Zix Annual Report 2018 | Quarterlytics

FY2018 Annual Report · Zix

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2018 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 Zix’s ability to
successfully acquire, finance and integrate other businesses, market acceptance of new
and enhanced Zix data protection solutions and how privacy and data security laws may
affect demand for Zix data protection solutions. Zix may not succeed in addressing these
and other risks. Further information regarding factors that could affect Zix’s business and
its financial and other results can be found in the risk factors section of the
accompanying annual report on Form 10-K.

April 26, 2019

Dear Shareholders,

As we close the books on 2018, the word affirmation seems an appropriate description. We’ve
charted a bold and ambitious course for Zix. The results we’ve reported throughout the year prove
that our strategy is sound and that we are moving in a direction and at a pace that is consistent with
the demands of our customers and channel partners. This gives us great confidence that we are
well-positioned for continued growth and profitability in the years ahead.

Our strategy was validated by the strong results we achieved in 2018. Our list of financial goals that
we’ve either met or exceeded is, in our opinion, quite impressive. Our record revenue and new first-
year orders reflects, in part, our success in bringing ZixProtect and an enhanced ZixArchive to
market. As we predicted, these services have been appealing to our customers and partners. This
has dramatically improved our ability to cross-sell to our existing customers who are more often
looking to purchase multiple services from one vendor.

We leveraged that success to further strengthen our archiving capabilities with the addition of the
Erado acquisition in April 2018. This further expanded our addressable market and began to
transition us from a company with a sole focus on email to one that is more broadly protecting all
business communications.

We also made significant enhancements to our cloud platform putting our product in a better position
to address market trends and meet our customer's current and future needs. But it's not just a great
product that made 2018 a very successful year for Zix. It was also the strong performance from our
sales, marketing and channel partners that helped us reach record revenue, orders and annual
recurring revenue. In fact, it is to the great credit of the entire team – at each location and in every
functional area – that 2018 was another giant step forward.

Our opportunity now is to build on last year’s success and use our momentum to help us reach the
new, even more ambitious goals we have set for 2019. Our fundamental strategy remains the same
but the context in which we will execute has changed substantially. Put simply, we are operating at a
different level as a result of our organic growth and acquisitions. With these new capabilities and
resources come higher expectations about what Zix will deliver for partners and customers going
forward.

Our financial performance is the most obvious and visible measure. We expect to end 2019 with
between $164 million and $167 million in total revenue. By then, we also plan to reach between
$200 million and $207 million in annual recurring revenue. In just three to five years, our goal is to hit
between $275 and $350 million of annual recurring revenue. Once again, we have set targets that
are very ambitious, but in our opinion, completely within reach if we manage our opportunities well.

Beyond the financial measures, however, we have to consider carefully our new position in the
market. Much depends on how well we operate, integrate, and then elevate the company going
forward.

As Zix makes the transition from best-of-breed solution to industry leader, our presence and
prominence must also reflect that growth. All of our stakeholders rightfully expect that the ‘whole’ of
Zix will now be much more than the sum of disparate pieces. The addressable market, and thus our
audience, is considerably larger. Our voice is louder. And our ideas and actions will be viewed more
closely.

The challenge in front of us is to capitalize on this additional strength and ensure that the Zix brand
represents both industry leadership and thought leadership. Toward those ends, you should expect
to see and hear about Zix more often and from more outlets than ever before. Our vision is for the
brand to be the new standard for business cybersecurity across multiple product types.

Accomplishing all of these objectives is a tall order that will require deep commitment and constant
focus from our leadership and team members. Experience has shown us, however, that with the
right resources and direction, they can deliver outstanding results.

Our strategy has proven sound thus far. Our plans for moving forward are coming into place. Our
team is prepared to execute.

As chairman, I am incredibly excited for the future and I thank you, our shareholders, for trusting us
enough to take this journey with us.

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, 2018
(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

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 Offff iceff

(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 markrr whethet
Indicate by check markrr whethet
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
(or for such shorter period that the Registrant was required to file such reports) and (2) has been subju ect

is a well-knownww seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95)
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:95)

r the Registratt ntaa
r the Registratt ntaa

Act of 1934 during the preceding 12 monthst
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 every Interactive Data File required to be submu

itted pursuant to

Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 monthst
submit and post such reports) Yes (cid:95) No (cid:134)

(or for such shorter period that the registrant was required to

Indicate by check mark if disclosure of delinquent filers pursuantaa

to Item 405 of Regulation S-K (§229.405 of this chapta er) 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:134)

Indicateaa by check markrr whethett

r the registratt ntaa

is a largaa e accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportirr ng company.

See definitions of “large accelerateaa d filer”, “accelerated filer” and “smaller repor

tinrr g company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
Non-accelerated filer

(cid:134)
(cid:134) (Do not check if a smaller reporting company)

(cid:95)
Accelerated filer
Smaller reporting company (cid:134)
Emerging growth company (cid:134)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying

with any new or revised financial

accounting standards provided pursuant to Section 13 (a) of the Exchange Act. (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 6, 2019, there were 54,089,273 shares of Zix Corporation $0.01 par value common stock outstanding. As of June 30, 2018, the

aggregate market value of the shares of Zix Corporation common stock held by non-affiliates was $289,258,242.

Portions of the Registrant’s 2019 Proxy Statement are incorporated by reference into Part III of this Form 10-K.

DOCUMENTS INCORPORATRR ED BY REFERENCE

TABLE OF CONTENTS

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.

Item 10.
Item 11.
Item 12.
Item 13.
Item 14.

Item 15.
Item 16.

PART I
Business.................................................................................................................................................................................
Risk Factors ...........................................................................................................................................................................
Unresolved Staff Comments ..................................................................................................................................................
Properties ...............................................................................................................................................................................
Legal Proceedings..................................................................................................................................................................
Mine Safety Disclosures ........................................................................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockhold
er Matters and Issuer Purchases of Equity Securities .............
Selected Financial Data .........................................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations.................................................
Quantitative and Qualitative Disclosures About Market Risk ...............................................................................................
Financial Statements and Supplementary Data......................................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................
Controls and Procedures ........................................................................................................................................................
Other Information ..................................................................................................................................................................
PART III
Directors, Executive Offiff cers and Corporate Governance .....................................................................................................
.......................................................................................................................................................
Executive Compensation
Security Owneww rshipi of Certain Beneficff ial Owneww rs and Manaaa gement andaa Relatedaa
rs ..........................................
Certain
Relationships and Related Transactions, and Director Independence .......................................................................
rr
Principal Accountant Fees and Servirr ces ................................................................................................................................
PART IV
Exhibits and Financial Statement Schedules..........................................................................................................................
Form 10-K Summary .............................................................................................................................................................

Stockholder Mattett

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Item 1. Business

Zix Corporation (“Zix®,” the “Company,” “we,” “our,” or “us”) is a leader in email security. Trusr

ted by the nation’s most

PART I

influff ential institutions in healthcare, finance, and government, Zix delivers a superi
encryption, data loss prevention (“DLP”), advanced threat protection, archiving, and bring your own device (“BYOD”) mobile
security. Focusing on the protection of business communication, Zix enables its customers to better secure data and meet compliance
needs. We primarily serve organizations in the healthcare, financial services, insurance and government sectors, including U.S. federal
financial regulators, such as members of the Federal Financial Institutions Examination Council (“FFIEC”), divisions of the U.S.
Treasury, the U.S. Securities and Exchange Commission (“SEC”), more than 30% of U.S. banks, more than 30% of Blue Cross Blue
Shield plans and more than 1,200 U.S. hospitals.

or experience and easy-to-use solutions for email

ZixEncryptyy SM (forff merly ZixGateway® and ZixQuarantine®) bundles email encryption and DLP capabilities to enable the

secure exchange of email that includes sensitive information. Through a comprehensive secure messaging service, ZixEncryptyy
an enterprise to use policy-driven rules to determine which email messages should be sent securely or quarantined for review to
comply with regulations or company-defined policies.

allows

The main differff entiation for Zix Encrypt in the marketplt ace is our exceptional ease of use. The best example of this is our ability

to provide transparent delivery of encrypted email. Most email encryption solutions are focused on the sender. They typiyy cally
introduce an added burden on recipients, ofteff n requiring additional user authentication with creation of new user identity and
password. We designed our solution to alleviate the recipient’s burden by enabling the delivery of encrypted email automatically and
transparently. Zix enables transparent delivery by (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 160,000 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) ZixEncrypt,yy which automatically encrypts and decryptyy s messages with sensitive content. The result is secure,
transparent encrypted email, such that secure email can be exchanged without any impacmm t to administrators or extra steps for both
senders and recipients. Zix delivers more than 1.5 million encryprr
are exchanged transparently between senders and recipients.

business day. Of those, approximately 70%

ted messages on a typical

ZixEncryptyy

also addresses a business’s greatest source of data loss – corporate email – with an easy straightforff ward DLP

approach. By focusing strictly on the risks of email, ZixEncryptyy
simplifies DLP in comparison to other DLP solutions by decreasing
complexity and costs, reducing deployment time from months to hours and minimizing impact on customer resources and workfloff w.
In addition, Zix offerff s a convenient experience for both emplmm oyees interacting with our solution and administrators managing the
system.

ZixEncryptyy

enables DLP capabilities for email by combining proven policy and content scanning capabilities with quarantine
functionality. The quarantine system and its intuitive interface allows administrators to (1) easily define policies and create custom
lexicons 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 emplmm oyees of quarantined messages.

ZixEncryptyy

also provides greater visibility into an organization’s data risks in email by capturing data in outbound emails and
highlighting violations that trigger policy filters to encrypt or quarantine. Through our interactive, real-time interface, companies can
monitor their greatest vulnerabilities, generate reports for business executives and train emplmm oyees about the sensitivity of their
company’s data.

ZixEncryptyy

is available as a hosted solution, as a multi-tenant cloud solution, or as a physical or virtual on-premises appliance.

In March 2017, Zix acquired Greenview Data Inc. (“Greenview”), an email security company. Zix’s acquisition of Greenview

addresses increasing buyer demand for email security bundles by adding advanced threat protection, antivirus, anti-spam and
archiving capabilities to its industry-leading email encryption. Greenview is a good fit for Zix’s business based on its employm
expertise in email security and its emphmm asis on customer success, which align with Zix’s reputation for delivering industry-leading
solutions and a supeuu rior experience.

ees’

Through the acquisition of Greenview, Zix launched two new solutions in April 2017 – ZixProtect and ZixArchive. ZixProtect

defends organizations from zero-day malware, ransomware, phishing, CEO fraud, W-2 phishing attacks, spam and viruses in email
with multi-layer filtering techniques. Accuracy in protecting organizations from email threats is increased further with automatedaa
trafficff

analysis, machine learning and real-time threat analysis.

ZixProtect is available as a cloud-based service in three bundles. ZixProtect Essentials includes email threat protection,

nation defenff

imperso
mm
se, 0-hour malware filtering, and business email continuity to enable access to emails during service disruprr
ZixProtect Plus adds policy based Content Disarm and Reconstruction with on-demand sandbox
ing, as well as time-of-click link
se, to provide enhanced protection against sophisticated, targeted threats; and ZixProtect Premium delivers a comprehensive
defenff
email security solution by including our leading email encryption and data loss prevention with our threat protection capabilities.

tion;

ZixArchive is a low-cost, cloud-based email retention solution that easily enables user retrieval, compliance and eDiscovery.

or ZixProtect bundles, ZixArchive includes policy-based retention,
Available as a standalone or add-on solution for ZixEncryptyy
automatic indexing and flexible search capabilities for audit and legal requirements. With on-demand access through the cloud,
organizations can conveniently share messages with emplomm yees, auditors and outside consultants or legal counsel, as well as revoke
access when needed.

In April 2018, Zix acquired CM2.COM, Inc., d/b/a Erado (“Erado”), a unifiedff

archiving company. Erado strengthens Zix’s

comprehensive archiving solutions with unifiedff
bundled services. Erado’s long standing focus on helping its customers comply with FINRA and SEC regulations helps further
strengthen Zix’s offeri
ngs for customers with compliance requirements. This acquisition also expands Zix’s cloud-based email
archiving capabilities into more than 50 content channels, including social medial, instant message, mobile, web, audio, and video.

ision, security, and messaging solutions for customers that demand

archiving, superv

ZixOne® is a unique mobile email app that solves the key IT challenge created by the BYOD trend in the workplace.
describes emplomm yee’s use of personal devices to conduct work. ZixOne provides mobile access to corporate email while never
allowing that data to be persistently stored on an emplomm yee’s device where it is vulnerable to loss or theft.ff
stolen, an administrator can simply disabla e access to corporate email from that device through ZixOne.

If the device is lost or

BYOD

ZixOne is available as a standalone solution and easily integrates with ZixEncryptyy

is the ability to encryptyy
inforff mation is secured either by the user or through automatic policies of ZixEncryptyy .

an email from your mobile device with the simple slide of an “Encrypt”yy

as an add-on solution. One feature of ZixOne
button, ensuring that sensitive

Unlike other BYOD solutions, ZixOne meets emplomm yee desire for 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, emplmm oyees can stay productive while preserving device independence. A BYOD solution that is acceptable to emplomm yees
and yet provides strong data protection for corporate data solves one of today’s greatest IT management challenges.

Our business operations and service offeff

rings are suppouu

rted by the ZixData CenterTM, which is PCI DSS 3.2 certifiedff

for

applicable services, SOC2 accredited, and SOC3 certifieff d. The operations of the ZixData Center are independently audited annually to
maintain AICPA SOC3 certification in the areas of security, confideff
report on the effecff
track record that exceeds 99.99% availability.

e a SOC2
tiveness of operational controls used over the audit period. The ZixData Center is staffed 24 hours a day and has a

ntiality, integrity and availability. Auditors also producdd

On Februar
security and productivity services, offerff

ry 20, 2019, Zix complmm eted its acquisition of AppRiver, LLC (“AppRiver”), a channel-first

provider of cloud-based
ing web protection, email encryption, secure archiving, and email continuity solutions.

cybery
AppRiver is a channel-first provider of cloud-based cybey r security and productivity services, offeff
encryption, secure archiving, and email continuity solutions. AppRiver also provides Microsoft Officff e 365 and Secure Hosted
Exchange services, which serve as an effect
accelerate our offeff
60,000 worldwide customers using a network of 4,500 Managed Service Providers, this acquisition also helps us expand our customer
base.

ive lead generation tool for the company’s solutions. The acquisition of AppRiver can
rings into the cloud at the point of initial cloud application purchase. Because AppRiver currently services over

ring web protection, email

Our company was incorporated in Texas in 1988. Originally named Amtech Corporation, we changed our name to ZixIt ®
Corporation in 1999 when we entered the encrypted email market. In 2002, we became Zix Corporation, and in 2017, the Company
rebranded to Zix. Our executive offices
(214) 370-2000.

are located at 2711 North Haskell Avenue, Suite 2200, LB 36, Dallas, Texas 75204-2960,

Overview

Email is a mission-critical means of communication for enterprises. However, if email leaves a secure network environment in

redirection, manipulation or
clear text, it can be intercepted along the path between a sender and a recipient, which permits theft,ff
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 examplm e, healthcare
organizations, business associates and sub-u contractors are subject to the Privacy, Security, and Enforcement Rules of the Healtht

Information Portability and Accountability Act (“HIPAA”) as amended by the Health Inforff mation Technology for Economic and
Clinical Health Act (“HITECH Act”). Financial institutions are subju ect 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
exemptimm ons from data breach notification laws.

rr
Corporat

ions require easy to use, cost-effect

ive 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 preferff ences. The
protocol suppouu
rts a number of encryptyy ed 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 implemm mentation for inforff mation technology
professionals. We believe the ability to send messages through different
our Email Encryption Service supuu erior to competitive offerff

modes of delivery is one of many differen

tiators that makes

ings.

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 enterpris
desktopkk

softwff

are. Our technology solutions are easy to use, easy to deploy, and can be made operational quickly.

e without the need to create, deploy or manage end user encryption keys or deploy

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 ownww custom
policies. This policy driven email encryption for regulatory compliance means customers can reduce the training required of their staffff
and significff antly reduce the risk of inadvertently sending sensitive content by controlling the method of delivery through preset
policies.

Email is the number one communication tool for businesses and it is also one of the top vectors for cybery

attacks. Attacks can

jeopardize a company through malware, phishing, ransomware, business email compromise, viruses and other threats. Our advanced
against email-borne attacks. Our
threat protection solution uses a multi-layer approach to accurately identify email threats and defendff
threat filters first analyze IP addresses and URLs then examine content for targeted phrases, campaign patterns and both known and
zero-hour malware attacks. Accuracy is increased further with real-time threat analysts, automated trafficff
learning.

analysis and machine

To safeguard against increasingly targeted and sophisticated attacks, our advanced threat protection can also leverage

inspection of emails to performff

quarantine and
environment. Testing
tly handles evasive attacker techniques while fully examining files for suspicious and malicious activity. Time-of-click link
se reduces the risk of users clicking links in emails and inadvertently visiting malicious or compromised websites. This feature

attachment assurance and time-of-click link defense to provide enhan nced protection. Attachment assurance offersff
sandbox
d
ff
efficien
defenff
re-writes all full, shortened, or obfuscated links to safe versions and perforff ms time-of-click analysis on the destination address,
including IP address and domain blacklists, domain age and reputation, and other checks.

forensic analysis of attachments in our secure, cloud-based sandbox

By combining our email encryption and advanced threat protection solutions, Zix meets customers’ increasing desire for a

bundled solution that protects inboun

d and outbound email with leading email security.

Competition

The most significant differentiators for Zix as compared with our competition is ease of use and exceptional support

. 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 ZixEncrypt. The most critical and highly differff entiated
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 offerff

interoperability is particularly importm

ant when it is necessary to communicate with external networks, as
is the case with the healthcare and financial services markets. Our customers become part of the ZixDirectory, a global “white pages”
enabling transparent secure communications with other ZixEncryptyy customers using our centralized key management system and
overall unique approach to implm ementing encryptyy ed 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
ff
preferred

delivery model.

Our exceptional suppuu ort allows customers to reach Zix via phone or email 24/7/365 to address any questions or concerns. With

the increasing cost and sophistication of email attacks, convenient access to our threat analysts at any time of the day provides our
customers with unmatched peace of mind.

We view our primary competitors in the email security space to be Proofpoint Inc., Mimecast, and Barracuda Networks.

advanced threat protection against email attacks and “send-to-anyone” encrypted email, we
Technically, while these companies offerff
believe that Zix offersff
supeuu rior customer service and unparalleled benefitff s 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
rr
enterpri

antial financial and technical resources that exceed those we possess.

ses with substu

Regulatory Drivers

We have been successful in securing market penetration in our target vertical markets of healthcare, finance services and

government primarily 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 security 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 subju ect 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, compamm nies 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 Confereff
isors, whose members regulate the more than 4,600
state-chartered banks in the U.S.

nce of State Bank Superv

Additionally, state data breach laws and privacy regulations, along with highly public

ized breaches, have enhanced security

awareness in vertical markets outside of healthcare and financial services and have promptmm ed affeff cted organizations to consider
adopting systems that ensure data security and privacy. Even where there are no specificff
protection to adhere to evolving industry best practices for protecting sensitive information.

regulations, businesses may require email

Sales and Marketing

We sell our Zix Email Encryption, ZixProtect, ZixArchive, 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 offeff
manufacturing (“OEM”)-like relationship. New first year orders (“NFYOs”), definff ed as the twelve-month value of orders received
from both new customers and from our existing customers ordering additional products or features, derived from our value-added
resellers, OEM and third party distribution channels for 2018 were 43% of the total new first year orders compamm red to 56% in 2017.
The reduction in orders received from our OEM channels was due in part to a migration of customers from our Google relationship
into a direct relationship with Zix. In both years, the balance of our NFYOs were originated by our telesales and direct sales forces. As
of December 31, 2018, we had 157 value-added resellers and 97 managed security service providers across the U.S.

ring in an original equipment

Employees

We had 265 emplomm yees as of December 31, 2018. The majoa rity of our emplomm yees are located in Dallas, Texas. We also have a

uu
sales officeff
smaller offiff ces located in Renton, Washington, and in Ottawa, Ontario, Canada.

in Burlington, Massachusetts; an officeff

in Ann Arbor,

Michigan supportin

g ZixProtect and ZixArchive services; and

Research and Development

We incurred research and development (“R&D”) expenses of $11.3 million, $11.0 million, and $9.6 million for the twelve-

month periods ended Decembem r 31, 2018, 2017, and 2016, respectively.

Over the course of 2018 we continued to make investments toward strengthening and expanding our service portfoff lio while
aligning with customer trends toward simplification of infrastructure management through the use of cloud technologies. A new cloud
tructure run and managed by
platforff m was delivered which allows Managed Service Providers to provision and handle trafficff
Zix. The new services and infrastruct
direct and alternative channels which include enhanced variants of core Threat Protection, Encryption, Continuity and Archiving
Technologies.

ure were also extended to become the foundation for new security and compliance bundles for

on infrasff

In delivering new security and compliance bundles, the R&D organization materially enhanced and integrated the subsu ystem

platforms obtained by way of acquisitions in 2017 and 2018. Web technology implem mentations associated with Threat
Protection/Continuin ty and Multimedia Archive/Compliance platforms, obtained by way of acquisitions of Greenview Data and Erado
respectively, were restructured to align to a new unifiedff
ience model as were legacy Encryption subsu ystems and associated
reporting and management capabilities. Most related services were enhanced with technologies to enable automation of customer-
for the encryption appliance
driven provisioning. We also completed branding and mobile-first modernization of the web interfaceff
softwff
elivery
framework, thus enabling on-premises message delivery portal options for our customers.

t Datacard and are now in the process of binding it into our Encryption Best-Method-of-Dff

are we acquired from Entrusr

user experxx

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 copyriyy ght law and contractual restrictions to protect the
proprietary aspects of our technology and related property rights and to defenff d against infringement and/or misappropriation claims
from others. We ownww 25 U.S. patents with expiration dates ranging from 2019 through 2036, and 10 pending U.S. Applications. We
foreign countries where
have a program to file applications for and obtain patents and trademarks in the United States and in specificff
we believe filing for such protection is appropriate. While intellectual property rights are generally importan
t 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.

Our Company and certain of our subsidiaries are the owners of trademarks and service marks registered with the United States

Patent & Trademark Offiff ce. These marks are renewable indefinitely, contingent upon continued use and payment of applicable
renewal fees. Additionally, our Compamm ny and certain of our subu sidiaries own several pending trademark applications with the United
States Patent & Trademark Offiff ce as well as a numberm of United States common law trademarks and several service marks and
trademarks and service marks registered in foreign countries. We consider our trademark and service marks as valuable assets of the
Company due to their recognition by our customers. We are not aware of any valid claims of infring
use any of our trademarks or service marks in the United States.

ement or challenges to our right to

Please see generally the risks that are more fully disclosed in “Item 1A. Risk Factors” for risks related to our intellectual

property.

Compliance with Environmental Regulations

We have not incurred, and do not expect to incur, any material expenditures or obligations related to environmental compliance

issues.

Governmental Contracts

We have contracts with many local, state and federal agencies and regulators, which in the aggregate contributed approximately

7% of our annual revenue in 2018.

Significant Customers

In each of 2018, 2017, and 2016, 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

$73.0 million at Decembem r 31, 2018, compamm red to $72.6 million at Decembem r 31, 2017.

As of Decembem r 31, 2018, our backlog is comprmm ised of the following elements: $32.1 million of deferred revenue that has been

billed and paid, $10.7 million billed but unpaid,

and approximately $30.2 million of unbilled contracts.

The backlog is recognized into revenue ratably as the services are performff

ed. Approximately 65% of our total backlog at

Decembem r 31, 2018, is expected to be recognized as revenue during the next twelve months.

Seasonality

The Compamm ny typiyy cally 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 impactm

to our revenue or earnings on a seasonal basis.

