2019 Annual Report
Statements in this document that are not purely historical facts or that necessarily
depend upon future events, including statements about forecasts of sales, revenue or
earnings, or other statements about anticipations, beliefs, expectations, hopes,
intentions or strategies for the future, may be forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Readers
are cautioned not to place undue reliance on forward-looking statements. All forward-
looking statements are based upon information available to Zix on the date this
document was printed. Zix undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or
otherwise. Any forward-looking statements involve risks and uncertainties that could
cause actual events or results to differ materially from the events or results described in
the forward-looking statements, including risks or uncertainties related to market
acceptance of new Zix solutions and how privacy and data security laws may affect
demand for Zix email data protection solutions. Zix may not succeed in addressing these
and other risks. Further information regarding factors that could affect Zix financial and
other results can be found in the risk factors section of the accompanying annual report
on Form 10-K.
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(cid:3)
(cid:3)
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, 2019
(cid:134) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-17995
Zix Corporation
(Exact Name of Registrant as Specified in its Charter)
Texas
(State or Other Jurisdiction of
Incorporation or Organization)
75-2216818
(I.R.S. Employer
Identification Number)
2711 N. Haskell Avenue, Suite 2200, LB 36, Dallas, Texas 75204-2960
(Address of Principal Executive Offices)
(214) 370-2000
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Trading Symbol
ZIXI
Name of each exchange on which registered
NASDAQ
Securities Registered Pursuant to Section 12(g) of the Act: None
Title of each class of stock
Common Stock
$0.01 Par Value
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No (cid:95)
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:95)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes (cid:95) No (cid:134)
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such reports) Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(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
(cid:134)
(cid:134)
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 4, 2020, there were 55,641,885 shares of Zix Corporation $0.01 par value common stock outstanding. As of June 30, 2019, the
aggregate market value of the shares of Zix Corporation common stock held by non-affiliates was $498,353,887.
Portions of the Registrant’s 2020 Proxy Statement are incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
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(cid:3) (cid:51)(cid:36)(cid:53)(cid:55)(cid:3)(cid:44)(cid:57)(cid:3)
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(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:20)(cid:20)(cid:17)(cid:3)
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(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:20)(cid:22)(cid:17)(cid:3)
(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:20)(cid:23)(cid:17)(cid:3)
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(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:20)(cid:24)(cid:17)(cid:3)
(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:20)(cid:25)(cid:17)(cid:3)
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PART I
Item 1. Business
Zix® (the “Company,” “we,” “our,” or “us”) is a leading provider of cloud email security, productivity and compliance solutions.
Trusted by the nation’s most influential institutions in healthcare, finance and government. Zix delivers a superior experience and easy-
to-use solutions for email encryption and data loss prevention (“DLP”), advanced threat protection and archiving. As a leading provider
of cloud-based cybersecurity, compliance, and productivity solutions for businesses of all sizes, we are focused on the protection of
business communication, enabling our customers to better secure data and meet compliance needs. We serve organizations in many
industries, with particular emphasis on the healthcare (including multiple major hospitals and several Blue Cross Blue Shield plans),
financial services (including several U.S. Banks), and insurance and government (including divisions of the U.S. Treasury and the U.S.
Securities and Exchange Commission (the “SEC”)) sectors.
Our email encryption and DLP capabilities enable the secure exchange of email that includes sensitive information. Through a
comprehensive secure messaging service, called Email Encryption (formerly ZixEncrypt), we allow 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.
The main differentiation for Email Encryption in the marketplace 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 typically
introduce an added burden on recipients, often requiring additional user authentication with the creation of a new user identity and
password. We designed our solution to alleviate the recipient’s burden by enabling the delivery of encrypted email automatically and
transparently. Zix enables transparent delivery through (1) The Directory (formerly ZixDirectory®), the world’s largest email encryption
community which is designed to share identities of our tens of millions of members, (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) Email Encryption, which
automatically encrypts and decrypts messages with sensitive content. The result is secure, transparent encrypted email, such that secure
email can be exchanged without any impact to administrators or extra steps for both senders and recipients. Our Email Encryption also
addresses a business’s greatest source of data loss – corporate email – with an easy, straightforward DLP approach. By focusing strictly
on the risks of email, Email Encryption simplifies DLP in comparison to other DLP solutions by decreasing complexity and cost,
reducing deployment time from months to hours and minimizing impact on customer resources and workflow. In addition, Zix offers a
convenient experience for both employees interacting with our solution and administrators managing the system.
Our Email Encryption solution enables DLP capabilities for email by combining proven policy and content scanning capabilities with
quarantine functionality. The quarantine system and its intuitive interface allow 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 employees of quarantined messages.
Email Encryption from Zix 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 employees about the sensitivity
of their company’s data.
The solution is available as a hosted solution, as a multi-tenant 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 was a good fit for Zix’s business based on its employees’ expertise in
email security and its emphasis on customer success, which align with Zix’s reputation for delivering industry-leading solutions and a
superior experience.
Through the acquisition of Greenview, Zix launched two new solutions in April 2017 – ZixProtectSM and ZixArchiveSM. ZixProtect
is now called Advanced Email Threat Protection while ZixArchive is called Information Archive. Advanced Email Threat Protection
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 automated traffic
analysis, machine learning and real-time threat analysis. The solution is available as a cloud-based service in a variety of bundles.
Information Archive (formerly ZixArchive) is a low-cost, cloud-based email retention solution that easily enables user retrieval,
compliance and eDiscovery. Available as a standalone or add-on solution for other products, Zix’s Information Archive includes policy-
based retention, automatic indexing and flexible search capabilities for audit and legal requirements. With on-demand access through
the cloud, organizations can conveniently share messages with employees, auditors and outside consultants or legal counsel, as well as
revoke access when needed.
3
In April 2018, Zix acquired Erado, a unified archiving company. Erado strengthened Zix’s comprehensive archiving solutions
with unified archiving, supervision, security, and messaging solutions for customers that demand bundled services. Erado’s long
standing focus on helping its customers comply with FINRA and SEC regulations helped further strengthen Zix’s offerings for customers
with compliance requirements. This acquisition also expanded Zix’s cloud-based email archiving capabilities into more than 50 content
channels, including social media, instant message, mobile, web, audio and video.
On February 20, 2019, Zix acquired AppRiver, a leading provider of cloud-based cybersecurity solutions for Small and Medium
Businesses (“SMB”). The combined company creates one of the leading cloud-based security solutions providers, particularly for the
small and mid-size enterprise market. This acquisition further strengthened that alignment by bolstering our security offerings,
expanding our go-to-market channels, and providing a stronger cloud platform to drive even more value for our customers and partners.
In addition, we now can directly offer Microsoft’s substantial catalog of productivity and Microsoft Office 365 cloud email solutions.
On May 7, 2019, Zix acquired DeliverySlip, expanding our portfolio with additional email encryption, e-signatures, and secure
file sharing solutions.
Our business operations and service offerings are supported by the ZixData Center™, which is PCI DSS 3.2 certified for applicable
services, SOC2 accredited and SOC 3 certified. The operations of the ZixData Center are independently audited annually to maintain
AICPA SOC3 certification in the areas of security, confidentiality, integrity and availability. Auditors also produce a SOC2 report on
the effectiveness of operational controls used over the audit period.
Our company was incorporated as a corporation 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.
Overview
Email is a mission-critical means of communication for enterprises. However, if email leaves a secure network environment in
clear text, it can be intercepted along the path between a sender and a recipient, which permits theft, redirection, manipulation or exposure
to unauthorized parties. Failure to control and manage such risks can result in enforcement penalties for noncompliance under numerous
regulations, in addition to damaged reputation, competitive disadvantage, a loss of intellectual property or other corporate assets,
exposure to negligence or liability claims, and diversion of resources to repair such damage. For example, healthcare organizations,
business associates and sub-contractors are subject to the Privacy, Security, and Enforcement Rules of the Health Information Portability
and Accountability Act (“HIPAA”) enacted in 1996, and as amended by the Health Information Technology for Economic and Clinical
Health Act (“HITECH Act”) enacted in 2009. Financial institutions are subject to data privacy laws including the Gramm-Leach-Bliley
Act (“GLBA”) enacted in 1999. These federal laws help drive the use of encrypted email. In addition, individual states such as
Massachusetts and Nevada have enacted privacy laws requiring the safeguard of personal data, and almost all states encourage email
encryption by allowing exemptions from data breach notification laws.
Corporations require easy to use, cost-effective email protection that can be used on an enterprise-wide basis. They need it to be
quickly deployed and regularly updated to evolve with innovative technology practices and meet changing regulatory standards. To
satisfy these needs, our Email Encryption Service provides a comprehensive solution that analyzes and encrypts email communications.
Our Email Encryption Service allows a user to send encrypted email to any email user anywhere and on any Internet-enabled
device. Encrypted email is delivered through the patented Best Method of Delivery protocol which automatically determines the most
direct and appropriate means of delivery, based on the sender’s and recipient’s communications environment and preferences. The
protocol supports a number of encrypted email delivery mechanisms, including S/MIME, Transport Layer Security (“TLS”), Open
Pretty Good Privacy (“PGP”), “push” delivery and secure portal “pull” delivery. These last two mechanisms enable users to send
messages securely to anyone with an email address, including those who do not have an encryption tool. Our Best Method of Delivery
makes the technology simple for end users and provides flexibility and ease of implementation for information technology professionals.
We believe the ability to send messages through different modes of delivery is one of many differentiators that makes our Email
Encryption Service superior to competitive offerings.
The deployment of our Email Encryption Service at the periphery of the customer’s network means our Email Encryption Service
encrypts outbound email for an enterprise without the need to create, deploy or manage end user encryption keys or deploy desktop
software. Our technology solutions are easy to use, easy to deploy, and can be made operational quickly.
Our service has an integrated policy management capability. This policy engine can inspect the contents of emails and apply
policies matching specific industry criteria such as HIPAA, the HITECH Act and GLBA. Customers can also build their own custom
policies. This policy driven email encryption for regulatory compliance means customers can reduce the training required of their staff
and significantly reduce the risk of inadvertently sending sensitive content by controlling the method of delivery through preset policies.
4
Email is the number one communication tool for businesses and it is also one of the top vectors for cyberattacks. Attacks can
jeopardize a company through malware, phishing, ransomware, business email compromise, viruses and other threats. Our Advanced
Email Threat Protection solution uses a multi-layer approach to accurately identify email threats and defend against email-borne attacks.
Our 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 traffic analysis and machine learning.
To safeguard against increasingly targeted and sophisticated attacks, our Advanced Email Threat Protection can also leverage
attachment assurance and time-of-click link defense to provide enhanced protection. Attachment assurance offers quarantine and
sandbox inspection of emails to perform forensic analysis of attachments in our secure, cloud-based sandbox environment. Testing
efficiently handles evasive attacker techniques while fully examining files for suspicious and malicious activity. Time-of-click link
defense reduces the risk of users clicking links in emails and inadvertently visiting malicious or compromised websites. This feature re-
writes all full, shortened, or obfuscated links to safe versions and performs time-of-click analysis on the destination address, including
IP address and domain blacklists, domain age and reputation, and other checks.
By combining our Email Encryption and Advanced Email Threat Protection solutions, Zix meets customers’ increasing desire for
a bundled solution that protects inbound 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 superior ease of use is transparent delivery of encrypted email messages. We are able to deliver transparent email
encryption as a result of The Directory and Best Method of Delivery capabilities of our Email Encryption. The most critical and highly
differentiated component of our solution is The Directory, which provides the ability to share user identities for encryption, and in turn
provides frictionless interoperability between users in a community of interest such as healthcare, finance or government.
Our capability to offer interoperability is particularly important when it is necessary to communicate with external networks, as
is the case with the healthcare and financial services markets. Our customers become part of The Directory, a global “white pages”
enabling transparent secure communications with other Email Encryption customers using our centralized key management system and
overall unique approach to implementing encrypted email. We enable secure communications with other users via TLS, Open PGP,
“push” delivery and secure portal “pull” delivery mechanisms. However, we believe our unique transparent delivery is the more
preferred delivery model.
Our phenomenal support allows customers to reach Zix via phone or email at all times 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.
Technically, while these companies offer advanced threat protection against email attacks and “send-to-anyone” encrypted email, we
believe that Zix offers superior customer service and unparalleled benefits that come from access to The Directory, use of our Best
Method of Delivery protocol, and the industry’s only transparent email encryption. Nevertheless, some of these competitors are large
enterprises with substantial financial and technical resources that exceed ours. We are also competing against other value-added cloud
distributor platforms such as PAX8 and Sherweb.
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, including strict breach notification requirements,
and allow states to pursue HIPAA violations. In the financial services industry, financial institutions and their service providers are
subject to the GLBA, which is enforced by the U.S. Federal Trade Commission (“FTC”). The FTC has issued guidance saying that
businesses that transmit sensitive data by email should ensure that data is encrypted.
In choosing an email security provider, companies are influenced by the solutions chosen by their regulators. Our customers
include all of the federal regulators that comprise the FFIEC as well as the state banking regulators in more than twenty states. Our
service is also a recommended solution of the Conference of State Bank Supervisors, whose members regulate the more than 4,200
state-chartered banks in the U.S.
5
Additionally, state data breach laws and privacy regulations, along with highly publicized breaches, have enhanced security
awareness in vertical markets outside of healthcare and financial services and have prompted affected organizations to consider adopting
systems that ensure data security and privacy. Even where there are no specific regulations, businesses may require email protection to
adhere to evolving industry best practices for protecting sensitive information.
Sales and Marketing
We sell our Email Encryption, Advanced Email Threat Protection, Information Archive, and DLP 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 managed service providers (“MSP”) seeking an email security offering.
Approximately 74% of our new business transacted in 2019 resulted from our partner relationships. As of December 31, 2019, we had
4,338 monthly transacting MSP partners.
Employees
We had 566 employees as of December 31, 2019. The majority of our employees are located in Gulf Breeze, Florida and Dallas,
Texas.
Research and Development
We incurred research and development (“R&D”) expenses of $20.4 million, $11.3 million, and $11.0 million for the twelve-month
periods ended December 31, 2019, 2018, and 2017, respectively.
Early 2019 saw technical completion of our new security and compliance bundle platform (ZixSuite) which includes enhanced
variants of core Threat Protection, Encryption, Continuity and Archiving Technologies. The introduction of ZixSuite was immediately
followed by the announcement of our AppRiver acquisition and ensuing technology integration thrust.
As part of early AppRiver integration, we delivered a technology interoperation framework, which enabled enhanced Encryption
and Archive models from ZixSuite to be sold with AppRiver service using the AppRiver Nautical framework for customer partner
ordering, provisioning, and billing. This was followed by a much larger set of R&D projects targeting consolidation of best-in-class
subsystems from both companies into one premium Email Threat Protection offer, seamless LDAP driven integration of bundle services
and modernized and enhanced web access and provisioning capabilities for these bundled services through an enhanced Nautical
customer enablement and tech touch framework. The service components can be bundled and integrated with Microsoft Office 365
mailboxes or offered separately. Enhanced reporting and Security Information and Event Management (SIEM) integration capabilities
dovetail into the resulting new service portfolio, which we expect to become commercially available in early 2020.
Year 2019 also saw completion of the first full technical integration of the EMS appliance into the Zix Encryption Network. We
acquired the EMS technology in late 2017, bringing us an on premises encryption portal and encryption interoperation technologies,
which were complementary to our legacy encryption service portfolio. Our 2019 investments significantly improved mobile web
responsiveness and accessibility features and added an Outlook plugin client framework and capability to integrate into the Email
Encryption Best Method of Delivery. The capabilities are currently available.
Intellectual Property
We depend upon our ability to develop, maintain and protect our proprietary technology and our related intellectual property
rights. We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology and related property rights and to defend against infringement and/or misappropriation claims
from others. We own 44 U.S. patents with various expiration dates through 2036, and 15 pending U.S. applications. We have a program
to file applications for and obtain patents and trademarks in the United States and in specific foreign countries where we believe filing
for such protection is appropriate. While intellectual property rights are generally important to our business, we do not believe that our
business is dependent on any single item of intellectual property, or that any single item of intellectual property is material to the
operation of our business. Rather, we believe that our intellectual property rights provide us with a competitive advantage, and from
time to time we have taken steps to enforce our intellectual property rights as a means of protecting that competitive advantage.
Our Company and certain of our subsidiaries are the owners of trademarks and service marks registered with the United States
Patent & Trademark Office. These marks are renewable indefinitely, contingent upon continued use and payment of applicable renewal
fees. Additionally, our Company and certain of our subsidiaries own several pending trademark applications with the United States
Patent & Trademark Office as well as a number of United States common law trademarks, 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 infringement or challenges to our right to use any of our
trademarks or service marks in the United States.
6
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
4% of our annual revenue in 2019.
Significant Customers
In each of 2019, 2018, and 2017, 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 $89.4
million at December 31, 2019, compared to $73.0 million at December 31, 2018.
As of December 31, 2019, our backlog is comprised of the following elements: $43.3 million of deferred revenue that has been
billed and paid, $10.9 million billed but unpaid, and approximately $35.2 million of unbilled contracts.
The backlog is recognized into revenue ratably as the services are performed. Approximately 70% of our total backlog at
December 31, 2019, is expected to be recognized as revenue during the next twelve months.
Seasonality
The Company typically experiences less new business in the first quarter of the calendar year. Our annual budget anticipates this
in our forecasting of the first quarter, but historically this has not resulted in a material impact to our revenue or earnings on a seasonal
basis. The first quarter typically includes a slight decline in profitability and cash flow for the Company, as our first quarter includes
increases in cost associated with payroll taxes, sales and marketing investments for the year and timing of the payment of the Company’s
annual bonus program and retention bonuses associated with our acquisitions.
