951)
(6,687)

28,664
3,821
87,286
56,772

$
$

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

58,967

62,527

13,317 $
(3,402)
(15,748 )

13,298
(1,593)
(7,175)

21,685 $
2,249
83,724
56,270

27,518
12,127
90,702
66,234

43,356
7,609
35,747
7,419
19,385
(1,949)
11,003
0.18
0.17
62,211

62,875

12,533
(1,533)
(8,692)

22,988
6,626
82,849
61,245

(1) The $1.0 million and $1.9 million tax benefits in 2013 and 2012 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 $25.8 million, $23.2 million, $21.6 million, $19.1 million, and $17.5 million,

as of December 31, 2016, 2015, 2014, 2013, and 2012, respectively.

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-LOOKING
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, integ

rity and security.

Our 2016 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 2016, 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 2016, we reported revenue of $60.1 million, an increase of $5.4 million over the prior year, driven principally by continued

growth in our Email Encryption business.

For the year ended December 31, 2016, our gross profit of $49.6 million increased 10% compared to 2015. This increase was
the
f
d increased selling, general and administrative

primarily driven by increased revenue. Our 2016 operating income of $9.3 million increased $1.4 million over the prior year, as
d
gross profit increase was offset by increased research and development headcount an
expense primarily related to patent defense and planned advertising and promotional spending.

Our $5.8 million net income in 2016 is an increase of 16% compared to our $5.0 million net income in 2015.

Other Financial Highlights

(cid:120)

Backlog was $81.7 million at the end of 2016, compared with $74.2 million at the end of 2015

Total orders for 2016 were $68.6 million, an increase of 12% from the 2015 total orders of $61.0 million

Our deferred revenue at the end of 2016 was $27.2 million, compared with $24.0 million at the end of 2015

We generated cash flows from operations of $15.3 million during fiscal 2016. Our cash and cash equivalents were $26.5
million at the end of 2016, compared with $28.7 million at the end of 2015.

Our shared, cloud-based ZixDirectory now has approximately 55 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.

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 aa
sequential quarterly revenue comparisons.

t
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 10% in 2016 compared with 2015. 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.

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. Actu
results may materially differ from these estimates under different assumptions or conditions. If actual results were to differ
t
estimates materially, the resulting changes could have a material adverse effect on our consolidated financial statements.

al
from these

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)

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)

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
hardware that we own to the customer site.

(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.

Approximately 9% of our revenue in 2016 was 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

units of accounting for the multiple elements of our arrangements that are b
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.

we cannot establish separate
undled and sold as one unit. All revenue arrangements are

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, 2016, we provided a valuation allowance against a significant portion,
$46.0 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 $45.7 million, and consists of $39.0 million for federal net operating loss
carryforwards, $3.7 million relating to temporary timing differences between U.S. generally accepted accounting principles (“GAAP”)
and tax-related expense, $1.7 million relating to U.S. state income tax credits, and $1.3 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
aa
that certain of the Company’s deferred tax assets will be realized. Alternatively, should our future income decrease from curre
levels, a resulting increase to all or a part of this valuation allowance could also
a
results.

have a significant negative impact on our operating

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, or 3% and 2% of total assets, in each of the years ended December 31, 2016 and 2015.

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
rr
value of the assets and liabilities of that unit including the assigned goodwill value. We include our entire Company as the reporting
unit. 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
f
exceeds its estimated fair value. We have evaluated our goodwill and determined no impairment adjustment is required.

the net book value of the un

Stock-based Compensation

Our share-based awards include stock options, restricted stock awards and restricted stock units. 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 op
tions 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 restricted stock units when vesting conditions are met. The transfer restrictions and vesting conditions may be
aa
time- or performance-based. Restricted stock and restricted stock units typically vest pro-rata annually over three or four yea
rs. We
use the straight-line amortization method for recognizing stock-based compensation costs. The weighted average grant-date fair value
of awards of restricted stock, and restricted stock units is based on quoted market price of the Company’s common stock on the date of
grant. Option, restricted stock and restricted stock unit 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.

Full Year 2016 Summary of Operations

Financial

(cid:120)

Revenue for 2016 was $60.1 million compared with $54.7 million in 2015 and $50.3 million in 2014.

Gross margin for 2016 was $49.6 million or 82% of revenues compared with $45.1 million or 82% of revenues in 2015
and with $42.0 million or 83% of revenues in 2014.

Net income for 2016 was $5.8 million compared with $5.0 million in 2015 and $4.1 million in 2014.