Geographic Inforff mation

Our operations are primarily based in the U.S., with approximately 4% of our emplomm yees located in Canada. Except for a United
Kingdom based data center, we did not operate in, or have dependencies on, any other foreign countries as of Decembem r 31, 2018. Our
revenues and orders to-date are almost entirely sourced in the U.S. and all significaff
located in the U.S.

nt corporate assets at December 31, 2018, were

Financial Inforff mation About Industry Segments

We have one reportable segment consisting of email encryption and security solutions. We internally evaluate all of our product

offeff

rings and other sources of revenue as one industry segment, and, accordingly, do not report segment information.

Available Information

rr
Our Internet address is www.zixcor
p.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
electronically file such material with, or furnish it to, the SEC. The information found on our website shall not be considered to be part
of this or any other report filed with or furnished to the SEC.

ff we

In addition to our website, you may read and copy any materials we electronically file with the SEC through the SEC’s website
at www.sec.gov. The SEC’s website contains reports, proxy and other inforff mation statements, and other information regarding issuers,
including us, that file electronically with the SEC.

NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This document contains “forff ward-looking statements” (including the discussion appearing under the caption “Liquidity

of Financial Condition and Resultsll of Operations,”) within the

Summary” in “Item 7. Management’s Discussion and Analysis
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 “forff ward-looking statements” for purposes of federal and state securities laws, including,
but not limited to: 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, future
acquisitions or the integration thereof; any statements concerning proposed new products, services, or developments; any statements
regarding future economic conditions or performff
ance; 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,” “foff recast,”
“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 differff
materially from the events or results described in the forward-looking statements, including, butuu not limited to, the risks and
uncertainties described in the “Item 1A. Risk Factors” section.

Although we believe that expectations reflected in and the assumptions underlying our forward-looking statements are

reasonable, actual results or assumptions made could differff 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 subju ect 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 discuii

ssion of risks, uncertainties and assumptions that we believe are significant to our business,

financial condition and financial results. In addition to the factors discussed elsewhere in thisii Annual Repor
following are some of the important factors that,t individualdd
froff m those described in any forward-looking statements. It is impossible to predict or identify all such factorsrr and,dd as a result, you
the following factorsrr to be a complete discii ussion of risks, uncertainties and assumptions.
should not considerdd

ate, we believe could make our results differ

t on Form 10-K,KK the
i

ly or in the aggreg

materially

Risks Related to our Business

Our business depends upon customers using email and certain social media platforms to exchange confidff ential information,
and a significff ant shiftff of those messages to other communication channels could impair our growth prospects and negatively
affeff ct our business, financial condition and financial results.

Our customers deploy and use our products and services to easily, securely and confideff

ntially send and receive electronic

ntially depend on our current and potential customers using email and social media to exchange sensitive information

messages, by way of internet communications channels including email and certain social media platforff ms. Our business and revenue
substa
u
migration to alternative means of secure
electronically. New technologies, products, or business models that could support
communications could be disruptuu ive to our business. If prospective or current customers were to send and receive sensitive
inforff mation using technology or communication channels other than email or the social media platforff ms that we suppuu ort, our growth
prospects and our business, financial condition and financa

ial results could be materially adversely affeff cted.

Our business depends on market acceptance of our products and services, and our failure to achieve and maintain influential
customers could negatively affecff

t our business, financial condition and financial results.

In order to continue to operate profitff ably 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
Encryptyy ion products and services to high-profilff e customers in the healthcare, financial services and government segments of the
market. The acceptance and use of our products and services by those significaff
nt customers facilitates our sales to other potential
customers, and an expanding base of users in the Zix Directory aids in our market penetration and expansion. The loss of an influential
customer of our existing producd ts and services, or the failure to achieve suffici
ZixProtect and ZixArchive, could impamm ir our ability to expand the market penetration of our products and services, or cause us to
reduce or increase prices, which could reduce our revenues and net income and materially adversely affeff ct our business, financial
condition and financial results.

ent market adoption of new products including

Our business relies on securing new customer subscriptions and subscription renewals from existing customers.

The vast majoa rity of our revenue is derived from customer subscu

riptions, and existing customers have no contractual obligations

iptions and purchasing additional solutions or services after

to purchase beyond the initial subsu cription or contract period. Our ability to grow our business is dependent in part on customers
renewing their existing subscr
we maintain and analyze historical data with respect to rates of customer renewals, upgrades and expansions, those rates may not
accurately predict future trends in renewal of certain producdd ts and services offeff
red by us. If our customers cancel or amend their
agreements with us during their term, do not renew their agreements, renew on less favorable terms or do not purchase additional
solutions or products during renewal periods, our revenue may grow more slowly than expected or decline and our profitabil
be harmed.

the initial term of their agreement. Though

ity may

Additionally, we have experienced, and expect to continue to experience, some level of attrition with existing customers and we

may not maintain historical subsu cription rates, and we may be unablea
have historically retained approximately 90% of our recurring revenue on an annual basis, there has been some recent decline in such
retention and our customers’ renewal rates may further decline or fluctuate as a result of a number of factors, including the level of
their satisfacff
services, customer merger or acquisition activity, customer budgets, the
pricing of our products compared with those offerff ed by our competitors, technology trends, the prevailing regulatory regime and
general market conditions. If new subscu
ion renewals decline from their current levels, our revenue or revenue
growthww may decline, and our business may sufferff which could have a materially adverse effeff ct on our financial performance.

to accurately predict our customer renewal rates. Although we

tion with our products and technical support

riptions or subscript

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
condition and financial results.

our reputation, business, financial

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 cybery
data protection breaches, computer viruses and other similar disruptu ions from unauthorized tamperimm ng or human error that attempt to
penetrate and could harm our networks and data centers. Our business depends on customers having and maintaining confidence
that
we provide effeff ctive network and security protection. To reduce the risk of a successful cybery
implemm mented significaff
nt 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 effoff
rts may be costly to implmm ement and may not be successful. If a cybey r-
malicious third parties to disrupr
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 publu icity, interruption of our services, damage to our reputation, unauthorized disclosure of our customers’
confideff
disclosure, modification or removal of our confidential
ff
secrets, loss of customers, lost revenue and increased expense (including potentially indemnificatio
could have a material adverse effeff ct on our business, financial condition and financial results.

n of our trade
n or warranty costs), any of which

ntial or proprietary information (including personally identifiabff

or sensitive information, theftff or unauthorized use or publicatio

le information), disclosure of our intellectual property,tt

-attack or similar event, we have

t or undermine our security effoff

rts to limit the ability of

-attacks,

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.

c reports of successfulff

Our business emplomm ys public

key cryptography technology and other encryption technologies to encrypt and decrypt sensitive
data. The security afforff ded by encryption depends on the integrity of the private key, which is predicated on the assumptm ion that it is
very diffiff cult to mathematically derive the private key from the related public
email, or publiu
methods or technologies, such as quantum computing, make it easier to derive the private key from the related public
y technology could be impairmm ed and our products and services could become less
of encryption services using public
key cryptographa
marketable. That could require us to make significan
t changes to our products and 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 affeff ct our business, financial condition and financial results.

decryption, whether or not true, could reduce demand for our products and services. If new

key. Successful decryptyy ion of intercepted encrypted

key, the security

Our business depends substantially on our data center facilities and other systems and infrastructure provided by third
parties, and their unreliability or unavailability for a significant period could cause us to lose customers and could negatively
affeff ct our business, financial condition and financial results.

-attacks, sabotage, vandalism, earthquakes, terrorist attacks, hostilities or war or other events. Computer

Our business relies on third-party suppuu liers of computer, cloud and telecommunications infrastructure to provide our products
and services through the global Internet and to provide network access between our data centers, our customers and end-users of our
products and services. Much of the computer and communications hardware upon which our businesses depend is located in our data
center facilities in North America and in the United Kingdom. Our data centers might be damaged or interruprr
numerous factors, many of which are beyond our control, including fire, flood, power loss, mechanical failure, telecommunications
failure, break-ins, cybery
viruses, equipment failure, denial of service attacks, and similara disruprr
ed by third
parties or our systems might cause service interruptuu ions, delays and loss of critical data, and could prevent us from providing our
services. Problems affeff cting our data center operations or the networks on which we rely, whether or not in our control, could result in
loss of revenues, increased expenses, failure to achieve market acceptance, diversion of resources, injun ry to our reputation, liability
and increased costs, and may cause our customers to terminate or elect not to renew their agreements. We do not carryrr sufficie
nt
insurance to compensate us for all losses that may occur as a result of any of these events. Though our products generally tolerate
isolated supplie
r outages or problems, could materially
adversely affeff ct our business, financial condition and financial results.

r failures, the occurrence of any of these events, including multiple supplie

tions affeff cting the internet, infrastructure suppli

ted as a result of

Outages or problems with internet communication systems and infrastructure supplied by third parties could negatively affect
our business, financial condition and financial results.

Our business relies on third-party suppluu
communications service suppliers
uu
users of our products and services. If those supplier
systems, we may be unable to gain or retain customers. These suppliers
as a result of internal system failures or external third-party actions. Though our products generally tolerate isolated suppli
multiple suppuu lier outages or problems could materially adversely affeff ct our business, financial condition and financial results.

periodically experience outages or other operational problems
er failures,

and the global internet to provide network access between our data centers, our customers and end-

s do not enable us to provide our customers with reliable, real-time access to our

iers of the telecommunications and internet infrastructure. We use various

The infrastructure supporting our business may sufferff
lose customers, increase our operating costs and could negatively affecff

capacity constraints and business interruptions that could cause us to
t our business, financial condition and financial results.

Our business depends on our providing our customers reliable, real-time access to our data centers and networks. Customers will

not tolerate a service hampered by slow delivery times, unreliable service levels, service outages, or insufficient capacity. System
capacity limits or constraints arising from unexpected increases in our volume of business or network trafficff
outages or delays in our services, or deterioration in their performance, or could impairmm
be able to accurately projeo ct the rate of increase in usage of our systems or to timely increase capacity to accommodate increased
trafficff
third parties, which could result in our losing customers and revenues, or incurring liabilities that could have a material adverse effecff
on our business, financial condition and financial results.

could cause interruptuu ions,
our ability to process transactions. We may not

ons may prevent us from effiff ciently providing services to our customers or other

on our systems. System delays or interruptiuu

The growth of our business may require significaff
achieve delayed, or lower than expected benefitff s, which could impair our profitab
financial condition and financial results.

nt investment in systems and infrastructure and these investments may
t our business,

ility and negatively affff ecff

r an increasing numberm of customers enhanced

rings, systems and infraff structure may require us to commit substa

As our operations grow in size and scope, we continually need to improvmm

rings, systems and
infrastructure to offeff
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
offeff
u
assurance that the volume of our business will increase, which could reduce our net income, deplete our cash, and materially advedd rsely
affeff ct our business, financial condition and financial results. Developing and launching new product offerff
ings adjad cent to or outside of
our core service offeff
the same time, these new offeff
execute a sales and marketing strategy that justifiesff
initiatives could materially adversely affeff ct our business, financial condition and financial results.

rings involve greater uncertainty concerning both market acceptance and our ability to successfulff
our investments. Our failure to properly manage and execute new product

rings can be particularly costly in terms of capital investments for both product development and marketing. At

ntial financial, operational and technical resources, with no

e and upgrade our technology offeff

Because we recognize subscription revenue over the term of the applicable customer agreement, a decline in subscription
renewals or new service agreements may not be reflected immediately in our operating results.

y one
We generally recognize revenue from customers ratably over the terms of their customer agreements, which are typicall
year or two years. As a result, much of the revenue we report in each quarter is deferred revenue from customer agreements entered
into during previous quarters. Consequently, a decline in new or renewed client agreements in any one quarter will not be fully
reflected
diffiff cult for us to rapidly increase our revenue through additional sales in any period, as revenue from new clients must be recognized
over the applicable subscriptio

in our revenue or our results of operations until future periods. Accordingly, this revenue recognition model also makes it

n term.

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 improm ve the perforff mance, features and reliability of our products and services,
particularly in response to competitive offerff
services address evolving operating environments, devices, industry trends, certificatio
required to expand our offeff
rt a broader range of mobile
rings for virtual computer environments and mobile environments to suppouu
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 superio
development, but our research and development resources are more limited than many of our competitors.

ings, to keep pace with these developments. We must ensure that our producdd ts and

r to oursuu . We spend considerable resources on technology research and

ns and standards. For example, we have been

In addition, we are also focused on addressing new and accelerating market trends, such as the continued decline of on premise
email security and advance threat protection solution(s) and the continued transition towards cloud-based solutions, which requires us
to continue to impromm ve our product and service offeff
our effoff
rts to address these challenges and higher than expected or unanticipated execution costs. Our failure to introduce new or
enhanced products on a timely basis, to keep pace with rapid indusd try, technological or market changes or to gain customer acceptance
for our new and existing producdd ts and services, such as mobile device data protection, could have a material adverse effeff ct on our
business, financial condition and financial results.

rings. We may experience delays in the anticipated timing of activities related to

We face strong competition, which could negatively affecff

t 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.

red by companies such as Barracuda Networks, Inc., Proofpoin

red by companies such as AirWatch/VMWare, Citrix (with XenMobile), Blackberry, IBM/Fiberlink (with
ings to expand the

With rising demand for private and secure email communications, there is strong competition for email encryptyy ion products and
services. Our Email Encryption Threat Protection, Archive, and Data Loss Prevention business competes with products and services
offeff
products and services offeff
MaaS360), and MobileIron. Strong competition requires us to develop new technology solutions and service offerff
functionality and value that we offeff
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 oftenff
formed that create producdd ts competitive with our products. Competitive pressures could lead to price discounting or to increases in
expenses such as advertising and marketing costs. Increased competition could also decrease demand for our products and services.
Competition could reduce our revenues and net income and materially adversely affeff ct our business, financial condition and financaa
results.

r to our customers. Our competitors may develop producdd ts and services that are perceived by

t, MIMECast, and Virtru. Our ZixOne business competes with

ial

Industry consolidation may lead to increased competition and may negatively affect our operating results.

There has been a trend toward industry consolidation in our industry for several years. We expect this trend to continue as
companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to
continue operations. For example, some of our current and potential competitors have made acquisitions, or announced new strategic
alliances. Compamm nies that are strategic alliance partners in some areas of our business may acquire or form alliances with our
competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are
better abla e to compete as sole-source vendors for customers. This could have a material adverse effecff
condition and financial results.

t on our business, financial

Some competitors have advantages that may allow them to compete more effectively
business, financial condition and financial results.

than us, which could negatively affect our

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 producd ts and services faster than we can, to spend more money to market and distribute products
r their products and services at prices lower than ours. These advantages could reduce our revenues
and services than we can, or to offeff
and net income and materially adversely affeff ct our business, financial condition and financial results.

If we do not effectively expand and train our sales force, we may be unable to add new customers or increase sales to our
existing customers and our business may be negatively affected.

We continuenn

u
to be substan

tially dependent on our sales force to obtain new customers and to sell additional solutions to our

nt numbem rs of sales personnel to suppor

existing customers. We believe that there is significff ant competition for sales personnel with the skills and technical knowledge that we
require. Our ability to achieve significaff
ting, training and retaining
t training and, in most cases, take significff ant
ff
sufficie
time beforff e they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect, and we
may be unable to hire or retain sufficie
If we are unable to hire and train sufficff
new clients or increasing sales to our existing client base, our business will be harmed.

nt numbers of qualified individuals in the markets where we do business or plan to do business.
in obtaining
of effeff ctive sales personnel, or the sales personnel are not successfulff
ient numbersm

nt revenue growth will depend, in large part, on our success in recruirr

t our growthww . New hires require significan

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 offeff

r complementary products and services. These

arrangements are generally limited to specificff projects or series of projects, and their main goal is generally to facilitate product
compamm tibility 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 beneficia
l 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
performff
delays in product development or other operational
diffiff culties.

or if these relationships fail to materialize as expected, we could sufferff

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.

We distribute a significaff

nt percentage of our products and services by entering into alliances with third parties who can offeff

r our
products and services along with their own or our competitors’ products and services. Increased reliance on third parties to market and
distribute our producd ts 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 unpred
and make it difficff ult 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
significaff
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 affeff ct our business, financial condition and financial results.

nt distributor were to discontinue its relationship with us, we could experience an interruprr

tion in the distribution of our

ictably

Our future growth and success may be affected by acquisitions. If we are not able to successfull
and integrate acquisitions, our operating results and prospects could be negatively affect

ed.

y identify, negotiate, complete

We have acquired and expect to continue to acquire new products and technology, as well as customers, through acquisitions.

The success of our future acquisition strategy will depend on our ability to identify, negotiate, complete and integrate acquisitions.
Acquisitions are inherently risky, and any acquisition we complete may not be successful. Acquisitions we pursue, including our
recent AppRiver acquisition, involve numerous risks, including the following:

(cid:120)

diffiff culties in integrating and managing the operations and technologies of the companies and assets we acquire;

diversion of our management’s attention from normal daily operations of our business;

our inability to maintain the customers, the key emplom yees, the key business relationships and the reputations of the
businesses and producd ts we acquire;

our inability to generate sufficff
acquisitions;

ient revenue from acquisitions to offsff et increased expenses generally associated with

diffiff culties in predicting or achieving synergies and cost savings between our existing businesses and acquired businesses;

our responsibility for the liabilities of the businesses we acquire, including liabilities arising out of their failure to operate
correctly, maintain effeff ctive data security, data integrity, disaster recovery and privacy controls prior to acquisition, or
their infringement or alleged infringement of third-party intellectual property, contract or data access rights prior to
acquisition;

diffiff culties in complying with new markets or regulatory standards to which we were not previously subju ect;

diffiff culties or unanticipated expenses associated with development work that is necessary to achieve interoperability
between our products and solutions and the products and solutions we acquire;

difficulties or unanticipated expenses associated with migrating customers from producd ts and solutions developed by our
acquisition targets to our own products and solutions;

delays in our ability to implmm ement internal standards, controls, procedures and policies in the businesses we acquire; and

adverse effect

s of acquisition activity on the key performance indicators we use to monitor our performff

ance as a busines

Unanticipated events and circumstances occurring in future periods may affeff ct the realizability of intangible assets that we are

required to record on our balance sheet as a result of acquisitions. These events and circumstances could include significff ant under-
performff
ance relative to projeo cted future operating results and significant changes in our overall business or product strategies. Such
events and circumstances may cause us to revise our estimates and assumptions used in analyzing the value of our intangible assets,
and any such revision could result in a non-cash impamm irment charge that could have a material impamm ct on our financial results.

Unfavorab
financial results.

le economic environments, particularly in the U.S., could negatively affect

our business, financial condition and

Challenging economic conditions worldwide have from time to time contributed, and may contribute to future slowdowns in
the technology and networking industries at large, as well as in the email/data security market and in specific geographic markets in
which we operate. If economic growthww in those markets, particularly in the U.S., which accounts for a subsu tantial majoa rity of our
revenue, slows, or credit is unavailable at a reasonable cost, curren
purchases, including the deployment or expansion of our products and services. Additionally, as we continue along our path of

t and potential customers may delay or reduce technology

exploring additional international markets, we may become more susceptible to unfavorable economic environments outside the U.S.
and that could compound the negative effeff cts 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 increased
s,
price competition. In addition, adverse economic conditions could negatively affeff ct the cash flow of our customers and distributoruu
which might result in failures or delays in payments to us. This could increase our credit risk exposure and delay our recognition of
revenue. Specificff
corporate information technology spending, could have a more direct impamm ct on our business. If these conditions persist, spread or
deteriorate further, our business, financial condition and financial results could be materially adversely affeff cted.

economic trends, such as declines in the demand for cloud computing services and computing devices, or softnff ess in

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, ofteff n 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 complmm ex
solutions that incorporate leading-edge technology, including both hardware and softwff
are that must operate in a wide variety of
technology environments. Softwff
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 defecff
t or mitigate vulnerabilities could be material to our operating results. Our
inability to cure a product defecff
security breach, negative publiu
expense, any of which could have a material adverse effect

t could result in the temporaryrr or permanent withdrawal of a product or service from the market, a
city, damage to our reputation, failure to achieve market acceptance, lost revenue and increased

are may contain defeff cts or “bugs” that can interfere with expected operations or introduce security

on our reputation, business, financial condition and financial results.

Our transmission and storage of personally identifiable information, including the personal data of European data subjects
and other confidential information, and the potential for 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 confidentia
and enhance, security measures and controls to help protect against unauthorized disclosure of such PII and other CI, an inadvertent
disclosure of,ff or unauthorized third-party access to, PII or CI, could disruptuu
our operations, damage our reputation and subject us to
claims or other liabilities.

l information (“CI”). Although we have established, and continue to develop

In addition, our processing and storage of certain typeyy s of data is subju ect to confideff

ntiality agreements with our clients and

handling PII is increasingly subject to a variety of changing privacy and data security regulations around the world. For examplemm , the
collection and use of personal data in the European Union, previously governed by the provisions of the Data Protection Directive,
were replaced with the General Data Protection Regulation, or GDPR, in May 2018. GDPR imposmm es several requirements relating to
the collection, use, processing and transfer of personal data, such as requirements for using consent or other legal grounds to process
personal data, providing inforff mation to individuals about how their personal data is used, maintaining adequate security and data
protection measures, giving data breach notificaff
tions, complying with individuals’ requests to access, correct or delete their personal
data and using third-party processors of personal data. GDPR also maintains the European Union’s strict rules limiting the transfer of
personal data out of the European Economic Area. Failure to comply with the requirements of GDPR and the applicable national data
protection laws of the European Union Member States may result in fines and other administrative penalties. GDPR will introduce
substa
ntial potential fines for violations and increase our responsibility and liability in relation to personal data that we process. To
u
comply with the GDPR, we may be required to put in place additional technical and administrative measures and controls
mechanisms. This may be onerous and adversely affect
ff
laws and regulations are subju ect to new and differing
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 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 certificati
Privacy Shield self-cff ertification was finalized by the Department of Commerce and became effeff ctive as of November 9, 2016 and was
renewed in Novembem r 2017. This allows us to transferff
United States, in compliance with the Privacy Shield principles. While our Privacy Shield certificaff
Model Clauses) to lawfulff
these legal challenges may result in different
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 effeff ct on our business, including increased cost of compliance and limitations on data transfer for us and our
customers.

ly transfer such data remain in place, those mechanisms are also subju ect to pending legal challenges and
ring standards for the transfer of

our business, financial condition, results of operations and prospects. Such
interpretations and may be inconsistent among jurisdictions. For examplmm e, in

personal data of European data subju ects that we receive from customers to the

on and are now an Active Participant in the Privacy Shield program. Ouru

European data protection regulators applying diffeff

tion and other mechanisms (such as

Any inability to adequately address privacy concerns, even if unfounff

ded, 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,ff or unauthorized access (including due to a cybey r-attack) to, PII or other CI or
other failure by us to comply with data privacy requirements could subju ect us to significaff
expenses, and damage our reputation, any of which could have a material adverse effect
financial results.

nt penalties, damages, remediation and other
on our business, financial condition and

Problems with protecting and enforcing our intellectual property rights could negatively affect
condition and financial results.

our business, financial

We rely on a combination of contractual rights, trademarks, trade secrets, patents and copyriyy ghts to establish and protect
intellectual property rights and other proprietary rights in ouruu 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 inforff mation
may not prevent its misuse, theftff or misappa
substu
antially equivalent or supeuu rior to our products or that inappropriately incorporate our intellectual property rights or other
proprietary technology into their products. Competitors may hire our former emplomm yees 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.

ropriation. Competitors may independently develop technologies or products that are

We may have to defend or assert our rights in intellectual property that we use in our products and 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 defenff d against claims that we or our customers are infriff nging the rights of third parties in patents, copyriyy ghts,

trademarks and other intellectual property. If we acquire technology to include in our products and services from third parties, our
gement actions may increase because we must rely upon these third parties to verify the origin and ownership of
exposure to infrinff
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 foff r infringement or misappropriation. Intellectual property litigation and
controversies are disruptuu ive 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 significaff
may have to be settled for significff ant amounts. Infriff ngement claims against us could require us to develop non-infringing products and
services or enter into expensive royalty or licensing arrangements. Our business, financial condition and finff ancial results could be
materially adversely affeff cted if we are not able to develop non-infringing technology or license technology on commercially
reasonable terms.

nt legal and other fees to defenff d, and

We may face risks from using “open source” software that could negatively affect our business, finff ancial condition and
financial results.