Geographic Information
Our operations are primarily based in the U.S., with approximately 4% of our employees located internationally, predominantly
in Canada. We did not have significant dependencies on any other foreign countries as of December 31, 2019. While the vast majority
of our revenues are sourced in the U.S. and all significant corporate assets at December 31, 2019 were located in the U.S., we host data
in foreign countries, such as the United Kingdom and Switzerland and are strategizing to increase our international footprint in United
Kingdom and European Union for further revenue growth in those geographic areas.
Financial Information About Industry Segments
We have one reportable segment consisting of email encryption and security solutions. We internally evaluate all of our product
offerings and other sources of revenue as one industry segment, and, accordingly, do not report segment information.
Available Information
Our Internet address is www.zix.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), are available on our website, without charge, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The information found on our website shall not be considered to be part
of this or any other report filed with or furnished to the SEC.
In addition to our website, you may read and copy any materials we electronically file with the SEC through the SEC’s website
at www.sec.gov. The SEC’s website contains reports, proxy and other information statements, and other information regarding issuers,
including us, that file electronically with the SEC.
7
NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains “forward-looking statements” (including the discussion appearing under the caption “Liquidity Summary”
in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) within the meaning of Section
27A of the Securities Act of 1933, as amended (the “Act”) and Section 21E of the Exchange Act. All statements other than statements
of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, 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 performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-
looking statements may, but need not, include words such as “may,” “will,” “predict,” “project,” “forecast,” “plan,” “should,” “could,”
“goal,” “estimate,” “intend,” “continue,” “believe,” “expect,” “outlook,” “anticipate,” “hope,” and other similar expressions. Any
forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events
or results described in the forward-looking statements, including, but not limited to, the risks and uncertainties described in the “Item
1A. Risk Factors” section.
Although we believe that expectations reflected in and the assumptions underlying our forward-looking statements are reasonable,
actual results or assumptions made could differ materially from those projected or assumed in any of our forward-looking statements.
Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent
risks and uncertainties, including, but not limited to, those disclosed in this document. Forward-looking statements speak only as of the
date on which they are made, and we do not intend, and undertake no obligation, to update any forward-looking statement.
8
Item 1A. Risk Factors
The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business,
financial condition and financial results. In addition to the factors discussed elsewhere in this Annual Report on Form 10-K, the
following are some of the important factors that, individually or in the aggregate, we believe could make our results differ materially
from those described in any forward-looking statements. It is impossible to predict or identify all such factors and, as a result, you
should not consider the following factors to be a complete discussion of risks, uncertainties and assumptions.
Risks Related to our Business
Our business depends upon customers using email and certain social media platforms to exchange confidential information, and
a significant shift of those messages to other communication channels could impair our growth prospects and negatively affect
our business, financial condition and financial results.
Our customers deploy and use our products and services to easily, securely and confidentially send and receive electronic
messages, by way of internet communications channels including email and certain social media platforms. Our business and revenue
substantially depend on our current and potential customers using email and social media to exchange sensitive information
electronically. New technologies, products, or business models that could support migration to alternative means of secure
communications could be disruptive to our business. If prospective or current customers were to send and receive sensitive information
using technology or communication channels other than email or the social media platforms that we support, our growth prospects and
our business, financial condition and financial results could be materially adversely affected.
Our business depends on market acceptance of our products and services, and our failure to achieve and maintain influential
customers could negatively affect our business, financial condition and financial results.
In order to continue to operate profitably and grow, we must achieve and maintain broad market acceptance of our products and
services at a price that provides us with an acceptable rate of return relative to our costs. We have been successful in selling our Email
Encryption products and services to high-profile customers in the healthcare, financial services and government segments of the market.
The acceptance and use of our products and services by those significant customers facilitates our sales to other potential customers.
The loss of an influential customer of our existing products and services, or the failure to achieve sufficient market adoption of new
products including Advanced Email Threat Protection and Information Archive, could impair our ability to expand the market
penetration of our products and services, or cause us to reduce or increase prices, which could reduce our revenues and net income and
materially adversely affect our business, financial condition and financial results.
Our business relies on securing new customer subscriptions and subscription renewals from existing customers.
The vast majority of our revenue is derived from customer subscriptions, and existing customers have no contractual obligations
to purchase beyond the initial subscription or contract period. Our ability to grow our business is dependent in part on customers
renewing their existing subscriptions and purchasing additional solutions or services after the initial term of their agreement. Though
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 products and services offered 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 profitability may be
harmed.
Additionally, we have experienced, and expect to continue to experience, some level of attrition with existing customers and we
may not maintain historical subscription rates, and we may be unable to accurately predict our customer renewal rates. Although we
have historically retained approximately 90% of our recurring revenue on an annual basis, 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
satisfaction with our products and technical support services, customer merger or acquisition activity, customer budgets, the pricing of
our products compared with those offered by our competitors, technology trends, the prevailing regulatory regime and general market
conditions. If new subscriptions or subscription renewals decline from their current levels, our revenue or revenue growth may decline,
and our business may suffer which could have a materially adverse effect on our financial performance.
9
The security of our networks and data centers is critical to our business and an actual or perceived breach of security through
a cyber-attack or otherwise could cause us to lose customers and could negatively affect our reputation, business, financial
condition and financial results.
We are dependent on our networks and data centers to provide our products and services. Due to the nature of the products and
services we provide and the sensitive nature of the information we collect, process, store, use and transmit, we detect cyber-attacks from
unauthorized parties attempting to penetrate our networks and data centers. We are also susceptible to inadvertent data protection
breaches, computer viruses and other similar disruptions from process, coding or human error that could harm our networks and data
centers. Our business depends on customers having and maintaining confidence that we provide effective network and security
protection. To reduce the risk of a successful cyber-attack or similar event, we have implemented significant physical and logical security
measures to detect, identify and mitigate threats as well as to monitor for and respond to potential breaches and incidents. Despite these
security measures, we may be unable to anticipate malicious techniques or implement adequate measures to prevent an intrusion and
our networks and data centers may remain vulnerable. We may not be able to correct a security flaw or particular vulnerability promptly,
or at all. Further efforts to limit the ability of malicious third parties to disrupt or undermine our security efforts may be costly to
implement and may not be successful. Also, many of our products are cloud-based, and the amount of data we store for our customers
on our servers has been increasing as our business as grown. The risk that these types of events could seriously harm our business is
likely to increase as we expand the number of cloud-based products we offer and operate in more countries. Despite the implementation
of security measures, if a cyber-attack or other breach of security occurs, or is perceived to have occurred, in our internal systems or at
our data centers and networks, it could cause negative publicity, interruption of our services, damage to our reputation, unauthorized
disclosure of our customers’ confidential or proprietary information (including personally identifiable information), disclosure of our
intellectual property, disclosure, modification or removal of our confidential or sensitive information, theft or unauthorized use or
publication of our trade secrets, loss of customers, lost revenue and increased expense (including potentially indemnification or warranty
costs), any of which could have a material adverse effect on our business, financial condition and financial results.
In addition, while we maintain cyber liability insurance coverage that may cover certain liabilities in connection with a
cybersecurity incident, we cannot be certain that our insurance coverage will be adequate for liabilities actually incurred, that insurance
will continue to be available to us on commercially reasonable terms, or at all, or that any insurer will not deny coverage as to any future
claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of
changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could
have a material adverse effect on our business, financial condition, financial results and reputation.
Public key and other cryptographic technologies used in our businesses are subject to technology risks that could reduce demand
for our products and services and could negatively affect our business, financial condition and financial results.
Our business employs public key cryptography technology and other encryption technologies to encrypt and decrypt sensitive
data. The security afforded by encryption depends on the strength of the private key, which is predicated on the assumption that it is
very difficult to mathematically derive the private key from the related public key. Successful decryption of intercepted encrypted email,
or public reports of successful decryption, whether or not true, could reduce demand for our products and services. If new methods or
technologies, such as quantum computing, make it easier to derive the private key from the related public key, the security of encryption
services using public key cryptography technology could be impaired and our products and services could become less marketable. That
could require us to make significant changes to our 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 affect our
business, financial condition and financial results.
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 affect our
business, financial condition and financial results.
Our business relies on third-party suppliers 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 Europe. In addition to our data centers, as our business has grown, we have increased the use of co-
located data centers managed by third parties to support our computer and communications hardware. If we are unable to maintain our
contractual relationships with existing co-located data center providers or establish new contractual relationships with co-located data
center providers on favorable terms, or at all, we could be required to move our equipment to a new facility and may experience delays,
increased costs or downtime for our customers. Our company-owned and co-located data centers might be damaged or interrupted as a
result of numerous factors, many of which are beyond our control, including epidemics, fire, flood, natural disasters, power loss,
mechanical failure, telecommunications failure, break-ins, cyber-attacks, sabotage, vandalism, earthquakes, terrorist attacks, hostilities
or war or other events. Computer viruses, equipment failure, denial of service attacks, and similar disruptions affecting the internet,
infrastructure supplied by third parties or our systems might cause service interruptions, delays and loss of critical data, and could
prevent us from providing our services. Problems affecting our data center operations or the networks on which we rely, whether or not
in our control, could result in loss of revenues, increased expenses, failure to achieve market acceptance, diversion of resources, injury
to our reputation, liability and increased costs, and may cause our customers to terminate or elect not to renew their agreements. We do
not carry sufficient insurance to compensate us for all losses that may occur as a result of any of these events. Though our products
generally tolerate isolated supplier failures, the occurrence of any of these events, including multiple supplier outages or problems, could
materially adversely affect our business, financial condition and financial results.
10
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 suppliers of the telecommunications and internet infrastructure. We use various communications
service suppliers and the global internet to provide network access between our data centers, our customers and end-users of our products
and services. If those suppliers do not enable us to provide our customers with reliable, real-time access to our systems, we may be
unable to gain or retain customers. These suppliers periodically experience outages or other operational problems as a result of internal
system failures or external third-party actions. They might be damaged or interrupted as a result of numerous factors, many of which
are beyond our or their control, including fire, flood, power loss, mechanical failure, telecommunications failure, break-ins, cyber-
attacks, sabotage, vandalism, earthquakes, terrorist attacks, hostilities or war or other events. Computer viruses, equipment failure, denial
of service attacks, and similar disruptions affecting the internet, infrastructure supplied by third parties or our systems might cause
service interruptions, delays and loss of critical data, and could prevent us from providing our services. Further, striving to protect email
recipients from phishing and other exports, such suppliers email and web page security protection systems outside of our control may
randomly and inadvertently delay or block important customer email streams or interfere with linkages between emails and web page
access. Though our products generally tolerate isolated supplier failures, multiple supplier outages, problems providing reliable, real-
time access or inadvertent delays or blocking of access could materially adversely affect our business, financial condition and financial
results.
The infrastructure supporting our business may suffer capacity constraints and business interruptions that could cause us to
lose customers, increase our operating costs and could negatively affect our business, financial condition and financial results.
Our business depends on our providing our customers reliable, real-time access to our data centers and networks. Customers will
not tolerate a service hampered by slow delivery times, unreliable service levels, service outages, or insufficient capacity. System
capacity limits or constraints arising from unexpected increases in our volume of business or network traffic could cause interruptions,
outages or delays in our services, or deterioration in their performance, or could impair our ability to process transactions. We may not
be able to accurately project the rate of increase in usage of our systems or to increase capacity to accommodate increased traffic on our
systems in a timely fashion. System delays or interruptions may prevent us from efficiently providing services to our customers or other
third parties, which could result in our losing customers and revenues, or incurring liabilities that could have a material adverse effect
on our business, financial condition and financial results.
The growth of our business may require significant investment in systems and infrastructure and these investments may achieve
delayed, or lower than expected benefits, which could impair our profitability and negatively affect our business, financial
condition and financial results.
As our operations grow in size and scope, we continually need to improve and upgrade our technology offerings, systems and
infrastructure to offer an increasing number of customers enhanced products, services, features and functionality, while maintaining the
reliability and integrity of our systems and infrastructure and pursuing reduced costs per transaction. Expanding our technology
offerings, systems and infrastructure may require us to commit substantial financial, operational and technical resources, with no
assurance that the volume of our business will increase, which could reduce our net income, deplete our cash, and materially adversely
affect our business, financial condition and financial results. Developing and launching new product offerings adjacent to or outside of
our core service offerings can be particularly costly in terms of capital investments for both product development and marketing. At the
same time, we may not be able to accurately forecast demand or predict the results we will realize from these new offerings increasing
the uncertainty concerning both market acceptance and our ability to successfully execute a sales and marketing strategy that justifies
our investments. Our failure to properly manage and execute new product initiatives could materially adversely affect our business,
financial condition and financial results.
Development of our products depends on software service and maintenance and information systems provided by third parties,
and their unreliability, system failures, interruptions or breaches of security could cause us to lose customers and could
negatively affect our business, financial condition and financial results.
We rely on third-party contractors, often located outside of the United States, to perform certain services and maintain our software
and develop our products. If we are unable to maintain our contractual relationships with existing third parties that facilitate our business
or establish new contractual relationships with third parties that facilitate our business on favorable terms, or at all, it could adversely
affect our ability to provide products and services to our customers. The third parties upon which we rely may fail to operate properly
or experience operational disruption, failure, termination, or capacity constraints which might cause service interruptions, delays and
loss of critical data, and could prevent us from timely development of our products or from providing our services. Such parties could
also be the source or cause of an attack on, or breach of, our operational systems, data or infrastructure. Problems with respect to such
third parties, whether or not in our control, could result in loss of revenues, increased expenses, inability to bill our customers, failure to
achieve market acceptance, diversion of resources, injury to our reputation, liability and increased costs, and may cause our customers
to terminate or elect not to renew their agreements.
11
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.
We recognize revenue from some customers ratably over the terms of their customer agreements, which may be one 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 in our
revenue or our results of operations until future periods. Accordingly, this revenue recognition model also makes it difficult for us to
rapidly increase our revenue through additional sales in any period, as revenue from new clients must be recognized over the applicable
subscription 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 improve the performance, features and reliability of our products and services, particularly in
response to competitive offerings, to keep pace with these developments. We must ensure that our products and services address evolving
operating environments, devices, industry trends, certifications and standards. For example, we have been required to expand our
offerings to support newer multi-tenant cloud architectures and accessibility standards. We also may need to develop products that are
compatible with new operating systems while remaining compatible with existing, popular operating systems. Our business could be
harmed by our competitors announcing or introducing new products and services that could be perceived by customers as superior to
ours. We spend considerable resources on technology research and development, but our research and development resources are more
limited than many of our competitors.
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 improve our product and service offerings. We may experience delays in the anticipated timing of activities related to our
efforts 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 industry, technological or market changes or to gain customer acceptance for our
new and existing products and services, such as mobile device data protection, could have a material adverse effect on our business,
financial condition and financial results.
Mobile devices are increasingly used to access the internet, and our cloud-based and mobile support products may not operate
or be as effective when accessed through these devices, which could harm our business.
Historically, we designed our web-based products for use on a desktop or laptop computer; however, mobile devices, such as
smartphones and tablets, are increasingly being used as the primary means for accessing the internet and conducting e-commerce. We
are dependent on the interoperability of our products with third-party mobile devices and mobile operating systems, as well as web
browsers we do not control. Any changes in such devices, systems or web browsers which degrade the functionality of our products or
give preferential treatment to competitive products could adversely affect usage of our products. In the event our customers have
difficulty accessing and using our products on mobile devices, our customer growth, business and operating results could be adversely
affected.
Failure to effectively manage our product and service lifecycles could harm our business.
As part of the natural lifecycle of our products and services and synergies resulting from our recent acquisitions, we periodically
inform customers that products or services will be reaching their end of life or end of availability and will no longer be supported or
receive updates and security patches. To the extent these products or services remain subject to a service contract with the customer, we
offer to transition the customer to alternative products or services. Failure to effectively manage our product and service lifecycles and
effectively convert to alternative products and services could result in us losing customers and revenues, or incurring contractual
liabilities, which could adversely affect our business, financial condition and financial results.
We face strong competition, which could negatively affect our business, financial condition and financial results.
The markets in which we compete are characterized by rapid change and converging technologies and are very competitive. With
rising demand for private and secure email communications, there is strong competition for our products and services. Our Email
Encryption Threat Protection, Archive, and Data Loss Prevention business competes with products and services offered by companies
such as Barracuda Networks, Inc., Proofpoint, and Mimecast. Strong competition requires us to develop new technology solutions and
service offerings to expand the functionality and value that we offer to our customers. Our competitors may develop products and
services that are perceived by customers as equivalent to, or having advantages over, our products and services. We are also competing
against other value-added cloud distributor platforms such as PAX8 and Sherweb, and our ability to maintain our managed service
provider partners is dependent on our success in successfully competing with such competitors. Competitors could capture a significant
share in our markets, causing our sales and revenue to decline or grow more slowly. Barriers to entry are relatively low, and new ventures
are often formed that create products and platforms competitive with our products and platforms. Competitive pressures could lead to
price discounting or to increases in expenses such as advertising and marketing costs. Increased competition could also decrease demand
for our products and services. Competition could reduce our revenues and net income and materially adversely affect our business,
financial condition and financial results.
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Industry consolidation may lead to increased competition and may negatively affect our operating results.
There has been a trend toward consolidation in our industry for several years. We expect this trend to continue as companies
attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue
operations. For example, some of our current and potential competitors have made acquisitions, or announced new strategic alliances.
Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby
reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete
as sole-source vendors for customers. This could have a material adverse effect on our business, financial condition and financial results.
Some competitors have advantages that may allow them to compete more effectively than us, which could negatively affect our
business, financial condition and financial results.