Net income per diluted share was $0.11 for 2016 compared with $0.09 for 2015 and $0.07 for 2014.

Unrestricted cash was $26.5 million on December 31, 2016.

Results of Operations

Revenue

The following table sets forth a year-over-year comparison of our total revenues:

(In thousands)

Year Ended December 31,
2015

2014

2016

Variance
2016 vs. 2015

Variance
2015 vs. 2014

60,144 $

54,713

50,347

5,431

10 % $

4,366

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. In the year ended December 31, 2016, we categorized our revenue in
the following core verticals: 51% healthcare, 28% financial services, 7% government sector, and 14% as other. In the year ended
December 31, 2015, we categorized our revenue in the following core verticals: 54% healthcare, 28% financial services, 6%
government sector, and 12% as other. 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 2016 were 57% of total
NFYOs compared to 64% in 2015 and 58% in 2014. 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

2016

Year Ended December 31,
2015

2014

9,524

10,158 $

8,489

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 2017 and increase our year-over-year
revenue.

Backlog and Orders

Backlog — Our backlog was $81.7 million at December 31, 2016 compared with $74.2 million at December 31, 2015. The
backlog is comprised of contractual commitments that we expect to amortize into revenue. As of December 31, 2016, the backlog was
comprised of the following elements: $27.2 million of deferred revenue that has been billed and paid, $7.1 million billed but unpaid,
and approximately $47.4 million of unbilled contracts.

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 2016 were $68.6 million compared with $61.0 million in 2015. 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)

Year Ended December 31,
2015

2014

2016

Variance
2016 vs. 2015

Variance
2015 vs. 2014

10,533 $

9,593

8,324

940

10 % $

1,269

15%

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 10% increase in
cost of revenue in 2016 compared with 2015 reflected in the table above resulted primarily from increases in average headcount,

software maintenance and license support, costs associated with hardware sales related to our Cisco partnership as well as depreciation
expense related to networking equipment. These investments support growth in customers and users.

The 15% increase in cost of revenue in 2015 compared with 2014 reflected in the table above resulted primarily from increases

in average headcount and depreciation expense

Research and Development Expenses

The following table sets forth a year-over-year comparison of our research and development expenses:

(In thousands)

Year Ended December 31,
2015

2014

2016

9,553 $

8,317

9,051

Variance
2016 vs. 2015

Variance
2015 vs. 2014

$
1,236

15% $

(734)

(8)%

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 15% increase in research and development expense in 2016 compared with 2015 reflected in the table above resulted

primarily from increased in average headcount focused on development of our core email encryption portfolio, including performa
enhancements to our hosted service solutions, and upgrades to our ZixOne product.

nce

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.

Selling and Marketing Expenses

The following table sets forth a year-over-year comparison of our selling and marketing expenses:

(In thousands)

2016
$ 19,015 $

Year Ended December 31,
2015
18,075

2014
18,284

Variance
2016 vs. 2015

Variance
2015 vs. 2014

940

5 % $

(209)

(1)%

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.

The $0.9 million increase in selling and marketing expense in 2016 compared with 2015 resulted primarily from our 2016
branding initiative and planned increase in advertising and promotional expenses, as well as higher payroll costs associated with
enhancing our product management team.

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.

General and Administrative Expenses

The following table sets forth a year-over-year comparison of our general and administrative expenses:

(In thousands)

Year Ended December 31,
2015
10,812

2016
11,727 $

Variance
2016 vs. 2015

Variance
2015 vs. 2014

2014

7,938

915

8% $

$
2,874

36%

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 $0.9 million increase in general and administrative expense from 2016 compared with 2015 resulted primarily from an

increase in litigation fees associated with defense our intellectual property and other consulting fees. These increases were partially
offset by a decrease in year over year severance costs related to transition within our executive team.

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.

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.
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

The second

Our Company incurred tax expense of $3.7 million, $3.1 million and $2.8 million for 2016, 2015 and 2014, respectively. For all

years presented, tax expense represented deferred tax expense, 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.

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, 2016, the Company partially re
served 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 $45.7 million. The majority of this unreserved portion related to $39.0 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 $3.7million relating to temporary timing differences between GAAP and t
ax-
related expense, $1.7 million relating to U.S. state tax income credits, and $1.3 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 curren
t nn
u
estimates and assumptions are based were to change, thereby impacting the likelihood of realizi
ng 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 uu
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.

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 $5.8 million in 2016 compared with $5.0 million in 2015 and $4.1 million

in 2014. The increase to our net income is due to revenue growth, offset by higher operating expenses, as discussed above.