Like many other software companies, we use “open source” software in order to take advantage of common industry building

blocks and to add functionality to our products quickly and inexpxx ensively. Open source software license terms could adversely affeff ct
our intellectual property rights in our products that include open source software. Depending upon how the open source softwff
deployed, we could be required to offeff
modifications or derivative works. Any of these obligations could have an adverse impactm
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 public
s in
place that are designed to address these risks and concerns, but we cannot be sure that our process or controls will be suffici
mitigate all risk in this regard. Open source software might also introducd e security vulnerabilities or defecff
ts.
source community may not always respond with adequate urgency to mitigate the impacmm ts of such defecff

ly disclose proprietary information. We have processes and control

are for no cost, or make available the source code for

ff
tive functionality. The open

r products that use the open source softwff

on our intellectual property rights and

tt
ent to

are is

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 for our use. For examplmm e, a

nt portion of the revenue generated by our Erado business is dependent on the licensing of certain electronic message API’s,
nt

significaff
such as those made available by LinkedIn Corporation, SMS providers, Facebook, and othet
portion of the revenue generated by our AppRiver business is dependent on the licensing of Microsoftff products such as Officeff
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 or maintain the necessary licenses for new or current products on acceptable terms or at
all. Changes in the terms of such licenses may decrease our product margins and our failure to obtain or maintain such licenses may
limit our ability to sell our products, either of which could have a material adverse effect
financial results.

r social media channels, and a significaff
365.

on our business, financial condition and

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 disruptuu ive to our business. It could be diffiff cult, time consuming and expensive to replace key
personnel. Integrating new key personnel may be difficu
lt and costly. Volatility, lack of positive perforff mance in our stock price or
changes to our overall compensation program including our stock incentive program may adversely affeff ct our ability to retain key
emplomm yees, many of whom are compensated, in part, based on the perforff mance 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
our business, financial
diffiff cult to meet key objectives. Any of these impamm irments related to our key personnel could negatively affect
condition and financial results.

Governmental restrictions on the sale of our products and services in non-U.S. markets could negatively affeff ct our business,
financial condition and financial results.

Exports of softwff

are solutions and services using encryption technology such as ours are generally restricted by the U.S.

restrictions on the impomm rtation and use of encryption solutions and services such as ours. The cost of compliance with U.S. and
our products and services in non-U.S. markets, could affeff ct

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 producdd ts and services could be expanded in the future. In addition, some countries
imposemm
other export laws, or our failure to obtain governmental approvals to offerff
our ability to sell our products and services and could impairmm
compliance risks. If we or our distributors fail to comply with applicable law and regulations, we may become subu jeb ct to penalties,
fines or restrictions that could materially adversely affeff ct our business, financial condition and financial results.

ouruu international expansion. We face a variety of other legal and

Our sales to government entities are subject to a number of challenges and risks.

nt upfront time and expense without any assurance that these effoff

Sales to U.S. federal, state and local governmental agency customers have accountenn d for a significaff

in
past periods, and we may in the future increase sales to government agencies. Sales to government entities are subju ect to a number of
challenges and risks. Selling to government entities can be highly competitive, expensive and time consuming, ofteff n requiring
significaff
requirements ofteff n carry a high compliance risk. Government certification requirements for solutions like ours may change and in
doing so restrict our ability to sell into the federal government sector until we have attained the revised certification. Government
demand and payment for our solutions may be impacted
reductions or delays adversely affeff cting public
contractual or other legal rights to terminate contracts for convenience or due to a default,
impactmm

mm
sector demand for our solutions. Government entities also may have statutory,

sector budgetary cycles and funding authorizations, with funding

rts will generate a sale. Government contractual

and any such termination may adversely

our future operating results.

nt portion of our revenuen

u
by public

Risks Related to our Indebtedness, Capital Strutt

cture and Ownershrr

ip of our Common Stoctt k

Our indebtedness could adversely affect
we may be unable to generate suffiff cient cash flow to satisfyff our debt service obligations.

our business and limit our ability to expand our business or respond to changes, and

In February 2019, we entered into a credit agreement with the lenders party thereto under which we established (i) a senior
secured term loan facility in an aggregate principal amount of $175 million, (ii) a senior secured delayed draw term loan facility in an
aggregate principal amount of $10 million and (iii) a senior secureu d revolving credit facility in an aggregate principal amount of $25
million (collectively, the “Credit Facilities”). The Credit Facilities are guaranteed by certain wholly-owned subsidiarie
s of Zix. The
Credit Facilities are secured by substa
ntially all assets of Zix and the guarantors, subju ect to certain customary exceptions. The Credit
u
Facilities will mature in February
following:

of 2024. The incurrence of this indebtedness could have adverse consequences, including the

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reducing the availability of our cash flow for our operations, capital expenditures, future business opportunities, stock
buybay cks and other purposes;

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

making it more difficuff
market or industry conditions;

lt to pay or refinff ance our debts as they become due during periods of adverse economic, financial

limiting our ability to obtain additional financing for working capital, acquisitions or other purposes, particularly since
substu

antially all of our assets are subju ect to securituu y interests relating to existing indebtedness;

requiring our debt to become due and payabla e upon a change in control;

increasing our vulnerability to general adverse economic and industry conditions; and

lengthening or otherwise adversely affeff cting our sales process as customers evaluate our financial viability.

Optional prepayments of borrowings under the Credit Facilities will be permitted at any time, without premium (other than

customary LIBOR breakage costs). We must prepay the term loan facility in equal quarterly installments of $437,500 on the last day
of each March, June, Septembem r and December (commencing on June 30, 2019) until maturity in February of 2024. In addition to
other customary mandatory prepayment requirements, the term loan facility requires annual prepayments based on a percentage fof
Zix’s excess cash flow, which percentage will reduce as Zix’s total net leverage ratio decreases. We depend on cash on hand and cash
flows from operations to make scheduled debt payments. To a significan
t extent, our ability to do so is subju ect to general economic,
ff
financial, competitive, legislative, regulatory and other factors that are beyond our control. If our business does not generate sufficie
cash flow from operating activities or if future borrowings are not availabla e to us in amounts sufficie
liquidity needs, our operating results, financial condition and ability to expand our business may be adversely affected

nt to enable us to fund our

The interest rate borne by our Credit Facilities will float over time and is initially LIBOR plus 3.50%, with future step downs in

the interest rate margin as our total net leverage reduces. The floating rate nature of this interest rate exposes us to interest rate risk.
Changes in economic conditions outside of our control could result in higher interest rates, thereby increasing our interest expense
even though the amount borrowed remains the same.

Restrictive covenants in our credit agreement may adversely affect our financial and operational flexibility.

The credit agreement governing our Credit Facilities contains certain financial, operational and legal covenants. The financial
covenant requires Zix to maintain a maximum total net leverage ratio (as defined in the credit agreement) and is tested on a quarterly
basis (commencing March 31, 2019), based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The non-
financial covenants restrict our ability and the ability of our restricted subsu idiaries to, among other things, incur indebtedness, incur
liens, merge with or acquire other entities, make investments, dispose of assets, enter into sale and leaseback transactions, make
dividends, distributions or stock repurchases, prepay junior indebtedness, enter into transactions with affiliates,
agreements, and amend our organizational documents or the terms of junior indebtedness.

enter into restrictive

These restrictions may make it more diffiff cult or discourage a takeover of Zix, whether favored or opposed by our management

and/or our Board of Directors.

Our ability to comply with some of these restrictive covenants can be affected

by events beyond our control, and we may be

unabla e to do so. Failure to comply could require us to seek waivers or amendments of covenants or alternative sources of financing, or
to reduce expenditures. We cannot guarantee that such waivers, amendments or alternative financing could be obtained or, if obtained,
would be on terms acceptable to us.

Upon the occurrence of a defauff

lt, or if we are unable to make the representations and warranties in the credit agreement

governing our Credit Facilities, we will not be able to borrow funds or issue letters of credit under our Credit Facilities. Upon the
occurrence of an event of defauff
immediately due and payabla e. If we are unable to repay that amount,nn our lenders could seize our assets securing the loans and our
business and financial condition could be materially and adversely affeff cted.

lt, our lenders could elect to declare all amounts outstanding under our Credit Facilities to be

Our Series A Convertible Preferred Stock (the “Series A Preferred Stock”), Series B Convertible Preferred Stock (the “Series
B Preferred Stock”) and investment agreement restrict our ability to incur certain indebtedness which limits our flexibility in
operating our business.

In February 2019, we issued Series A Preferred

Designations”) and Series B Preferr
which contain covenants that, among other things, require the consent of the holders of a majoa rity of each of the then-outstanding
Stock beforff e we can incur indebtedness in excess of a specifieff d leverage
shares of Series A Preferr
ratio.

ed Stock established by a Certificaff

ed Stock and Series B Preferred

Stock established by a Certificate of Designations (the “Series A Certificate of
e of Designations”),

te of Designations (the “Series B Certificat

In January 2019, we entered into an investment agreement with an investment fund managed by Truer Wind Capita

l (the

“Investor”), which contains customary covenants, including among others, that for so long as any shares of preferred stock issued
pursuant to the investment agreement are outstanding, the consent of the Investor will be necessary for us to issue, subju ect to certain
exceptions, any debt securities convertible into any of our capital stock.

We may need additional capital, and we cannot be certain that additional financing will be available.

We may require additional financing in the future to operate or expand our business, acquire assets or repay or refinff ance our
rts, business plans,

existing debt. Our ability to obtain financing will depend, among other things, on our business development effoff
operating performance and the condition of the capital markets at the time we seek financing, as well as other factors beyond our
control. We cannot provide any assurance that additional financing will be availabla e to us on favorable terms when required, or at all.
Additionally, under the terms of our credit agreement, preferred
stock and investment agreement, respectively, we are restricted from
incurring additional debt, subju ect to certain exceptions. If we raise additional funds through the issuance of equity, equity-linked or
debt securities, those securities may have rights, preferences
and our stockholders may experience dilution.

or privileges senior to the rights of our common stock or preferff

red stock,

If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

(cid:120)

develop or enhance our solutions;

continue to expand our sales and marketing and research and development organizations;

repay or refinff ance our existing debt;

acquire complementary technologies, solutions or businesses;

expand operations, in the United States or internationally;

hire, train and retain emplomm yees; or

respond to competitive pressure or unanticipated working capital requirements.

Our failure to do any of these things could seriously impacm t our business, negatively affeff cting financial condition and operating

results.

We may be able to incur more debt and take other actions that could diminish our ability to make payments on our
indebtedness when due, which could further exacerbate the risks associated with our current level of indebtedness.

Despite our current indebtedness level, we may be able to incur more indebtedness in the future. We are not completely

prohibited under the terms of the credit agreement, preferred
indebtedness from incurring additional debt, securing existing or futff ure debt, recapitalizing our debt or taking a number of othet
r
actions, any of which could diminish our ability to make payments on our indebtedness when due and further exacerbat
associated with our current level of indebtedness. If new debt is added to our or any of our existing and future subsiu
debt, the related risks that we now face could intensify.ff

stock, investment agreement or other agreements governing our currer nt

r
e the risks
diaries' current

Our preferred stockholders can exercise significant control over the Company, which could limit the ability of our common
stockholders to influence the outcome of key transactions, including a change of control.

The Investor holds approximately 16.6% of our outstanding voting capital stock based on the numberm of shares of common

red Stock outstanding as of March 6, 2019, on an as-converted basis. If Stockholder Approval (as

stock and convertible Series A Preferff
definff ed in the investment agreement) is obtained, the Investor will have an aggregate voting power of at least 24.2% of our
outstanding capital stock on the date of such Stockholder Approval, which amount may increase based on the accrued value of the
Series B Preferre
d Stock at conversion. In addition, the Investor’s aggregate voting power will increase further in connection with
future accretion of the Series A Preferr
Series A Preferre
ff
matters submu
the ability to significaff
Investor is entitled to act separately in its own respective interests with respect to its ownership interests in the Company and has the
ability to subsu tantially influff ence the election of the members of our Board of Directors, thereby potentially controlling our
management and affaff
including the approval of significaff

d Stock are entitled to vote their shares, on an as-converted basis, together with holders of our common stock on all

itted to a vote of the holders of our common stock. As a result, the holders of shares of the Series A Preferred

irs. In addition, the Investor has significant influence over all matters that require approval by our stockholders,

itted for the vote of the holders of our common stock. The

d Stock remains outstanding. The holders of our

ntly influff ence the outcome of any matter submu

ed Stock for as long as the Series A Preferre

nt corporate transactions.

Stock have

Additionally, holders of a majoa rity of the then-outstanding shares of Series A Preferred

Stock are required to approve certain

matters as a class, voting separately from the common stock, such as (1) any amendment, alteration or repeal to our Restated Artirr cles
of Incorporation (the “Articles of Incorporation”) or the Series A Certificate of Designations in a manner that would adversely affeff ct
the rights, prefereff
Incorporation or any other action to authorize or create, or increase the numberm of authorized or issued shares of,ff or any securities
convertible into shares of,ff or reclassifyff any security into, or issue any parity stock or senior stock as to dividend or liquidation rights;
(3) the issuance of shares of Series A Preferred

Stock other than in connection with the conversion of Series B Preferred

ed Stock; (2) any amendment or alteration to our Articles of

nces, privileges or power of the Series A Preferr

Stock that

was issued on the Issue Date; (4) any action that would cause us to cease to be treated as a domestic corporation for U.S. federal
income tax purposes; or (5) the incurrence of indebtedness that would cause us to exceed a specified leverage ratio.

Further, holders of a majoa rity of the then-outstanding shares of Series B Preferred

as a class, voting separately from the common stock and the Series A Preferff
to our Articles of Incorporation or the Series B Certificate of Designations in a manner that would adversely affeff ct the rights,
prefeff rences, privileges or power of the Series B Preferr
any other action to authorize or create, or increase the number of authorized or issued shares of,ff or any securities convertible into
shares of,ff or reclassify any security into, or issue any parity stock or senior stock as to dividend or liquidation rights; (3) the issuance
of any additional shares of Series B Preferred
corporation for U.S. federal income tax purposes; or (5) the incurrence of indebtedness that would cause us to exceed a specified
leverage ratio.

ed Stock; (2) any amendment or alteration to our Articles of Incorporation or

Stock; (4) any action that would cause us to cease to be treated as a domestic

Stock, are required to approve certain matters
red Stock, such as (1) any amendment, alteration or repeal

Any issuance of common stock upon conversion of the Series A Preferred Stock and the issuance of Series A Preferred Stock
upon automatic conversion of the Series B Preferred Stock in connection with the Stockholder Approval will cause dilution to
existing stockholders and may depress the market price of our common stock.

The Series A Preferred

Stock has an initial stated value of $1,000 per share, which stated value will accrete at an annual rate of
8% per annum, compounded quarterly. Each share of Series A Preferff
red Stock is convertible, at the option of the holders, into (i) the
number of shares of common stock equal to the producd t of (A) the stated value per share as it has accreted as of such date multiplied
by (B) the Conversion Rate as of the applicable conversion date divided by (C) 1,000 plus (ii) cash in lieu of fractional shares. The
initial Conversion Rate is equal to 166.11 shares of our common stock and is subju ect to adjud stment from time to time upon the
occurrence of certain customary events in accordance with the terms of the Series A Certificate of Designations. Each share of Series
A Preferr

ed Stock is entitled to participate in dividends paid in respect of the common stock on an as-converted basis.

The issuance of common stock upon conversion of the Series A Preferred

Stock (including any shares of Series A Preferred

Stock issued upon automatic conversion of the Series B Prefeff rred Stock in connection with the Stockholder Approval) will result in
immediate and substa
connection with the future accretion of the Series A Prefeff rred Stock and the conversion of Series B Preferred
Preferff

ntial dilution to the interests of our common stock holders, and such dilution will increase over time in

red Stock (assuming Stockholder Approval is obtained).

Stock into Series A

Texas law and our Articles of Incorporation and bylaws contain certain provisions, including anti-takeover provisions, that
limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may
consider favorable.

The Texas Business Organizations Code, as amended (“TBOC”), and our Articles of Incorporation and second amended and

restated bylaws contain provisions that could have the effecff
deemed undesirable by our Board of Directors and thereforeff
also make it difficff ult for stockholders to take certain actions, including electing directors who are not nominated by the current
members of our Board of Directors or taking other corporate actions, including effeff cting changes in our management. Among other
things, our certificate

t of rendering more difficff ult, delaying, or preventing an acquisition
depress the trading price of our common stock. These provisions could

of incorporation and bylaws include provisions regarding:

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the ability of our Board of Directors to issue shares of preferred
determine the price and other terms of those shares, including preferences
which could be used to significantly dilute the ownership of a hostile acquirer, and pursuant to which we have issued the
Series A Preferre
e and
ed Stock, each of which are entitled to receive a liquidation preferenc
certain amounts in connection with a change of control of the company and other similar extraordinary transactions;

ff
and voting rights, without stockhokk lder approval,

stock, including “blank check” preferred
ff

d Stock and Series B Preferr

stock, and to

the limitation of the liability of,ff and the indemnificff ation of,ff our directors and offiff cers;

the requirement that directors may only be removed from our Board of Directors by the affirff mative vote of a majoa rity of
the issued and outstanding shares entitled to vote in the election of directors at a special meeting of the shareholders called
for that purpose at which quorum is present;

a prohibition on common stockhokk lder action by written consent, which forces common stockholder action to be taken at
an annual or special meeting of stockholders and could delay the ability of stockholders to force consideration of a
stockholder proposal or to take other action, including the removal of directors;

the requirement that a special meeting of stockholders may be called only by the chairperson of our Board of Directors,
our Board of Directors or a holder of at least 10% of all of the shares of the Company entitled to vote at the proposed
special meeting, and must be called by our president or secretaryrr at the request in writing of a majoa rity of the members of

our Board of Directors, which could delay the ability of stockhokk lders to force consideration of a proposal or to take action,
including the removal of directors;

(cid:120)

provisions enabling us to control the procedurd es for the conduct and scheduling of Board of Directors and stockholder
meetings;

the requirement for the affiff rmative vote of holders of at least a majoa rity of all issued and outstanding shares entitled to
vote in the election of directors at a properly called and convened annual or special meeting of shareholders, to amend,
alter, change or repeal any provision of our Articles of Incorporation or our bylaws, which could preclude stockholders
from bringing matters before annual or special meetings of stockholders and delay changes in our Board of Directors and
also may inhibit the ability of an acquirer to effeff ct such amendments to facilitate an unsolicited takeover attempt;

the ability of our Board of Directors to amend our bylaws, which may allow our Board of Directors to take additional
actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend our bylaws to facilitate an
unsolicited takeover attempt; and

advance notice procedures with which stockholders must comply to nominate candidates to our Board of Directors or to
propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters
beforff e annual or special meetings of stockholders and delay changes in our Board of Directors and also may discourage or
deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or
otherwise attemptm ing to obtain control of our Company.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our Board of

Directors or management.

In addition, as a Texas corporation, we are subju ect to provisions of Texas law, including Section 21.606 of the TBOC, which

may prohibit certain stockholders holding 20% or more of our outstanding capital stock from engaging in certain business
combinations with us for a specifiedff

period of time.

Any provision of Texas law or our Articles of Incorporation or bylaws that has the effect

of delaying or preventing a change in
control could limit the opportuniu ty for our stockholders to receive a premium for their shares of our capital stock and could also affeff ct
the price that some investors are willing to pay for our common stock.

Othett

r Riskskk Relatll edtt

to our Series A Preferr

ed Stock and Series B Preferred Stocktt

Future resales of our common stock held by our significant stockholders or of the shares of common stock issuable upon
conversation of the Series A Preferred Stock may cause the market price of our common stock to drop significaff

ntly.

We are obligated to register the resale of the common stock issuable upon conversion of,ff or issued as dividends upon, the Series
A Preferred
Stock, and to take certain actions to facilitate the transfer and sale of such shares. Upon such registration, shares of
ff
common stock into which the Series A Preferff
conversion may represent overhang that may also adversely affeff ct the market price of our common stock. Overhang occurs when there
is a greater suppluu
company’s stock will decrease, and any additional shares which stockholders attempt to sell in the market, or the perception that such
sales might occur, will only further decrease the share price. If the share volume of our common stock cannot absorb converted shares
sold by the holders of the Series A Preferred

y of a company’s stock in the market than there is demand for that stock. When this happa

red Stock are converted would be freely tradable. The common stock issuable upon

Stock, then the value of our common stock will likely decrease.

ens, the price of the

Any sale of large amounts of our common stock on the open market or in privately negotiated transactions could have the effeff ct

of increasing the volatility in the price of our common stock or putting significaff
stock.

nt downward pressure on the price of our common

Our Series A Preferred Stock and Series B Preferred Stock have rights, preferences and privileges that are not held by, and
are preferential to, the rights of our common stockholders, which could adversely affect
and may result in the interests of the holders of our Series A Preferred Stock and Series B Preferred Stock differin
those of our common stockholders.

our liquidity and financial condition,

g from

In the event of our liquidation, dissolution or the winding up of our affaff

irs, the holders of our Series A Preferr

ed Stock have the

right to receive a liquidation preferff ence entitling them to be paid out of our assets generally available for distribution to our equity
holders, together with holders of our Series B Preferr
series of capital stock (including our common stock), in an amountuu

ed Stock and beforff e any payment may be made to holders of any other class or

equal to the greater of (i) $1,000 plus all accreted but unpan id

dividends and (ii) the amount such holder would have been entitled to receive if the Series A Preferff
common stock immediately prior to such liquidation.

red Stock had converted into

In the event of our liquidation, dissolution or the winding up of our affaiff

rs, the holders of our Series B Preferred

Stock have the

right to receive a liquidation preferff ence entitling them to be paid out of our assets generally available for distribution to our equity
holders, together with holders of our Series A Preferred
series of capital stock (including our common stock), in an amount equal to $1,000 plus all accrued but unpaid

Stock and before any payment may be made to holders of any other class or

dividends.