Some of our competitors have longer operating histories, more extensive operations, greater name recognition, larger technical
staffs, bigger product development and acquisition budgets, established relationships with more distributors and hardware vendors, and
greater financial and marketing resources than we do. These advantages might enable them (independently or through alliances) to
develop and expand functionality of products and services faster than we can, to spend more money to market and distribute products
and services than we can, or to offer their products and services at prices lower than ours. These advantages could reduce our revenues
and net income and materially adversely affect our business, financial condition and financial results.
We rely on marketing efforts of our sales force and channels to promote our brand and acquire new customers. If we do not
effectively expand and train our sales force or lose access to these channels, we may be unable to add new customers or increase
sales to our existing customers and our business may be negatively affected.
We rely on our sales force and a variety of channels, including online keyword search, television, email and social media
marketing, to promote our brand, to obtain new customers and to sell additional solutions to our existing customers. We believe that
there is significant competition for sales personnel with the skills and technical knowledge that we require and our ability to achieve
significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales
personnel to support our growth. New hires require significant training and, in most cases, take significant time before they achieve full
productivity. If we lose access to one of more of our marketing channels, either because the costs of advertising become prohibitively
expensive or we change our marketing practices, or for other reasons, we may become unable to promote our brand effectively, limiting
our ability to grow the business. Our marketing channels and our recent and planned hires may not become as productive or cost-
effective as we expect in generating traffic to our website, attracting customers and renewing sales of our products. If we are unable to
hire and train sufficient numbers of effective sales personnel or maintain access to sufficient channels, or the sales personnel and
marketing channels are not successful in obtaining new clients or increasing sales to our existing client base, our business will be harmed.
If we do not successfully manage our strategic alliances, we may not realize the expected benefits from such alliances and we
may experience increased competition or delays in product development.
We have entered into several strategic alliances with other companies to offer complementary products and services. These
arrangements are generally limited to specific projects or series of projects, and their main goal is generally to facilitate product
compatibility and adoption of industry standards. There can be no assurance that we will realize the expected benefits from these strategic
alliances. If successful, these relationships may be mutually beneficial and result in industry growth. However, alliances carry an element
of risk because, in most cases, we must compete in some business areas with a company with which we have a strategic alliance and, at
the same time, cooperate with that company in other business areas and these alliances can require substantial investment while providing
no assurance of return. Also, if these partner companies fail to perform or if these relationships fail to materialize as expected, we could
suffer delays in product development or other operational difficulties. If we are unable to maintain our contractual relationships with
existing strategic partners or establish new contractual relationships with potential partners on favorable terms, or at all, we may not be
able to offer the products and related functionality our customers expect, and we may experience delays and increased costs in adding
customers and may lose customers. Any ineffectiveness of our strategic alliances could materially adversely affect our business, financial
condition and financial results.
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 significant percentage of our products and services by entering into alliances with third parties who can offer our
products and services along with their own or our competitors’ products and services. Increased reliance on third parties to market and
distribute our products and services exposes us to a variety of risks. For example, we have limited control over and visibility into the
sales cycles of third-party distributors, which could increase the length of our sales cycle, cause our revenue to fluctuate unpredictably
and make it difficult to accurately forecast our revenue. In addition, we may not succeed in developing or maintaining marketing
alliances. Companies with which we have marketing alliances may in the future discontinue their relationships with us, form marketing
alliances with our competitors, or develop and market their own products and services that compete with ours. If a significant distributor
were to discontinue its relationship with us, we could experience an interruption in the distribution of our products and services and our
revenues could decline. Our failure to develop, maintain and expand strategic distribution relationships could reduce our revenues and
net income and materially adversely affect our business, financial condition and financial results.
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Our relationship with Microsoft is non-exclusive and our failure to effectively manage and maintain this relationship or to
successfully compete with other providers of Microsoft could negatively affect our business, financial condition and financial
results.
Because we provide our products to customers with Microsoft products, including Office 365, as well as the fact that a significant
portion of our revenue is reliant on Microsoft products, Microsoft has a significant direct and indirect influence on our business. If we
do not maintain our relationship with Microsoft as a reseller, or if they decide to stop utilizing resellers in distribution of their products,
make an adverse change in their reseller program or change their product offerings, it could reduce our revenues and net income and
materially adversely affect our business, financial condition and financial results.
Microsoft can change its product pricing and discounting to us at any time, and unless we are able to pass through such changes
to our customers, our revenue, gross profit and operating results would be negatively impacted. Further, Microsoft currently offers co-
op and rebate programs in conjunction with our resale activities in which we earn money for certain purposes or achieving certain
predefined objectives. If Microsoft changed the way that co-op or rebates are earned by eliminating or negatively modifying the
programs, our gross profit and operating results distribution of our products and services and our revenues could decline.
Our relationship with Microsoft is non-exclusive and there are other resellers that also provide Microsoft products, including
Office 365. Currently, we maintain a portion of the discount provided by Microsoft in the reseller program and pass along part of the
discount to our distributors. Other resellers may be passing along to their third-party distributors the discount provided by Microsoft
differently than us, which may increase competition for third-party distributors. Our failure to effectively compete with other Microsoft
resellers could reduce our revenues and net income and materially adversely affect our business, financial condition and financial results.
Our future growth and success may be affected by acquisitions. If we are not able to successfully identify, negotiate, complete
and integrate acquisitions, our operating results and prospects could be negatively affected.
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 suitable acquisition candidates, negotiate on favorable
terms, successfully complete and fully integrate such acquisitions. We may have to pay cash, incur debt or issue equity securities to pay
for future acquisitions, each of which could adversely affect our financial condition or the value of our common stock. Equity issuances
in connection with potential future acquisitions may also result in dilution to our stockholders. Acquisitions are inherently risky, and
any acquisition we complete may not be successful. Acquisitions we pursue, including our recent AppRiver acquisition and DeliverySlip
asset acquisition, involve numerous risks, including the following:
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difficulties 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 or changes in relationships with the customers, the key employees, the key business relationships
and the reputations of the businesses and products we acquire and our current strategic partners;
our inability to generate sufficient revenue from acquisitions to offset increased expenses generally associated with
acquisitions;
difficulties 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 effective 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,
tax liabilities, litigation claims from terminated employees, customers, former stockholders or other third parties and other
known or unknown liabilities;
difficulties in complying with new markets or regulatory standards to which we were not previously subject;
difficulties 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 products and solutions developed by our
acquisition targets to our own products and solutions;
delays in our ability to implement internal standards, controls, procedures and policies in the businesses we acquire
increasing our vulnerability to network attacks security incidents, or similar events; and
adverse effects of acquisition activity on the key performance indicators we use to monitor our performance as a business,
including impacts resulting from performance earn-outs or contingent bonuses.
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Unanticipated events and circumstances occurring in future periods may affect 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 significant under-
performance relative to projected 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 impairment charge that could have a material impact on our financial results.
Unfavorable economic environments, particularly in the U.S., could negatively affect our business, financial condition and
financial results.
Challenging economic conditions worldwide have from time to time contributed, and may 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 growth in those markets, particularly in the U.S., which accounts for a substantial majority of our revenue,
slows, or credit is unavailable at a reasonable cost, current and potential customers may delay or reduce technology purchases, including
the deployment or expansion of our products and services and make it difficult to accurately forecast and plan our future business
activities. Additionally, as our business grows in international markets, we may become more susceptible to unfavorable economic
environments outside the U.S. and that could compound the negative effects of unfavorable economic environments in markets in which
we currently operate. This could result in reduced sales of our products and services, longer sales cycles, slower adoption of new
technologies and increased price competition. In addition, adverse economic conditions and changes in trade policies, treaties,
government regulations and tariffs could negatively affect the cash flow of our customers and distributors, which might result in failures
or delays in payments to us. This could increase our credit risk exposure and delay our recognition of revenue. Specific economic trends,
such as declines in the demand for cloud computing services and computing devices, or softness in corporate information technology
spending, could have a more direct impact on our business. In addition, changing economic conditions may also adversely affect third
parties with which we have entered into strategic relationships and upon which we depend in order to grow our business. As a result,
we may be unable to continue to grow in the event of future economic slowdowns. If these conditions persist, spread or deteriorate
further, our business, financial condition and financial results could be materially adversely affected.
If our products have defects or security vulnerabilities, our reputation, business, financial condition and financial results could
be negatively affected and we could experience negative publicity, declining sales and legal liability.
The threats facing our customers are constantly evolving and the techniques used by experienced hackers to access or sabotage
data change frequently, often are not recognized until launched against a target, and may originate from less regulated or remote areas
around the world. As a result, we must constantly update our product solutions to respond to these threats. We produce complex solutions
that incorporate leading-edge technology, including both hardware and software that must operate in a wide variety of technology
environments. Software may contain defects or “bugs” that can interfere with expected operations or introduce security vulnerabilities
that can lead to unauthorized use or data loss. Through our acquisitions, we have acquired some technology that we did not produce that
may be particularly vulnerable to defects or “bugs”. There can be no assurance that our testing programs will be adequate to detect all
defects prior to the product being introduced, which might decrease customer satisfaction with our products and services. The product
reengineering cost to remedy a product defect or mitigate vulnerabilities could be material to our operating results. Our inability to cure
a product defect could result in the temporary or permanent withdrawal of a product or service from the market, a security breach,
negative publicity, damage to our reputation, failure to achieve market acceptance, lost revenue and increased expense, any of which
could have a material adverse effect on our reputation, business, financial condition and financial results.
If our products do not work properly and customers do not receive high-quality customer service and support, our reputation,
business, financial condition and financial results could be negatively affected and we could experience negative publicity and
declining sales.
After implementing our product offerings, customers depend on our customer service and support team to quickly resolve any
issues relating to those offerings. Further, as we continue to broaden our portfolio of solutions and increase the size of our customer
base, we must continue to adapt our customer support organization to ensure our customers continue to receive the high level of customer
service which they have come to expect. Notwithstanding our commitment to customer support, our customers will occasionally
encounter defects or “bugs” that can interfere with expected operations or introduce security vulnerabilities that can lead to unauthorized
use or data loss and other technical challenges and it is therefore critical we are there to provide ongoing, high-quality support to help
our customers. If we do not provide effective ongoing customer service and support, our ability to sell our products to new and existing
customers could be harmed, and our subscription renewal rates and cross-selling of our products may decline, any of which could have
a material adverse effect on our reputation, business, financial condition and financial results.
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If our cloud platform does not interoperate with our customers’ network and security infrastructure or with third-party
products, websites or services, our cloud platform may become less competitive and our results of operations may be harmed.
Our cloud platform must interoperate with our customers’ existing network and security infrastructure. These complex systems
are developed, delivered and maintained by the customer and a myriad of vendors and service providers. As a result, the components of
our customers’ infrastructure have different specifications, rapidly evolve, utilize multiple protocol standards, include multiple versions
and generations of products and may be highly customized. We must be able to interoperate and provide our security services to
customers with highly complex and customized networks, which requires careful planning and execution between our customers, our
customer support teams and our channel partners. Further, when new or updated elements of our customers’ infrastructure or new
industry standards or protocols, such as IPv6 are introduced, we may have to update or enhance our cloud platform to allow us to
continue to provide service to customers. Our competitors or other vendors may refuse to work with us to allow their products to
interoperate with our solutions, which could make it difficult for our cloud platform to function properly in customer networks that
include these third-party products.
We also seek to integrate our customers’ existing network and infrastructure to establish interoperability with our Information
Archive product. The integration requires coordination with other venders that could refuse to work with us or make it difficult to
complete these integrations, potentially impacting our sales and revenue.
We may not deliver or maintain interoperability quickly or cost-effectively, or at all. These efforts require capital investment and
engineering resources. If we fail to maintain compatibility of our cloud platform and products with our customers’ network and security
infrastructures, our customers may not be able to fully utilize our solutions, and we may, among other consequences, lose or fail to
increase our market share and experience reduced demand for our services, which would materially harm our business, operating results
and financial condition.
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 confidential information (“CI”). Data privacy and protection is highly regulated in many
jurisdictions and may become the subject of additional regulation in the future. For example, lawmakers and regulators worldwide are
considering proposals that would require companies, like us that encrypt users’ data to ensure access to such data by law enforcement
authorities. Although we have established, and continue to develop and enhance, security measures and controls to help protect against
unauthorized disclosure of such PII and other CI and comply with applicable laws, an inadvertent disclosure of, or unauthorized third-
party access to, PII or CI, or failure to comply with applicable laws could disrupt our operations, damage our reputation and subject us
to claims, fines or other liabilities.
In addition, our processing and storage of certain types of data is subject to confidentiality agreements with our clients and handling
PII is increasingly subject to a variety of changing privacy and data security regulations around the world. For example, California
recently enacted the California Consumer Protection Act, or the CCPA, that will, among other things, require covered companies to
provide new disclosures to California consumers and afford such consumers new abilities to opt-out of certain sales of personal
information; the CCPA will go into full effect on July 1, 2020. The CCPA has been amended on multiple occasions and is the subject
of proposed regulations of the California Attorney General released on October 10, 2019. We cannot fully predict the impact of the
CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial
costs and expenses in an effort to comply. Future restrictions on the collection, use, sharing or disclosure of our users’ data or additional
requirements for express or implied consent of users for the use and disclosure of such information could require us to modify our
products, possibly in a material manner, stop offering certain products and could limit our ability to develop and implement new product
features.
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In addition, several foreign countries and governmental bodies, including the European Union and Canada, have laws and
regulations concerning the collection and use of personally identifiable information obtained from their residents which are often more
restrictive than those in the U.S. For example, the collection and use of personal data in the European Union is governed by the General
Data Protection Regulation, or GDPR, which became effective in May 2018. GDPR imposes 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 information to individuals about how their personal data is used, maintaining adequate security and data protection
measures, giving data breach notifications, 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 imposes substantial potential fines for
violations and increased our responsibility and liability in relation to personal data that we process. We are an Active Participant in the
Privacy Shield program. Although our personal data practices, policies, and procedures are intended to comply with GDPR, there can
be no assurance that regulatory or enforcement authorities will view these arrangements as being in compliance with applicable laws,
or that one or more of our employees or agents will not disregard the rules we have established which allows us to transfer personal data
of European data subjects that we receive from customers to the United States, in compliance with the Privacy Shield principles. Such
laws and regulations, Privacy Shield certification and other mechanisms are subject to pending legal challenges which may result in new
and differing interpretations and different European data protection regulators applying differing standards for the transfer of personal
data among jurisdictions. Further, following a referendum in June 2016 in which United Kingdom voters approved an exit from the
European Union, the United Kingdom officially left the European Union on January 31, 2020, with a transitional period set to end on
December 31, 2020 (often referred to as “Brexit”), which has created uncertainty with regard to the requirements for data transfers
between the United Kingdom and the European Union and other jurisdictions.
Any new laws, regulations, or other legal obligations or industry standards, or future changes in requirements or interpretations
under these regulations may be inconsistent with our existing data management practices. If so, we could be required to fundamentally
change our business activities and practices or modify our software, which could have an adverse effect on our business, including
increased cost of compliance, negative publicity to us and limitations on data transfer for us and our customers.
Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection
laws, regulations and policies, could result in additional costs and liability to us, damage our reputation, inhibit sales, and harm our
business. Furthermore, any inadvertent disclosure of, or unauthorized access (including due to a cyber-attack) to, PII or other CI or other
failure by us to comply with data privacy requirements could subject us to significant penalties, damages, remediation and other
expenses, and damage our reputation, any of which could have a material adverse effect on our business, financial condition and financial
results.
Problems with protecting and enforcing our intellectual property rights could negatively affect our business, financial condition
and financial results.
We rely on a combination of contractual rights, trademarks, trade secrets, patents and copyrights to establish and protect
intellectual property rights and other proprietary rights in our products and services. These intellectual property rights or other proprietary
rights might be challenged, invalidated or circumvented. We attempt to protect our intellectual property under patent, trademark,
copyright and trade secret laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all
of which may not prevent the misuse, theft or misappropriation of our proprietary information. We may choose not to seek patent or
trademark protection for certain innovations or not to pursue patent or trademark protection in certain jurisdictions, and may choose to
abandon patents and trademarks that are no longer of strategic value to us. The process of obtaining patent and trademark protection is
expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent and trademark applications at a
reasonable cost or in a timely manner.
Despite our efforts to protect our proprietary information, competitors may independently develop technologies or products that
are substantially equivalent or superior to our products or that inappropriately incorporate our intellectual property rights or other
proprietary technology into their products. Competitors may hire our former employees who may misappropriate our intellectual
property rights or other proprietary technology. Policing unauthorized use of our proprietary information is difficult, expensive and
time-consuming, particularly in some jurisdictions which may not provide adequate legal protection of our intellectual property rights
or other proprietary technology and where mechanisms for enforcement of intellectual property rights may be weak. As we continue to
grow our international business, our exposure to unauthorized copying and use of our products and proprietary information may increase.
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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 defend against claims that we or our customers are infringing the rights of third parties in patents, copyrights,
trademarks and other intellectual property. If we acquire technology to include in our products and services from third parties, our
exposure to infringement actions may increase because we must rely upon these third parties to verify the origin and ownership of such
technology. Also, we may be required to spend significant resources to monitor and protect our intellectual property rights, including
initiating claims or litigation against third parties for infringement or misappropriation. Intellectual property litigation and controversies
are disruptive and expensive, whether or not resolved in our favor and may be particularly difficult, expensive and time-consuming in
some jurisdictions which do not afford as strong of legal protections of our intellectual property rights or other proprietary technology
and where mechanisms for enforcement of intellectual property rights may be weak. Even unmeritorious claims brought against us or
our customers may harm our reputation and customer relationships, may cause us to incur significant legal and other fees to defend, and
may have to be settled for significant amounts. Infringement claims against us could require us to develop non-infringing products and
services or enter into expensive royalty or licensing arrangements. Our business, financial condition and financial results could be
materially adversely affected if we are not able to develop non-infringing technology or license technology on commercially reasonable
terms.