Liquidity and Capital Resources

Overview

Based on our 2016 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
annual budgeting process. During 2016, our uu
r
twelve months. We plan for and measure our liquidity and capital resources through an
cash flow from operations was $15.3 million, which represents a slight decrease over the $15.6 million cash flow from operations
during 2015. At December 31, 2016, our cash and cash equivalents totaled $26.5 million, and we had no debt. This represents a $2.2
million decrease over our cash balance as of December 31, 2015, which is partially attributed to our expenditure of $15 million during
2016 under a share repurchase program that completed in July 2016.

For the year ended December 31, 2016, we achieved 10% 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

2016

Years Ended December 31,
2015

2014

$
$
$

15,251
$
(2,136) $
(15,322) $

15,617 $
(1,951) $
(6,687) $

13,317
(3,402)
(15,748)

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 2016 consisted primarily of computer and networking equipment purchases to improve
our capacity to provide hosting services. 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.

Cash used in financing activities in 2016 included $15.0 million used to repurchase our common stock and $527 thousand used

in the repurchase of common stock related to the tax impact of vesting restricted awards offset by $205 thousand 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 July 2016. 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
ff
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.

Options of Zix 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
table summarizes the options that were outstanding as of December 31, 2016. 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.

activity is not certain. The following

Summary of Outstanding Options

Exercise Price Range

$1.11 - $1.99
$2.00 - $3.49
$3.50 - $4.99
Total

Outstanding
Options

102,834
522,938
1,334,507
1,960,279

Total Value of
f
Outstanding
Options
(In thousands)
$

Vested
Options
(included in
outstanding
options)

102,834 $
147
1,355
522,938
5,906 1,059,960
7,408 1,685,732 $

Total Value of
f
Vested
Options
(In thousands)
147
1,355
4,883
6,385

Liquidity Summary

Based on our current 2017 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 of $1.4 million over the next year and $3.8 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, 2016, is as follows:

(In thousands)
Operating leases

Total

1 Year

Payments Due by Period
2-3 Years

4-5 Years

> 5 Years

8,996 $

1,448 $

2,387 $

2,095 $

3,066

We have severance agreements with certain employees which would require us to pay up to approximately $4.6 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 certa
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 have begun an assessment of the guidance and expect our revenue to
remain primarily unchanged. We are additionally analyzing the effect of the new guidance on the timing of our recognition of the
incremental costs of obtaining contracts. Accordingly, we are still evaluating the impact of our pending adoption of ASU 2014-0
our consolidated financial statements and we have not yet determined the method by which we will adopt the standard.

9 on

in practical

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (Topic 842), which introduces a lessee

model that brings most leases onto the balance sheet. The new ASU eliminates the requirement in U.S. GAAP that entities use bright-
line tests in determining lease classifications and requires lessors to provide additional transparency into their exposure to the changes
in value of their residual assets and how they manage that exposure.

The standard is effective for us beginning 2019. We expect the valuation of right to use assets and lease liabilities to be the
present value of our forecasted future lease commitments and are assessing the discount rate to be applied in these valuations. We are
currently evaluating the potential impact of this new guidance on our consolidated financial statements.

Accounting for Share-Based Payments

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based Payment
Accounting (Topic 718), which simplifies several aspects of the accounting for employees of the accounting for employee share-based
payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows.

The Company currently has been tracking $3.6 million of excess tax benefits that were not previously recognized, as required by
existing GAAP, because the related tax deduction did not reduce current taxes payable. Upon adopti
on of the new standard beginning
in year 2017, these benefits will be recorded on a modified retrospective basis through a cumulative-effect adjustment to retained
earnings. A valuation allowance will also be recognized as a part of the cumulative-effect adjustment to retained earnings.

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 $26.5 and $28.7 million at December 31, 2016 and 2015, respectively. We held no marketable securities
and no debt as of December 31, 2016 and 2015.

Item 8. Financial Statements and Supplementary Data

n
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 acco

unting officer, which are required in accordance with RuleRR

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, 2016. In making this

assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway
y
Commission in “Internal Control—Integrated Framework
kk
”. Based on this assessment, our management concluded that, as of
December 31, 2016, 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, 2016, 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, 2016, 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.

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, 2016
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 ac
Management’s Annual Report on Internal Control Over Financial Reporting
rr
Company’s internal control over financial reporting based on our audit.

. Our responsibility is to express an opinion on the

companying

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 iny
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
f
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,
2016, 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
f
the Public Company
consolidated balance sheets of the Company as of December 31, 2016 and 2015, 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, 2016, and our report dated
March 6, 2017, expressed an unqualified opinion on those consolidated financial statements.