In addition, the $1,000 stated value per share of our Series A Preferred

Stock will accrete at a fixed rate of 8.0% per annum,

ded quarterly. The holders Series A Preferff

compounmm
stock on an as-converted basis. The holders of our Series B Preferr
cumulative basis payablea
“Dividend Rate”), which rate will automatically increase by 1.0% every six months that the Series B Preferff
outstanding and unconverted (subjeb ct to a cap of 12.0%). If cash dividends are not paid in respect of any dividend payment period, the
liquidation prefereff

ed Stock are entitled to receive dividends accruing daily on a
quarterly in arrears in cash at a fixed rate of 10.0% per annum on the $1,000 stated value per share (the

red Stock are also entitled to receive any dividends paid in respect of our common

Stock will automatically increase at the Dividend Rate.

nce of each outstanding share of Series B Preferred

red Stock remains

Further, the Series A Preferre

d Stock is mandatorily redeemable upon a change of control (as defined in the Series A Certificaff

Stock in cash equal to the greater of (i) the Series A Change of Control

Stock, immediately prior to such change of control, converted such shares of Series A Prefeff rred Stock into shares of

of Designations), at a price per share of Series A Preferred
Redemption Price (as definff ed below) and (ii) (A) the amount of cash such holder of Series A Preferred
received plus (B) the fair market value of any other assets such holder would have received, in each case had such holder of the Series
ff
A Preferred
common stock. The “Series A Change of Control Redemption Price” per share of Series A Preferred
accreted value of such share as of the date of determination multiplied by (1) 1.30 (if the change of control occurs beforff e the first
anniversary of the date of issuance); (2) 1.35 (if the change of control occurs on or after
but before the second anniversary of the date of issuance); (3) 1.40 (if the change of control occurs on or afteff
of the date of issuance but before the third anniversary of the date of issuance); (4) 1.45 (if the change of control occurs on or after
ff
third anniversary of the date of issuance but before the fourth anniversary of the date of issuance); and (5) 1.50 (if the change of
control occurs on or after

r the second anniversary
the

the fourth anniversary of the date of issuance).

the first anniversary of the date of issuance

Stock is the product of the

Stock would have

Stock also have redemption rights upon the occurrence of certain events.

red Stock to be redeemed as of the applicable redemptmm ion date multiplied by 1.50. The

Stock is also mandatorily redeemable upon a change of control (as defined in the Series B Certificate fof

d Stock is mandatorily redeemable, upon the holder’s election and after 90 days prior notice, any
d Stock equal to the liquidation

y, the Series B Preferre
the seventh anniversary of the date of issuance at na amount per share of Series B Preferre
per share of the Series B Preferff
ff

Further, the holders of our Series B Preferred
ff
Specificall
ff
time after
ff
preference
ff
Series B Preferred
Designations), at a price per share of Series B Preferr
Redemption Price (as definff ed below) and (ii) (A) the amount of cash such holder of Series B Preferred Stock would have
received plus (B) the fair market value of any other assets in each case had such holder of Series B Prefeff rred Stock, immediately prior
to such change of control, converted such shares of Series B Preferre
Change of Control Redemption Price” per share of Series B Preferff
as of the date of determination multiplied by (1) 1.30 (if the change of control occurs beforff e the first anniversary of the date fof
issuance); (2) 1.35 (if the change of control occurs on or after the first anniversary of the date of issuance but before the second
anniversary of the date of issuance); (3) 1.40 (if the change of control occurs on or after
the third anniversary fof
bbut before the third anniversary of the date of issuance); (4) 1.45 (if the change of control occurs on or after
the date of issuance but before the fourth anniversary of the date of issuance); and (5) 1.50 (if the change of control occurs on or afteff
the fourth anniversary of the date of issuanc )e .

ed Stock in cash equal to the greater of (i) the Series B Change of Control

red Stock is the producd t of the liquidation prefereff

the second anniversary of the date of issuance

d Stock into shares of Series A Preferred

Stock. The “Series B

nce of such share

the fourth anniversary of the date of issuance of the Series A Preferre

d Stock, we have the right to redeem

Stock for cash at a redemptmm ion price equal to the accreted value per share of Series A Preferred

Stock to be

Finally, any time after
ff

the Series A Preferred
redeemed multiplied by 1.50. Likewise, at any time afteff
we have the right to redeem the shares of the Series B Preferff
prefereff

nce per share of the Series B Prefeff rred Stock to be redeemed multiplied by 1.50.

r the fourth anniversary of the date of issuance of the Series B Preferr
Stock for cash at a redemptmm ion price equal to the liquidation

redrr

ed Stock,

These dividend and redemptmm ion payment obligations could significantly impacm t our liquidity and reduce the amount of our cash

flows that are available for working capital, capital expenditures, growth opportuniu ties, acquisitions, and other general corporate
purposes. Our obligations to the holders of Series A Preferre
additional financing or increase our borrowing costs, which could have an adverse effeff ct on our financial condition. The preferff ential
rights described above could also result in divergent interests between the holders of shares of Series A Preferred
Stock and/or Series
ff
B Preferre

d Stock and the holders of our common stock.

d Stock could also limit our ability to obtain

d Stock and Series B Preferre

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We leased properties during 2018 that are considered significff ant to the operations of the business in the following locations:
Michigan; Renton, Washington; Ottawa, Ontario, Canada; the United Kingdom; and Dallas

and development for our ZixArchive product line, which we acquired with our purchase of Erado. Our Ottawa emplmm oyees

Burlington, Massachusetts; Ann Arbor,
and Austin, Texas. Our Burlington emplmm oyees perform sales and marketing activities. Our Ann Arbor
uu
the support
and development of our ZixProtect product line, which we acquired with our purchase of Greenview. Our Renton emplm oyees perforff m
support
uu
perforff m both client services and sales suppouu
customers. The Dallas offiff ce 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 suppouu
rt normal ongoing operations. Our facilities are suitable for our current needs and are considered
adequate to suppor

rt activities. The United Kingdom facility provides data center suppor

t expected near-term growth.

r emplmm oyees performff

t for our European

Item 3. Legal

sgg
Proceedingii

We are subju ect to legal proceedings, claims, and litigation involving our business. While the outcome of these matters is
currently not determinabla e, and the costs and expenses of resolving these matters may be significant, we currently do not expect that
the ultimate costs to resolve these matters will have a material adverse effeff ct on our consolidated financial condition or operating
results.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Market for Registrant’s’ Common Equity,

ii Relatll edtt

Stockholder Matters and Issuer Purchases of Equity Securitiestt

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 2018 and 2017.

PART II

Quarter Ended
March 31
June 30
September 30
December 31

2018

2017

High

Low

High

Low

$
$
$
$

4.75
5.62
5.93
7.09

$
$
$
$

3.82
4.25
4.91
4.66

$
$
$
$

5.41
6.67
6.04
5.40

$
$
$
$

4.60
4.75
4.55
4.16

At March 6, 2019, there were 54,089,273 shares of common stock outstanding held by 397 shareholders of record. On that date,

the last reported sales price of the common stock was $7.17.

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.”

Perfor

rmance Graph

The following graph compares the cumulative total return of an investment in our common stock over the five-year period
ended December 31, 2018, as compamm red 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 compamm rison assumes $100 was invested on December 31, 2013, in our common stock and
in each of the two indices and assumes reinvestment of all dividends, if any. The stock price perforff mance on the following graph is
not necessarily indicative of futff ure stock price perfoff rmance. 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 2018

250.00

200.00

150.00

100.00

50.00

0.00

2013

2014

2015

2016

2017

2018

Zix Corporation

NASDAQ Stock Market (US Companies)

NASDAQ Computer and Data Processing Index

Sale of Unregistered Securities

None.

Purchases of Equitytt Securities by the Issuer

Period

October 1, 2018 to October 31, 2018
November 1, 2018 to November 30, 2018
Decembem r 1, 2018 to Decembem r 31, 2018
Total

Total Number of
Shares Purchased(1)

Average Price
Paid per Share
——
6.67
——
6.67

—— $
914 $
—— $
914 $

Total Number of Shares
Purchased as part of
Publicly 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 Of the total numberm of shares repurchased for the one month period ended Novembem r 30, 2018, 914 shares of Restricted Stock

were 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 emplomm yees for whom Restricted Stock vested during the applicable period, which is required once the
Restricted Stock is vested.

Item 6. Selected Finaii ncial 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,” and the consolidated financial statements and notes thereto. No cash dividends were
declared in any of the five years shown below:

tement 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 (loss)
Basic income (loss) per common share
Diluted income (loss) per common share
Shares used in computing basic income per common share
Shares used in computing diluted income per common

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 capita
a
Total assets
Stockholders’ equity

l(2)

2018

2017

Year Ended December 31,
2015
2016
(In thousands, except per share data)

2014

$
$

70,478
15,186
55,292
11,323
33,999
(4,720)
15,444
0.29
0.29
52,592

53,481

16,671
(15,952)
(6,593)

27,109
(7,665)
104,640
60,947

$
$

65,663
12,602
53,061
10,980
31,871
18,606
(8,057)
(0.15) $
(0.15) $

53,430

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

53,430

54,395

18,204
(11,285)
(367)

33,009
2,104
81,308
43,520

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

58,967

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

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

(1)

The $4.7 million income tax benefitff
in 2018 resulted from the release of a portion of our deferred tax asset valuation allowance.
Based on analysis of both projected and current earnings, we have estimated our deferred tax asset as likely to be utilized prior
to expiration, thus triggering this release. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (thett
Act”) which significantly changed U.S. tax law. The Tax Act lowered the Company’s statutory federal income tax rate from
34% to 21% effeff ctive January 1, 2018. At December 31, 2017, the Company adjud sted its deferred tax balances to reflecff
tax rate that resulted in income tax expense of $12.5 million in that year. See “Income Taxes” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”

“Tax

t the new

(2) Working capital includes deferff

red revenue totaling $30.6 million, $28.4 million, $25.8 million, $23.2 million and $21.6 million,

as of Decembem r 31, 2018, 2017, 2016, 2015, and 2014, respectively.

Item 7. Managema

ent’s’ Discuii

ssion and Analysll

is of Financial Condition and Resultsll of Operations

The following discussion and analysis contains forward-looking statements about trends, uncertainties and our plans and

en in the future. Forward-looking statements involve risks and uncertainties that could cause actual

r materially from the events or results described in the forward-looking statements, including risks and

expectations of what may happa
events or results to diffeff
uncertainties described above in “Item 1A. Risk Factors.” Readers are cautioned not to place undue reliance on forward-looking
statements. The forward-looking statements in this report are based upon inforff mation available to us on the date of this report. We
undertake no obligation to publicl
STATEMENTS AND RISK FACTORS” in “Item 1. Business.”

y update or revise any forward-looking statements. See “NOTE ON FORWAR

RD-LOOKING

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 email security. We provide email encryption, DLP, advanced threat protection, archiving, 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 offeff
reliabia lity, integrity and security.

ring with a high level of availability,

Our 2018 results included record revenues. We attribute our success to on-going effoff

rts to build a solid and predictable business

based on our successful recurring revenue subsu cription business model. For 2018, we continuen d to benefit from growing concerns
about data security and integrity issues, which continue to make headline news, as well as the growing acceptance of cloud-based
offeff

rings along with the growing regulatory compliance burdens on many businesses.

For 2018, we reported revenue of $70.5 million, an increase of $4.8 million over the prior year, driven by both continued growthww

u
in our subscriber

base and new sales attributable to our Erado and Greenview acquisitions.

For the year ended Decembem r 31, 2018, our gross profitff of $55.3 million increased 4% compamm red to 2017. This increase was

primarily driven by increased revenue. Our 2018 operating income of $10.0 million decreased $240 thousand over the prior year, as
the gross profitff
acquisition related costs.

increase was offsff et primarily by increased general and administrative expense, related to additional headcount and

Our $15.4 of million net income in 2018 is an increase of $23.5 million compared to our $8.1 million net loss in 2017. Our 2018

net income includes a $7.8 million tax benefit resulting from a decrease to our deferff
expected future profitabff
to enactment of the Tax Act, which required us to reduce the valuation of our deferff

red tax asset.

ility and ability to use net operating losses. This compares to a $12.5 million tax expense incurred in 2017 due

red tax asset valuation allowance based on

Other Financial Highlig

htgg stt

(cid:120)

Backlog was $73.0 million at the end of 2018, compared with $72.6 million at the end of 2017.

Total orders for 2018 were $73.3 million, an increase of 24% from 2017 total orders of $58.9 million.

Our deferff

red revenue at the end of 2018 was $32.1 million, compared with $29.4 million at the end of 2017.

We generated cash flows from operations of $16.7 million during fiscal 2018. Our cash and cash equivalents were $27.1
million at the end of 2018, compared with $33.0 million at the end of 2017.

Our shared, cloud-based ZixDirectoryrr now has approximately 60 million members including from some of the most
respected institutions in the country.

Our services are sold on a subsu cription basis with contract terms generally ranging from one to five years. At the end of the

contract term we attempt to renew the subsu cription for the originally contracted period. Our customers pay us annually at the start of
the subscrip
u
on a monthly basis over the term of the subsu cription once service commences.

tion term and each succeeding year on the anniversary of the commencement of the service. We recognize revenue ratabla y

We attempt to grow the business by signing new customers to subscripti

on services and/or selling new or higher volume

services to existing customers (i.e., “upsuu ell”) while retaining existing customers through renewal of their subsu criptions for successive
periods.

Our total orders consist of orders from new customers, sale of additional products or features 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 subscr

iption 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

n term because total order value will exceed the first year value on multi-year orders. By segregating the first year value of

subscriptio
u
new orders, we eliminate the fluctuation in total order amount caused by the dollar impactmm
metric as New First Year Orders (“NFYOs”).

of multi-year contracts. We referff

to this

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 adjud st backlog for customer
bankrukk ptcuu
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. A decline in backlog may result from fluctuations in
total orders caused by timing of renewal orders described above as well as the shortening of the average term of our contracts.

y or change of term, but these instances are rare and do not materially impactmm

the backlog amount. The backlog will grow if

ed by the 2017 merger and acquisition activity of three health care customers, as well as by loss due to customer

As of Decembem r 31, 2018, we retained approximately 87% 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. Our recurring revenue retention
has been impactm
ts to either shiftff
migration to Officeff
those remaining customers still using their hardware-based platforff m to the Zix cloud platform, or to secure long term commitments
from those customers who instead wish to retain their existing hardware-based solutions. Based on these continued efforff
our recurring revenue retention to return to the 90% range going forward. Deferr
ed 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 “Backlog and Orders
In this “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

365 from their on-premise-based hardware encryption solution. The Company has focused efforff

ts, we expect

Our revenue growthww is dependent on our ability to sell subscu

ription services to new customers, sell additional products or

features or increase volume with existing customers and retain existing customers by renewing their subscription
u
if annual NFYOs exceed the annual value of discontinued or non-renewed subscriptions,
growthww may fluctuate due to timing of deployment of new services and subscu
ription cancellations. For example, a new order reported
in NFYOs in one quarter may not be deployed to the customer until the following quarter and therefoff re 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 impactm
impactmm
comparisons more indicative of revenue growth than sequential quarterly revenuen

of these quarter to quarter fluctuations tends to diminish over annual periods making year over year quarterly revenue

on revenue in the quarter than a contract of the same amount with an expiration in the last month of a quarter. The

revenue should grow. However, revenue

services. Generally,

comparisons.

Our operations and future prospects are further discussed throughout this “Item 7. Management’s Discussion and Analysis of

Financial Condition and Results of Operations.”

There are no assurances we will be successfulff

in our effoff

rts to achieve continued growth. Our continued growthww depends on the

timely development and market acceptance of our products and services. See “Item 1A. Risk Factors” for more inforff mation on the
risks relative to our operations and future prospects.

Revenue

Revenue increased by 7% in 2018 compamm red with 2017. Our revenue growth was driven by new sales attributable to our Erado

and Greenview acquisitions, a successfulff
rate of renewing existing customers supported

u
subscriptio

n model that continues to yield steady additions to the subscu

riber base, and a high

by our migration of customers to our cloud platform.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant
impacmm t 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 significff ant
accounting judgements by us. Management bases its estimates on historical experience and on various other assumptm ions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying
values of assets and liabilities. We evaluate our estimates on a regular basis and make changes accordingly. Senior management has
discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual
results may materially differff
from these estimates, the resulting changes could have a material adverse effecff

from these estimates under different assumptmm ions or conditions. If actual results were to materially differff

t on our consolidated financial statements.

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
effeff ct 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 assumptm ions used in the preparation of our
consolidated financial statements.

Our critical accounting policies included the following:

(cid:120)

Revenue recognition

Commission amortization

Income taxes

Valuation of goodwill and other intangible assets

Stock-based compensation costs

For additional discussion of the Company’s significaff

nt accounting policies, referff

to Note 2 to our consolidated financial

statements.

Revenue Recognition

In May 2014, The Financial Accounting Standards Board (“FASB”) issued ASC 606 which requires revenue recognition when
ed to customers in an amount that reflects the consideration to which an entity expects to be
to our revenue

promised goods or services are transferr
entitled to those goods and services. The standard became effeff ctive for us in 2018, but did not have a material impactm
recognition process. For additional inforff mation regarding our adoption of ASC 606 please see “New Accounting Standards.”

We earn our revenue from subsu cription fees for rights related to the use of our softwff

ance obligations that are highly interdependent and consist of software at the customer’s site, ongoing customer suppouu
of message security offeff

performff
cloud-based access to the hosted Zix encryption network. As our Company has expanded its portfolio
recent years, we have increased our revenue obtained from hosted service solutions. Approximately 38% of our revenue in 2018 was
derived from hosted email protection solutions.

are. Our revenue contracts include multiple
rt, and
rings in

u
Our subscript

ion terms typicyy

ally range from one to five years.

Revenue is recognized by applying the following steps:

(cid:120)

Step 1: Identify the contract(s) with a customer,

Step 2: Identify the perforff mance obligations in the contract,

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the perforff mance obligations in the contract, and

Step 5: Recognize revenue when (or as) the perforff mance obligation is satisfiedff

Step 1: Identify the contract(s) with a customer:

We consider the terms and conditions of the contract and our customary business practice in identifying our contracts. We
determine we have a contract with a customer when (i) the contract is approved, (ii) we can identify each party’s rights regarding the
services and products transferr
commercial subsu tance, and (v) it is probabla e we will be paid.

ed, (iii) we can identify the payment terms for the services and products, (iv) the contract has

(cid:120)

Step 2: Identifying the performff

ance obligations:

ASC 606 requires identificff ation and disclosure of performance obligations within a revenue contract. A good or service is

considered distinct if the customer can both benefitff
available to the customer, and the promise to transferff

from the good or service on its own or with other resources that are readily

the good or service is separately identifiable from other promises in the contract.

As of December 31, 2018, revenue from our email protection services represented 100% of our revenue, of which

approximately 88% was specific to email encryption. To provide this service, our softwff
to create a private encryptyy ion key that works in conjunction with the publu ic encryption key provided via cloud-based access to our
hosted Zix encryption network. Both keys are required to enable our asymmetrical encryption service. In our assessment of the factors
listed in ASC 606-10-25-21, we have determined that because our software at the customer’s site and the access to our hosted Zix
encryption network are highly interrelated, these items are not regarded as distinct components. Based on this assessment, these
elements are combined as a single perforff mance obligation.

are at the customer site includes functionality

(cid:120)

Step 3: Determine the transaction price:

The transaction price is determined based on the consideration we expect to be entitled to receive in exchange for transferring

goods and services to the customer. We include variablea
future reduction of cumulative revenue under the contract will not occur.

consideration in the transaction price if we view it probable that a significant

(cid:120)

Step 4: Allocate the transaction price to the perforff mance obligations in the contract:

We allocate transaction prices to each perforff mance obligation based on the stand-alone selling price of our component services.

(cid:120)

Step 5: Recognize revenue when (or as) the perforff mance obligation is satisfiedff

We recognize revenue when the customer obtains control of the product or services, at the amount allocated to the satisfieff d

performff

ance obligation. Our perforff mance obligations are generally satisfied over time.

While some contracts include one or more perforff mance obligations (including the combined elements noted above along with

additional ongoing customer suppor
d by the
separate allocations of these obligations because the services are generally satisfieff d over the same period of time and revenue is
recognized over the contract period. Discounts provided to customers are recorded as reductions in revenue.

recognition pattern generally is not impacte

t and other hosted services), the revenuen

Commission Amortization

We amortize ouruu commission costs to expens

e on a systemic basis over the period of expexx cted benefitff

to the customer.

Determination of the amortization period requires significant judgement.nn We apply the practical expedx
accountnn for ouruu commission costs and related amortirr zations at thet
earned upon contract renewal as compared to initial commissions paid and determined that because commissions paid were not
reasonably proportional to their respective contract
initial commissions paid.

values, our renewal commissions could not be considered commensurauu te with the

io level. Additionally, the Company has evaluated commissions

ient noted in ASC 606-10-104 to

portfrr olff

We considered ouruu average contrnn act term lengtht and historical customer retention rates to determine an average length of ouruu
customer relationships. We also concluded ouruu add-on sales generally occur halfway into ouruu customer relationships, and evaluated ouruu
average customer renewal terms. Based on these factors we have determined that 8 years, 4 years and 18 months area
amortization periods to ouruu new, add-on, and renewal sales commission expexx nses, respectively. We also perforff m subsu equeqq nt assessmentsnn
for impamm irment of the related deferred cost asset when indicators present.

the appropriateaa

Income Taxes

red tax assets. This significaff
nt valuation allowance reflect
nt to utilize net operating loss carryforff wards prior to their expiration. Our total deferff

Deferred tax assets are recognized if it is “more likely than not” that our benefit of the deferred tax assets will be realized on
future federal or state income tax returns. At Decembem r 31, 2018, we provided a valuation allowance against a significff ant portion,
s our historical losses and the
$22.7 million, of our accumulated U.S. deferff
uncertainty of future taxabla e income sufficie
red
tax assets not subju ect to a valuation allowance are valued at $28.8 million, and consist of $27.0 million for federal net operating loss
carryforwards, $2.1 million relating to U.S. state income tax credits, and $678 thousand related to Alternative Minimum Tax credits,
and $114 thousand related to foreign tax credits. These credits are offsff et by ($1.2) million relating to temporary timing differences
between U.S. Generally Accepted Accounting Principles (“GAAP”) and tax-related expense. If our U.S. taxabla e income increases
from its current level in a future period or if the facts and circumstances on which our estimates and assumptmm ions are based were to
change, thereby impactmm
ning the
amount of valuation allowance no longer required. Reversal of all or a part of this valuation allowance could have a significff antnn
positive impacmm t on operating results in the period that it becomes more likely than not that certain of the Company’s deferff
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 have a significant negative impactmm

ing the likelihood of realizing our deferred tax assets, judgment would have to be applied in determi

on our operating results.

red tax assets

Valuation of Goodwidd ll 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 subju ect to amortization; (2) intangible assets with indefinite lives not subju ect to amortization; and (3)
goodwill. For intangible assets with finite lives, tests for impamm irment must be perforff med if conditions exist that indicate that the
carrying value may not be recoverable. For intangible assets with indefinff
ite lives and goodwill, tests for impairmm
perforff med at least annuan lly or more frequently if events or circumstances indicate that assets might be impaired

ment must be
.

Goodwill was $13.8 million, or 13%, and $8.5 million, or 10% of total assets, in each of the years ended Decembem r 31, 2018 and

2017, respectively.

We evaluate goodwill for impamm irment annuan lly in the fourth quarter, or when there is reason to believe that the value has been

. Evaluations for possible impairmm

diminished or impaired
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 Company’s outstanding common stock and market price of the
stock. Impamm irment is deemed to exist if the net book value of the unit exceeds its estimated fair value. We evaluated our goodwill in
ment adjud stment is required.
the fourth quarter of 2018 and determined no impairm

ment are based upon a comparison of the estimated fair value of the reporting

Our intangible assets with finite lives are amortized using a straight-line basis over their economic useful lives.

Stock-bkk ased Compensation

Our share-based awards include stock options, restricted stock awards and restricted stock units. We have non-qualified stock

options outstanding to emplomm yees 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,
subju ect to termination of emplmm oyment, generally expire ten years from the date of grant. Emplmm oyee stock options typiyy cally vest pro-rata
and quarterly over three or four years. Restricted stock is issued to the emplomm yee at grant but is subju ect to vesting and transfer
restrictions and vesting
restrictions. Stock is issued in exchange for restricted stock units when vesting conditions are met. The transferff
lly vest pro-rata annually over three or
conditions may be time- or perforff mance-based. Restricted stock and restricted stock units typica
four years. 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 the quoted market price of the Company’s common
stock on the date of grant. Option, restricted stock and restricted stock unit grants to emplmm oyees, officer
s and directors frequeq ntly
contain accelerated vesting provisions upon the occurrence of a change of control, as defined in the applicable grant agreements.

Full Year 2018 Summary of Operations

Financial

(cid:120)

Revenue for 2018 was $70.5 million compared with $65.7 million in 2017 and $60.1 million in 2016.

Gross margin for 2018 was $55.3 million or 78% of revenues compared with $53.1 million or 81% of revenues in 2017
and with $49.6 million or 82% of revenues in 2016. Our 2018 decrease in gross margin is related to our Erado acquisition.
We expect the Erado gross margins to improvmm
recognize the value of revenue earned on post-acquisition sales.

e as we complete recognition of our acquired deferred revenue and

Net income (loss) for 2018 was $15.4 million compared with $(8.1) million in 2017 and $5.8 million in 2016. Our 2018
net income includes a $7.8 million tax benefit resulting from a decrease to our deferff
based on our expected future profitabilit
expense incurred in 2017 due to enactment of the Tax Act, which required us to reduce the valuation of our deferred tax
asset

red tax asset valuation allowance
y and ability to use net operating losses. This compares to a $12.5 million tax

Net income (loss) per diluted share was $0.29 for 2018 compmm ared with $(0.15) for 2017 and $0.11 for 2016.

Unrestricted cash was $27.1 million on December 31, 2018.