We may face risks from using “open source” software that could negatively affect our business, financial condition and financial
results.
Like many other software companies, we use “open source” software in order to take advantage of common industry building
blocks and to add functionality to our products quickly and inexpensively. Open source software license terms could adversely affect
our intellectual property rights in our products that include open source software. Depending upon how the open source software is
deployed, we could be required to offer products that use the open source software for no cost, or make available the source code for
modifications or derivative works. Any of these obligations could have an adverse impact on our intellectual property rights and revenue
from products incorporating the open source software. Using open source code could also cause us to inadvertently infringe third-party
intellectual property rights or require us to publicly disclose proprietary information. We have processes and controls in place that are
designed to address these risks and concerns, but we cannot be sure that our process or controls will be sufficient to mitigate all risk in
this regard. Open source software might also introduce security vulnerabilities or defective functionality. The open source community
may not always respond with adequate urgency to mitigate the impacts of such defects.
We rely on the availability of third-party intellectual property, which may not be accessible to us on reasonable terms or at all.
Some of our products include third-party intellectual property, which may require licenses for our use. For example, a significant
portion of the revenue generated by our Erado business is dependent on the licensing of certain electronic message API’s, such as those
made available by LinkedIn Corporation, SMS providers, Facebook, and other social media channels, and a significant portion of the
revenue generated by our AppRiver business is dependent on the licensing of Microsoft products such as Office 365. We also rely on
the licensing of certain third-party APIs with respect to our billing systems for customers. 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 on our business, financial condition and financial results.
We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and
liquidity.
From time to time, we are a party to or otherwise involved in legal proceedings, claims and litigation, law enforcement
investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of our business or
otherwise. We are currently subject to legal proceedings, claims, and litigation involving our business, and additional claims may arise
in the future. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome
depending on a number of variables, some of which are not within our control. Litigation is subject to significant uncertainty and may
be expensive, time-consuming, and disruptive to our operations. Although we vigorously defend ourselves in such legal proceedings,
their ultimate resolution and potential financial and other impacts on us are uncertain. For these and other reasons, we may choose to
settle legal proceedings and claims, regardless of their actual merit. If a legal proceeding is resolved against us, it could result in
significant compensatory damages, and in certain circumstances punitive or trebled damages, disgorgement of revenue or profits,
remedial corporate measures or injunctive relief imposed on us. If our existing insurance does not cover the amount or types of damages
awarded, or if other resolution or actions taken as a result of the legal proceeding were to restrain our ability to operate or market our
products and services, our consolidated financial position, results of operations or cash flows could be materially adversely affected. In
addition, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to our reputation, which
could adversely impact our business.
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Our corporate culture has contributed to our success, and if we cannot maintain this culture, we could lose the innovation,
creativity and teamwork fostered by our culture, and our business may be harmed.
We believe a critical contributor to our success has been our corporate culture, which we believe fosters innovation, creativity,
diversity, a customer-centric focus, collaboration and loyalty. Our corporate culture is central to our devoted customer support and
service team which is a key component of the value we offer our customers. As we continue to evolve our business, we may find it
difficult to maintain these important aspects of our corporate culture, which could limit our ability to innovate and operate effectively.
Difficulty in preserving our corporate culture could be exacerbated as we continue to expand internationally, grow our employee base
and expand our solutions. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel,
continue to perform at current levels or execute on our business strategy.
We may fail to recruit, retain and motivate key personnel, which could impair our ability to meet key objectives.
Our success depends on our ability to attract, retain and motivate highly-skilled technical, managerial, sales, and marketing
personnel. Competition for these personnel is intense and there is high demand for employees who have highly technical skills and
experience, increasing difficulty in recruiting, hiring and retaining such key employees. Although we have entered into employment
agreements with certain key personnel, our employees generally work for us on an “at-will” basis, which means they may terminate
their employment with us at any time and, as highly skilled and experienced personnel, would be difficult to replace. Changes in key
personnel may be disruptive to our business. It could be difficult, time consuming and expensive to replace key personnel. Integrating
new key personnel may be difficult and costly. Volatility, lack of positive performance in our stock price or changes to our overall
compensation program including our stock incentive program may adversely affect our ability to retain key employees, many of whom
are compensated, in part, based on the performance of our stock price. The loss of services of any of our key personnel, the inability to
retain and attract qualified personnel in the future or delays in hiring required personnel could make it difficult to meet key objectives.
Any of these impairments related to our key personnel could negatively affect our business, financial condition and financial results.
Governmental restrictions on the sale of our products and services in non-U.S. markets could negatively affect our business,
financial condition and financial results.
Exports of software solutions and services using encryption technology such as ours are generally restricted by the U.S.
government. Although we have obtained U.S. government approval to export our service to almost all countries, the list of countries to
which we (and our distributors) cannot export our products and services could be expanded in the future. In addition, some countries
impose restrictions on the importation and use of encryption solutions and services such as ours. The cost of compliance with U.S. and
other export laws, or our failure to obtain governmental approvals to offer our products and services in non-U.S. markets, could affect
our ability to sell our products and services and could impair our international expansion. We face a variety of other legal and compliance
risks. If we or our distributors fail to comply with applicable law and regulations, we may become subject to penalties, fines or
restrictions that could materially adversely affect our business, financial condition and financial results.
As a result of our international operations, we could be adversely affected by violations of the United States Foreign Corrupt
Practices Act and similar foreign anti-corruption laws.
The U.S. Foreign Corrupt Practices Act and similar foreign anti-corruption laws generally prohibit companies and their
intermediaries from making improper payments or providing anything of value to improperly influence foreign government officials for
the purpose of obtaining or retaining business, or obtaining an unfair advantage. Recent years have seen a substantial increase in the
global enforcement of anti-corruption laws. Our continued operation and expansion outside the United States, including in developing
countries, could increase the risk of such violations. Violations of these laws may result in severe criminal or civil sanctions, could
disrupt our business, and result in a material adverse effect on our reputation, business and financial results.
Our sales to government entities are subject to a number of challenges and risks.
Sales to U.S. federal, state and local governmental agency customers have accounted for a significant portion of our revenue in
past periods, and we may in the future increase sales to government agencies. Sales to government entities are subject to a number of
challenges and risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant
upfront time and expense without any assurance that these efforts will generate a sale. Government contractual requirements often 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 by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely
affecting public sector demand for our solutions. Government entities also may have statutory, contractual or other legal rights to
terminate contracts for convenience or due to a default, and any such termination may adversely impact our future operating results.
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Risks Related to our Indebtedness, Capital Structure and Ownership of our Common Stock
Our indebtedness could adversely affect our business and limit our ability to expand our business or respond to changes, and
we may be unable to generate sufficient cash flow to satisfy our debt service obligations.
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 secured revolving credit facility in an aggregate principal amount of $25 million
(collectively, the “Credit Facilities”). The Credit Facilities are guaranteed by certain wholly-owned subsidiaries of Zix. The Credit
Facilities are secured by substantially all assets of Zix and the guarantors, subject to certain customary exceptions. The Credit Facilities
will mature in February of 2024. The incurrence of this indebtedness could have adverse consequences, including the following:
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reducing the availability of our cash flow for our operations, capital expenditures, future business opportunities, stock
buybacks 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 difficult to pay or refinance our debts as they become due during periods of adverse economic, financial
market or industry conditions;
limiting our ability to obtain additional financing for working capital, acquisitions or other purposes, particularly since
substantially all of our assets are subject to security interests relating to existing indebtedness;
requiring our debt to become due and payable upon a change in control;
increasing our vulnerability to general adverse economic and industry conditions; and
lengthening or otherwise adversely affecting 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, September and December 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 of 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 significant extent, our ability to do so is subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. If our business does not generate sufficient cash flow from operating activities or if future
borrowings are not available to us in amounts sufficient to enable us to fund our liquidity needs, our operating results, financial condition
and ability to expand our business may be adversely affected.
The interest rate on 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, 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 subsidiaries 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, enter into restrictive agreements, and amend our
organizational documents or the terms of junior indebtedness.
These restrictions may make it more difficult 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
unable 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.
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Upon the occurrence of a default, 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 default, our lenders could elect to declare all amounts outstanding under our Credit Facilities to be immediately due and payable.
If we are unable to repay that amount, our lenders could seize our assets securing the loans and our business and financial condition
could be materially and adversely affected.
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 Stock established by a Certificate of Designations (the “Series A Certificate of
Designations”) and Series B Preferred Stock established by a Certificate of Designations (the “Series B Certificate of Designations”),
which contain covenants that, among other things, require the consent of the holders of a majority of each of the then-outstanding shares
of Series A Preferred Stock and Series B Preferred Stock before we can incur indebtedness in excess of a specified leverage ratio.
In January 2019, we entered into an investment agreement with an investment fund managed by True Wind Capital (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, subject to certain
exceptions, any debt securities convertible into any of our capital stock.
At our Annual Meeting of Shareholders in June 2019, our shareholders voted to approve, in accordance with Nasdaq Listing Rule
5635, (i) the conversion of our then-outstanding shares of Series B Preferred Stock into shares of our Series A Preferred Stock and
(ii) the issuance of shares of our common stock in connection with any future conversion or redemption of our Series A Preferred Stock
into common stock, or any other issuance of common stock to the Investor pursuant to the terms of the investment agreement that, absent
such approval, would violate Nasdaq Listing Rule 5635 (the “Nasdaq Proposal”). Following shareholder approval of the Nasdaq
Proposal, the 35,086 then-outstanding shares of our Series B Preferred Stock converted into 35,292 shares of Series A Preferred Stock
and we paid to the holders of Series B Preferred Stock cash in lieu of any fractional shares. We currently do not have any shares of
Series B Preferred Stock outstanding.
We may need additional capital, and we cannot be certain that additional financing will be available on favorable terms, or at
all, and such additional financing may adversely affect our financial and operational flexibility or cause dilution to existing
stockholders.
We may require additional financing in the future to operate or expand our business, acquire assets or repay or refinance our
existing debt. Our ability to obtain financing will depend, among other things, on our business development efforts, business plans,
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 available 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, subject to certain exceptions. Any additional funding we obtain may include similar restrictive covenants,
which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences
or privileges senior to the rights of our common stock or preferred stock, and our stockholders may experience dilution.
If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
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develop or enhance our solutions;
continue to expand our sales and marketing and research and development organizations;
repay or refinance our existing debt;
acquire complementary technologies, solutions or businesses;
expand operations, in the United States or internationally;
hire, train and retain employees; or
respond to competitive pressure or unanticipated working capital requirements.
Our failure to do any of these things could seriously impact our business, negatively affecting financial condition and operating
results.
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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 stock, investment agreement or other agreements governing our current indebtedness
from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions, any of which
could diminish our ability to make payments on our indebtedness when due and further exacerbate the risks associated with our current
level of indebtedness. If new debt is added to our or any of our existing and future subsidiaries' current debt, the related risks that we
now face could intensify.
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 24 % of our outstanding voting capital stock based on the number of shares of common stock
and convertible Series A Preferred Stock outstanding as of March 4, 2020, on an as-converted basis. The Investor’s aggregate voting
power will increase further in connection with future accretion of the Series A Preferred Stock for as long as the Series A Preferred
Stock remains outstanding. The holders of our Series A Preferred Stock are entitled to vote their shares, on an as-converted basis,
together with holders of our common stock on all matters submitted to a vote of the holders of our common stock. As a result, the holders
of shares of the Series A Preferred Stock have the ability to significantly influence the outcome of any matter submitted for the vote of
the holders of our common stock. The 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 substantially influence the election of the members of our Board of Directors, thereby
potentially controlling our management and affairs. In addition, the Investor has significant influence over all matters that require
approval by our stockholders, including the approval of significant corporate transactions.
Additionally, holders of a majority 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 Articles of
Incorporation (the “Articles of Incorporation”) or the Series A Certificate of Designations in a manner that would adversely affect the
rights, preferences, privileges or power of the Series A Preferred Stock; (2) any amendment or alteration to our Articles of Incorporation
or any other action to authorize or create, or increase the number of authorized or issued shares of, or any securities convertible into
shares of, or reclassify 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; (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 majority of the then-outstanding shares of Series B Preferred Stock, are required to approve certain matters
as a class, voting separately from the common stock and the Series A Preferred Stock, such as (1) any amendment, alteration or repeal
to our Articles of Incorporation or the Series B Certificate of Designations in a manner that would adversely affect the rights, preferences,
privileges or power of the Series B Preferred Stock; (2) any amendment or alteration to our Articles of Incorporation or any other action
to authorize or create, or increase the number of authorized or issued shares of, or any securities convertible into shares of, 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 Stock; (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.
Any issuance of common stock upon conversion of the Series A Preferred Stock 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 Preferred Stock is convertible, at the option of the holders, into (i) the
number of shares of common stock equal to the product 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
Conversion Rate is equal to 166.11 shares of our common stock and is subject to adjustment 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 Preferred
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 will result in immediate and substantial dilution
to the interests of our common stock holders, and such dilution will increase over time in connection with the future accretion of the
Series A Preferred Stock.
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Our business could be negatively impacted as a result of shareholder activism.
In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists frequently
propose to involve themselves in the governance, strategic direction, and operations of companies. We may in the future become subject
to such shareholder activism and demands. Such demands may disrupt our business and divert the attention of management and
employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential
business opportunities, be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult
to attract and retain qualified personnel and business partners, all of which could negatively impact our business. Shareholder activism
could result in substantial costs. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based
on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals of our
business.
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 effect of rendering more difficult, delaying, or preventing an acquisition deemed
undesirable by our Board of Directors and therefore depress the trading price of our common stock. These provisions could also make
it difficult 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 effecting changes in our management. Among other things, our certificate
of incorporation and bylaws include provisions regarding:
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the ability of our Board of Directors to issue shares of preferred stock, including “blank check” preferred stock, and to
determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval,
which could be used to significantly dilute the ownership of a hostile acquirer, and pursuant to which we have issued the
Series A Preferred Stock and Series B Preferred Stock, each of which are entitled to receive a liquidation preference and
certain amounts in connection with a change of control of the company and other similar extraordinary transactions;
the limitation of the liability of, and the indemnification of, our directors and officers;
the requirement that directors may only be removed from our Board of Directors by the affirmative vote of a majority 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 stockholder 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 secretary at the request in writing of a majority of the members of our Board
of Directors, which could delay the ability of stockholders to force consideration of a proposal or to take action, including
the removal of directors;
provisions enabling us to control the procedures for the conduct and scheduling of Board of Directors and stockholder
meetings;
the requirement for the affirmative vote of holders of at least a majority 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 effect 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
before 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
attempting to obtain control of our Company.
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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 subject 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 specified 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 opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect
the price that some investors are willing to pay for our common stock.
Other Risks Related to our Series A Preferred Stock and Series B Preferred Stock
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 significantly.
We are obligated to register the resale of the common stock issuable upon conversion of, 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 common
stock into which the Series A Preferred Stock are converted would be freely tradable. The common stock issuable upon conversion may
represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply
of a company’s stock in the market than there is demand for that stock. When this happens, the price of the 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 Stock, then the value of our common stock will likely decrease.
Any sale of large amounts of our common stock on the open market or in privately negotiated transactions could have the effect
of increasing the volatility in the price of our common stock or putting significant downward pressure on the price of our common stock.
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 our liquidity and financial condition, and
may result in the interests of the holders of our Series A Preferred Stock and Series B Preferred Stock differing from those of
our common stockholders.
In the event of our liquidation, dissolution or the winding up of our affairs, the holders of our Series A Preferred Stock have the
right to receive a liquidation preference entitling them to be paid out of our assets generally available for distribution to our equity
holders, together with holders of our Series B Preferred Stock and before any payment may be made to holders of any other class or
series of capital stock (including our common stock), in an amount equal to the greater of (i) $1,000 plus all accreted but unpaid dividends
and (ii) the amount such holder would have been entitled to receive if the Series A Preferred Stock had converted into common stock
immediately prior to such liquidation.
In the event of our liquidation, dissolution or the winding up of our affairs, the holders of our Series B Preferred Stock have the
right to receive a liquidation preference 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 Stock and before any payment may be made to holders of any other class or
series of capital stock (including our common stock), in an amount equal to $1,000 plus all accrued but unpaid 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,
compounded quarterly. The holders Series A Preferred Stock are also entitled to receive any dividends paid in respect of our common
stock on an as-converted basis. The holders of our Series B Preferred Stock are entitled to receive dividends accruing daily on a
cumulative basis payable quarterly in arrears in cash at a fixed rate of 10.0% per annum on the $1,000 stated value per share (the
“Dividend Rate”), which rate will automatically increase by 1.0% every six months that the Series B Preferred Stock remains outstanding
and unconverted (subject to a cap of 12.0%). If cash dividends are not paid in respect of any dividend payment period, the liquidation
preference of each outstanding share of Series B Preferred Stock will automatically increase at the Dividend Rate.
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Further, the Series A Preferred Stock is mandatorily redeemable upon a change of control (as defined in the Series A Certificate
of Designations), at a price per share of Series A Preferred Stock in cash equal to the greater of (i) the Series A Change of Control
Redemption Price (as defined below) and (ii) (A) the amount of cash such holder of Series A Preferred Stock would have 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 A Preferred
Stock, immediately prior to such change of control, converted such shares of Series A Preferred Stock into shares of common stock.