Accounting Oversight Board (United States), the

/s/ WHITLEY PENN LLP

Dallas, Texas
March 6, 2017

Item 9B. Other Information

None.

Item 10. Directors, Executive Officers and Corporate Governance

PART III

Certain information required by this Item 10 is incorporated by reference from our Proxy Statement related to the 2017 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 executiv
e 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 2017 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 2017 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 2017 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 2017 Annual

Meeting of Shareholders under the section “INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS.”

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

Description

3.1

f
— 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.

3.2

— Second Amended and Restated Bylaws of Zix Corporation dated November 1, 2016. Filed as Exhibit 3.2 to Zix

Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016, 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 Current 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

J
Corporation’s Current 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 Current 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

JJ
Corporation’s Current 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.

Exhibit
Number

Description

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
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 ll
uu
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 ll
uu
Report on Form 10-Q for the quarterly 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 quarterly 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 Quarterly Report on Form 10-

Q for the quarterly period ended September 30, 2016, 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 quarterly 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 quarterly 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 quarterly 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 quarterly 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 quarterly period ended June 30, 2015, and incorporated herein by reference.

10.27† — Amendment No. One to Zix Corporation Amended and Restated 2012 Incentive Plan. Filed as Exhibit 10.27 to Zix

Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015, and incorporated herein by
reference.

10.28† — Amendment No. One to Zix Corporation Stock Option Agreement, dated as of January 18, 2016,

between Richard D.

Spurr and Zix Corporation. Filed as Exhibit 10.28 to Zix Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2015, and incorporated herein by reference.

Exhibit
Number

Description

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. Filed as Exhibit 10.29 to Zix Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2015, and incorporated herein by reference.

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. Filed as Exhibit 10.30 to Zix Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2015, and incorporated herein by reference.

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.

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 David E. Rockvam, 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 David E. Rockvam, 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.

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 6, 2017.

SIGNATURES

ZIX CORPORATION

By: /s/ DAVID E. ROCKVAM

David E. Rockvam
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 6, 2017.

Signature

Title

/s/ DAVID J. WAGNER
(David J. Wagner)

/s/ DAVID E. ROCKVAM
(David E. Rockvam)

/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

Chairman, Director

Director

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ..............................................................................................................
F-2
Consolidated Balance Sheets at December 31, 2016 and 2015 ......................................................................................................... F-3
Consolidated Statements of Income for the years ended December 31, 2016, 2015, and 2014 ......................................................... F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015, and 2014 ................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014 .................................................. 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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2016 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, 2016, 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 6, 2017 expressed an unqualified opinion.

/s/ WHITLEY PENN LLP

Dallas, Texas
March 6, 2017

F-2

ZIX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

Current assets:

Receivables, net
Prepaid and other current assets

Total current assets

Property and equipment, net
Goodwill
Deferred tax assets
Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accrued expenses
Deferred revenue

Total current liabilities

Long-term liabilities:

Deferred rent

Total long-term liabilities
Total liabilities

Commitments and contingencies (Note 13)
Stockholders’ equity:

,000 shares authorized; none issued

and outstanding
Common stock, $0.01 par value, 175,000,000 shares authorized; 78,913,266 issued
and 53,643,139 outstanding in 2016 and 77,852,453 issued
and 56,546,879 outstanding in 2015
Additional paid-in capital
Treasury stock, at cost; 25,270,127 common shares in 2016 and 21,305,574 common
shares in 2015
Accumulated deficit

Total stockholders’ equity
Total liabilities and stockholders’ equity

December 31,

2016

2015

26,457 $
1,209
2,829
30,495
3,976
2,161
45,726
82,358 $

355 $

4,365
25,773
30,493

1,448
1,347
2,795
33,288

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

——

769
374,386

(97,770)
(228,315)
49,070
82,358 $

767
372,400

(82,243)
(234,152)
56,772
87,286

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
Interest expense

Total other income

Income before income taxes
Income tax expense
Net income
Basic income per common share
Diluted income per common share

Weighted average shares outstanding
Basic common shares outstanding
Diluted common shares outstanding

2016

Year Ended December 31,
2015

2014

$
$
$

60,144
10,533
49,611
9,553
30,742
9,316

246
33
213
9,529
3,692
5,837
0.11
0.11

$
$
$

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

53,819,772
54,395,145

56,421,833
57,476,006

57,948,864
58,966,625

See notes to consolidated financial statements.