Results of Operations

Revenue

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

(In thousands)
Revenues

Year Ended December 31,
2017
65,663

2018
70,478

Variance
2018 vs. 2017

Variance
2017 vs. 2016

2016
60,144

$
4,815

7% $

$
5,519

Our growth model seeks to continually add new users to the subscribe

r base, while at the same time retaining a high percentage
whose subsu criptions are up for renewal. In the year ended Decembem r 31, 2018, we categorized our revenue in

of existing subscribers
the following core verticals: 49% healthcare, 29% financial services, 7% government sector, and 15% as other. In the year ended
December 31, 2017, we categorized our revenue in the following core verticals: 49% healthcare, 28% financial services, 7%
government sector, and 16% as other. The disaggregation of revenue by industry verticals does not include our revenue from
Greenview and Erado.

Additionally, sales continued from a wide base of distributors –NFYO’s derived from our value-added resellers, OEM and other

third party distribution channels for 2018 were 43% of total NFYOs compared to 56% in 2017 and 57% in 2016. The 2018 reduction
in orders received from our OEM channels was due in part to a migration of customers from our Google relationship into a direct
relationship with Zix. We measure additions to the subsu criber base by NFYOs, which is definff ed 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 firff st year order value

2018

Year Ended December 31,
2017

2016

11,282

9,340

9,524

While we introduced bundled email security pricing during 2017 and have continued to add new bundled price offeff

rings to our

product portfolio, 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 effeff ct on order growthww and the revenuen

derived from our new orders.

Revenue Outlook:

We expect continued growth in our core Email Encryption offerff

ing and in our new producd ts, along with increased sales from

our managed security service providers and value-added reseller channels to increase our NFYOs in 2019 and increase our year-over-
year revenue.

Backlogll

and Orderdd srr

Backlog — Our backlog was $73.0 million at December 31, 2018 compared with $72.6 million at Decembem r 31, 2017. The
backlog is comprised of contractual commitments that we expect to amortize into revenue. As of December 31, 2018, the backlog was
,
comprmm ised of the following elements: $32.1 million of deferred revenue that has been billed and paid, $10.7 million billed but unpaid
and approximately $30.2 million of unbilled

contracts.

The backlog is recognized into revenue ratably as the services are performff

ed. Approximately 65% of the total backlog is

expected to be recognized as revenue during the next twelve months.

Orders — Total orders in 2018 were $73.3 million compared with $58.9 million in 2017. 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 compamm rison of the cost of revenue.

(In thousands)
Cost of revenue

Year Ended December 31,
2017
12,602

2018
15,186

Variance
2018 vs. 2017

Variance
2017 vs. 2016

2016
10,533

$
2,584

21% $

$
2,069

20%

Cost of revenue is comprmm ised of expenses related to operating and maintaining the ZixData Center, a field deployment team,
rt and the amortization of Company-owned, customer-based computer appliances. The 21% increase in

customer service and suppouu
cost of revenue in 2018 compamm red with 2017 reflected
which include additional ZixArchive suppor
the Greenview acquisition in March 2017. We are also incurring additional costs associated with leased equipment suppuu
Advanced Threat Protection, and we are amortizing expense resulting from the acquisition of technology. Additional increases relate
to standard software maintenance and license suppuu ort, and depreciation and other expense relating to investments in networking
equipment.

in the table above resulted primarily from increases in average headcount,

t gained in the Erado acquisition in April 2018 and the ZixProtect support

team gained in

orting

The 20% increase in cost of revenue in 2017 compamm red with 2016 refleff cted in the table above resulted primarily from increases

in average headcount expense, including our ZixProtect support
incurred additional costs associated with leased equipment supportin
resulting from the acquisition of Greenview’s internally developed softwff

are.

team gained in the Greenview acquisition in March 2017. We also
g Greenview customers and we began amortizing expense

Research and Developmo

ent Expenses

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

(In thousands)
Research and development
expenses

Year Ended December 31,
2017

2016

2018

Variance
2018 vs. 2017

Variance
2017 vs. 2016

11,323

10,980

9,553

343

3% $

1,427

15%

Research and development expenses consist primarily of salary, benefits and stock-based compensation for our development

staff,ff independent contractor expense, and other direct and indirect costs associated with enhancing our existing products and services
and developing new products and services.

The 3% increase in research and development expense in 2018 compamm red with 2017 reflect

ed in the table above resulted

primarily from an increase in travel and average headcount, including the ZixProtect and additional ZixArchive R&D emplmm oyees
gained in the Greenview acquisition and Erado acquisition in March 2017 and April 2018, respectively, partially offseff
t by $1.5 million
of costs related to development of new features and functionality for our hosting service arrangements which we began capia talizing in
2018.

The 15% increase in research and development expense in 2017 compamm red with 2016 reflected in the table above resulted

primarily from additional headcount expense, including ZixProtect R&D emplmm oyees gained in the Greenview acquisition in March
2017.

Selling and Marketing Expenses

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

(In thousands)
Selling and marketing expenses

Year Ended December 31,
2017
20,472

2018
20,380

Variance
2018 vs. 2017

(92)

(0)% $

Variance
2017 vs. 2016

$
1,457

2016
19,015

Selling and marketing expenses consist primarily of salary, commissions, travel, stock-based compensation and emplomm yee

benefits for selling and marketing personnel as well as costs associated with promotional activities and advertising.

The $92 thousand decrease in selling and marketing expense in 2018 compamm red with 2017 resulted from lower commission and

bonus expenses driven by our implemm mentation of GAAP accounting rule ASC 606, which became effeff ctive for our Company on
January 1, 2018, and lower advertising and marketing costs. This decrease was offsff et by additional headcount expenses, including the
emplomm yees gained in the April 2018 Erado acquisition and the expansio
n of our business development lead qualifications team, stock
based compensation, travel, and the amortization of acquisition related intangible assets.

The $1.5 million increase in selling and marketing expense in 2017 compamm red with 2016 resulted from the addition of sales

leadership, sales executives, and the buildout of our Customer Success team. Additional amortization expense resulting from
Greenview’s customer base and brand were offseff

t by decreased advertising as compamm red to our 2016 branding initiative.

General and Administrative

Expenses

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

(In thousands)
General and administrative
expenses

Year Ended December 31,
2017

2016

2018

Variance
2018 vs. 2017

Variance
2017 vs. 2016

13,619

11,399

11,727

2,220

19% $

(328)

(3%)

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 profess
million increase in general and administrative expense from 2018 compared with 2017 resulted from an increase in acquisition-related
costs, consulting fees, stock-based compensation expense, the addition of our Erado offiff ce, and amortization expense of internal use
softwff

are, as well as other general and administrative costs due to increase of headcount.

ional services and other general corporate activities. The $2.2

The $0.3 million decrease in general and administrative expense from 2017 compared with 2016 resulted from a $2.6 million

reduction in legal fees specific to intellectual property litigation, offsff et by increased headcount and stock-based compensation
expenses, revaluation of earn-out costs associated with our Greenview acquisition, the addition of the Greenview officeff
investment in an ERP solution.

, and

Income Taxeaa s

Our Company or one of our subsidi

aries files income tax returns in the U.S. federal jurisdiction and various states and in the

Canadian federal and provincial jurisdictions. We recognize and measure uncertain tax positions using a two-step approach. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Our Company incurred a tax benefitff of $4.7 million, and incurred tax expense of $18.6 million, and $3.7 million for 2018, 2017,

and 2016, respectively. Our 2018 tax benefitff
expected future profitability
. On December 22, 2017, the U.S. enacted the Tax Act which significaff
Act lowered the Company’s statutory tax rate from 34% to 21% effeff ctive January 1, 2018. At Decembem r 31, 2017, the Company
adjusted its deferff
expense represented defeff rred tax expense, refundff
U.S. taxes payabla e related to the operations of the Company’s Canadian subsid

red tax balances to refleff ct the new tax rate that resulted in tax expense of $12.5 million. For all years presented, tax
able U.S. Alternative Minimum Tax, U.S. research and development credits, non-
iary established in late 2002, and state income taxes.

includes a $7.8 million release to our deferff

red tax asset valuation allowance based on

ntly changed U.S. tax law. The Tax

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 Decembem r 31, 2018, the Compamm ny partially reserved its U.S. net deferr
uncertainty of future taxabla e income sufficie
defeff rred tax asset not reserved was $28.8 million. The majoa rity of this unreserved portion related to $27.0 million U.S. net operating
ient taxabla e income in future years to utilize these NOLs prior
losses (“NOLs”) because we believe the Company will generate sufficff
to their expiration. The remaining balance consists of $2.1 million relating to U.S. state tax income credits, $678 thousand related to
Alternative Minimum Tax credits, and $114 thousand related to foreign tax credits. These items are offsff et by ($1.2) million relating to
temporary timing differeff

ed tax assets due to the
nt to utilize net loss carryforff wards prior to their expiration. The portion of the Company’s

nces between GAAP and tax-related expense.

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 taxabla e income.

If we begin to generate additional U.S. taxabla e income in a futureuu

period or if the facts and circumstances on which our current

estimates and assumptmm ions are based were to change, thereby impacti
ng the likelihood of realizing a greater or lesser amount of our
deferred tax assets, judgement would have to be applied in determining the amount of valuation allowance required. Adjud sting ouruu
valuation allowance could have a significff ant impacm t on operating results in the period that it becomes more likely than not that an
additional portion of our deferff

red tax assets will or will not be realized.

Our provision for income taxes is subju ect to volatility and could be adversely impacted

by earnings being lower or higher than
of nondeductible compensation; or by changes in tax laws, regulations, or accounting principles, including

anticipated; by tax effects
accounting for uncertain tax positions or interpretations. Significan
measurement applicable to all income tax positions. This includes the potential recovery of previously paid taxes, which if settled
unfavorably could adversely affeff ct our provision for income taxes or additional paid-in capital. In addition, our income tax returns are
subju ect 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.

t judgment is required to determine the recognition and

Net Income (Loss)

Net Income (Loss)s – The Company generated net income of $15.4 million compared with a net loss of $8.1 million in 2017 and
net income of $5.8 million in 2016. The increase in our net income is primarily due to revenue growth and a 2018 tax benefit resulting
from the decrease to our deferff
legislation, as discussed above.

red tax asset valuation allowance as compared to the tax expense incurred following 2017 tax-reforff m

Liquidity and Capital Resources

Overview

Based on our 2018 financial results and current expectations, we believe our cash and cash equivalents, cash generated from

al expenditures, investment requirements, contractual obligations, commitments, , and other

operations, and availability under our $25 million revolving credit facility and $10 million delayed draw term loan facilities, will
satisfyff our working capital needs, capita
liquidity requirements associated with our operations through at least the next twelve months. We plan for and measure our liquidity
and capital resources through an annuan l budgeting process. During 2018, our cash flow from operations was $16.7 million, a decrease
of $1.5 million from the $18.2 million cash flow from operations during 2017. At December 31, 2018, our cash and cash equivalents
totaled $27.1 million, a decrease of $5.9 million from the December 31, 2017 balance, and we had no bank debt. The $5.9 million
decrease in our cash position indicated our expenditure of $11.8 million, net of cash acquired, related to our Erado purchase in April
2018 and $6.0 million related to our share repurchase activity, as discussed elsewhere herein. As disclosed elsewhere in this Annual
Report on Form 10-K, on February 20, 2019, we obtained a $25 million revolving credit facility and a $10 million delayed draw term
loan facility from a syndicate of banks, which can be used to manage our future liquidity needs.

For the year ended December 31, 2018, we achieved 7% growth in revenuen , 78% 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 significff ant
portion of our spending is discretionary and flexible and that we have the ability to adjud st overall cash spending and raise additional
funds in order to react, as needed, to any shortfalff

ls 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

2018

Years Ended December 31,
2017

2016

$
$
$

16,671
$
(15,952) $
(6,593) $

$
18,204
(11,285) $
(367) $

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

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.

Investing activities in 2018 consist of $11.8 million, net of cash acquired, used in the acquisition of Erado and $4.2 million for

l use softwff

capia tal expenditures, which include $2.1 million for computer and networking equipment, $1.5 million in internal research and
development costs of hosting arrangement for our customers, and $500 thousand for other activities including the acquisition of other
internar
ucture are to modernize our business processes
and product offeff
acquisition of Greenview and Entelligence Messaging Server technology. We additionally purchased $2.2 million of computer and
networking equipment, and invested $802 thousand in new systems to modernize our business processes.

rings. Cash used in our investing activities for 2017 consisted of $8.2 million, net of cash acquired, used in the

are. These investments in new equipment and cloud hosting infrastr

Financing activities in 2018 relate primarily to $5.4 million used in a $10 million share repurchase program authorized by our

Board of Directors on April 24, 2017, and $656 thousand used in the repurchase of common stock related to the tax impamm ct of vesting
restricted stock awards, and a $605 thousand earn-out payment associated with our acquisition of Greenview. Financing activities in
2017 include $3.8 million used in the same share repurchase program and $762 thousand used in the repurchase of common stock
related to the tax impamm ct of vesting restricted awards offseff

t by the receipt of $4.2 million from the exercise of stock options.

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 activity is not certain. The following
table summarizes the options that were outstanding as of December 31, 2018. The vested options are a subsu et of the outstanding
options. The value of the options is the number of options exercisable into shares multiplied by the exercise price for each share.

Exercise Price Range

$2.00 - $3.49
$3.50 - $4.99
Total

Liquidity Summary

Summary of Outstanding Options
Total Value fof
Outstanding
Options
(In
thousands)

Vested
Options
(included in
outstanding
options)

Outstanding
Options

431,813
492,010
923,823

1,112
1,871
2,983

431,813
385,760
817,573

Total Value fof
Vested
Options
(In thousands)
1,112
1,473
2,585

Based on our current 2019 budget plans, we believe we have adequate resources and liquidity to sustain operations or raise

capia tal as needed for at least the next twelve months.

Off-Balanc

e Sheet Arrangements

None.

Contractual Obligations and Contingent Liabilities and Commitments

We have total contractual obligations of $1.6 million over the next year and $3.9 million over the next three years primarily

consisting of various operating officeff

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, 2018, is as follows:

(In thousands)
Operating leases

Total

1 Year

Payments Due by Period
2-3 Years

4-5 Years

> 5 Years

6,983

1,625

2,292

2,205

861

As of December 31, 2018, we had severance agreements with certain emplom yees which would require us to pay up to

approximately $5.8 million if all such emplomm yees were terminated from emplom yment 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 ASC 606, which supers

edes most prior revenue recognition guidance under U.S. Generally

Accepted Accounting Principles (“GAAP”). The core principle of ASC 606 is to recognize revenues when promised goods or services
red to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or
are transferff
services. ASC 606 definff es a five step process to achieve this core principle and, in doing so, more judgment and estimates may be
required within the revenue recognition process than were required under prior U.S. GAAP. The standardaa
beginning in 2018. Ouruu Company provides primarily email encryption and advanced threahh
services in which we recognize revenue as ouruu services are rendered. We determined ouruu revenue was not materially impamm cted by the new
guidance. However, the guidance did requiqq re us to increase the amortization period of ouruu sales commission expex nse. We applied the
guidance to commissions earned on all contratt cts that were not complete as of January 1, 2018. Prior period amountsnn have not been
adjusted and continuenn
years, 4 years and 18 montht amortization periods for ouruu to ouruu new, add-on, and renewal sales commission expens
Determination of the amortization period and subsu equent assessmentsnn for impaimm rment of the related deferred cost asset requires significant
judgement.

to be reporterr d in accordance with the previous guidance. Ouruu Company elected a portfrr olff
xx

io approach, applying 8
es, respectively.

t protection securiuu ty solutions as subsu cription

became effeff ctive for us

We applied a modified retrott

spective approach to ouruu implmm ementann tion of ASC 606 in which we recognized a $4.6 million

cumulmm ative effeff ct adjustmentnn to ouruu 2018 retained earnings opening balance related to ouruu increased amortization period. This adjud stment
includes a $1.6 million impamm ct to ouruu deferred tax asset. The tabla e below presents the cumulative effeff ct of the changes made to ouruu
consolidated balance sheet due to the adoption of ASC 606:

(InII

aa
thousands

)

Assets:

Prepaid and other current assets
Other assets and deferff
red costs
ff
Deferr

ed tax assets
Stockholders’ equity:
ff

Accumulated deficit

January 1, 2018
Cumulative
Effeff ct
Adjustment

Beginning
Balance, as
Adjusted

Beginning
Balance

3,222
——
25,647

(415) $
6,595
(1,616)

2,807
6,595
24,031

(236,372) $

4,564

(231,808)

Financial statement results as reported under the new revenue standard as compared to the previous standarda

for the twelve months

ended and as of December 31, 2018, are as follows:

thousands, except per share data)

(InII
Revenues
Cost of revenues
Gross margin
Operating expenses:

arch and development

Selling, general and administrative

Total operating expenses

Operating income
Other income, net
Income beforff e income taxes
Income tax expense
Net income

Basic income per common share

Diluted income per common share

(1) Per share variance may not foot due to rounding

(InII

thousands)

Assets:

Prepaid and other current assets
Other assets and deferff
red costs
ff
Deferr

ed tax assets
Stockholders’ equity:
ff

Accumulated deficit

Twelve Months Ended December 31, 2018
Under
Under
ASC 606
ASC 605

Variance

70,478
15,186
55,292

11,323
36,554
47,877
7,415
754
8,169
5,257
13,426

0.26

0.25

70,478
15,186
55,292

11,323
33,999
45,322
9,970
754
10,724
4,720
15,444

0.29

——
——
——

——
(2,555)
(2,555)
2,555
——
2,555
(537)
2,018

0.04

Under
ASC 605

December 31, 2018
Under
ASC 606

Variance

3,760
——
30,401

3,176
9,424
28,785

(584)
9,424
(1,616)

(222,946) $

(216,364) $

6,582

Cash Flow Statement

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which amends guidance on the
classification of certain cash receipts and payments in the statement of cash flows. This ASU was issued with the intent to reduce
diversity in practice with respect to eight typesyy
of cash flows. The new guidance addressed debt prepayment or extinguishment of
costs, settlement of zero-coupouu
insurance claims, proceeds from the settlement of corporate-owned lifeff
distributions received from equity method investees, beneficff
flows and application of the predominance principle.

ff
insurance policies and bank-owned life insurance policies,

n bonds, contingent consideration made after

ial interests in securitization transactions, and separately identifiable cash

a business combination, proceeds from the settlement of

The standard became effeff ctive for us beginning in 2018. We applied the new guidance within our consolidated statements of

cash flows classification to an $800 thousand earn-out payment associated with our Greenview acquisition. Because this consideration
$605 thousand of the payment as
the consummation date, as required by the guidance, we classifiedff
payment was not made soon after
a financing activity. This refleff cts the portion of the payment recognized a contingent liability as of the acquisition date. The $195
thousand balance of the payment was in excess of the original contingent consideration liability and was classifiedff
as an operating
activity. The standard had no other impactmm

on our consolidated financial statements.

Leases

In Februar

ry 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Topic 842 requires companies to generally recognize on

assets. The new lease standard becomes
the balance sheet operating and financing lease liabilities and corresponding right-of-use
effeff ctive for us beginning 2019. We expect to adopt Topic 842 using the effeff ctive date as the date of our initial application of the
standard. Consequently, financial inforff mation for the comparative periods will not be updated. We currently expect that most of our
operating lease commitments will be subju ect to the new standard and recognized as operating lease liabilities and right-of-uff
se assets
upon our adoption of Topic 842. We are evaluating the potential impamm ct of this new guidance on our consolidated financial statements,
and currently estimate the recognition of our outstanding lease obligations as of December 31, 2018, will result in recording right-to-
use-assets and lease liabili

ties of $4.5 million to $6.5 million.

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 $27.1 and $33.0 million at December 31, 2018 and 2017, respectively. We held no marketable securities
and no debt as of Decembem r 31, 2018 and 2017.

ii
Item 8. Financial

Statements and Supplementary Data

The information required by this Item 8 begins on page F-1 of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreem

ents with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controlsll and Procedures

Effectiv

eness 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 offiff cer and principal financial offiff cer, the effecff
tiveness of
the design and operation of the Company’s disclosure controls and procedurdd es (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 effect

ive as of the date of such evaluation.

ff
Certificati

ons of our principal executive offiff cer and our principal accounting officer
13a- 14 of the Exchange Act, are attached as exhibits to this Annual Report. This “Effecti
Procedures” section includes the inforff mation concerning controls evaluation referred
conjunction with the certifications for a more complete understanding of the topics presented.

, which are required in accordance with Rule
veness of Disclosure Controls and

ff
ff
to in the certifications, and it should be read in

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
l control over financial reporting may not prevent

definff ed in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internar
or detect misstatements. Also, projeo ctions of any evaluation of effeff ctiveness to future periods are subju ect to risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management assessed the effecff

tiveness of our internal control over financial reporting as of Decembem r 31, 2018. In making this

assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway
Commission in “Inte
Decembem r 31, 2018, our internal control over financial reporting was effeff ctive based on those criteria.

rated Framework”. Based on this assessment, our management concluded that, as of

rnal Control—Integ—

“

On April 2, 2018, we completed our acquisition of CM2.COM, Inc., d/b/a Erado (“Erado”). We are in the process of evaluating

the existing controls and procedures of Erado and integrating Erado into our internal control over financial reporting. In accordance
with SEC Staff guidance permitting a company to exclude an acquired business from management’s assessment of the effectiv
internal control over financial reporting for the year in which the acquisition is completed, we have excluded the business that we
acquired in the Erado Combination from our assessment of the effecff
Decembem r 31, 2018. The business we acquired in the Erado Combination represented approximately 9% of the Company’s total assets
at Decembem r 31, 2018 and 3% of the Company’s revenues for the year ended Decembem r 31, 2018. The scope of management’s
assessment of the effeff ctiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31,
2018, includes all of the Company’s consolidated operations except for those disclosure controls and procedures of Erado that are
subsu umed by internal control over financial reporting.

tiveness of internal control over financial reporting as of

eness of

The effeff ctiveness of our internal control over financial reporting as of December 31, 2018, 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 Decembem r 31, 2018, there have been no changes in our internal control over financial reporting
identified in connection with the evaluation described above that have materially affeff cted or are reasonably likely to materially affeff ct
internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockhokk

lders

Zix Corporation

Opinion on Internal Control Over Financial Reporting

We have audited Zix Corporation and subsiu
2018, based on criteria established in 2013 Internal Control—Integ—
Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effecti
internal control over financial reporting as of December 31, 2018, based on criteria established in 2013 IntII ernal Control—In
Frameworkrr issued by COSO.

diaries’ (the “Compamm ny”) internal control over financial reporting as of December 31,

rated Frameworkrr issued by the Committee of Sponsoring

ff
ve
tegrated

We also have audited, in accordance with the standards of the Public
u
(“PCAOB”), the consolidated balance sheets of the Company, as of December 31, 2018 and 2017, and the related consolidated
statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2018, and our report dated March 8, 2019 expressed an unqualifiedff

Company Accounting Oversight Board (United States)

opinion on those consolidated financial statements.

Basis for Opinion

The Compamm ny’s management is responsible for maintaining effeff ctive internal control over financial reporting, and for its assessment
of the effeff ctiveness of internal control over financial reporting, included in the accompamm nying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the entity’s internal control over financial reporting
based on our audit. We are a publu ic accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicabla e rules and regulations of the Securities and Exchange
Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perforff m the audit
to obtain reasonable assurance about whether effeff ctive 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 weaknekk ss exists, and testing and evaluating the design and operating effecff
tiveness of internal control
based on the assessed risk. Our audit also included perforff ming such other procedurd es as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.

As indicated in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting, management’s
assessment of and conclusion on the effeff ctiveness of internal control over financial reporting did not include the internal controls of
the business that the Company acquired in the acquisition of CM2.COM, Inc., d/b/a/
Erado (“Erado”), which is included in the 2018
consolidated financial statements of the Company and constituted approximately 9% of the total assets as of December 31, 2018, and
approximately 3% of revenues for the year then ended. Our audit of the internal control over financial reporting of the Company also
did not include an evaluation of the internal control over financial reporting of Erado.