The “Series A Change of Control Redemption Price” per share of Series A Preferred Stock is the product of the accreted value of such
share as of the date of determination multiplied by (1) 1.30 (if the change of control occurs before the first anniversary of the date of
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 second anniversary 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 the 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 the
fourth anniversary of the date of issuance).
Further, the holders of our Series B Preferred Stock also have redemption rights upon the occurrence of certain events. Specifically,
the Series B Preferred Stock is mandatorily redeemable, upon the holder’s election and after 90 days prior notice, any time after the
seventh anniversary of the date of issuance at an amount per share of Series B Preferred Stock equal to the liquidation preference per
share of the Series B Preferred Stock to be redeemed as of the applicable redemption date multiplied by 1.50. The Series B Preferred
Stock is also mandatorily redeemable upon a change of control (as defined in the Series B Certificate of Designations), at a price per
share of Series B Preferred Stock in cash equal to the greater of (i) the Series B Change of Control Redemption Price (as defined 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 Preferred Stock, immediately prior to such change of control, converted such shares of
Series B Preferred Stock into shares of Series A Preferred Stock. The “Series B Change of Control Redemption Price” per share of
Series B Preferred Stock is the product of the liquidation preference of such share as of the date of determination multiplied by (1) 1.30
(if the change of control occurs before the first anniversary of the date of 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 second anniversary 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 the 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 the fourth anniversary of the date of issuance).
Finally, any time after the fourth anniversary of the date of issuance of the Series A Preferred Stock, we have the right to redeem
the Series A Preferred Stock for cash at a redemption price equal to the accreted value per share of Series A Preferred Stock to be
redeemed multiplied by 1.50. Likewise, at any time after the fourth anniversary of the date of issuance of the Series B Preferred Stock,
we have the right to redeem the shares of the Series B Preferred Stock for cash at a redemption price equal to the liquidation preference
per share of the Series B Preferred Stock to be redeemed multiplied by 1.50.
These dividend and redemption payment obligations could significantly impact our liquidity and reduce the amount of our cash
flows that are available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate
purposes. Our obligations to the holders of Series A Preferred Stock and Series B Preferred Stock could also limit our ability to obtain
additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential
rights described above could also result in divergent interests between the holders of shares of Series A Preferred Stock and/or Series B
Preferred Stock and the holders of our common stock.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We leased properties during 2019 that are considered significant to the operations of the business in the following locations:
Florida, Georgia, Massachusetts, Michigan, Texas, Washington, Canada, and the United Kingdom. These leased properties are used as
offices for our employees. Our corporate headquarters, which includes the ZixData Center, is located in Dallas, Texas and currently
consists of 42,912 square feet of space under a lease that expires in 2024 with two five-year extension options. Another of our major
offices is located in Gulf Breeze, Florida and is the headquarters of AppRiver, acquired in February, 2019. The lease consists of 32,246
square feet of office space under a lease that also expires in 2024 with options to renew. We believe our facilities are adequate for our
current needs and for the foreseeable future.
In addition to our ZixData center, we operate several data centers at third-party facilities in California, Georgia, Texas, Virginia,
Washington, the United Kingdom and Switzerland.
Item 3. Legal Proceedings
We are subject to legal proceedings, claims, and litigation involving our business. While the outcome of these matters is currently
not determinable, and the costs and expenses of resolving these matters may be significant, we currently do not expect that the ultimate
costs to resolve these matters will have a material adverse effect on our consolidated financial condition or operating results.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on The Nasdaq Stock Market under the symbol ZIXI. The table below shows the high and low sales
prices by quarter for fiscal 2019 and 2018.
PART II
Quarter Ended
March 31
June 30
September 30
December 31
2019
2018
High
Low
High
Low
$
$
$
$
9.07 $
11.15 $
10.51 $
7.75 $
5.34 $
6.66 $
6.91 $
6.25 $
4.75 $
5.62 $
5.93 $
7.09 $
3.82
4.25
4.91
4.66
At March 4, 2020, there were 55,641,885 shares of common stock outstanding held by 399 shareholders of record. On that date,
the last reported sales price of the common stock was $8.27.
We have not paid any cash dividends on our common stock and do not anticipate doing so in the foreseeable future.
For information regarding options and stock-based compensation awards outstanding and available for future grants, see “Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Performance Graph
The following graph compares the cumulative total return of an investment in our common stock over the five-year period ended
December 31, 2019, as compared with the cumulative total return of an investment in (i) the Center for Research in Securities Prices
(“CRSP”) Total Return Index for Nasdaq Stock Market (U.S. companies) and (ii) the CRSP Total Return Index for Nasdaq Computer
and Data Processing Stocks. The comparison assumes $100 was invested on December 31, 2014, in our common stock and in each of
the two indices and assumes reinvestment of all dividends, if any. The stock price performance on the following graph is not necessarily
indicative of future stock price performance. A listing of the companies comprising each of the CRSP- NASDAQ indices used in the
following graph is available, without charge, upon written request.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2019
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
2014
2015
2016
2017
2018
2019
Zix Corporation
NASDAQ Stock Market (US Companies)
NASDAQ Computer and Data Processing Index
27
Sale of Unregistered Securities
On February 20, 2019, (the “Original Issuance Date” or “Closing Date”), Zix consummated a private placement pursuant to an
investment agreement with an investment fund managed by True Wind Capital and issued an aggregate of $100 million of shares of
convertible Preferred Stock (as defined below) at a price of $1,000 per share (the “Stated Value”). 64,914 shares of Series A Convertible
Preferred Stock (the “Series A Preferred Stock”) were issued for proceeds of $62.7 million, net of issuance costs of $2.3 million, and
35,086 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock” and, together with the Series A Preferred Stock,
the “Preferred Stock”) were issued for proceeds of $33.9 million, net of issuance costs of $1.2 million. The Preferred Stock is classified
outside of stockholders’ equity in temporary equity because the shares contain certain redemption features which require redemption
upon a change in control. The Series A Preferred Stock can be immediately converted to common stock.
On June 5, 2019, Shareholders approved the conversion of the outstanding shares of Series B Preferred Stock into shares of Series
A Preferred Stock. Each share of Series B Preferred Stock was converted into the number of shares of Series A Preferred Stock equal
to the liquidation preference of such share of Series B Preferred Stock divided by the accreted value of a share of Series A Preferred
Stock on the date of conversion plus cash in lieu of fractional shares. On June 6, 2019, all the outstanding shares of Series B Preferred
Stock were converted into 35,292 shares of Series A Preferred Stock. As of December 31, 2019, no shares of Series B Preferred Stock
are outstanding.
Purchases of Equity Securities by the Issuer
Period
October 1, 2019 to October 31, 2019
November 1, 2019 to November 30, 2019
December 1, 2019 to December 31, 2019
Total
Total Number of
Shares Purchased(1)
Average Price
Paid per Share
7.66
7.98
—
7.93
467 $
2,667 $
— $
3,134 $
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 number of shares repurchased for the one-month periods ended October 31, 2019, and November 30, 2019; all 3,134
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 employees for whom Restricted Stock vested during the applicable period, which
is required once the Restricted Stock is vested. Certain of these shares relate to awards that were scheduled to vest in prior periods but
which did not settle until the fourth quarter of 2019.
28
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto. No cash dividends were
declared in any of the five years shown below:
2019(1)(2)
Year Ended December 31,
2018(1)
2016
2017
(In thousands, except per share data)
2015
Statement of Comphresive Income (Loss):(3)
Revenues
Cost of revenue
Gross margin
Research and development expenses
Selling, general and administrative expenses
Income tax expense (benefit)(4)
Net income (loss)
Deemed and accrued dividends on preferred stock
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
share
Statements of Cash Flows Data:
Net cash flows provided by (used for):
Operating activities
Investing activities(5)
Financing activities(6)
Balance Sheet Data:
Cash, Cash Equivalents and Marketable Securities
Working capital(7)
Total assets
Stockholders’ equity
$
$ 173,428
76,908
96,520
20,431
85,230
(4,478 )
(14,647 )
9,984
(0.46 ) $
(0.46 ) $
$
$
53,025
70,478 $
15,186
55,292
11,323
33,999
(4,720 )
15,444
—
0.29 $
0.29 $
52,592
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
54,713
9,593
45,120
8,317
28,887
3,144
5,016
—
0.09
0.09
56,422
53,025
53,481
53,430
54,395
57,476
$
$
13,951
$
(296,243 )
268,740
16,671 $
(15,952 )
(6,593 )
18,204 $
(11,285 )
(367 )
15,251 $
(2,136 )
(15,322 )
15,617
(1,951 )
(6,687 )
13,349
$
(46,610 )
412,721
41,291
27,109 $
(7,665 )
104,640
60,947
33,009 $
2,104
81,308
43,520
26,457 $
2
82,358
49,070
28,664
3,821
87,286
56,772
(1) The consolidated statement of comprehensive income (loss) data for fiscal 2019 and 2018, and the selected consolidated balance
sheet data as of December 31, 2019 and 2018 reflect the modified retrospective adoption of Accounting Standards Update (“ASU”)
2014-09, “Revenue from Contracts with Customers (“Topic 606”)”.
(2)
January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842). Prior period amounts have not been
adjusted under the modified retrospective method.
(3) The 2019 increase in our operating revenue and expenses is primarily attributable to our February 2019 acquisition of AppRiver.
(4) The $4.5 million income tax benefit in 2019 is primarily attributed to current year loss which increased our deferred tax asset. The
$4.7 million income tax benefit in 2018 resulted from the release of a portion of our deferred tax asset valuation allowance based
on expected likelihood to use our existing deferred tax assets prior to their expiration, thus triggering the release. On December
22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) which significantly changed U.S. tax law. The Tax
Act lowered the Company’s statutory federal income tax rate from 34% to 21% effective January 1, 2018. At December 31, 2017,
the Company adjusted its deferred tax balances to reflect the new 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.”
(5)
Investing activities in 2019 consist of $284.6 million, net of cash acquired, used in the acquisitions of AppRiver and DeliverySlip.
(6) Financing activities in 2019 includes proceeds from long-term debt of $179.2 million, net of issuance costs of $6.4 million and
repayment of $1.4 million. We also raised $96.6 million, net of issuance costs, through the private purchase of preferred stock.
(7) Working capital includes deferred revenue totaling $40.8 million, $30.6 million, $28.4 million, $25.8 million and $23.2 million,
as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements about trends, uncertainties and our plans and
expectations of what may happen in the future. Forward-looking statements involve risks and uncertainties that could cause actual events
or results to differ materially from the events or results described in the forward-looking statements, including risks and uncertainties
described above in “Item 1A. Risk Factors.” Readers are cautioned not to place undue reliance on forward-looking statements. The
forward-looking statements in this report are based upon information available to us on the date of this report. We undertake no
obligation to publicly update or revise any forward-looking statements. See “NOTE ON FORWARD-LOOKING STATEMENTS AND
RISK FACTORS” in “Item 1. Business.”
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 cloud email security, productivity, and compliance solutions. We provide easy-to-use solutions for
email encryption and data loss prevention (“DLP”), advanced threat protection, and archiving. As a leading provider of cloud-based
cybersecurity, compliance, and productivity solutions for businesses of all sizes, we are focused on securing data and meeting the
compliance needs of organizations with particular emphasis on the healthcare, finance, and government sectors. One of our core
competencies is our ability to deliver this complex service offering with a high level of availability, reliability, integrity and security.
Our 2019 results included record revenues attributable to both our AppRiver acquisition and our ongoing efforts to build a solid
and predictable business based on our recurring revenue subscription business model. For 2019, we continued to benefit from growing
concerns about data security and integrity issues as well as the growing acceptance of cloud-based offerings along with the growing
regulatory compliance burdens on many businesses.
For 2019, we reported revenue of $173.4 million, an increase of $103.0 million over the prior year, primarily driven by new sales
attributable to our AppRiver acquisition in February 2019 in addition to continued growth in our subscriber base of existing business.
For the year ended December 31, 2019, our gross profit of $96.5 million increased 75% compared to 2018. This increase was
primarily driven by new sales from AppRiver. Our 2019 operating loss of $9.1 million decreased $19.1 million over the prior year, as
the gross profit increase was offset primarily by increased research and development and selling, general and administrative expenses,
related to additional headcount, acquisition related costs and integration costs.
Our $14.6 million net loss in 2019 is a decrease of $30.1 million compared to our $15.4 million net income in 2018. Our 2019 net
loss includes a $4.5 million income tax benefit resulting from current year net loss. Our 2018 net income includes a $7.8 million tax
benefit resulting from a decrease to our deferred tax asset valuation allowance based on expected future profitability and ability to use
net operating losses.
Other Financial Highlights
(cid:120)
(cid:120)
(cid:120)
Backlog was $89.4 million at the end of 2019, compared with $73.0 million at the end of 2018.
Total billings for 2019 were $170.2 million, compared to $77.1 million for 2018, representing an increase of 121%.
AppRiver contributed $96.1 million of the 2019 billings.
The annual recurring revenue value of our customer subscriptions as of December 31, 2019, was $209.7 million, compared
with $75.8 million for the same period in 2018, representing an increase of $133.9 million that was largely attributable to
our AppRiver acquisition.
(cid:120)
Our deferred revenue at the end of 2019 was $43.3 million, compared with $32.2 million at the end of 2018.
(cid:120) We generated cash flows from operations of $14.0 million during fiscal 2019. Our cash and cash equivalents were $13.3
million at the end of 2019, compared with $27.1 million at the end of 2018.
Our services are sold on a subscription basis with contract terms historically ranging from one to five years billed annually. We
are increasingly moving toward a monthly billing model. This shift has been largely driven by our recent acquisition activity, including
AppRiver. We recognize revenue ratably on a monthly basis over the term of the subscription once service commences.
30
We attempt to grow the business by signing new customers to subscription services and/or selling new or higher volume services
to existing customers (i.e., “upsell”) while retaining existing customers through renewal of their subscriptions for successive periods.
Our backlog consists of the total order value of contracted business that has not yet been recognized into revenue. Backlog is
calculated by adding to the existing contracted order value the total value of all orders booked in the period (e.g., quarterly) less the
value of revenue recognized for that period. Although orders are non-cancellable, occasionally we adjust backlog for customer
bankruptcy or change of term, but these instances are rare and do not materially impact the backlog amount. The backlog will grow if
the value of total orders added in a period exceeds the value of revenue recognized in that period. Conversely, the backlog amount will
decline if revenue recognized exceeds the total order value added for the period. A decline in backlog may result from fluctuations in
total orders caused by timing of renewal orders or by the shortening of the average term of our contracts from a multi-year to an annual
commitment or to a monthly billing and subscription model.
As of December 31, 2019, our total company net dollar retention was 102%. We calculate this percentage by first identifying our
current period renewal and upsell orders secured from existing customers and then combining these totals with billings for the period.
We then compare this amount to the total orders that were due to renew and were then combined with scheduled billings. Increasing
retention is a key driver for the company to increase overall revenue and annual recurring revenue. Deferred revenue is the value of
contracted business that has been paid but has not been recognized as revenue. See description of the components of the backlog
following in “Backlog and Orders In this “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
As of December 31, 2019, our annual recurring revenue (ARR) was $209.7 million. We calculate ARR by determining the annual
or monthly revenue of subscription agreements that are active as of the end of the applicable period and multiplying by 1 or 12. We
monitor this metric to aid in determining to what extent individual customer relationships, considered in the aggregate, are growing or
declining in financial magnitude.
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 successful in our efforts to achieve continued growth. Our continued growth depends on the
timely development and market acceptance of our products and services. See “Item 1A. Risk Factors” for more information on the risks
relative to our operations and future prospects.
Revenue
Revenue increased by 146% in 2019 compared with 2018. Our revenue growth was primarily driven by new sales attributable to
our AppRiver acquisition. We additionally grew out revenue with continued success in our subscription-based business model with both
steady additions to the subscriber base and a high rate of existing customer renewals and the realization of previously contracted revenue
in our backlog.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant
impact on revenue, income from operations and net income, as well as the value of certain assets and liabilities on our consolidated
balance sheet. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant
accounting judgements by us. Management bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values
of assets and liabilities. We evaluate our estimates on a regular basis and make changes accordingly. Senior management has discussed
the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may
materially differ from these estimates under different assumptions or conditions. If actual results were to materially differ from these
estimates, the resulting changes could have a material adverse effect on our consolidated financial statements.
31
We consider accounting policies to be critical when they require us to make assumptions about matters that are highly uncertain
at the time the accounting estimate is made and when different estimates that our management reasonably has used have a material effect
on the presentation of our financial condition, changes in financial condition or results of operations. Management believes the following
critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial
statements.
Our critical accounting policies included the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Revenue recognition
Commission amortization
Income taxes
Valuation of goodwill and other intangible assets
Stock-based compensation costs
Right-of-use assets and lease obligations
Internal-use software
For additional discussion of the Company’s significant accounting policies, refer 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
promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be
entitled to those goods and services. The standard became effective for us in 2018, but did not have a material impact to our revenue
recognition process. For additional information regarding our adoption of ASC 606 please see “New Accounting Standards.”
We earn our revenue from subscription fees for rights related to the use of our software. Approximately 73% of our revenue in
2019 was derived from hosted solutions. While some contracts include one or more performance obligations, the revenue recognition
pattern generally is not impacted by separate allocations of these obligations because the services are generally satisfied over the same
period of time and revenue is recognized ratably over the contract term.
Our subscription terms historically have ranged from one to five years. We are increasingly moving to a monthly subscription
model. This shift has been largely driven by our recent acquisition activity, including AppRiver. As we further integrate our business,
we expect to focus on a monthly subscription model.