F-4

ZIX CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Stockholders’ Equity

(In thousands, except share data)

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
Issuance of common stock upon exercise of stock
options
Issuance of common stock upon vesting of
restricted stock units
Issuance of common stock upon vesting of
performance stock units
Issuance of restricted common stock
Issuance of restricted performance common stock
Employee stock-based compensation costs
Treasury repurchase program
Net income
Balance, December 31, 2016

Common Stock

74,417,946 $

Amount

Treasury
Stock
737 $ 359,154 $ (50,386) $ (243,271) $

Accumulated
Deficit

Additional
Paid-In
Capital

Total
Stockholders’
Equity

66,234

407,829

744

—

748

52,000
140,000

——
—
——

75,017,775

——
—
——
—
——
741

——
—

1,681

—
——

— —
—
(257)
(16,239 )
— —

——
—
——
—

4,103

361,579

(66,882 ) (239,168)

——
—
1,424
(16,239)
4,103
56,270

2,668,928

8,648

— —

——

8,674

65,750

100,000

—
——
—

—
——
—
——
—

—
——
2,173
——
—

77,852,453

767

372,400

—
— —
(361 )
(15,000)
—
(82,243)

—
——
—
——
5,016

(234,152)

—
——
1,812
(15,000)
5,016
56,772

123,760

203

—

205

179,914

——

— —

——

97,428

518,211
141,500

——
—
——

—
——
—
——
—
——

—
——
—

1,783

—
——

—
— —
—
(527)
(15,000 )
— —

—
——
—
——
—

5,837

78,913,266 $

769 $ 374,386 $ (97,770 ) $ (228,315) $

—
——
—
1,256
(15,000)
5,837
49,070

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

(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

2016

Year Ended December 31,
2015

2014

5,837

5,016

2,303
1,783
3,186

(711)
79
(15)
3,200
(411)
15,251

(2,136)
(2,136)

205
(15,527)
(15,322)
(2,207)
28,664
26,457

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

4,103

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

See notes to consolidated financial statements.

F-6

ZIX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Company Overview

Zix Corporation (“Zix,” 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 (“U.S.
GAAP”). 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
d
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 oth
assets and accrued expenses are also not recorded at fair value, but approximate fair values primarily due to their short-term nature.

er current

Valuation of Property and Equipment — The accounting policies and estimates relating to property and equipment are
d

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
mm
carrying value of the asset exceeded the discounted projected net cash flows or estimated fair market value. Also, even where a current
a
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 intangibl

e 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 e
xist that
mm
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 3% and 2% of total assets for the years ended December 31, 2016 and 2015, respectively.

F-7

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
rr
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. We include our entire Company as the reporting
unit. 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, 2016, we provided a valuation allowance against a
significant portion, $46.0 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 $45.7 million, and consists of $39.0 million for federal net operating loss carryforwards,
$3.7 million relating to temporary timing differences between U.S. GAAP and tax-related expense, $1.7 million relating to U.S. state
income tax credits and $1.3 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.

Uncertain Tax Positions — Our Company recognizes and measures 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.
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

The second

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 2016
and 2015 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
three years.

one to

Revenue is recognized when all of the following criteria have been met:

(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

(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

F-8

secure and easiest method to deliver encrypted email. Customers can install the software on their own hardware or we can
deliver hardware that we own to the customer site. 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.

Approximately 9% of our revenue in 2016 was 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
undled and sold as one unit. All revenue arrangements are

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 softwa

re 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 $1.9 million,

$2.1 million, and $2.9 million in 2016, 2015, and 2014, 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,

F-9

in doing so, more judgment and estimates may be required within the revenue recognitio
U.S. GAAP.

n process than are required under existing

The standard is effective for us beginning 2018, and requires using either of the following transition methods: (i) a full

9 on

in practical

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (Topic 842), which introduces a lessee

The standard is effective for us beginning 2019. We expect the valuation of the right of use assets and lease liabilities to be the
present value of our forecasted future lease commitments and are assessing the discount rate to be applied in these valuations. We are
currently evaluating the potential impact of this new guidance on our consolidated financial statements.

Accounting for Share-Based Payments

The Company currently has been tracking $3.6 million of excess tax benefits that were not previously recognized, as required by

existing GAAP, because the related tax deduction did not reduce current taxes payable. Upon adoption of the new standard beginn
in year 2017, these benefits will be recorded on a modified retrospective bases through a cumulative-effect adjustment to retained
earnings. A valuation allowance will also be recognized as a part of the cumulative-effect adjustment to retained earnings.

ing

3. Stock Options and Stock-based Employee Compensation

Below is a summary of common stock options outstanding at December 31, 2016:

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

2,525,000
300,000
5,000,000
1,100,000
6,300,000
15,225,000

11,400
4,020

11,400
4,020
1,116,234 1,116,234
169,500
384,578
1,960,279 1,685,732

169,500
659,125

——
——
——
——
2,325,491
2,325,491

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.