Definitio

n and Limitations of Internal Control Over Financial Reporting

An entity’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 accounting principles generally
accepted in the United States of America. An entity’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 assets of the entity; (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 entity are being
made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a
material effeff ct on the financial statements.

the transactions and dispositions of

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projeo ctions
of any evaluation of effecff
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

tiveness to future periods are subju ect to the risk that controls may become inadequate because of changes in

/s/ WHITLEY PENN LLP

Plano, Texas
March 8, 2019

Item 9B. Other Informatiott n

None.

PART III

Item 10. Directortt

s,rr Executive Officers and Corporate Governance

Certain information required by this Item 10 is incorporated by reference from our Proxy Statement related to our 2019 Annual

Meeting of Shareholders under the sections “OTHER INFORMATION YOU NEED TO MAKE AN INFORMED DECISION —
ff
Directors, Executive Offiff cers and Significaff
al Ownership Reporting Compliance,” and
nt Emplomm yees” and “Section 16(a) Benefici
rate Governance Committee, Selection of Director
NCAA E — Code of Ethics,” and “Nominating and Corporr
“CORPORATE GOVERNARR
Nominees,” and “Audit Committee.”

Our Board of Directors has adopted a Code of Conduct and Code of Ethics that applies to all directors, offiff cers and emplmm oyees

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 ouruu chief executive officff er and senior financial offiff cers will be publu icly
disclosed as required by applicable law and regulation, including by posting the waiver on our website.

Item 11. Executive Compem nsation

The information required by this Item 11, including certain information pertaining to Company securities authorized for
issuance under equity compensation plans, is incorporated by referff ence from our Proxy Statement related to our 2019 Annual Meeting
of Shareholders under the section “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.”

Item 12. Security Ownershrr

ip of Certainii Beneficial

Owners and Management and Related Stockholder

ll Matters

The information required by this Item 12 is incorporated by reference from our Proxy Statement related to our 2019 Annual

Meeting of Shareholders under the sections “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAAA
Information.”

GEMENT” and “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS — Equity Compensation Plan

Item 13. Certainii Relatll

iontt

ships and Related Transactions, and Directortt

Independence

The information required by this Item 13 is incorporated by referff ence from our Proxy Statement related to our 2019 Annual

Meeting of Shareholders under the sections “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS — Certain
Relationships and Related Transactions” and “CORPORATE GOVERNANCE — Corporate Governance Requirements and Board
Member Independence.”

Item 14. Princip

al Accountant Fees and Services

The information required by this Item 14 is incorporated by reference from our Proxy Statement related to our 2019 Annual

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

PART IV

Item 15. Exhibitstt and Finanii

cial Statemtt

ent Schedules

(a)(1) Financial Statements

See Index to Consolidated Financial Statements on page F-1 hereof.

FF
(a)(2) Financi

al Statement Scheduldd es

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 becauseaa
statements or notes thereto.

the information required is included in the consolidated financial

(a)(3) Exhibits

Exhibit
Number

2.1

Description

— Stock Purchase Agreement, dated as of April 2, 2018, by and among Craig Brauff,ff
tee of the Alexandra Brauffff Gift Trusr

Richardson, as Trusr
Courtney Brauff Gift Trusrr
Zix Corporation. Filed as Exhibit 2.1 to Zix Corporation’s Current Report on Form 8-K, filed on April 2, 2018, and
incorporated herein by reference.

t U/A 12/21/12, Shari Wood-Richardson, as Trusrr
tee of the Julie Lomax Giftff Trusr

t U/A 12/21/12, Julie A. Lomax, as Trusr

Julie Lomax Brauff,ff Shari Wood-
tee of the

t U/A 12/21/12, and

2.2* — Securities Purchase Agreement, dated as of January 14, 2019, by and among Zix Corporation, AR Topco, LLC,

AppRiver Marlin Blocker Corp., AppRiver Holdings, LLC, AppRiver Marlin Topco, L.P., AppRiver Management
Holding, LLC, Marlin Equity IV, L.P. and Marlin Topco GP, LLC, as the sellers’ representative.

3.1

— Restated Articles of Incorporation of Zix Corporatio

n, 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 Decembem r 31, 2005, and
incorporated herein by reference.

3.2

— Second Amended and Restated Bylaws of Zix Corpora

tion dated November 1, 2016. Filed as Exhibit 3.2 to Zix

ration’s Quarterly Report on Form 10-Q for the quarterly period ended Septemberm 30, 2016, and incorporated

Corporr
herein by reference.

3.3

— Certificate of Designations of Series A Convertible Preferr

ed Stock, as filed with the Texas Secretary of State on

February 15, 2019. Filed as Exhibit 3.1 to Zix Corporation’s Current Report on Form 8-K, filed on February 22, 2019,
and incorporated herein by reference.

3.4

— Certificaff

te of Designations of Series B Convertible Preferred

February 15, 2019. Filed as Exhibit 3.1 to Zix Corpor
and incorporated herein by reference.

Stock, as filed with the Texas Secretary of State on
ation’s Current Report on Form 8-K, filed on February 22, 2019,

10.1† — Zix Corporation 2004 Stock Option Plan (Amended and Restated as of June 7, 2007). Filed as Exhibit 10.3 to Zix

Corporation’s Current Report on Form 8-K, filed on June 12, 2007, and incorporated herein by referff ence.

10.2† — 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 on June 12, 2007, and incorporated herein by reference.

10.3† — Form of Stock Option Agreement (with no “change in contrott

l” 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 referff ence.

10.4† — Form of Stock Option Agreement (with “change in control” provision) for Zix Corporation Stock Option Plans. Filed as

Exhibit 10.3 to Zix Corporr
2005, and incorporated herein by reference.

ration’s Registration Statement on Form S-8 (Registration No. 333-126576), dated July 13,

10.5† — 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 offiff cer and direct reports. Filed as Exhibit 10.17
to Zix Corpora
rr
reference.

tion’s Annual Report on Form 10-K for the year ended December 31, 2007, and incorporated herein by

10.6

— 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.

10.7

— Adoption Agreement relating to Zix Corporation 401(k) Retirement Plan. Filed as Exhibit 10.11 to Zix Corporat
r
Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by referff ence.

ion’s

Exhibit
Number

Description

10.8† — Form of Zix Corporation Outside Director Stock Option Agreement Filed as Exhibit 10.3 to Zix Corporation’s

Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, and incorporated herein by referff ence.

10.9† — Zix Corporation Outside Director Stock Option Agreement. Filed as Exhibit 10.1 to Zix Corporation’s Quarterly Report

on Form 10-Q for the quarterly period ended June 30, 2010, and incorporated herein by reference.

10.10† — Form of Zix Corporation Emplmm oyee 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 referff ence.

10.11† — Form of Director Indemnificat

ion Agreement. Filed as Exhibit 10.1 to Zix Corporation’s Quarterly Report on Form 10-

Q for the quarterly period ended Septemberm 30, 2016, and incorporated herein by referff ence.

10.12 — Form of Amended and Restated Termination Benefits Agreement. Filed as Exhibit 10.1 to Zix Corporr

ration’s Quarterly

Report on Form 10-Q for the quarterly period ended June 30, 2015, and incorporated herein by reference.

10.13† — Zix Corporation Amended and Restated 2012 Incentive Plan. Filed as Appendix A of Schedule 14A on May 13, 2015,

and incorporated herein by reference.

10.14† — Amendment No. One to Zix Corpor

ation 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 Decembem r 31, 2015, and incorporated herein by
reference.

10.15† — Zix Corporation 2018 Omnimm bus Incentive Plan. Filed as Appendix A of Schedule 14A on April 27, 2018, and

incorporated herein by reference.

10.16† — Form of Executive Restricted Stock Agreement. Filed as Exhibit 10.22 to Zix Corporation’s Annual Report on Form

10-K for the year ended Decembem r 31, 2017, and incorporated herein by referff ence.

10.17† — Form of Executive Restricted Stock Agreement (Qualifieff d Perforff mance Based Award). Filed as Exhibit 10.23 to Zix

Corporation’s Annual Report on Form 10-K for the year ended Decembem r 31, 2017, and incorporated herein by
reference.

10.18† — Form of Executive Restricted Stock Unit Agreement. Filed as Exhibit 10.24 to Zix Corpor

ation’s Annual Report on

Form 10-K for the year ended December 31, 2017, and incorporated herein by referff ence.

10.19† — Form of Executive Restricted Stock Unit Agreement (Qualifiedff

Performff

ance Based Award). Filed as Exhibit 10.25 to

Zix Corporr
reference.

ration’s Annual Report on Form 10-K for the year ended December 31, 2017, and incorporated herein by

10.20† — Form of Non-Emplmm oyee Director Restricted Stock Agreement. Filed as Exhibit 10.26 to Zix Corporation’s Annual
Report on Form 10-K for the year ended Decembem r 31, 2017, and incorporated herein by reference

10.21† — Form of Non-Emplmm oyee Director Deferred Stock Unit Agreement. Filed as Exhibit 10.27 to Zix Corporr

ration’s Annual

Report on Form 10-K for the year ended Decembem r 31, 2017, and incorporated herein by reference.

t
10.22* — Debt Commitment Letter, dated as of January 14, 2019, by and among SunTrust Robinson Humphmm rey, Inc., SunTrusrr

Bank, KeyBanc Capital Markets Inc., KeyBank National Association and Zix Corporation.

10.23* — Credit Agreement, dated as of February 20, 2019, by and among Zix Corporation, the lenders party thereto, and

SunTrusrr

t Bank, as administrative agent.

10.24 — Investment Agreement, dated as of January 14, 2019, by and between Zix Corporation and the investor named therein.

Filed as Exhibit 10.1 to Zix Corporation’s Current Report on Form 8-K, filed on January 17, 2019, and incorporated
herein by reference.

10.25 — Registration Rights Agreement, dated as of February 20, 2019, by and among Zix Corporation and Truer Wind Capital,

L.P. Filed as Exhibit 10.1 to Zix Corporation’s Current Report on Form 8-K, filed on February 22, 2019, and
incorporated herein by reference.

21.1* — Subsidiari

es of Zix Corporation.

Exhibit
Number

Description

23.1* — Consent of Independent Registered Publu ic Accounting Firm (Whitley Penn LLP).

31.1* — Certification of David J. Wagner, President and Chief Executive Offiff cer of the Company, pursuant to Section 302 of the

Sarbanr

es-Oxley Act of 2002.

31.2* — Certification of David E. Rockvam, Chief Financial Office

r (Principal Financial Offiff cer and Principal Accounting

Officeff

r) 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, pursuu uant 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
101. DEF (XBRL Taxonomy Linkbase Document)
101. PRE (XBRL Taxonomy Presentation Linkbase Document)

Linkbase Document)

*
**
†

Filed herewith.
Furnished herewith.
Management contract or compensatory plan or arrangement.

Item 16. Form 10-K Summary

Not Applicable.

Pursuuu

antnn to the requirements of Section 13 or 15(d) of the Securiuu ties Exchange Act of 1934, the Registratt nt has duly caused this
reportrr to be signed on its behalf by the undersigned, thereuntonn duly authuu orized, in the city of Dallas, state of Texas, on March 8, 2019.

SIGNATURES

ZIX CORPORATION

By:

/s/ DAVID E. ROCKVAM
David E. Rockvam
Chief Financial Officer (Principal Financial
Officff er and Principal Accounting Officer)r

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 8, 2019.

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/ JAMES H. GREENE, JR.
(James H. Greene, Jr.)

/s/ ROBERT C. HAUSMANN
(Robert C. Hausmann)

/s/ MARIBESS L. MILLER
(Maribess L. Miller)

/s/ RICHARD D. SPURR
(Richard D. Spurr)

/s/ BRANDON VANAA BUREN
(Brandon Van Buren)

Chief Executive Offiff cer, President and Director
(Principal Executive Offiff cer)

Chief Financial Offiff cer
ff
(Principal Financial Officer

and Principal Accounting Offiff cer)

Director

Chairman, Director

Director

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting Firm

Report of Independent Registered Public
Consolidated Balance Sheets at Decembem r 31, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended Decembem r 31, 2018, 2017, and 2016
Consolidated Statements of Stockhok lders’ Equity for the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements

F-2
F-3
F-4
F-5
F-6
F-7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockhokk
Zix Corporation

lders

Opinion on the Financial Statements

tion and subsidiaries (the “Compamm ny”), as of December
We have audited the accompanying consolidated balance sheets of Zix Corpora
31, 2018 and 2017, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of
the years in the three-year period ended Decembem r 31, 2018, and the related notes (collectively referred
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the
period ended Decembem r 31, 2018, in conforff mity with accounting principles generally accepted in the United States of America.

to as the “finff ancial

We also have audited, in accordance with the standards of the Public
(“PCAOB”), the Company’s internar
Internal Control—Integ—
(“COSO”), and our report dated March 8, 2019, expressed an unqualified opinion.

l control over financial reporting as of December 31, 2018, based on criteria established in 2013

rated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission

Company Accounting Oversight Board (United States)

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits. We are a publu ic accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perfoff rm the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included perforff ming procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significaff
nt estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2006.

/s/ WHITLEY PENN LLP

Plano, Texas
March 8, 2019

F-2

December 31,

2018

2017

27,109
3,188
3,176
33,473
3,924
9,424
15,251
13,783
28,785
104,640

769
9,747
30,622
41,138

1,539
1,016
2,555
43,693

33,009
1,389
3,222
37,620
4,048
—
5,524
8,469
25,647
81,308

1,053
6,101
28,362
35,516

1,087
1,185
2,272
37,788

—

779
384,940

(108,392)
(216,364)
(16)
60,947
104,640

778
381,457

(102,343)
(236,372)
—
43,520
81,308

ZIX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

ASSETS

Current assets:

Cash and cash equivalents
Receivables, net
Prepaid and other current assets

Total current assets

Property and equipment, net
Other assets and deferff
Intangible assets, net
Goodwill
ff
Deferr

red costs

ed tax assets
Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payabla e
Accrued expenses
Deferred revenue

Total current liabilities

Long-term liabilities:
Deferred revenue
Deferred rent

Total long-term liabilities
Total liabilities

Commitments and contingencies (Note 15)
Stockholders’ equity:

ff
Preferred

stock, $1 par value, 10,000,000 shares authorized; none issued

and outstanding

Common stock, $0.01 para value, 175,000,000 shares authorized; 81,715,330 issued

and 54,186,180 outstanding in 2018 and 80,709,970 issued
and 54,542,612 outstanding in 2017

Additional paid-in capital
Treasury stock, at cost; 27,529,150 common shares in 2018 and 26,167,358 common

shares in 2017
Accumulated deficit
Accumulated other comprehensive (loss) income

Total stockholders’ equity
Total liabilities and stockholders’ equity

See notes to consolidated financial statements.

F-3

ZIX CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except share and per share data)
Revenues

st of revenue

Gross margin

arch and development expenses

Selling, general and administrative expenses

Operating income

er income (expense):
Investment and other income
Interest expense

Total other income
come beforff e income taxes
come tax benefit (expense)

Net income (loss)

sic income (loss) per common share
Diluted income (loss) per common share

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

Other comprehensive income, net of tax:

Foreign currency translation adjud stments

Comprehensive income (loss)

2018

Year Ended December 31,
2017

2016

70,478
15,186
55,292
11,323
33,999
9,970

754
——
754
10,724
4,720
15,444
0.29
0.29

$
$
$

65,663
12,602
53,061
10,980
31,871
10,210

339
——
339
10,549
(18,606)

(8,057) $
(0.15) $
(0.15) $

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

52,591,714
53,481,295

53,430,492
53,430,492

53,819,772
54,395,145

(16)
15,428

——
(8,057) $

——
5,837

$
$
$

See notes to consolidated financial statements.

F-4

ZIX CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)
Balance, December 31, 2015

uance of common stock upon
exercise of stock options

Issuance of common stock upon vesting

of restricted stock units, net

Issuance of common stock upon vesting

of perforff mance stock units, net
Issuance of restricted common stock,

net

Issuance of restricted perforff mance

common stock, net

Emplmm oyee stock-based compensation

costs

Treasury repurchase program
Net income (loss)
Balance, December 31, 2016

uance of common stock upon
exercise of stock options

Issuance of common stock upon vesting

of restricted stock units, net

Issuance of common stock upon vesting

of perforff mance stock units, net
Issuance of restricted common stock,

net

Issuance of restricted perforff mance

common stock, net

Emplmm oyee stock-based compensation

costs

Treasury repurchase program
Net income (loss)
Balance, December 31, 2017, as reported

ulmm ative effeff ct adjud stment from
changes in accounting standards
(Note 2)

Balance, January 1, 2018, as adjud sted
uance of common stock upon
exercise of stock options

Issuance of common stock upon vesting

of restricted stock units, net

Issuance of common stock upon vesting

of perforff mance stock units, net
Issuance of restricted common stock,

net

Issuance of restricted perforff mance

common stock, net

Emplmm oyee stock-based compensation

costs

Treasury repurchase program
Adjud stment from foreign currency

translation

Net income (loss)
Balance, December 31, 2018

Stockhokk lders’ Equity

Common Stock

Shares
77,852,453

Amount

767

Additional
Paid-In
Capital
$ 372,400

Treasury
Stock

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Total
Stockhokk lders’
Equity

$ (82,243) $ (234,152) $

—— $

56,772

123,760

179,914

97,428

518,211

141,500

——
——
——
78,913,266

932,303

126,167

20,999

645,623

71,612

——
——
——
80,709,970

——
80,709,970

90,011

50,751

32,665

735,987

95,946

——
——

——

——
——
——
769

——

——
——
——
778

——
778

——

——
——

203

——

1,783
——
——
374,386

4,197

——

—

(527)
(15,000)
——
(97,770)

—
—
5,837
(228,315)

——

—

2,874
——
——
381,457

(762)
(3,811)
——
(102,343)

—
—
(8,057)
(236,372)

——
381,457

——
(102,343)

4,564
(231,808)

165

——

3,318
——

(656)
(5,393)

—

—
—

——

——
——
——
——

——

——
——
——
——

——
——

——

——
——

——
——
81,715,330

——
——
779

——
——
$ 384,940

——
——

—
15,444

$ (108,392) $ (216,364) $

(16)
——
(16) $

See notes to consolidated financial statements.

F-5

205

——

1,256
(15,000)
5,837
49,070

4,206

——

2,112
(3,811)
(8,057)
43,520

4,564
48,084

166

——

2,662
(5,393)

(16)
15,444
60,947

ZIX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
Operating activities:
Net income (loss)
Non-cash items in net income (loss):
Depreciation and amortization
Emplomm yee stock-based compensation expense
ed taxes
Changes in deferr

Changes in operating assets and liabilities:

Receivables
Prepaid and other assets
Other assets and deferff
Accounts payabla e
Deferred revenue
Earn-out payment
Accrued and other liabilities

red costs

Net cash provided by operating activities

vesting activities:

Purchases of property, equipment and internal-use software
Acquisition of business, net of cash acquired

Net cash used in investing activities

ed debt financing costs

ancing activities:
Proceeds from exercise of stock options
ff
Deferr
Stock issuance costs
Earn-out payment
Treasury stock

Net cash used in financing activities

feff ct of exchange rate changes on cash
crease (decrease) in cash and cash equivalents
h and cash equivalents, beginning of year

Cash and cash equivalents, end of year

2018

Year Ended December 31,
2017

2016

15,444

(8,057) $

3,706
3,318
(4,754)

(1,376)
108
(3,139)
(325)
1,892
(195)
1,992
16,671

(4,179)
(11,773)
(15,952)

166
(60)
(45)
(605)
(6,049)
(6,593)
(26)
(5,900)
33,009
27,109

2,741
2,874
18,470

64
(386)
—
645
1,370
—
483
18,204

(3,041)
(8,244)
(11,285)

4,206
—
—
—
(4,573)
(367)
—
6,552
26,457
33,009

5,837

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

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, advanced threat protection, email
archiving, 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 Significaff

nt Accounting Policies

Basis of Presentation — The accompanying consolidated financial statements include the accounts of all our wholly-owned
iaries and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

subsid
u
GAAP”). All inter-compamm ny accounts and transactions have been eliminated in consolidation.

Use of Estimates — The preparation of consolidated financial statements in conforff mity with accounting principles generally

accepted in the United States of America requires management to make estimates and assumptions that affeff ct the reported amount of
assets and liabia lities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reported period. Our significant estimates include primarily those required in the
valuation or impaimm rment analysis of goodwill and intangibles, property and equipment, revenue recognition, amortization period of our
commission amortization, allowances for doubtfu
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.

accounts, stock-based compensation, litigation accruals, valuation allowances for

ulff

CashCC

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 payabla e)
are not recorded at fair value but approximate fair values primarily due to their short-term nature. The carrying values of other current
assets and accrued expenses are also not recorded at fair value, but approximate fair values primarily due to their short-term nature.

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

considered significff ant because of the potential impactm
the Company’s operating results.

that impamm irment, obsolescence, or change in an asset’s useful life could have on

We record an impairmm

ment 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 impairmm ment 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. Assumptmm ions are made with respect to future net
cash flows expected to be generated by the related asset. An impamm irment charge would be recorded for an amount by which the
carryirr ng value of the asset exceeded the discounted projeo cted net cash flows or estimated faff ir market value. Also, even where a current
impairmm ment charge is not necessary, the remaining usefulff
presented.

ment was recorded for any of the periods

lives are evaluated. No impairmm

Property and equipment are recorded at cost and depreciated or amortized using the straight-line method over their estimated
ements — the shorter of five
lives as follows: computer and offiff ce equipment and software — three years; leasehold improvmm
usefulff
years or the lease term; and furniture and fixtures — five years. We recorded a depreciation expenx
se of $2.4 million for the year ended
Decembem r 31, 2018. We allocated $1.7 million of the expense to cost of revenue, $426 thousand to research and development expense,
and $314 thousand to selling, marketing, and general and administrative expenses.

Goodwill and Other Intangi

blell 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 subju ect to amortization; (2) intangible assets with
ite lives not subju ect to amortization; and (3) goodwill. For intangible assets with finite lives, tests for impairmm
indefinff
performff
ed if conditions exist that indicate the carrying value may not be recoverable. For intangible assets with indefinite lives and
goodwill, tests for impamm irment must be perforff med at least annuan lly or more frequently if events or circumstances indicate that assets
might be impamm ired.

ment must be

F-7

Goodwill was $13.8 million, or 13%, and $8.5 million, or 10%, of total assets as of December 31, 2018 and 2017, respectively.

We evaluate the goodwill for impamm irment annually in the fourth quarter, or when there is reason to believe that the value has
. Evaluations for possible impaimm rment are based upon a comparison of the estimated fair value of the

been diminished or impaired
reporting unit to which the goodwill has been assigned, versus the sum of the carrying value of the assets and liabila
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.
Impairmm
of the periods presented.

ment is deemed to exist if the net book value of the unit exceeds its estimated fair value. No impairmm

ment was recorded for any

ities of that unit

Our intangible assets with finite lives are amortized using a straight line basis over their economic usefulff

lives.

Deferred Taxaa Assetstt — Deferred tax assets are recognized if it is “more likely than not” that the benefitff of our deferff

red tax

t portion, $22.7 million, of our accumulated U.S. deferff

ient to utilize net operating loss carryforff wards prior to their expiration. Our total deferff

assets will be realized on future federal or state income tax returns. At December 31, 2018, we provided a valuation allowance against
a significan
red tax assets, reflecting our historical losses and the uncertainty of
ff
future taxabla e income sufficff
subju ect to a valuation allowance are valued at $28.8 million, and consist of $27.0 million for federal net operating loss carryforwards ,
$2.1 million relating to U.S. state income tax credits, $678 thousand related to Alternative Minimum Tax credits and $114 thousand
related to foreign tax credits. These credits are offsff et by ($1.2) million relating to temporary timing differeff
nces between U.S. GAAP
and tax-related expense. If our 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 impacti
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 significan
t positive impacmm t on operating results in the period that it becomes more likely
than not that certain of the Company’s deferr
current levels, a resulting increase to all or a part of this valuation allowance could have a significaff
results.

ed tax assets will be realized. Alternatively, should our future income decrease from

ng the likelihood of realizing our deferff

nt negative impactmm

red tax assets not

on our operating

red tax

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

Leases — A leased asset whose lease terms meet the criteria for capa italization is recorded as an asset and depreciated. If a lease
as an operating lease and payments are recorded as rent expense. For 2018
does not meet the criteria for capitalization, it is classifiedff
and 2017 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 improvmm
amortized as a reduction of rent expense over the lease term.

ements are recorded as a deferff

red lease incentive and

Revenue Recognition— In Mayaa 2014, The Financial Accounting Standards Board (“FASB”) issued ASC 606 which requires

revenue recognition when promised goods or services are transferr
which an entity expects to be entitled to those goods and services. The standard became effeff ctive for us in 2018, but did not have a
material impacmm t to our revenue recognition process. For additional inforff mation regarding our adoption of ASC 606 please see “New
Accounting Standards.”

ed to customers in an amount that reflects the consideration to

We earn our revenue from subsu cription fees for rights related to the use of our softwff

ance obligations that are highly interdependent and consists of software at the customer’s site, ongoing customer support

are. Our revenue contracts include multiple
, and
performff
cloud-based access to the hosted Zix encryption network. As our Company has expanded its portfoff lio of message security offeff
rings in
recent years, we have increased our revenue obtained from hosted service solutions. Approximately 38% of our revenue in 2018 was
derived from hosted email protection solutions.