Revenue is recognized by applying the following steps:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Step 1: Identify the contract(s) with a customer,
Step 2: Identify the performance obligations in the contract,
Step 3: Determine the transaction price,
Step 4: Allocate the transaction price to the performance 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 (i) the contract is approved, (ii) we can identify each party’s rights regarding the
services and products transferred, (iii) we can identify the payment terms for the services and products, (iv) the contract has commercial
substance, and (v) it is probable we will be paid.
Step 2: Identifying the performance obligations in the contract:
ASC 606 requires identification and disclosure of performance obligations within a revenue contract. A good or service is
considered distinct if the customer can both benefit from the good or service on its own or with other resources that are readily available
to the customer, and the promise to transfer the good or service is separately identifiable from other promises in the contract.
32
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 probable that a significant
future reduction of cumulative revenue under the contract will not occur.
Step 4: Allocate the transaction price to the performance obligations in the contract:
We allocate transaction prices to each performance obligation based on the stand-alone selling price of our component services.
Step 5: Recognize revenue when (or as) the performance obligation is satisfied:
We recognize revenue when the customer obtains control of the product or services, at the amount allocated to the satisfied
performance obligation. Our performance obligations are generally satisfied over time.
While some contracts include one or more performance obligations (including the combined elements noted above along with
additional ongoing customer support and other hosted services), the revenue recognition pattern generally is not impacted by the 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 revenue.
Commission Amortization
We amortize our commission costs to expense on a systemic basis over the period of expected benefit to the customer. Determination
of the amortization period requires significant judgement. We apply the practical expedient noted in ASC 606-10-104 to account for our
commission costs and related amortizations at the portfolio level. Additionally, the Company has evaluated commissions earned upon
contract renewal as compared to initial commissions paid and determined that because commissions paid were not reasonably proportional
to their respective contract values, our renewal commissions could not be considered commensurate with the initial commissions paid.
We considered our average contract term length and historical customer retention rates to determine an average length of our customer
relationships. We also concluded our add-on sales generally occur halfway into our customer relationships, and evaluated our average
customer renewal terms. Based on these factors we have determined that 8 years, 4 years and 18 months are the appropriate amortization
periods to our new, add-on, and renewal sales commission expenses, respectively. We also perform subsequent assessments for impairment
of the related deferred cost asset when indicators present.
Following our acquisition of AppRiver in February 2019, we additionally evaluated AppRiver’s sales program to determine whether
capitalization of these expenses was appropriate. While we determined certain costs to acquire met the capitalization criteria, we also
determined renewal commissions earned were commensurate to the initial sales. Based on AppRiver’s primarily month-to-month
commitments the Company has chosen to apply the practical expedient approach to immediately recognize commission expenses associated
with the AppRiver program.
Income Taxes
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 December 31, 2019, we provided a valuation allowance against a significant portion, $22.5
million, of our accumulated deferred tax assets. This significant valuation allowance reflects our historical losses and the uncertainty of
future taxable income sufficient to utilize net operating loss carryforwards prior to their expiration. Our total deferred tax assets not
subject to a valuation allowance are valued at $36.6 million, and consist of $30.8 million for federal net operating loss carryforwards,
$3.2 million relating to temporary timing differences between U.S. Generally Accepted Accounting Principles (“GAAP”) and tax-related
expense, $2.2 million relating to U.S. state income tax credits, and $337 thousand related to Alternative Minimum Tax credits. 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 impacting the likelihood of realizing our deferred tax assets, judgment would have to be
applied in determining the amount of valuation allowance no longer required. Reversal of all or a part of this valuation allowance could
have a significant positive impact on operating results in the period that it becomes more likely than not that certain of the Company’s
deferred tax assets will be realized. Alternatively, should our future income decrease from current levels, a resulting increase to all or a
part of this valuation allowance could have a significant negative impact on our operating results.
33
Valuation of Goodwill and Other Intangible Assets
We account for the valuation of goodwill and other intangible assets after classifying intangible assets into three categories: (1)
intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3)
goodwill. For intangible assets with finite lives, tests for impairment must be performed if conditions exist that indicate that the carrying
value may not be recoverable. For intangible assets with indefinite lives and goodwill, tests for impairment must be performed at least
annually or more frequently if events or circumstances indicate that assets might be impaired.
Goodwill was $171.2 million, or 41%, and $13.8 million, or 13% of total assets, in each of the years ended December 31, 2019
and 2018, respectively.
We evaluate goodwill for impairment annually in the fourth quarter, or when there is reason to believe that the value has been
diminished or impaired. Evaluations for possible impairment are based upon a comparison of the estimated fair value of the reporting
unit to which the goodwill has been assigned, versus the sum of the carrying value of the assets and liabilities of that unit including the
assigned goodwill value. We include our entire Company as the reporting unit. The fair values used in this evaluation are estimated
based on the Company’s market capitalization, which is based on the Company’s outstanding common stock and market price of the
stock. Impairment is deemed to exist if the net book value of the unit exceeds its estimated fair value. We evaluated our goodwill in the
fourth quarter of 2019 and determined no impairment adjustment is required.
Our intangible assets with finite lives are amortized using a straight-line basis over their economic useful lives.
Stock-based Compensation
Our share-based awards include stock options, restricted stock awards and restricted stock units. We have non-qualified stock
options outstanding to employees and directors under various stock option plans. The plans require the exercise price of options granted
under these plans to equal or exceed the fair market value of the Company’s common stock on the date of grant. The options, subject to
termination of employment, generally expire ten years from the date of grant. Employee stock options typically vest pro-rata and
annually over three or four years. Restricted stock is issued to the employee at grant but is subject to vesting and transfer restrictions.
Stock is issued in exchange for restricted stock units when vesting conditions are met. The transfer restrictions and vesting conditions
may be time or performance-based. Restricted stock and restricted stock units typically vest pro-rata annually over three or 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 employees, officers and directors frequently contain
accelerated vesting provisions upon the occurrence of a change of control, as defined in the applicable grant agreements.
Right-of-use Assets and Lease Obligations
On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02) using the
modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results
and disclosure requirements for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior period
amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.
We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our
historical lease classification, our assessment on whether a contract was or contains a lease, and our initial direct costs for any leases
that existed prior to January 1, 2019. The first package of practical expedients only can be applied if lease assessment was correct under
ASC 840 which defines a lease as an arrangement conveying the right to use property, plant, or equipment usually for a stated period
of time. Historically, we did not perform the embedded lease assessment under ASC 840 as such we identified lease components of a
service contract as required by ASC 842 upon adoption. We did not elect the hindsight practical expedient in determining the lease and
in assessing impairment of our right-of-use assets. We also elected to combine our lease and non-lease components and to keep leases
with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements
of comprehensive income (loss) on a straight-line basis over the lease term. Additionally, for certain equipment leases, we apply a
portfolio approach to effectively account for the finance lease right-of-use (ROU) assets and lease liabilities.
Upon adoption, we recognized total ROU assets of $4.8 million, with corresponding lease liabilities of $6.0 million on the
consolidated balance sheets. The ROU assets include adjustments for deferred rent liabilities. The adoption did not impact our beginning
retained earnings, or our prior year consolidated statements of compressive income (loss) and statements of cash flows.
34
Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and lease liabilities are recognized at
commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only
payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use
our incremental borrowing rate based on the information available at commencement date in determining the present value of lease
payments. Our incremental borrowing rate is the financing rate of our long-term debt at the commencement date. The ROU asset also
includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may
include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. When determining the
probability of exercising such options, we consider contract-based, asset-based, entity-based, and market-based factors. Our lease
agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease
costs are expensed as incurred on the consolidated statements of income. Our lease agreements generally do not contain any residual
value guarantees or restrictive covenants.
Operating leases and finance leases are included in operating lease assets and property and equipment, respectively, on the
consolidated balance sheets. Operating lease and finance lease liabilities are separately presented on our consolidated balance sheets.
Internal-use Software
The Company capitalizes costs related to its cloud email security, productivity and compliance solutions and certain projects for
internal use incurred during the application development stage. Costs related to preliminary project activities and post implementation
activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is
generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events
or changes in circumstances occur that could impact the recoverability of these assets.
Full Year 2019 Summary of Operations
Financial
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Revenue for 2019 was $173.4 million compared with $70.5 million in 2018 and $65.7 million in 2017.
Gross margin for 2019 was $96.5 million or 56% of revenues compared with $55.3 million or 78% of revenues in 2018 and
with $53.1 million or 81% of revenues in 2017. Our 2019 decrease in gross margin is related to lower margin of revenue
associated with AppRiver’s Microsoft Office365 and hosted exchange products.
Net income (loss) for 2019 was $(14.7) million compared with $15.4 million in 2018 and $(8.1) million in 2017. Our 2019
net loss is attributed to significant transaction and integration-related costs incurred to acquire AppRiver and DeliverySlip
in 2019, amortization of intangible assets recognized from the same acquisitions as well as higher operating expenses and
interest expense. Our 2018 net income includes a $7.8 million tax benefit resulting from a decrease to our deferred tax asset
valuation allowance based on our expected future profitability and ability to use net operating losses. This compares to a
$12.5 million tax expense incurred in 2017 due to enactment of the Tax Act, which required us to reduce the valuation of
our deferred tax asset.
Net income (loss) attributable to common shareholders for 2019 was $(24.6) million compared with $15.4 million in 2018
and $(8.1) million in 2017. Our 2019 net loss attributable to common shareholders includes deemed and accrued dividends
of $9.9 million to preferred shareholders.
Net income (loss) per diluted share was $(0.46) for 2019 compared with $0.29 for 2018 and $(0.15) for 2017.
Unrestricted cash was $13.3 million on December 31, 2019.
Results of Operations
Revenue
The following table sets forth a year-over-year comparison of our total revenues:
(In thousands)
Revenues
2019
$ 173,428
Year Ended December 31,
2018
$ 70,478
Variance
2019 vs. 2018
2017
$
%
$ 65,663 $ 102,950
Variance
2018 vs. 2017
$
4,815
%
7 %
146 % $
35
The $103 million or 146% increase in revenue was primarily related to our AppRiver acquisition in February 2019, which
contributed $97.8 million for the year-end December 31, 2019 since the acquisition date. We additionally grew our revenue with
continued success in our subscription-based business model with both steady additions to the subscriber base and a high rate of existing
customer renewals and the realization of previously contracted revenue in our backlog. In the year ended December 31, 2019, we
categorized our revenue in the following core industry verticals: 23% healthcare, 19% financial services, 4% government sector and
54% as other. In the year ended December 31, 2018, we categorized our revenue in the following core industry verticals: 49% healthcare,
29% financial services, 7% government sector, and 15% as other. The year over year shift in our industry verticals is a result of a more
diverse customer base resulting from our AppRiver acquisition.
Additionally, sales continued from a wide base of distributors. Approximately 74% of our new business transacted in the year
ended December 31, 2019 resulted from our partner relationships. Approximately 43% of our new business transacted during the year
ended December 31, 2018, was from our partner relationships. Our acquired AppRiver partner network was the primary driver in our
year over year increase.
While we introduced bundled email security pricing during 2017 and have continued to add new bundled price offerings 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 effect on order growth and the revenue derived from our new orders.
Revenue Outlook:
We expect continued growth in our existing offering and in our new products, along with increased sales from our partner channels
to increase our business in 2020 and increase our year-over-year revenue.
Annual Recurring Revenue
We measure the health of our subscriber base by the growth of our Annual Recurring Revenue (“ARR”), which is defined as the
aggregate annualized contract value attributable to recurring revenue contracts as of the end of the applicable reporting period. We
calculate ARR be determining the annual or monthly revenue of subscription agreements that are active as of the end of the applicable
period and multiplying by 1 or 12. ARR aids us in determining to what extent individual customer relationships, considered in the
aggregate, are growing or declining in financial magnitude. ARR is summarized in the table below:
(In thousands)
Annual Recurring Revenue
2019
Year Ended December 31,
2018
2017
$
209,715 $
75,819 $
67,039
Backlog
Our backlog was $89.4 million at December 31, 2019, compared to $73.0 million at December 31, 2018. The backlog is comprised
of contractual commitments that we expect to amortize into revenue. As of December 31, 2019, the backlog was comprised of the
following elements: $43.3 million of deferred revenue that has been billed and paid, $10.9 million billed but unpaid, and approximately
$35.2 million of unbilled contracts.
The backlog is recognized into revenue ratably as the services are performed. Approximately 70% of the total backlog is expected
to be recognized as revenue during the next twelve months.
Cost of Revenue
The following table sets forth a year-over-year comparison of the cost of revenue.
(In thousands)
Cost of revenue
Year Ended December 31,
2018
2017
2019
Variance
2019 vs. 2018
$
%
$ 76,908 $ 15,186 $ 12,602 $ 61,722
406 % $
Variance
2018 vs. 2017
$
2,584
%
21 %
36
Cost of revenues is comprised of costs related to operating and maintaining the ZixData Center, a field deployment team, customer
service and support, Microsoft fees mostly associated with the resale of Microsoft Office365 and hosted exchange products and
depreciation expense of computer equipment and amortization of acquired technology. The $61.7 million or 406% increase in 2019
compared to 2018 reflected in the table above resulted primarily from our acquisition of AppRiver in February 2019. As a reseller of
Microsoft Office365 and hosted exchange products, which comprise approximately 75% of AppRiver-related revenue earned for the
year ended December 31, 2019, we expect our costs of revenue to remain at higher levels than we have historically incurred. We
additionally incurred increases in average headcount and other expenses to accommodate revenue growth.
The $2.6 million or 21% increase in cost of revenue in 2018 compared with 2017 reflected in the table above resulted primarily
from increases in average headcount, which include additional Information Archive support gained in the Erado acquisition in April
2018 and the Advanced Email Threat Protection support team gained in the Greenview acquisition in March 2017. We also incurred
additional costs associated with leased equipment supporting Advanced Threat Protection, and we amortized expense resulting from the
acquisition of technology. Additional increases relate to standard software maintenance and license support, and depreciation and other
expense relating to investments in networking equipment.
Research and Development Expenses
The following table sets forth a year-over-year comparison of our research and development expenses:
(In thousands)
Research and development expenses $ 20,431
2019
Year Ended December 31,
2018
$ 11,323
2017
$ 10,980 $
Variance
2019 vs. 2018
$
9,108
%
Variance
2018 vs. 2017
$
%
80 % $
343
3 %
Research and development expenses consist primarily of salary, benefits and stock-based compensation for our development staff,
independent contractor expense, and other direct and indirect costs associated with enhancing our existing products and services and
developing new products and services.
The $9.1 million or 80% increase in research and development expense in 2019 compared with 2018 reflected in the table above
resulted from combined $15.6 million cost increases in headcount and consulting attributable to our AppRiver acquisition in February
2019 and the expansion of our core Zix team, offset by additional $6.5 million of capitalized costs related to development of internal-
use software compared to 2018.
The $343 thousand or 3% increase in research and development expense in 2018 compared with 2017 reflected in the table above
resulted primarily from an increase in travel and average headcount, including the Advanced Email Threat Protection and additional
Information Archive R&D employees gained in the Greenview acquisition and Erado acquisition in March 2017 and April 2018,
respectively, partially offset by $1.5 million of costs related to development of new features and functionality for our hosting service
arrangements which we began capitalizing in 2018.
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,
2018
2017
2019
Variance
2019 vs. 2018
$
%
Variance
2018 vs. 2017
$
%
$ 54,903 $ 20,380 $ 20,472 $ 34,523
169 % $
(92 )
(0 )%
Selling and marketing expenses consist primarily of salary, commissions, travel, stock-based compensation and employee benefits
for selling and marketing personnel as well as costs associated with promotional activities and advertising.
The $34.5 million or 169% increase in selling and marketing expense in 2019 compared with 2018 reflected in the table above
was primarily due to our AppRiver acquisition in February 2019 as well as related integration activities including rebranding and website
development. We additionally increased in headcount expense and spending for marketing programs.
The $92 thousand decrease in selling and marketing expense in 2018 compared with 2017 resulted from lower commission and
bonus expenses driven by our implementation of GAAP accounting rule ASC 606, which became effective for our Company on January
1, 2018, and lower advertising and marketing costs. This decrease was offset by additional headcount expenses, including the employees
gained in the April 2018 Erado acquisition and the expansion of our business development lead qualifications team, stock- based
compensation, travel, and the amortization of acquisition related intangible assets.
37
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,
2018
2017
2019
Variance
2019 vs. 2018
$
%
Variance
2018 vs. 2017
$
%
$ 30,327
$ 13,619 $ 11,399 $ 16,708
123 % $
2,220
19 %
General and administrative expenses consist primarily of salary and bonuses, travel, stock-based compensation and benefits for
administrative and executive personnel as well as fees for professional services and other general corporate activities.
The $16.7 million or 123% increase in general and administrative expense from 2019 compared with 2018 resulted primarily from
AppRiver acquisition in February 2019 and transaction and integration costs associated with AppRiver acquisition and DeliverySlip
acquisition in May 2019. We additionally incurred increases in headcount expense, stock-based compensation expense as well as
advisory and audit fees.
The $2.2 million or 19% 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 office, and amortization
expense of internal use software, as well as other general and administrative costs due to the increase in headcount.
Income Taxes
Our Company or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and in the
Canadian federal and provincial jurisdictions. We recognize and measure uncertain tax positions using a two-step approach. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than
not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Our Company incurred a tax benefit of $4.5 million and $4.7 million, in 2019 and 2018, respectively, and incurred tax expense of
$18.6 million for 2017. The $4.5 million income tax benefit in 2019 is primarily attributed to current year loss, which increased our
deferred tax asset. Our 2018 tax benefit includes a $7.8 million release to our deferred tax asset valuation allowance based on expected
future profitability. On December 22, 2017, the U.S. enacted the Tax Act which significantly changed U.S. tax law. The Tax Act lowered
the Company’s statutory tax rate from 34% to 21% effective January 1, 2018. At December 31, 2017, the Company adjusted its deferred
tax balances to reflect the new tax rate that resulted in tax expense of $12.5 million. For all years presented, tax expense represented
deferred tax expense, refundable U.S. Alternative Minimum Tax, U.S. research and development credits, non-U.S. taxes payable related
to the operations of the Company’s Canadian subsidiary established in late 2002, and state income taxes.