F-10

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

d
We use the straight-line amortization method for recognizing stock option compensation

costs. Our share-based awards include
(i) stock options, (ii) restricted stock awards, some of which are subject to time-based vesting (“Restricted Stock”) and some of which
are subject to performance-based vesting (“Performance Stock”), and (iii) restricted stock units, some of which are subject to time-
based vesting (“RSUs”) and some of which are subject to performance-based vesting (“Performance RSUs”).

For the twelve months ended December 31, 2016, 2015, and 2014, respectively, the total stock-based compensation expense

resulting from stock options, Restricted Stock, RSUs, Performance RSUs, and Performance Stock 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,
2015

2014

2016

186
246
1,351
1,783

182 $
242
1,749
2,173 $

180
237
1,264
1,681

Our 2016 stock-based compensation expense includes $280 thousand related to the accelerated vesting of awards related to our

CFO transition. Our 2015 stock-based compensation expense includes $540 thousand related to the accelerated vesting of awards
related to our CEO transition. A deferred tax asset of $506 thousand, $625 thousand, and $462 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, 2016, 2015, and 2014, respectively. As of December 31, 2016, there was $3.3 million of total unrecognized stock-based
compensation 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 1.7 years.

We use the Black-Scholes Option Pricing Model (“BSOPM”) to determine the fair value of option grants. 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 elected to use the “historical” method to calculate the
estimated life of any options that may be granted beginning 2014. 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. We granted 373,187 options
in 2016. No options were granted in 2014 or 2015.

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,
2015

2016

2014

1.21%
5.3
44%
——
1.51

——
——
——
——
——

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 restricted stock units is
based on quoted market price of the Company’s common stock on the date of grant.

F-11

Stock Option Activity

There were 123,760 stock options exercised for the twelve months ended December 31, 2016. As a result of these stock option
exercises, there was $55 thousand in excess tax benefits recorded in 2016. For the comparative period in 2015, there were 2,668,928
stock option exercises, resulting in a $19 thousand excess tax benefit. In the twelve
months ended December 31, 2014, 407,829 stock
t
options were exercised, resulting in a $99 thousand excess tax benefit.

The following is a summary of all stock option transactions for the three years ended December 31, 2016:

Outstanding at January 1, 2014
Granted at market price
Cancelled or expired
Exercised

Outstanding at December 31, 2014

Cancelled or expired
Exercised

Outstanding at December 31, 2015

Cancelled or expired
Exercised

Outstanding at December 31, 2016
Options exercisable at December 31, 2016

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (Yrs)

4.50
— —
7.71
1.83
3.42
— —
4.69
3.25
3.65
3.70
3.95
1.66
3.78

3.79

3.90

3.03

Shares
6,748,374

$
—— $
(1,850,036) $
(407,829) $
4,490,509
$
——
(47,029) $
(2,668,928) $
$
1,774,552
373,187
$
(63,700) $
(123,760) $
$
1,960,279

1,685,732

At December 31, 2016, all 1,960,279 options outstanding and all 1,685,732 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 $2.3 million and $1.9 million,
respectively. 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.

The total intrinsic value of options exercised during the years ended December 31, 2016 and 2015, was $290 thousand and $4.4

million, respectively.

Summarized information about stock options outstanding at December 31, 2016, is as follows:

Range of
Exercise Prices
$1.11 - $1.99
$2.00 - $3.49
$3.50 - $4.99

Number
Outstanding
102,834
522,938
1,334,507
1,960,279

Options Outstanding
Weighted
Average
Remaining
Contractual Life
2.27
4.51
3.53
3.73

Options Exercisable

Weighted
Average

Number
Exercisable
Exercise Price
102,834
1.43
$
2.59
$
522,938
4.43 1,059,960
$
3.78 1,685,732
$

Weighted
Average
Exercise Price
1.43
$
2.59
$
4.61
$
3.79
$

There were 1,636,238 and 4,135,731 exercisable options at December 31, 2015 and 2014, respectively.