Our subscu

ription terms typica

lly range from one to five years.

Revenue is recognized by applying the following steps:

(cid:120)

Step 1: Identify the contract(s) with a customer,

Step 2: Identify the perforff mance obligations in the contract,

F-8

(cid:120)

Step 3: determine the transaction price

Step 4: allocate the transaction price to the performff

ance obligations in the contract, and

Step 5: recognize revenue when (or as) the performance obligation is satisfied.

Step 1: Identify the contract(s) with a customer:

We consider the terms and conditions of the contract and our customary business practice in identifying our contracts. We
determine we have a contract with a customer when the contract is approved, we can identify each party’s rights regarding the services
and products transferred, we cana identify the payment terms for the services and products, the contract has commercial substa
nce, and
it is probable we will be paid.

(cid:120)

Step 2: Identifying the performff

ance obligations:

ASC 606 requires identificaff

tion and disclosure of perfoff rmance obligations within a revenue contract. A good or service is
from the good or service on its own or with other resources that are readily

considered distinct if the customer can both benefitff
available to the customer, and the promise to transferff

the good or service is separately identifiabff

le from other promises in the contract.

As of Decembem r 31, 2018, revenue from our email protection services represent 100% of our revenue, of which approximately

to email encryption. To provide this service, our softwff

88% is specificff
are at the customer site includes functionality to create a private
encryption key provided via cloud-based access to our hosted Zix encryption
encryption key that works in conjunction with the public
network. Both keys are required to enable our asymmetrical encryption service. In our assessment of the factors listed in ASC 606-10-
25-21, we have determined that because our softwff
are at the customer’s site and the access to our hosted Zix encryptyy ion network are
highly interrelated, these items are not regarded as distinct components. Based on this assessment, these elements are combined as a
single perforff mance obligation.

(cid:120)

Step 3: Determine the transaction price:

The transaction price is determined based on the consideration we expect to be entitled to receive in exchange for transferring

goods and services to the customer. We include variable consideration in the transaction price if we view it as probable that a
significant future reduction of cumulative revenue under the contract will not occur.

(cid:120)

Step 4: Allocate the transaction price to the perforff mance obligations in the contract:

We allocate transaction prices to each perforff mance obligation based on the stand-alone selling price of our component services.

(cid:120)

Step 5: Recognize revenue when (or as) the perforff mance obligation is satisfiedff

We recognize revenue when the customer obtains control of the product or services, at the amount allocated to the satisfieff d

performff

ance obligation. Our perforff mance obligations are generally satisfied over time.

While some contracts include one or more perforff mance obligations (including the combined elements noted above along with

d by the
additional ongoing customer suppuu ort and other hosted services), the revenue recognition pattern generally is not impacte
separate allocations of these obligations because the services are generally satisfied over the same period of time and revenue is
recognized over the contract period. Discounts provided to customers are recorded as reductions in revenuen .

Commission Amortization — We amortize ouruu commission costs to expens
ation period requiqq res significaff

e on a systemic basis over the period of expexx cted
nt judgement. We apply the practical expex dientnn noted
benefit to the customer. Determination of the amortizrr
in ASC 606-10-10-4 to account for ouruu commission costs and related amortizations at the portfolff
io level. Additionally, the Company has
evaluated commissions earned upon contratt ct renewal as compared to initial commissions paid and determined that because commissions
paid were not reasonabla y proportional to their respective contract values, ouruu renewal commissions could not be considered
commensurate with the initial commissions paid.

We considered ouruu average contrnn act term length and historical customer retention rates to determine an average length of our
customer relationships. We also concluded ouruu add-on sales generally occur halfway into ouruu customer relationships, and evaluated ouruu
average customer renewal terms. Based on these factors we have determined that 8 years, 4 years and 18 months area
amortization periods to ouruu new, add-on, and renewal sales commission expexx nses, respectively. We also perform subsu equentnn assessmentsnn
for impamm irment of the related deferred cost asset when indicators present.nn

ropriate

the appaa

F-9

Software Developmen

t Costs —Costs incurred in the development and testing of subscu

ription softwff

are 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 substu

are solutions are expensed
as incurred until technological feasibility has been established, at which time any additional costs would be capa italized. Historically,
we have not capitalized standard research and development costs because we believe that technological feasibility is established
concurrent with general release to customers.

antial enhancements to existing softwff

Research and development costs associated with softwff

are developed for internal use on behalf of our customers are capitalized.

As we increasingly moved to a multi-tenant environment to keep up with the industry trend requiring transition to a cloud based
solution for our existing services, certain research and development expenditures associated with hosting arrangements began to meet
the accounting guidance requirement for capia talizing development costs under ASC 350-40, Internal-Use Softwff
hosting arrangements. These capia talized costs are classified as intangible assets in our consolidated balance sheet. In 2018, we
capitalized $1.5 million of research and development costs related to hosted softwff
expects our capitalization of these research and development expenditures to increase in the future.

are development for our customers. The Company

are, as it applies to

Advertis

ing Expense — Advertising costs are expensed as incurred. Our operations include advertising expense of $1.3 million,

$1.5 million, and $1.9 million in 2018, 2017, and 2016, respectively.

Stock-Bkk ased 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 emplmm oyees 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 emplmm oyee 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 numberm of instruments that
tures as they occur.
will ultimately be earned, rather than accounting for forfeiff

Earnings Per Share (“EP“

S”PP )” — Basic EPS is based on the weighted average numberm of common shares outstanding during

each period. Diluted EPS adjud sts Basic EPS for the effeff cts 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 ASC 606, which supers

edes most prior revenue recognition guidance under U.S. Generally

Accepted Accounting Principles (“GAAP”). The core principle of ASC 606 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. ASC 606 definff es a five step process to achieve this core principle and, in doing so, more judgment and estimates may be
required within the revenue recognition process than were required under prior U.S. GAAP.

The standard became effeff ctive for us beginning in 2018. Ouruu Company provides primarily email encryption and advanced threat

protection securiuu ty solutions as subsu cription services in which we recognize revenue as ouruu services are rendered. We determined ouruu
revenue was not materially impam cted by the new guidance. However, the guidance did require us to increase the amortization period of
ouruu commission expex nse. We applied the guidance to commissions earned on all contract
Prior period amountsnn were not adjusted and continuen
use a portfolio approach, applying 8 year, 4 year, and 18 month amortization periods for ouruu new, add-on, and renewal sales commission
expexx nses, respectively. Determination of the amortirr zation period and the subsu equent assessmentsnn for impairmm ment of the related deferred
cost asset requiqq res significff antnn judgement.nn

s that were not complete as of January 1, 2018.
to be reporterr d in accordance with the previous guidance. Ouruu Company elected to

F-10

We applied a modified retrott

spective approach to ouruu implmm ementann tion of ASC 606 in which we recognized a $4.6 million

(InI

thousands)

Assets:

Prepaid and other current assets
Other assets and deferff
red costs
ff
Deferr

ed tax assets
Stockholders’ equity:
ff

Accumulated deficit

January 1, 2018
Cumulative
Effeff ct
Adjustment

Beginning
Balance, as
Adjusted

Beginning
Balance

3,222 $
——
25,647

(415) $
6,595
(1,616)

2,807
6,595
24,031

(236,372) $

4,564

(231,808)

Financial statement results as reported under the new revenue standard as compared to the previous standarda

for the twelve months

ended and as of December 31, 2018, are as follows:

thousands, except per share data)

(InII
Revenues
Cost of revenues
Gross margin
Operating expenses:

arch and development

Selling, general and administrative

Total operating expenses

Operating income
Other income, net
Income beforff e income taxes
Income tax expense
Net income

Basic income per common share

Diluted income per common share

(1) Per share variance may not foot due to rounding

(InII

thousands)

Assets:

Prepaid and other current assets
Other assets and deferff
red costs
ff
Deferr

ed tax assets
Stockholders’ equity:
ff

Accumulated deficit

Twelve Months Ended December 31, 2018
Under
Under
ASC 606
ASC 605

Variance

70,478
15,186
55,292

11,323
36,554
47,877
7,415
754
8,169
5,257
13,426

0.26

0.25

70,478
15,186
55,292

11,323
33,999
45,322
9,970
754
10,724
4,720
15,444

0.29

——
——
——

——
(2,555)
(2,555)
2,555
——
2,555
(537)
2,018

0.04

Under
ASC 605

December 31, 2018
Under
ASC 606

Variance

3,760 $
——
30,401

3,176
9,424
28,785

(584)
9,424
(1,616)

(222,946) $

(216,364) $

6,582

F-11

Cash Flow Statement

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which amends guidance on the
classification of certain cash receipts and payments in the statement of cash flows. This ASU was issued with the intent to reduce
diversity in practice with respect to eight typesyy
of cash flows. The new guidance addressed debt prepayment or extinguishment of
costs, settlement of zero-coupouu
insurance claims, proceeds from the settlement of corporate-owned lifeff
distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash
flows and application of the predominance principle.

ff
insurance policies and bank-owned life insurance policies,

a business combination, proceeds from the settlement of

n bonds, contingent consideration made after

The standard became effeff ctive for us beginning in 2018. We applied the new guidance within our consolidated statements of

cash flows classification to an $800 thousand earn-out payment associated with our Greenview (as defined herein) acquisition.
r the consummation date, as required by the guidance, we classifiedff
Because this consideration payment was not made soon afteff
thousand of the payment as a financing activity. This reflects the portion of the payment recognized a contingent liability as of the
acquisition date. The $195 thousand balance of the payment was in excess of the original contingent consideration liability and was
classified as an operating activity. The standard had no other impacmm t on our consolidated financial statements.

$605

Leases

In Februar

ry 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Topic 842 requires companies to generally recognize on

assets. The new lease standard becomes
the balance sheet operating and financing lease liabilities and corresponding right-of-use
effeff ctive for us beginning 2019. We expect to adopt Topic 842 using the effeff ctive date as the date of our initial application of the
standard. Consequently, financial inforff mation for the comparative periods will not be updated. We currently expect that most of our
operating lease commitments will be subju ect to the new standard and recognized as operating lease liabilities and right-of-uff
se assets
upon our adoption of Topic 842. We are evaluating the potential impamm ct of this new guidance on our consolidated financial statements,
and currently estimate the recognition of our outstanding lease obligations as of Decembem r 31, 2018, will result in the recognition of
right-to-use-assets and lease liabilities of $4.5 million to $6.5 million.

3. Stock Options and Stock-Based Employee Compensation

Below is a summary of common stock options outstanding at December 31, 2018:

Employee and Director Stock Option Plans:

Stock Option Plan

2006 Director’s Stock Option Plan
2012 Incentive Plan
2018 Omnimm bus Incentive Plan
Total

Authorized
Shares

Options
Outstanding

Options
Vested

Available
for Grant

5,000,000
1,100,000
6,300,000
6,000,000
18,400,000

230,000
55,000
638,823
——
923,823

230,000
55,000
532,573
——
817,573

——
——
——
5,875,000
5,875,000

Under all of our stock option plans, new shares are issued when options are exercised.

Employee

and Director Stock- Based Plans

We have non-qualified stock options outstanding to emplmm oyees 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 Compamm ny’s common stock on
the date of grant. The options, subju ect to termination of emplmm oyment, generally expire ten years from the date of grant. Historically,
our emplomm yee options and equity awards typica
lly vested pro-rata and quarterly over three years. Stock-based grants to emplmm oyees,
offiff cers and directors frequently contain accelerated vesting provisions upon the occurrence of a change of control, as defined in the
applicable option agreements.

Under the terms of the 2018 Omnibus Incentive Plan approved by our shareholders during our annual meeting held on June 6,
ally vest pro-rata and

2018, (the “2018 Plan”), 6,000,000 shares are available for issuance. Awards issued under the 2018 Plan typicyy
quarterly over four years.

F-12

Under the terms of the 2012 Incentive Plan adopted by our Board of Directors on April 13, 2012 (the “2012 Plan”), 2,700,000
shares are available for issuance, plus a numberm of additional shares (not to exceed 1,327,000) underlying options outstanding under
certain of the Compamm ny’s prior equity plans that thereafter terminate or expire unexercised, or are cancelled, forfeited
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 typical
quarterly over four years.

ly vest pro-rata and

, or lapse for any

Accounting Treatment

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 subju ect to time-based vesting (“Restricted Stock”) and some of which
are subju ect to perforff mance-based vesting (“Perforff mance Stock”), and (iii) restricted stock units, some of which are subju ect to time-
based vesting (“RSUs”) and some of which are subju ect to perforff mance-based vesting (“Performance RSUs”).

For the twelve months ended December 31, 2018, 2017, and 2016, respectively, the total stock-based compensation expense

resulting from stock options, Restricted Stock, RSUs, Perforff mance RSUs, and Perforff mance Stock was recorded to the following line
items of our consolidated statements of operations:

(In thousands)
Cost of revenue
Research and development expenses
Selling, general and administrative expenses
Stock-based compensation expense

Year Ended December 31,
2017

2016

2018

327
469
2,522
3,318

304
374
2,196
2,874

186
246
1,351
1,783

Our stock-based compensation expense has increased yearly due to program expansion associated with our Company growthww .

Our 2017 stock-based compensation expense includes $292 thousand related to accelerated vesting of awards associated with
executive departures. Our 2016 stock-based compensation expense includes $280 thousand related to the accelerated vesting of
awards related to our CFO transition. A deferff
stock-based compensation expense associated with awards relating to the Company’s U.S. operations, was recorded for the twelve
months ended December 31, 2018, 2017, and 2016, respectively. As of December 31, 2018, there was $5.2 million of total
unrecognized stock-based compensation related to non-vested share-based compensation awards granted under the stock award plans.
This cost is expected to be recognized over a weighted average period of 1.5 years.

red tax asset of $673 thousand, $824 thousand, and $506 thousand, resulting from

We use the Black-Scholes Option Pricing Model (“BSOPM”) to determine the fair value of option grants. The Company uses

the “historical” method to calculate the estimated life of any options that may be granted. The expected stock price volatility is
calculated by averaging the historical volatility of the Company’s common stock over a term equal to the expected lifeff of the options.
We did not grant options in 2018. We granted 30,750 options in 2017 and 373,187 options in 2016.

The following weighted average assumptm ions were applied in determining the fair value of options granted during the respective

periods:

Risk-free interest rate

pected option life (years)
Expected stock price volatility
Expected dividend yield
Fair value of options granted

Year Ended December 31,
2017

2016

2018

——
——
——
——
—— $

2.02%
5.7
42%
——
2.06

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 impacmm t 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-13

Stock Option Activity

The following is a summary of all stock option transactions for the three years ended Decembem r 31, 2018:

Outstanding at January 1, 2016
Granted at market price
Cancelled or expired
Exercised

Outstanding at Decembem r 31, 2016

Granted at market price
Cancelled or expired
Exercised

Outstanding at Decembem r 31, 2017

Granted at market price
Cancelled or expired
Exercised

Outstanding at Decembem r 31, 2018
Options exercisable at December 31, 2018

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (Yrs)

3.65
3.70
3.95
1.66
3.78
4.96
4.71
4.51
3.11
0.00
4.04
1.83
3.23

3.16

4.76

4.43

Shares
$
1,774,552
373,187
$
(63,700) $
(123,760) $
$
1,960,279
30,750
$
(37,412) $
(932,303) $
$
1,021,314
—— $
(7,480) $
(90,011) $
$
923,823

817,573

At December 31, 2018, all 923,823 options outstanding and all 817,573 options exercisable had an exercise price lower than the

market value of the Company’s common stock. The aggregate intrnn insic value of these options was $2.3 million and $2.1 million,
respectively. At Decembem r 31, 2017, 983,564 options outstanding and 802,314 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 $1.3 million and $1.2 million,
respectively.

The total intrinsic value of options exercised during the years ended Decembem r 31, 2018 and 2017, was $334 thousand and $914

thousand , respectively.

Summarized information about stock options outstanding at December 31, 2018, is as follows:

Options Exercisable

Number
Exercisable

431,813 $
385,760 $
817,573 $

Weighted
Average
Exercise Price
2.58
3.82
3.16

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

Number
Outstanding
431,813
492,010
923,823

Options Outstanding
Weighted Average
Remaining
Contractual Lifeff

Weighted
Average
Exercise Price
2.58
3.80
3.23

2.90 $
6.40 $
4.76 $

There were 832,376 and 1,685,732 exercisable options at December 31, 2017 and 2016, respectively.

F-14

tt
Restricte

d Stock Activity

The following is a summary of all Restricted Stock activity during the three years ended Decembem r 31, 2018:

Non-vested restricted stock at January 1, 2016

Granted at market price
Vested
Cancelled

Non-vested restricted stock at Decembem r 31, 2016

Granted at market price
Vested
Cancelled

Non-vested restricted stock at Decembem r 31, 2017

Granted at market price
Vested
Cancelled

Non-vested restricted stock at December 31, 2018

Restricted
Shares
423,250
$
$
573,461
(292,469) $
(15,000) $
689,242
$
$
665,623
(251,956) $
(20,000) $
1,082,909
$
$
842,546
(419,452) $
(151,003) $
$
1,355,000

Weighted
Average
Fair Value

3.91
3.75
3.50
4.11
3.94
5.02
4.00
4.96
4.57
4.53
4.44
4.77
4.71

tt
Restricted

Stock Unit Activity

The following is a summary of all RSU activity during the three years ended December 31, 2018:

Non-vested restricted stock units at January 1, 2016

Granted at market price
Vested
Cancelled

Non-vested restricted stock units at December 31, 2016

Granted at market price
Vested
Cancelled

Non-vested restricted stock units at December 31, 2017

Granted at market price
Vested
Cancelled

Non-vested restricted stock units at December 31, 2018

Restricted
Stock Units

Weighted
Average
Fair Value

$
299,500
38,500
$
(179,914) $
—— $
$
158,086
54,500
$
(126,167) $
—— $
$
86,419
36,500
$
(50,751) $
—— $
$

72,168

3.79
3.74
3.66
——
3.92
4.96
4.07
——
4.36
4.57
4.18
——
4.59

F-15

Performance RSU Activity

The following is a summary of all Perforff mance RSU activity during the three years ended December 31, 2018:

Non-vested performff

ance RSUs at January 1, 2016

Granted at market price
Vested
ff
Forfeit

Non-vested performff

ance RSUs at Decembem r 31, 2016

Granted at market price
Vested
ff
Forfeit

Non-vested performff

ance RSUs at Decemberm 31, 2017

Granted at market price
Vested
ff
Forfeit

Non-vested performff

ance RSUs at Decembem r 31, 2018

Restricted
Stock Units

Weighted
Average
Fair Value

182,500
$
$
22,500
(97,428) $
(16,741) $
90,831
$
$
11,500
(20,999) $
(41,668) $
39,664
$
$
5,500
(32,665) $
—— $
$

12,499

3.88
3.61
3.88
3.88
3.81
4.96
4.08
3.83
3.98
4.04
3.91
0.00
4.20

Performance Stock Activityi

The following is a summary of all Perforff mance Stock activity during the three years ended December 31, 2018:

Non-vested performance stock at January 1, 2016

Granted at market price
Vested
ff
Forfeit

Non-vested performance stock at Decembem r 31, 2016

Granted at market price
Vested
ff
Forfeit

Non-vested performance stock at Decembem r 31, 2017

Granted at market price
Vested
ff
Forfeit

Non-vested performance stock at Decembem r 31, 2018

Restricted
Stock Units

Weighted
Average
Fair Value

$
$

——
141,500
$
(20,000) $
——
121,500
112,112
——
(40,502) $
193,110
$
$
153,723
(77,874) $
(13,333) $
$
255,626

——
3.61
3.61
——
3.61
4.96
——
3.61
4.39
4.04
4.26
4.50
4.22

The weighted average grant-date fair value of awards of Restricted Stock, RSUs, Perforff mance RSU’s, and Perforff mance Stock is

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

4. Supplemental Cash Flow Information

Suppuu lemental information relating to interest and taxes:

(In thousands)
Interest payments
Income tax payments

2018

Year Ended December 31,
2017

2016

$
$

—— $
$

1,115

—— $
$

636

33
670

F-16

5. Receivables, net

(In thousands)

Gross accounts receivabla es
Allowance for returns and doubu tfulff
Unpaid
red revenue
Note receivabla e
Allowance for note receivable

portion of deferff

Receivables, net

accounts

December 31,

2018

2017

14,135
(277)
(10,670)
458
(458)
3,188

9,307
(270)
(7,648)
458
(458)
1,389

The allowance for doubtfu

ulff

accounts includes all specificff

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
ff
specificall

y reserved, as a general allowance against accounts that could potentially become uncollectible.

The reduction for deferred revenue represents future customer service or maintenance obligations which have been billed to
customers, but remain unpaid as of the respective balance sheet dates. Deferred revenue on our consolidated balance sheets represents
future customer service or maintenance obligations which have been billed and collected as of the respective balance sheet dates.

The note receivabla e 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, 2018 and 2017.

6. Prepaid and other current assets

(In thousands)

Prepaid insurance, maintenance, softwff

are licenses and

other
Deferre
ff
Tax-related

d commissions

Prepaid and other current assets

7. Property and Equipment

(In thousands)

Computer and office
ff
Leasehold improvmm
Furnitureu

and fixtures

ements

equipment and software

Less accumulated depreciation
Property and equipment, net

December 31,

2018

2017

2,460
——
716
3,176

2,386
415
421
3,222

December 31,

2018

2017

26,762
6,834
2,181
35,777
(31,853)
3,924

25,379
6,763
2,136
34,278
(30,230)
4,048

Our operations include depreciation expense related to property and equipment of $2.4 million, $2.4 million, and $2.3 million in

2018, 2017, and 2016, respectfully.

8. Other Assets and Deferred

Costs

As of December 31, 2018, our other assets and deferred costs balance primarily consists of $9.3 million in unamortized contract

acquisition costs related to our adoption of ASC 606 as discussed above in Note 2 to the consolidated financial statements.

F-17

9. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017, are as follows:

(In thousands)
Opening balance
Additions
Acquisition adjud stments

Goodwill

Year Ended December 31,
2017
2018

8,469
6,215
(901)
13,783

2,161
6,308
——
8,469

Our 2018 acquisition of Erado (as definff ed herein) resulted in the addition to our goodwill the increase to our goodwill in 2018.
Our acquisition adjud stments to goodwill reflect the appropriate reallocation of excess purchase price from goodwill to acquired assets
ment annually
and liabilities related to our 2017 Greenview and EMS (as defined herein) purchases. We evaluate goodwill for impairmm
in the fourth quarter, or when there is reason to believe that the value has been diminished or impaired
m
indicators to the goodwill recorded as of Decembem r 31, 2018.