Significant judgement is required in determining any valuation allowance recorded against deferred tax assets. In assessing the
need for a valuation allowance, we consider available evidence, including past earnings, estimates of future taxable income, and the
feasibility of tax planning strategies. At December 31, 2019, the Company partially reserved its U.S. net deferred tax assets due to the
uncertainty of future taxable income sufficient to utilize net loss carryforwards prior to their expiration. The portion of the Company’s
deferred tax asset not reserved was $36.6 million. The majority of this unreserved portion related to $30.8 million U.S. net operating
losses (“NOLs”) because we believe the Company will generate sufficient taxable income in future years to utilize these NOLs prior to
their expiration. The remaining balance consists of $3.2 million relating to temporary timing differences between GAAP and tax-related
expense, $2.2 million relating to U.S. state tax income credits, and $337 thousand related to Alternative Minimum Tax credits.
We have determined that utilization of existing NOLs against future taxable income is not limited by Section 382 of the Internal
Revenue Code. Future ownership changes, however, may limit the Company's ability to fully utilize its existing net operating loss
carryforwards against any future taxable income.
If we begin to generate additional U.S. taxable income in a future period or if the facts and circumstances on which our current
estimates and assumptions are based were to change, thereby impacting the likelihood of realizing a greater or lesser amount of our
deferred tax assets, judgement would have to be applied in determining the amount of valuation allowance required. Adjusting our
valuation allowance could have a significant impact on operating results in the period that it becomes more likely than not that an
additional portion of our deferred tax assets will or will not be realized.
38
Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower or higher than
anticipated; by tax effects of nondeductible compensation; or by changes in tax laws, regulations, or accounting principles, including
accounting for uncertain tax positions or interpretations. Significant judgment is required to determine the recognition and measurement
applicable to all income tax positions. This includes the potential recovery of previously paid taxes, which if settled unfavorably could
adversely affect our provision for income taxes or additional paid-in capital. In addition, our income tax returns are subject to
examination by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our provision for income.
Net Income (Loss)
Net Income (Loss) – The Company generated net loss of $14.7 million compared with a net income of $15.4 million in 2018 and
net loss of $8.1 million in 2017. The decrease in our net income is primarily due to transaction costs associated with our AppRiver and
DeliverySlip acquisitions and integration costs, as well as higher operating expense and interest expense. Additionally, a $4.5 million
income tax benefit improved our net loss in 2019. Our 2018 net income included a tax benefit resulting from the decrease to our deferred
tax asset valuation allowance as compared to the tax expense incurred following 2017 tax-reform legislation, as discussed above.
Liquidity and Capital Resources
Overview
Based on our 2019 financial results and current expectations, we believe our cash and cash equivalents, cash generated from
operations, and availability under our $25 million Revolving Facility (under which $2 million was drawn as of December 31, 2019 and
the undrawn balance of $23 million was available to fund working capital and for other general corporate purpose, including the
financing of permitted acquisitions, investments and restricted payments, subject to the conditions contained in the Credit Agreement)
will satisfy our working capital needs, capital expenditures, investment requirements, contractual obligations, commitments, and other
liquidity requirements associated with our operations through at least the next twelve months. We plan for and measure our liquidity
and capital resources through an annual budgeting process.
During 2019, our cash flow from operations was $14.0 million, a decrease of $2.7 million from the $16.7 million cash flow from
operations during 2018. At December 31, 2019, our cash and cash equivalents totaled $13.3 million, a decrease of $13.8 millio n from
the December 31, 2018 balance. The $13.8 million decrease in our cash position included an additional cash payment for debt issuance
costs, finance lease liabilities and acquisition related contingent consideration related to our acquisitions completed in 2019.
For the year ended December 31, 2019, we achieved 146% growth in revenue, 56% gross margin and strong cash collections
which we invested back for business integration. We expect integration spending to decrease and cash provision from operations to
significantly improve with acquired deferred revenue fully amortized and contracts renewal activities. While future results cannot be
guaranteed, we expect these trends to continue in the foreseeable future, and believe a significant portion of our spending is discretionary
and flexible and that we have the ability to adjust overall cash spending and raise additional funds in order to react, as needed, to any
shortfalls in projected cash.
Credit Facilities
On February 20, 2019, the Company entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders and
SunTrust Bank as administrative agent, which (1) provided for borrowing in the form of a senior secured term loan facility in an
aggregate principal amount of $175 million (the “Term Loan”), (2) provided for a senior secured delayed draw term loan facility in an
aggregate principal amount of $10 million (the “Delayed Draw Term Loan Facility”), and (3) provided for 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 (the “Revolving
Facility” and, together with the Term Loan and the Delayed Draw Term Loan Facility, the “Credit Facilities”). 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 (described below
in Note 22 “Acquisitions”), including certain fees, costs and expenses related thereto. On May 2, 2019, the Delayed Draw Term Loan
Facility was borrowed in full to pay a portion of the purchase price in connection with the DeliverySlip acquisition (described below in
Note 22 “Acquisitions”), including certain fees, costs and expenses related thereto. The Credit Facilities are secured by substantially all
the assets of Zix and its wholly-owned domestic subsidiaries and guaranteed by substantially all of Zix’s wholly-owned domestic
subsidiaries.
39
Sources and Uses of Cash
(In thousands)
Net cash provided by operations
Net cash used in investing activities
Net cash provided by (used in) financing
activities
$
$
$
2019
Years Ended December 31,
2018
2017
13,951 $
(296,243 ) $
16,671 $
(15,952 ) $
18,204
(11,285 )
268,740 $
(6,593 ) $
(367 )
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 2019 consist of $284.6 million, net of cash acquired, used in the acquisitions of AppRiver and DeliverySlip
and $11.7 million for capital expenditures, which include $8.2 million in internal-use software costs, and $3.5 million for computer and
networking equipment. These investments in new equipment and cloud hosting infrastructure are to renovate our business processes and
product offerings.
Investing activities in 2018 consist of $11.8 million, net of cash acquired, used in the acquisition of Erado and $4.2 million for
capital expenditures, which include $2.1 million for computer and networking equipment, $1.5 million in internal-use software costs,
and $500 thousand for other activities including the acquisition of other internal use software. These investments in new equipment and
cloud hosting infrastructure were to modernize our business processes and product offerings.
Financing activities in 2019 includes proceeds from long term debt of $179.2 million, net of issuance costs of $6.4 million and
repayment of $1.4 million, as well as $96.6 million, net of issuance costs, raised through the private purchase of preferred stock, and
$415 thousand received from the exercise of stock options. The proceeds from our debt and preferred stock issuances were used to fund
our AppRiver acquisition in February 2019 and our DeliverySlip acquisition in May 2019. We also used $3.8 million for contingent
consideration payments associated with our acquisitions of Greenview, Erado and DeliverySlip. In addition to these items, we paid $1.7
million to satisfy finance lease liabilities and $1.9 million to repurchase common stock related to the tax impact of vesting restricted
awards in 2019.
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 impact 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 impact of vesting restricted awards offset 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, 2019. The vested options are a subset of the outstanding options. The
value of the options is the number of options exercisable into shares multiplied by the exercise price for each share.
Exercise Price Range
Outstanding
Options
Summary of Outstanding Options
Total Value of
Outstanding
Options
(In
Vested
Options
(included in
outstanding
options)
thousands)
$2.00 - $3.49
$3.50 - $4.99
Total
Liquidity Summary
294,375
462,010
756,385 $
813
1,754
2,567
Total Value of
Vested
Options
(In thousands)
813
1,635
2,448
294,375
430,760
725,135 $
Based on our current 2020 budget plans, we believe we have adequate resources and liquidity to sustain operations or raise capital
as needed for at least the next twelve months.
40
Off-Balance Sheet Arrangements
None.
Contractual Obligations and Contingent Liabilities and Commitments
Our principal commitments consist primarily of obligations under operating and financing leases, which include among others,
certain leases of our offices, colocations and servers as well as contractual commitment related network infrastructure and data center
operations. The following table summarizes our commitments to settle contractual obligations in cash as of December 31, 2019:
(In thousands)
Operating leases, including imputed interest
(1)
Finance leases, including imputed interest
Total contractual obligations
$
Total
12,807
2,165
14,972
$
Payments Due by Year Ending December 31, 2020
Year 1 (1)
Years 2 & 3
Years 4 & 5
3,519
1,423
4,942
$
5,102
736
5,838
$
4,186
6
4,192
Beyond 5 Years
—
—
—
$
(1) Finance leases are related to servers and network infrastructure and our data center operations.
As of December 31, 2019, we had severance agreements with certain employees which would require us to pay up to
approximately $6.4 million if all such employees were terminated from employment with our Company following a triggering event
(e.g., change of control) as defined in the severance agreements.
New Accounting Pronouncements
Leases
On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02) using the
modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results
and disclosure requirements for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior period
amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840. Upon
adoption, we recognized total ROU assets of $4.8 million, with corresponding lease liabilities of $6.0 million on the consolidated balance
sheets. The ROU assets include adjustments for deferred rent liabilities. The adoption did not impact our beginning retained earnings,
or our prior year consolidated statements of income and statements of cash flows.
Credit Losses
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the
measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing
incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit
losses. We will adopt the new standard effective January 1, 2020 and do not expect the adoption of this guidance to have a material
impact on our consolidated financial statements.
Income Taxes
In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us
in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new
guidance on our consolidated financial statements.
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 $13.3 and $27.1 million at December 31, 2019 and 2018, respectively. We held no marketable securities and
no debt as of December 31, 2018 and 2017.
Interest Rate Risk
We are exposed to interest rate risk with respect to our Credit Facilities. At December 31, 2019, we had $185.6 million aggregated
principal amount of long term debt. We are subject to the risk of higher interest cost if either the LIBOR or the applicable margin
increases. The applicable margin varies depending on the Company’s total net leverage ratio. A hypothetical 25 basis point increase in
margin from the current margin as of December 31, 2019 to the maximum level would not result in a material change in the interest
rate. We do not currently hedge our variable interest debt, but we may do so in the future.
41
LIBOR is used as a reference rate for borrowings under our Revolving Facility, which had $23 million undrawn balance as of
December 31, 2019. LIBOR is set to be phased out at the end of 2021. We are currently reviewing how the LIBO rate phase out will
affect us, but we do not expect the impact to be material.
Foreign Currency Exchange Risk
We are growing our business internationally and will be subject to foreign currency risks related to our revenue and operating
expenses denominated in currencies other than the U.S. dollar, primarily the Canadian dollar and British Pounds. Accordingly, changes
in exchange rates have negatively affected, and may continue to negatively affect, our revenue and other operating results as expressed
in U.S. dollars.
We will experience fluctuations in our net income as a result of transaction gains or losses related to revaluing monetary asset and
liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. At this
time, we have not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our
foreign currency exchange risk. Foreign currency losses recognized in 2019, 2018 and 2017, respectively as investment and other income
in our consolidated statement of income are immaterial.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 begins on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Effectiveness of Disclosure Controls and Procedure
In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-
K, management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of
the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).
Based on their evaluation of these disclosure controls and procedures, they have concluded that our disclosure controls and procedures
were effective as of the date of such evaluation.
Certifications of our principal executive officer and our principal accounting officer, which are required in accordance with Rule
13a- 14 of the Exchange Act, are attached as exhibits to this Annual Report. This “Effectiveness of Disclosure Controls and Procedures”
section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction
with the certifications for a more complete understanding of the topics presented.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this
assessment, management used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission
in “Internal Control—Integrated Framework”. Based on this assessment, our management concluded that, as of December 31, 2019,
our internal control over financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by Whitley Penn
LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Controls over Financial Reporting
During the three months ended December 31, 2019, there have been no changes in our internal control over financial reporting
identified in connection with the evaluation described above that have materially affected or are reasonably likely to materially affect
internal control over financial reporting.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Zix Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Zix Corporation and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019,
based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2019, based on criteria established in 2013 Internal Control—Integrated Framework issued
by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the consolidated balance sheets of the Company, as of December 31, 2019 and 2018, and the related consolidated statements of
comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2019, and our report dated March 6, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the entity’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition 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 transactions and dispositions of
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 effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ WHITLEY PENN LLP
Plano, Texas
March 6, 2020
43
Item 9B. Other Information
None.
44
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Certain information required by this Item 10 is incorporated by reference from our Proxy Statement related to our 2020 Annual
Meeting of Shareholders under the sections “OTHER INFORMATION YOU NEED TO MAKE AN INFORMED DECISION —
Directors, Executive Officers and Significant Employees” and “Section 16(a) Beneficial Ownership Reporting Compliance,” and
“CORPORATE GOVERNANCE — Code of Ethics,” and “Nominating and Corporate Governance Committee, Selection of Director
Nominees,” and “Audit Committee.”
Our Board of Directors has adopted a Code of Conduct and Code of Ethics that applies to all directors, officers and employees of
the Company. A copy of this document is available on our website at www.zix.com under “Corporate Governance.” Any waiver or
amendment of the Code of Ethics with respect to our chief executive officer and senior financial officers will be publicly disclosed as
required by applicable law and regulation, including by posting the waiver on our website.
Item 11. Executive Compensation
The information required by this Item 11, including certain information pertaining to Company securities authorized for issuance
under equity compensation plans, is incorporated by reference from our Proxy Statement related to our 2020 Annual Meeting of
Shareholders under the section “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated by reference from our Proxy Statement related to our 2020 Annual
Meeting of Shareholders under the sections “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT” and “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS — Equity Compensation Plan
Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated by reference from our Proxy Statement related to our 2020 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. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated by reference from our Proxy Statement related to our 2020 Annual
Meeting of Shareholders under the section “INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS.”
45
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
See Index to Consolidated Financial Statements on page F-1 hereof.
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because of the
absence of the conditions under which they are required or because the information required is included in the consolidated financial
statements or notes thereto.
(a)(3) Exhibits
46
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(cid:130)(cid:3) (cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:3)(cid:82)(cid:85)(cid:3)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)
(cid:3)
(cid:44)(cid:87)(cid:72)(cid:80)(cid:3)(cid:20)(cid:25)(cid:17)(cid:3)Form 10-K Summary(cid:3)
(cid:49)(cid:82)(cid:87)(cid:3)(cid:36)(cid:83)(cid:83)(cid:79)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:17)(cid:3)
(cid:23)(cid:27)(cid:3)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Dallas, state of Texas, on March 6, 2020.
SIGNATURES
ZIX CORPORATION
By: /s/ DAVID E. ROCKVAM
David E. Rockvam
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on March 6, 2020.
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 B. VAN BUREN
(Brandon B. Van Buren)
Chief Executive Officer, President and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Chairman, Director
Director
Director
Director
49
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(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:87)(cid:82)(cid:70)(cid:78)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)
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(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)(cid:17)
(cid:3)
(cid:3)
(cid:41)(cid:16)(cid:21)
(cid:41)(cid:16)(cid:22)
(cid:41)(cid:16)(cid:23)
(cid:41)(cid:16)(cid:24)
(cid:41)(cid:16)(cid:25)
(cid:41)(cid:16)(cid:26)
(cid:3)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Zix Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Zix Corporation and subsidiaries (the “Company”), as of December
31, 2019 and 2018, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in 2013 Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and
our report dated March 6, 2020, expressed an unqualified opinion.
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 public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2006.
/s/ WHITLEY PENN LLP
Plano, Texas
March 6, 2020
F-2
ZIX CORPORATION
CONSOLIDATED BALANCE SHEETS
$
$
$
(In thousands, except share and par value data)
ASSETS
Current assets:
Cash and cash equivalents
Receivables, net
Prepaid and other current assets
Total current assets
Property and equipment, net
Operating lease assets
Intangible assets, net
Goodwill
Deferred tax assets
Deferred costs and other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Current portion of long-term debt
Operating lease liabilities, current
Finance lease liabilities, current
Total current liabilities
Long-term liabilities:
Deferred revenue
Deferred rent
Noncurrent operating lease liabilities
Noncurrent finance lease liabilities
Long-term debt
Total long-term liabilities
Total liabilities
Commitments and contingencies (Note 17)
Preferred stock:
Series A convertible preferred stock, $1 par value; 100,206 shares
designated, issued and outstanding in 2019 and no designated,
issued or outstanding in 2018
Total preferred stock
Stockholders’ equity:
Preferred stock, $1 par value, 10,000,000 shares authorized; none issued
and outstanding
Common stock, $0.01 par value, 175,000,000 shares authorized; 83,393,514 issued
and 55,640,397 outstanding in 2019 and 81,715,330 issued
and 54,186,180 outstanding in 2018
Additional paid-in capital
Treasury stock, at cost; 27,753,117 common shares in 2019 and 27,529,150
common shares in 2018
Accumulated deficit
Accumulated other comprehensive (loss) income
Total stockholders’ equity
Total liabilities, preferred stock and stockholders’ equity
$
See notes to consolidated financial statements.