F-12

Restricted Stock Activity

The following is a summary of all Restricted Stock activity during the three years ended December 31, 2016:

Non-vested restricted stock at January 1, 2014

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

Granted at market price
Vested
Cancelled

Non-vested restricted stock at December 31, 2016

Restricted
Shares
648,250 $
140,000 $
(184,000) $
——
604,250 $
100,000 $
(240,750) $
(40,250) $
$
423,250
573,461 $
(292,469) $
(15,000) $

689,242 $

Weighted
Average
Fair Value

3.06
4.66
2.99
——
3.45
5.18
3.35
3.57
3.91
3.75
3.50
4.11

3.94

As a result of vesting Restricted Stock $59 thousand, $84 thousand, and $69 thousand in excess tax benefits were recorded in

2016, 2015, and 2014, respectively.

Restricted Stock Unit Activity

The following is a summary of all RSU activity during the three years ended December 31, 2016:

Non-vested restricted stock units at January 1, 2014

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

Granted at market price
Vested
Cancelled

Non-vested restricted stock units at December 31, 2016

Restricted
Stock Units

Weighted
Average
Fair Value

179,750 $
55,000 $
(52,000) $
——
182,750 $
215,000 $
(65,750) $
(32,500) $
299,500 $
38,500 $
(179,914) $
——
158,086 $

3.00
4.66
2.93
——
3.52
3.88
3.29
3.88
3.79
3.74
3.66
——
3.92

As a result of these vesting RSU’s $8 thousand in excess tax benefits was recorded in 2016. No excess tax benefits resulted fro

the vesting of RSU’s in 2015 or 2014.

F-13

Performance RSU Activity

The following is a summary of all Performance RSU activity during the three years ended December 31, 2016:

Non-vested performance RSUs at January 1, 2014

Granted at market price
Vested
Forfeited

Non-vested performance RSUs at December 31, 2014

Granted at market price
Vested
Forfeited

Non-vested performance RSUs at December 31, 2015

Granted at market price
Vested
Forfeited

Non-vested performance RSUs at December 31, 2016

Restricted
Stock Units

Weighted
Average
Fair Value

——
100,000 $
——
(100,000) $
——
215,000 $
——
(32,500) $
182,500 $
22,500 $
(97,428) $
(16,741) $
90,831 $

———
4.66
———
4.66
———
3.88
———
3.88
3.88
3.61
3.88
3.88
3.81

As a result of these vesting performance RSU’s $15 thousand in excess tax benefits was recorded in 2016.

Performance Stock Activity

The following is a summary of all Performance Stock activity during the one year ended December 31, 2016:

Non-vested performance stock at January 1, 2016

Granted at market price
Vested
Forfeited

Non-vested performance stock at December 31, 2016

Restricted
Stock Units

Weighted
Average
Fair Value

——
141,500 $
(20,000) $
——
$

121,500

———
3.61
3.61
———
3.61

As a result of these vesting Performance Stock $5 thousand in excess tax benefits was recorded in 2016.

The weighted average grant-date fair value of awards of Restricted Stock, RSUs, Performance RSU’s, and Performance Stock 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)
Interest payments
Income tax payments

2016

Year Ended December 31,
2015

2014

$
$

33 $
670 $

— — $
332 $

——
426

F-14

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,

2016

2015

8,417
(91)
(7,117)
458
(458)
1,209

7,882
(59)
(7,325)
458
(458)
498

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 po

tentially 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, 2016 and 2015.

6. Prepaid and other current assets

(In thousands)

other
Deferred commissions
Tax-related

Prepaid and other current assets

7. Property and Equipment

(In thousands)

Leasehold improvements
Furniture and fixtures

Less accumulated depreciation and amortization
Total Property and equipment, net

December 31,

2016

2015

2,381 $
435
13
2,829 $

2,596
364
(52)
2,908

December 31,

2016

2015

24,303
6,733
2,011
33,047
(29,071)
$
3,976

23,797
6,663
1,969
32,429
(28,286)
4,143

Our operations include depreciation and amortization expense related to property and equipment of $2.3 million, $2.2 million,

and $1.6 million in 2016, 2015, and 2014, respectfully.

8. Goodwill

At December 31, 2016 and 2015, 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, 2016.