. There were no impairm

ent

Our other intangible assets consist of the following:

(In thousands)

Internal use software

ternally-developed hosting arrangement

Trademarks and other
Technology
Customer relationships
Intangible assets, net

Gross Carrying
Amount

1,189
1,520
691
7,604
7,870
18,874

December 31, 2018
Accumulated
Amortization
$

Net Carrying
Amount

(162) $
(77)
(113)
(2,678)
(593)
(3,623) $

1,027
1,443
578
4,926
7,277
15,251

For the twelve months ended December 31, 2018, amortization of intangible assets was recorded to the following line items of

our consolidated statements of operations:

(In thousands)
Cost of revenue
Research and development expenses
Selling, general and administrative expenses
Amortization of intangible assets

Year Ended
December 31,
2018

368
203
699
1,270

The following table summarizes our estimated future amortization expense:

(In thousands)
Amortization expense

2019

2020

2021

2022

2023

Thereafter

Total

1,670

1,690

1,481

1,310

7,410

15,251

10. Accrued Expenses

ional fees

(In thousands)
Emplomm yee compensation and benefitff s
Profess
ff
Taxes
Other
Total accrued expenses

December 31,

2018

2017

5,122
1,289
113
3,223
9,747

4,452
356
154
1,139
6,101

F-18

11. Revenue from Contracts with Customers

Accounting policies

Our Company provides message security solutions as subu scription services in which we recognize revenue as our services are
rendered. Our customer contracts are typiyy cally one to three year contracts billed annually. We exclude from the measurement of the
transaction price all taxes assessed by a governmental authority that are both imposed
producing transaction and collected by our Compamm ny from a customer (e.g., sales, use, value added, and some excise taxes).

on and concurrent with a specificff

revenue-

Disaii ggregation of Revenue

In 2018, we recorded revenue for our services in the following core industry verticals: 49% healthcare, 29% financial services,

7% government sector, and 15% as other. The disaggregation of revenue by industry verticals does not include our revenue from
Greenview and Erado.

We operate as a single operating segment. Revenue generated from our email protection services represented 100% of our

revenue in 2018 and 2017. Further, we sell our solutions as a bundle, applying significaff
our services based on the standalone selling price of our component services.

nt judgement to allocate transaction prices of

Contract balances

Our contract assets include our accounts receivabla e, discussed in Footnote 5 above, and the deferred cost associated with

commissions earned by our sales team on securing new, add-on, and renewal contract orders. Upon our adoption of ASC 606, we
recorded a cumulative effeff ct adjud stment, establishing a $6.6 million noncurrent deferred contract asset in recognition of the
lengthened amortization period required by the new guidance. The Company simultaneously released the previously existing current
deferff
red commission asset balance of $415 thousand. During the twelve months ended Decembem r 31, 2018, we increased our
noncurrent deferred contract asset by $4.9 million, resulting from commissions earned by our sales team during the twelve months
ended Decembem r 31, 2018. We also amortized $2.2 million of deferff
Our deferred cost asset is assessed for impairmm ment on a periodic basis. There were no impaimm rment losses recognized on deferred
contract cost assets for the twelve months ended Decembem r 31, 2018.

red cost, as a selling and marketing expense in the related periods.

Our contract liabilities consist of deferr

The $2.7 million increase to our net deferff
and payments as well as growth of revenue.

ff
ed revenue representing future customer services which have been billed and collected.
red revenue in the twelve months ended December 31, 2018, is related to the timing of orders

Performance obligations

As of December 31, 2018, the aggregate amount of the transaction prices allocated to remaining service perforff mance
obligations, which represents the transaction price of firm orders less inception to date revenue, was $73.0 million. We expect to
recognize approximately $47.3 million of revenue related to this backlog in 2019, and $25.7 million in periods thereafter
Approximately $45.1 million of our $70.5 million revenue recognized in the twelve months ended December 31, 2018, was included
in our perforff mance obligation balance at the beginning of the period.

12. Fair Value Measurements

FASB guidance regarding fair value measurement establishes a three-tier fair value hierarchy, which prioritizes the inpun ts used
in measuring fair value. These tiers include: Level 1, definff ed as observable inpun ts such as quoted prices in active markets for identical
assets or liabilities; Level 2, definff ed as inputs other than quoted prices for similar assets and liabilities in active markets that are either
directly or indirectly observable; and Level 3, definff ed as unobservablea
requiring an entity to develop its own assumptm ions.

inputs for which little or no market data exists, thereforff e

For certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables, and accounts
payable, the fair values approximate the carrying value due to the short-term maturities of these instruments. The carrying values of
other current assets and accrued expenses are also not recorded at fair value, but approximate fair value due to their short-term nature.

The Compamm ny recorded a contingent liability for the estimated fair value of earn-out consideration payments in our Greenview

acquisition. The Company determined the fair value of this earn-a
milestones. Any changes to the variables and assumptm ions could significaff
liability, resulting in significaff
significaff
assumptmm ions concerning the achievement of the sales milestones in measuring the fair value of the acquisition-related contingent earn-
out lability.

ntly impactmm
nt changes to the Consolidated Statements of Operations. The fair value measurements are based on

ts not observable in the market and thus represent Level 3 measurements, which reflect the Company’s own

out liability based on the probability of attainment of certain sales

the estimated fair values recorded for the

nt inpun

F-19

The following table represents a reconciliation of our acquisition-related contingent earn-out liability measured at fair value on a

recurring basis, using Level 3 inpun ts for the year ended Decembem r 31, 2018:

(In thousands)
Balance at Decembem r 31, 2017
Additions during the period
Payments during the period
Adjud stments to fair value during the period recorded in General and

Administrative expenses

Balance at Decembem r 31, 2018

Fair Value
Measurements
Using Significff ant
Unobservable
Inputs (Level 3)
1,488
$
——
(800)

476
1,164

13. Earnings Per Share and Potential Dilution

Basic earnings per share are computed using the weighted average number of common shares outstanding for the period under
the Treasury Stock method. The dilutive effeff ct of potential common shares outstanding is included in diluted earnings per share. The
compumm tations for basic and diluted earnings per share for the years ended December 31, 2018, 2017, and 2016, are as follows:

Basic weighted average shares
Effeff ct of dilutive securities:
Emplmm oyee and director stock options
Restricted Stock
RSUs
Perforff mance RSUs
Perforff mance Stock
Potential dilutive common shares

2018
52,591,714

Year Ended December 31,
2017
53,430,492

2016
53,819,772

347,167
409,871
24,369
9,367
98,807
53,481,295

——
——
——
——
——
53,430,492

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

For the year ended December 31, 2018, weighted average shares related to 73,313 stock options; 131,774 shares of Restricted
Stock, 6,084 RSUs, 917 Perforff mance RSUs, and 18,536 shares of Performff
ance Stock were excluded from the calculation of diluted
earnings per share because these awards were anti-dilutive. For the year ended Decembem r 31, 2017, potential common shares of all
securities were excluded from the calculation of diluted earnings per share because the awards were anti- dilutive. For the year ended
December 31, 2016, weighted average shares related to 1,079,474 stock options; 109,293 shares of Restricted Stock, 20,600 RSUs,
886 Performff
per share because these awards were anti-dilutive.

ance Stock, respectively were excluded from the calculation of diluted earnings

ance RSUs, and 5,572 shares of Performff

14. Significant Customers

In 2018, 2017, and 2016, no single customer accounted for 10% or more of our revenuen s.

15. Commitments and Contingencies

Leases

We lease offiff ce facilities under non-cancelable operating lease agreements. Our operations include rent expense for these
operating leases of $1.6 million, $1.4 million, and $1.4 million in 2018, 2017, and 2016 respectively. The lease of our headquarters
facility in Dallas expires in 2024.

A summary of our fixed contractual obligations and commitments at December 31, 2018, is as follows:

(In thousands)
Operating leases

2019

2020

2021

2022

2023

Thereafter

Total

1,625

1,220

1,072

1,089

1,116

861

6,983

F-20

Claimll

s and Proceedings

We are subju ect to legal proceedings, claims, and litigation against our business. While the outcome of these matters is currently

not determinabla e and the costs and expenses of defenff ding these matters may be significaff
ultimate costs to resolve these matters will have a material adverse effect

on our consolidated financial statements.

nt, we currently do not expect that the

16. Other Comprehensive Loss

The assets and liabilities of international subsu idiaries are translated from the respective local currency to the U.S. dollar using

exchange rates at the balance sheet date. Related translation adjud stments are recorded as a component of the accumulated other
comprehensive loss. Our Consolidated Statement of Comprehensive Income of international subsidiaries
currency to the U.S. dollar using average exchange rates for the period covered by the income statements.

are translated from the local

We are exposed to fluctuations in the foreign currency exchange rates as a result of our net investments and operations in
Canada. For fiscal 2018, movements in currency exchange rates and the related impacmm t on the translation of the balance sheets of our
subsu idiary in Canada was the primary cause of our foreign currency translation loss of $16 thousand, net of $26 thousand in income
taxes.

17. Income Taxes

Components of the income taxes are as follows:

(In thousands)
Current:
U.S.
State
Foreign

Deferred

Federal
Foreign

Income tax (benefitff ) expense

2018

2017

2016

(794) $
725
71

183
(196)
156

(4,722)
——
(4,720) $

18,461
2
18,606

100
329
75

3,185
3
3,692

On Decembem r 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) which significaff

ntly changed U.S.

tax law. The Tax Act, among other things, lowered the federal statutory corporate income tax rate from 34% to 21% effeff ctive January
1, 2018. The Company completed its assessment of the impam ct to 2018 noting no changes from what it disclosed in 2017. The
Company’s income tax expense (benefit) for 2018, 2017 and 2016, respectively, reflect tax expense (benefit) based on statutory rates
in 2018, 2017, and 2016.

A reconciliation of the expected U.S. tax expense (benefitff ) to income taxes related to continuing operations is as follows:

(In thousands)
Expected tax expense at U.S. statutory rate
Change in corporate tax rate- deferred
Increase (decrease) in valuations allowance
Increase (decrease) in valuations allowance- other
Nondeductible expense and nontaxable income
State income taxes, net of federal benefits
Foreign income taxes
Other
Income tax (benefitff ) expense

2018

2017

2016

2,260
——
(7,841)
——
111
815
68
(133)
(4,720) $

3,587
12,473
——
2,064
890
(129)
159
(438)
18,606

3,250
——
——
——
114
217
78
33
3,692

.
$7.8 million of the valuation allowance was reversed in 2018 based on current and expected future profitability

F-21

ff
Deferred

income taxes reflect the net tax effeff cts of temporary differen

ces 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
Decembem r 31, 2018 and 2017 are as follows:

forwards

(In thousands)
Deferred tax assets:
Nondeductible
U.S. net operating loss carryforff wards
State net operating loss carryforff wards
Tax credit carryrr
Stock-based compensation
Depreciable assets
Other assets
Total deferr
ff
Deferre
Intangible assets
Prepaid expenses
ff
Total deferr
Less valuation allowance
ff
Net deferred

d tax liabilities:

ed tax assets

tax assets

2018

2017

113
46,826
71
5,703
976
822
938
55,449

112
48,769
321
6,450
750
851
1,039
58,292

(3,428)
(572)
51,449
(22,667)
28,782

(1,342)
(532)
56,418
(30,773)
25,645

The Company has partially reserved its U.S. net deferred tax assets in 2018 and 2017 due to the uncertainty of future taxable
income. The Company has U.S. net operating loss carryforwff
ards of approximately $223 million which begin to expire in 2021. The
Company has state credits totaling $2.0 million which can be utilized through 2027 and state net operating losses that have various
expiration dates. The Compamm ny also has tax credit carryforff wards of approximately $3.7 million consisting of business tax credits that
began to expire in 2018 and alternative minimum tax credits which will be refunded through 2021 in accordance with the new tax law
effeff ctive 2018.

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 carryforff wards against any future taxabla e income.

The Company or one of our subsu idiaries 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 effecff
t on the
financial statements or the effeff ctive tax rate for the twelve-months ended December 31, 2018, or during the prior three years. We have
determined it is not reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the
next twelve months. We are currently subju ect to a three-year statute of limitations by majoa r tax jurisdictions.

18. Employee Benefit Plan

401(k)(( Plan — We have a retirement savings plan structurt ed under Section 401(k) of the Internal Revenue Code covering
subsu tantially all of our U.S. emplmm oyees. Under the plan, contributu ions are voluntarily made by emplmm oyees, and we may provide
contributions based on the employees’ contributions. Our operating income includes $611 thousand, $512 thousand, and $448
thousand in 2018, 2017, and 2016, respectively, for net contributions from operations to this plan.

19. Zix Repurchase Program

On April 24, 2017, the Company’s Board of Directors approved a share repurchase program that enables the Company to
purchase up to $10 million of its shares of common stock. The shares repurchase program expired on May 31, 2018. During the year
ended December 31, 2018, the Company repurchased 1,206,994 shares at an aggregate cost of $5.4 million.

During the year ended December 31, 2017, the Company repurchased 750,000 shares at an aggregate cost of $3.8 million.

F-22

20. Acquisitions

Greenview Data, Inc.

On March 15, 2017, the Company acquired all of the outstanding capital stock of Greenview Data, Inc. (“Greenview”), a

provider of antivirus, anti-spam, and archiving products, for a total purchase price of $7.7 million, including cash consideration of
$6.7 million, subju ect to a customary post-closing adjud stment for working capital. Our acquisition of Greenview addresses increasing
buyer demand for email security bundles by adding these capabilities to our existing portfolio of encryption services. Of the cash
consideration paid, $650 thousand was deposited into an escrow account for the satisfaction of certain indemnification
Company, if any, during the two year period following the closing of the acquisition, afteff
distributed to the selling shareholders. Because sales of Greenview producd ts met certain sales milestones by December 31, 2017, the
Company was contractually obligated to pay earn-out consideration in cash of $800 thousand in the first quarter 2018. The Company
is also required to pay a further $800 thousand of earn-out consideration in cash in the first quarter of 2019 because sales of the
Greenview products achieved a separate target by December 31, 2018. Contingent consideration is considered a Level 3 fair value
measurement.

r which the balance, if any, will be

claims of the

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. The
goodwill from this transaction is not deductible for tax purposes. The intangible assets we acquired from Greenview consist of
trademarks, internally developed softwff
years, 10 years, and 15 years, respectively. The results of operations and the estimated fair values of the acquired assets and liabilities
assumed have been included in the accompanying consolidated financial statements since our March 15, 2017, acquisition date. The
Company incurred $476 thousand and $427 thousand in acquisition-related costs in which was recorded within operating expenses for
the year ended Decembem r 31, 2018 and 2017, respectively. Revenue from Greenview was $3.4 million and $2.4 million for the year
ended December 31, 2018 and 2017, respectively, and due to the continued integration of the combim ned businesses, it was
mm
impractic

are, and customer relationships, which we are amortizing over an estimated usefulff

able to determine the earnings.

lifeff of 5

The following table summarizes the estimated fair value of acquired assets and liabilities:

thousands)

(InII
Assets:

Current assets
Property and equipment
Trademark/names
Technology
Customer relationships
Goodwill

Total assets

Liabilities:

Deferred revenue
Other current liabilities
ff
Deferred
Total liabilities

tax liability

Net assets recorded

Estimated Fair
Value

334
249
170
1,990
2,880
4,343
9,966

537
124
1,609
2,270

7,696

F-23

Enteltt

lill gei nce Messagingii

Server

On September 13, 2017, the Compamm ny acquired Entelligence Messaging Server (“EMS”) technology, an email encryption

solution, and the related business from Entrust Datacard Corporation for a cash purchase price of $1.7 million. Our acquisition of
EMS strengthens our email encryptyy ion suite by offeff ring enterprise-centric capabilities, such as advanced message tracking, PDF
statement delivery, high availability on-premises architecture and standards-based end-to-end encryption. The Company incurred $58
thousand and $59 thousand in acquisition-related costs which were recorded within operating expenses for the year ended Decembem r
31, 2018 and 2017, respectively.

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. The
goodwill from this transaction is deductible for tax purposes. The results of operations and the estimated fair values of the acquired
assets and liabilities assumed have been included in the accompanying consolidated financial statements since our September 13,
2017, acquisition date. Revenue from EMS was not material for the year ended Decembem r 31, 2018 and 2017, respectively, and due to
the continued integration of the combined businesses, it was impract

icable to determine the earnings.

The following table summarizes the estimated fair value of acquired assets and liabilities:

thousands)

(InII
Assets:

Trademark/names
Technology
Customer relationships
Goodwill

Total assets

Liabilities:

Deferred revenue

Total liabilities

Net assets recorded

Estimated Fair
Value

140
550
230
1,063
1,983

333
333

1,650

Erado

On April 2, 2018, the Company acquired all the outstanding capital stock of CM2.COM, Inc., d/b/a Erado (“Erado”) for a total

purchase price of $14.4 million, including cash consideration of $11.8 million, net of cash acquired. The purchase of Erado
strengthens Zix’s comprehensive archiving solutions with unifieff d archiving, superv
customers that demand bundled services. Erado’s long standing focus on helping its customers comply with FINRA and SEC
regulations will help further strengthen Zix’s offeff
Zix’s cloud-based email archiving capabilities into more than 50 content channels, including social medial, instant message, mobile,
web, audio, and video.

ring for customers with compliance requirements. This acquisition also expands

ision, security, and messaging solutions for

The purchase price includes a holdback of $2.3 million for the satisfacff

tion of certain indemnification claims by the Compamm ny, if
any, during the two-year period following the closing of the acquisition. An amount equal to $1.1 million of the holdback amount, less
any amounts paid or otherwise subu jeb ct to an outstanding claim for indemnificatio
the one year anniversary of the closing of the acquisition, and the balance of the holdback amount, if any, will be distributed to the
Selling Shareholders following the two year anniversary of the closing of the acquisition.

n, will be released to the selling shareholders upon

The Compamm ny incurred $334 thousand in acquisition-related costs which were recorded within operating expenses during twelve

months ended Decembem r 30, 2018.

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. The

goodwill from this transaction is deductible for tax purpose. The intangible assets we acquired from Erado consist of trademarks,
internally developed softwff
and 15 years, respectively. The results of operations and the estimated fair values of the acquired assets and liabilities have been
included in the accompanying consolidated financial statements since our April 2, 2018, acquisition date. Revenue from Erado was
$2.1 million for the twelve months ended December 31, 2018, since the acquisition date. Due to the continued integration of the
combined businesses, it was impract

are, and customer relationships, which we are amortizing over an estimated useful life of 5 years, 10 years,

icable to determine the earnings.

F-24

The following table summarizes the estimated fair value of acquired assets and liabilities:

thousands)

(InI
Assets:

Current assets
Property and equipment
Trademark/names
Technology
Customer relationships
Goodwill

Total assets

Liabilities:

Deferred revenue
Other current liabilities
Total liabilities

Net assets recorded

Estimated Fair
Value

848
169
260
3,030
4,760
6,215
15,282

809
93
902

14,380

Pro Forma Financial Inforn marr

tion (UnaUU uditdd ed)

The following unaudited pro forma financial information presents the combined results of operations for the twelve month
periods ending Decembem r 31, 2018, and 2017, respectively, as though the Erado, EMS and Greenview acquisitions that occurred
during the reporting period had occurred as of the beginning of the earliest period presented, with adjud stments to give effeff ct to pro
forma events that are directly attributable to the acquisition, such as amortization expense of intangible assets and acquisition-related
transaction costs. These unaudited pro forma results are presented for inforff mation purposes only and are not necessarily indicative of
what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the
earliest period presented, nor are they indicative of future results of operations:

thousands, except per share data)

(InII
Revenues
Net income (loss)
Basic income (loss) per common share
Diluted income (loss) per common share

Twelve Months Ended December 31,

2018

2017

$
$

71,762
18,330
0.35
0.34

$
$

69,587
(6,981)
(0.13)
(0.13)

21. Quarterly Results of Operations (Unaudited)

The following is a summary of the quarterly results of operations for the years ended Decembem r 31, 2018 and 2017:

(In thousands except per share data)
2018

nues
Gross margin
Net income (loss)
Basic net income (loss) per common share*
Diluted net income (loss) per common share*
Comprehensive Income
2017
Revenues
Gross margin
Net income (loss)
Basic net income (loss) per common share*
Diluted net income (loss) per common share*
Comprehensive Income

March 31

June 30

September 30

December 31

Quarter Ended

16,654
13,140
1,892
0.04
0.04
——

15,893
13,070
1,775
0.03
0.03
——

17,500
13,694
1,840
0.04
0.03
——

16,378
13,131
1,139
0.02
0.02
——

17,876
14,006
2,455
0.05
0.05
——

16,592
13,320
1,905
0.04
0.03
——

18,448
14,451
9,240
0.18
0.17
9,224

16,800
13,540
(12,877)
(0.24)
(0.24)
——

Net income (loss) per share is calculated independently for each quarter. The sum of Net income (loss) per share for each quarter may not
equal the total Net income (loss) per share for the year due to rounding differen

ces.

F-25

22. Subsequent Events

Acquisitiontt

pp
of AppRiver

Companies

On February 20, 2019, Zix acquired 100% of the equity interest of AR Topco, LLC and its subsu idiaries, including AppRiver

LLC (“AppRiver” and collectively, the “AppRi
AppRiver Companies retired at closing and certain accrued items and unpaid
working capital adjustment. The Company is currently in the process of determining the fair value of the assets and liabilities acquired
in the AppRiver purchase.

ver Companies”). Zix paid $275 million in cash, less outstanding indebtedness of the

transaction expenses, and subju ect to a customary

Also on February 20, 2019, Zix entered into a credit agreement with a syndicate of lenders and SunTrusrr

t Bank, as administrative

agent, providing Zix with (1) a senior secured term loan facility in an aggregate principal amount of $175 million (the “Term Loan”),
(2) a senior secured delayed draw term loan facility in an aggregate principal amount of $10 million, and (3) a senior secured
revolving credit facility in an aggregate principal amount of $25 million, up to $5 million of which is available for letters of credit. On
February 20, 2019, the Term Loan was borrowed in full to pay a portion of the purchase price in connection with the AppRiver
acquisition.

The AppRiver acquisition was further funded by the February 20, 2019 private placement of preferred stock with an investment
d Stock, $1.00 par value per share, and its

fund managed by Truer Wind Capital. Zix issued shares of its Series A Convertible Preferre
Series B Convertible Preferr
million.

ed Stock, $1.00 par value per share, at a price of $1,000 per share for an aggregate purchase price of $100

AppRiver is a channel-firff st provider of cloud-based cybery

security and producd tivity services, offeff

ring web protection, email

encryption, secure archiving, and email continuity solutions. AppRiver also provides Microsoft Offiff ce 365 and Secure Hosted
Exchange services, which serve as an effeff ctive lead generation tool for the company’s solutions. The acquisition of AppRiver can
accelerate our offeff
rings into the cloud at the point of initial cloud application purchase. Because AppRiver currently services over
60,000 worldwide customers using a network of 4,500 Managed Service Providers, this acquisition can help us expand our customer
base.

F-26

Zix Corporation

Corporate Information*

Board of Directors

Robert C. Hausmann
Chairman of the Board,
Zix Corporation
Operating Partner,
Thoma Bravo

Mark J. Bonney

Consultant

Taher A. Elgamal
Chief Technology Officer of Security,
Salesforce.com Inc.

James H. Greene, Jr.

Founding Partner,
True Wind Capital Management, L.P.

Maribess L. Miller

Consultant

Richard D. Spurr

Retired Chief Executive Officer,
Zix Corporation

Brandon Van Buren

Principal,
True Wind Capital Management, L.P.

David J. Wagner

Chief Executive Officer,
Zix Corporation

Executive Officers

David J. Wagner

Chief Executive Officer and President

Kelly P. Haggerty

Vice President, Product Management and
Strategy

David J. Robertson

Vice President, Engineering

David E. Rockvam

Vice President and Chief Financial Officer

Noah F. Webster

Vice President, General Counsel and
Corporate Secretary

* Information current as of April 26, 2019.

Corporate Headquarters

Zix Corporation

2711 N. Haskell Avenue, Suite 2200, LB 36

Dallas, TX 75204-2960

Tel: (214) 370-2000

Fax: (214) 370-2070

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

Shareholder Services

Visit our website, www.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.
462 South 4th Street, Suite 1600
Louisville, KY 40202

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, 2018, are available without charge (i)
at www.zixcorp.com/investors or (ii) upon written
request by email to invest@zixcorp.com or by mail
to Zix Investor Relations at 2711 N. Haskell Ave.,
Suite 2200, LB 36, Dallas, Texas 75204.