F-15

9. Accrued Expenses

(In thousands)

Professional fees
Taxes
Other
Total accrued expenses

December 31,

2016

2015

2,739 $
405
434
787
4,365 $

3,028
467
399
803
4,697

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, 2016, 2015, and 2014, are as follows:

Basic weighted average shares
Effect of dilutive securities:
Employee and director stock options
Restricted Stock
RSUs
Performance RSUs
Performance Stock
Potential dilutive common shares

2016
53,819,772

Year Ended December 31,
2015
(cid:3)
56,421,833

2014
57,948,864

317,329
149,817
63,484
24,449
20,294
54,395,145

741,002
172,126
100,353
40,692
——
57,476,006

782,659
181,219
53,832
51
——
58,966,625

For the years ended December 31, 2016, 2015, and 2014, weighted average shares related to certain stock options of 1,079,474;

1,005,328; and 3,240,594, respectively, were excluded from the calculation of diluted earnings per share because the stock options
were anti-dilutive. Anti-dilutive Restricted Stock, RSUs, and Performance RSUs, and Performance Stock of 109,293; 20,600; 886;
5,572, respectively, were also excluded from the calculation for the year ended December 31, 2016. Anti-dilutive Restricted Stock,
RSUs, and Performance RSUs 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 Performance RSUs of 147,292; 50,833; and 33,333, respectively, were
excluded from the calculation for the year ended December 31, 2014.

and

12. Significant Customers

In 2016, 2015, and 2014, 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 2016, 2015 and 2014. The lease of our headquarters facility in Dallas expires in 2024.

F-16

A summary of our fixed contractual obligations and commitments at December 31, 2016, is as follows:

(In thousands)
Operating leases

2017

2018

2019

2020

2021

1,448 $

1,234

1,153

1,035

Thereafter
3,066

1,060 $

Total

8,996

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
Foreign

Income tax expense

2016

2015

2014

100 $
329
75

3,185
3
3,692 $

58 $
196
146

2,744
———
3,144 $

67
240
125

2,396
2
2,830

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
Nondeductible expense and nontaxable income
State income taxes
Foreign income taxes
Other
Income tax expense (benefit)

2016

2015

2014

3,250
114
217
78
33
3,692

2,775 $
133
129
146
(39)
3,144 $

2,357
127
224
127
(5)
2,830

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, 2016 and 2015 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

F-17

2016

2015

157 $
81,791
268
6,029
1,536
180
1,422
1,065
92,448

156
84,591
281
6,030
1,767
98
1,518
1,272
95,713

(696)
91,752
(46,028)
45,724 $

(671)
95,042
(46,134)
48,908

The Company has partially reserved its U.S. net deferred tax assets in 2016 and 2015 due to the uncertainty of future taxable

income. The Company has U.S. net operating loss carryforwards of approximately $241 million which begin to expire in 2020. The
perating
Company has state credits that net of federal tax expense total $1.7 million which can be utilized through 2027 and state net o
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 2017 and alternative minimum tax credits which do not expire.

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, 2016, 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 wit
tt
hin 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
$448 thousand, $389 thousand, and $354
tt
thousand, in 2016, 2015, and 2014, respectively, for net contributions from operations to this plan.

16. Zix Repurchase Program

During the year ended December 31, 2016, the Company repurchased 3,830,352 shares at an aggregate cost of $15.0 million.

This completed the $15 million share repurchase authorized by our board of directors in January 2016.

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
r
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 2013, and a $10 million
repurchase program announced July 2014. The 2014 repurchase activity completed both programs.

F-18

17. Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years ended December 31, 2016 and 2015:

(In thousands except per share data)
2016
Revenues
Gross margin
Net income
Basic net income per common share*
Diluted net income per common share*
2015

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

14,328
11,791
1,570
0.03
0.03

13,073
10,860
1,176
0.02
0.02

14,930 $
12,295
559
0.01
0.01

13,302 $
10,873
1,115
0.02
0.02

15,308 $
12,656
1,769
0.03
0.03

14,011 $
11,582
1,927
0.03
0.03

15,578
12,869
1,939
0.04
0.04

14,327
11,805
798
0.01
0.01

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.

F-19

Zix Corporation
Corporate Information*

Board of Directors

Robert C. Hausmann
Chairman of the Board

Mark J. Bonney
President and Chief Executive Officer,
MRV 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
Retired CEO

David J. Wagner
Chief Executive Officer

Executive Officers

David J. Wagner
Chief Executive Officer

Justin K. Ferguson
Vice President, General Counsel,
Corporate Secretary

Kelly P. Haggerty
Vice President, Product Management and
Strategy

David J. Robertson
Vice President, Engineering

David E. Rockvam
Vice President, Chief Financial Officer

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 27, 2017.

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.
211 Quality Circle, Suite 210
College Station, TX 77845
Tel: (877) 373-6374

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, 2016, are available
without charge at www.zixcorp.com/investors or
upon written request by email to
invest@zixcorp.com or from Zix Investor
Relations at 2711 N. Haskell Ave., Suite 2200,
LB 36, Dallas, Texas 75204.