F-3
December 31,
2019
2018
13,349 $
10,081
4,984
28,414
8,591
10,128
145,876
171,209
36,535
11,968
412,721 $
14,400 $
13,732
40,757
1,850
2,947
1,338
75,024
2,524
—
8,389
716
178,250
189,879
264,903
106,527
106,527
—
780
391,605
(110,298 )
(240,995 )
199
41,291
412,721 $
27,109
3,188
3,176
33,473
3,924
—
15,251
13,783
28,785
9,424
104,640
769
9,747
30,622
—
—
—
41,138
1,539
1,016
—
—
—
2,555
43,693
—
—
—
779
384,940
(108,392 )
(216,364 )
(16 )
60,947
104,640
ZIX CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share data)
Revenues
Cost of revenue
Gross margin
Operating expenses:
Research and development expenses
Selling, general and administrative expenses
Operating (loss) income
Other income (expense):
Investment and other income
Interest (expense)
Total other (expense) income
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Deemed and accrued dividends on preferred stock
Net income (loss) attributable to common stockholders
Basic income (loss) per share attributable to common stockholders
Diluted income (loss) per common share attributable to common
stockholders
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Comprehensive income (loss)
$
$
$
$
$
2019
Year Ended December 31,
2018
2017
173,428 $
76,908
96,520
20,431
85,230
(9,141 )
121
(10,105 )
(9,984 )
(19,125 )
4,478
(14,647 ) $
70,478 $
15,186
55,292
11,323
33,999
9,970
754
—
754
10,724
4,720
15,444 $
9,984
(24,631 ) $
—
15,444 $
65,663
12,602
53,061
10,980
31,871
10,210
339
—
339
10,549
(18,606 )
(8,057 )
—
(8,057 )
(0.46 ) $
0.29 $
(0.15 )
(0.46 ) $
53,025,152
53,025,152
0.29 $
52,591,714
53,481,295
(0.15 )
53,430,492
53,430,492
$
215
(14,432 ) $
(16 )
15,428 $
—
(8,057 )
See notes to consolidated financial statements.
F-4
ZIX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Stockholders’ Equity
(In thousands, except share data)
Balance, December 31, 2016
Issuance 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
performance stock units, net
Issuance of restricted common stock, net
Issuance of restricted performance common stock,
net
Employee stock-based compensation costs
Treasury repurchase program
Net income (loss)
Balance, December 31, 2017, as reported
Cumulative effect adjustment from changes
in accounting standards (Note 2)
Balance, January 1, 2018, as adjusted
Issuance 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 performance stock units, net
Issuance of restricted common stock, net
Issuance of restricted performance common stock,
net
Employee stock-based compensation costs
Treasury repurchase program
Adjustment from foreign currency translation
Net income (loss)
Balance, December 31, 2018
Issuance of Series A preferred stock in connection
with private placement, net of issuance costs
of $2,253
Issuance of Series B preferred stock in connection
with private placement, net of issuance costs
of $1,204
Issuance of Series A preferred stock for dividend
on Series B preferred stock upon conversion to
Series A preferred stock
Beneficial conversion feature of Series A
preferred stock
Accretion of beneficial conversion feature of
Series A Preferred Shares (Participating)
Beneficial conversion feature of Series B
preferred stock (Participating)
Accretion of beneficial conversion feature of
Converted Series A (Series B) Preferred
Shares (Participating)
Redemption Accretion of Series B preferred stock
Accrued dividend on Series A preferred
stock
Accrued dividend on Series B preferred stock
Issuance 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
performance stock units, net
Issuance of restricted common stock, net
Issuance of restricted performance common stock,
net
Employee stock-based compensation costs
Treasury repurchase program
Adjustment from foreign currency translation
Net income (loss)
Balance, December 31, 2019
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
—
— 78,913,266
769
Additional
Paid-In
Capital
374,386
Treasury
Stock
(97,770 )
Accumulated
Deficit
(228,315 )
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
—
49,070
—
—
932,303
9
4,197
—
—
—
4,206
—
—
126,167
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20,999
645,623
—
—
—
—
71,612
—
—
—
80,709,970
—
—
—
—
—
—
778
—
—
—
—
—
—
—
2,874
—
—
381,457
—
(762 )
(3,811 )
—
(102,343 )
—
—
—
(8,057 )
(236,372 )
—
—
— 80,709,970
—
778
—
381,457
—
(102,343 )
4,564
(231,808 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,112
(3,811 )
(8,057 )
43,520
4,564
48,084
—
—
90,011
1
165
—
—
—
166
—
—
50,751
—
—
—
—
—
—
—
—
—
—
—
—
—
—
32,665
735,987
95,946
—
—
—
—
—
—
—
—
—
— 81,715,330
—
—
—
—
—
—
—
779
—
—
—
—
—
—
—
3,318
—
—
—
384,940
—
(656 )
(5,393 )
—
—
(108,392 )
—
—
—
—
15,444
(216,364 )
—
—
—
—
—
—
(16 )
—
(16 )
—
—
—
—
2,662
(5,393 )
(16 )
15,444
60,947
64,914
62,662
—
—
—
—
—
—
—
35,086
33,881
—
—
—
—
—
—
—
206
—
—
—
—
—
—
—
—
—
1,407
—
—
—
—
(1,407 )
—
(1,407 )
—
99
—
—
—
—
(99 )
—
(99 )
—
1,067
—
—
—
—
(1,067 )
—
(1,067 )
—
—
—
—
35
187
6,159
1,030
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(35 )
(187 )
(6,159 )
(1,030 )
—
—
—
—
(35 )
(187 )
(6,159 )
(1,030 )
—
—
167,438
1
414
—
—
—
415
—
—
43,667
—
—
—
—
—
—
—
7,000
— 1,117,579
—
—
—
—
—
100,206 $
—
—
—
—
—
342,500
—
—
—
—
106,527 83,393,514 $
—
—
—
—
—
—
—
780 $
—
—
—
—
—
—
—
6,251
—
—
—
391,605 $
—
(1,906 )
—
—
—
(110,298 ) $
—
—
—
—
(14,647 )
(240,995 ) $
—
—
—
—
—
—
215
—
199 $
—
—
—
—
4,345
—
215
(14,647 )
41,291
See notes to consolidated financial statements.
F-5
ZIX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities:
Net income (loss)
Non-cash items in net income (loss):
Depreciation and amortization
Amortization of debt issuance costs
Employee stock-based compensation expense
Noncash lease costs
Changes in deferred taxes
Changes in operating assets and liabilities:
Receivables
Prepaid and other assets
Deferred costs and other assets
Accounts payable
Deferred revenue
Payment of acquisition related contingent consideration
Accrued and other liabilities
Net cash provided by operating activities
Investing activities:
Purchases of property, equipment and internal-use software
Acquisition of business, net of cash acquired
Net cash used in investing activities
Financing activities:
Proceeds of long-term debt
Debt issuance cost
Deferred debt financing costs
Repayment of long-term debt
Proceeds from issuance of preferred stock, net of offering costs
Payment of acquisition related contingent consideration
Proceeds from exercise of stock options
Stock issuance costs
Purchase of treasury stock
Repayment of finance lease liabilities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2019
Year Ended December 31,
2018
2017
$
(14,647 ) $
15,444 $
(8,057 )
24,429
967
6,251
2,828
(4,296 )
(369 )
(1,036 )
(2,347 )
6,121
(1,356 )
(582 )
(2,012 )
13,951
3,706
—
3,318
—
(4,754 )
(1,376 )
108
(3,139 )
(325 )
1,892
(195 )
1,992
16,671
2,741
—
2,874
—
18,470
64
(386 )
—
645
1,370
—
483
18,204
(11,653 )
(284,590 )
(296,243 )
(4,179 )
(11,773 )
(15,952 )
(3,041 )
(8,244 )
(11,285 )
187,000
(6,444 )
—
(1,363 )
96,588
(3,843 )
415
—
(1,906 )
(1,707 )
268,740
(208 )
(13,760 )
27,109
13,349 $
—
—
(60 )
—
—
(605 )
166
(45 )
(6,049 )
—
(6,593 )
(26 )
(5,900 )
33,009
27,109 $
—
—
—
—
—
—
4,206
—
(4,573 )
—
(367 )
—
6,552
26,457
33,009
$
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”) is a leading provider of cloud email security and productivity and
compliance solutions with easy-to-use solutions for email encryption and data loss prevention (“DLP”), advanced threat protection
archiving to meet the data protection and compliance needs of our customers in a variety of industries.
2. Summary of Significant Accounting Policies
Basis of Presentation — The accompanying consolidated financial statements include the accounts of all our wholly-owned
subsidiaries and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reported period. Our significant estimates include primarily those required in the valuation
or impairment analysis of goodwill and intangibles, property and equipment, revenue recognition, amortization period of our
commission amortization, allowances for doubtful accounts, stock-based compensation, litigation accruals, valuation allowances for
deferred tax assets and tax accruals. Although we believe that adequate accruals have been made for unsettled issues, additional gains
or losses could occur in future years from resolutions of outstanding matters. Actual results could differ materially from original
estimates.
Cash Equivalents — Cash investments with maturities of three months or less when purchased are considered cash equivalents.
Fair Value of Financial Instruments —The Company does not measure the fair value of any financial instrument other than cash
equivalents, options, and other equity awards. The carrying values of other financial instruments (receivables and accounts payable) are
not recorded at fair value but approximate fair values primarily due to their short-term nature. The carrying values of other current assets
and accrued expenses are also not recorded at fair value, but approximate fair values primarily due to their short-term nature. In addition,
the Company measures its long-term debt at fair value which approximates book value as the long-term debt bears market rate.
Valuation of Property and Equipment — The accounting policies and estimates relating to property and equipment are considered
significant because of the potential impact that impairment, obsolescence, or change in an asset’s useful life could have on the
Company’s operating results.
We record an impairment charge on the assets to be held and used when we determine based upon certain triggering events that
the carrying value of property and equipment may not be recoverable based on expected undiscounted cash flows attributable to such
assets. The amount of a potential impairment is determined by comparing the carrying amount of the asset to either the value determined
from a projected discounted cash flow method, using a discount rate that is considered to be commensurate with the risk inherent in the
Company’s current business model or the estimated fair market value. Assumptions are made with respect to future net cash flows
expected to be generated by the related asset. An impairment charge would be recorded for an amount by which the carrying value of
the asset exceeded the discounted projected net cash flows or estimated fair market value. Also, even where a current impairment charge
is not necessary, the remaining useful lives are evaluated. No impairment was recorded for any of the periods presented.
Property and equipment are recorded at cost and depreciated or amortized using the straight-line method over their estimated
useful lives as follows: computer and office equipment and software — three years; leasehold improvements — the shorter of five years
or the lease term; and furniture and fixtures — five years. We recorded a depreciation expense of $5.0 million for the year ended
December 31, 2019. We allocated $4.0 million of the expense to cost of revenue, $522 thousand to research and development expense,
and $482 thousand to selling, marketing, and general and administrative expenses.
Goodwill and Other Intangible Assets — We account for the valuation of goodwill and other intangible assets after classifying
intangible assets into three categories: (1) intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite
lives not subject to amortization; and (3) goodwill. For intangible assets with finite lives, tests for impairment must be performed if
conditions exist that indicate the carrying value may not be recoverable. For intangible assets with indefinite lives and goodwill, tests
for impairment must be performed at least annually or more frequently if events or circumstances indicate that assets might be impaired.
F-7
Goodwill was $171.2 million, or 41%, and $13.8 million, or 13%, of total assets as of December 31, 2019 and 2018, respectively.
We evaluate the goodwill for impairment annually in the fourth quarter, or when there is reason to believe that the value has been
diminished or impaired. Evaluations for possible impairment are based upon a comparison of the estimated fair value of the reporting
unit to which the goodwill has been assigned, versus the sum of the carrying value of the assets and liabilities of that unit including the
assigned goodwill value. We include our entire Company as the reporting unit. The fair values used in this evaluation are estimated
based on the Company’s market capitalization, which is based on the outstanding stock and market price of the stock. Impairment is
deemed to exist if the net book value of the unit exceeds its estimated fair value. No impairment was recorded for any of the periods
presented.
Our intangible assets with finite lives are amortized using a straight line basis over their economic useful lives.
Deferred Tax Assets — Deferred tax assets are recognized if it is “more likely than not” that the benefit of our deferred tax assets
will be realized on future federal or state income tax returns. At December 31, 2019, we provided a valuation allowance against a
significant portion, $22.5 million, of our accumulated deferred tax assets, reflecting our historical losses and the uncertainty of future
taxable income sufficient to utilize net operating loss carryforwards prior to their expiration. Our total deferred tax assets not subject to
a valuation allowance are valued at $36.6 million, and consist of $30.8 million for federal net operating loss carryforwards, $3.2 million
relating to temporary timing differences between U.S. GAAP and tax-related expense, $2.2 million relating to U.S. state income tax
credits, and $337 thousand related to Alternative Minimum Tax credits. 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 impacting the
likelihood of realizing our deferred tax assets, judgment would have to be applied in determining the amount of valuation allowance no
longer required. Reversal of all or a part of this valuation allowance could have a significant positive impact on operating results in the
period that it becomes more likely than not that certain of the Company’s deferred tax assets will be realized. Alternatively, should our
future income decrease from current levels, a resulting increase to all or a part of this valuation allowance could have a significant
negative impact on our operating results.
Uncertain Tax Positions — Our Company recognizes and measures uncertain tax positions using a two-step approach. The first
step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than
not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Right-of-use Assets and Lease Obligations — On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases
Topic 842) (ASU 2016-02) using the modified retrospective transition approach by applying the new standard to all leases existing at
the date of initial application.
We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our
historical lease classification, our assessment on whether a contract was or contains a lease, and our initial direct costs for any leases
that existed prior to January 1, 2019. The first package of practical expedients only can be applied if lease assessment was correct under
ASC 840 which defines a lease as an arrangement conveying the right to use property, plant, or equipment usually for a stated period of
time. Historically, we didn’t perform the embedded lease assessment under ASC 840 as such we identified lease components of a service
contract as required by ASC 842 upon adoption. We did not elect the hindsight practical expedient in determining the lease and in
assessing impairment of our right-of-use assets. We also elected to combine our lease and non-lease components and to keep leases
with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements
of comprehensive income (loss) on a straight-line basis over the lease term. Additionally, for certain equipment leases, we apply a
portfolio approach to effectively account for the finance lease right-of-use (ROU) assets and lease liabilities.
Upon adoption, we recognized total ROU assets of $4.8 million, with corresponding lease liabilities of $6.0 million on the
consolidated balance sheets. The ROU assets include adjustments for deferred rent liabilities. The adoption did not impact our beginning
retained earnings, or our prior year consolidated statements of comprehensive income (loss) and statements of cash flows.
Under Topic 842, we determine if an arrangement is a lease at inception. ROU assets and lease liabilities are recognized at
commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only
payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use
our incremental borrowing rate based on the information available at commencement date in determining the present value of lease
payments. Our incremental borrowing rate is the financing rate of our long-term debt at the commencement date. The ROU asset also
includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may
include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. When determining the
probability of exercising such options, we consider contract-based, asset-based, entity-based, and market-based factors. Our lease
agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease
costs are expensed as incurred on the consolidated statements of income. Our lease agreements generally do not contain any residual
value guarantees or restrictive covenants.
F-8
Operating leases are included in operating lease assets, other current liabilities and noncurrent lease liabilities on our consolidated
balance sheets. Finance leases are included in property and equipment, other current liabilities and noncurrent lease liabilities on our
consolidated balance sheets.
Revenue Recognition— In May 2014, The Financial Accounting Standards Board (“FASB”) issued ASC 606 which requires
revenue recognition when promised goods or services are transferred to customers in an amount that reflects the consideration to which
an entity expects to be entitled to those goods and services. The standard became effective for us in 2018 but did not have a material
impact to our revenue recognition process.
We earn our revenue from subscription fees for rights related to the use of our software. Approximately 73% of our revenue in
2019 was derived from hosted solutions. While some contracts include one or more performance obligations, the revenue recognition
pattern generally is not impacted by separate allocations of these obligations because the services are generally satisfied over the same
period of time and revenue is recognized ratably over the contract term.
Our subscription terms historically have ranged from one to five years. We are increasingly moving to a monthly subscription
model. This shift has been largely driven by our recent acquisition activity, including AppRiver. As we further integrate our business,
we expect to focus on a monthly subscription model.
Revenue is recognized by applying the following steps:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Step 1: Identify the contract(s) with a customer,
Step 2: Identify the performance obligations in the contract,
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance 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 can identify the payment terms for the services and products, the contract has commercial substance, and
it is probable we will be paid.
Step 2: Identify the performance obligations in the contract:
ASC 606 requires identification and disclosure of performance obligations within a revenue contract. A good or service is
considered distinct if the customer can both benefit from the good or service on its own or with other resources that are readily available
to the customer, and the promise to transfer the good or service is separately identifiable from other promises in the contract.
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.
Step 4: Allocate the transaction price to the performance obligations in the contract:
We allocate transaction prices to each performance obligation based on the stand-alone selling price of our component services.
Step 5: Recognize revenue when (or as) the performance obligation is satisfied:
We begin recognize revenue when the customer obtains control of the product or services, at the amount allocated to the satisfied
performance obligation. Our performance obligations are generally satisfied over time.
F-9
While some contracts include one or more performance obligations (including the combined elements noted above along with
additional ongoing customer support and other hosted services), the revenue recognition pattern generally is not impacted by the 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 revenue.
Commission Amortization — We amortize our commission costs to expense on a systemic basis over the period of expected benefit
to the customer. Determination of the amortization period requires significant judgement. We apply the practical expedient noted in ASC
606-10-10-4 to account for our commission costs and related amortizations at the portfolio level. Additionally, the Company has evaluated
commissions earned upon contract renewal as compared to initial commissions paid and determined that because commissions paid were
not reasonably proportional to their respective contract values, our renewal commissions could not be considered commensurate with the
initial commissions paid.
We considered our average contract term length and historical customer retention rates to determine an average length of our customer
relationships. We also concluded our add-on sales generally occur halfway into our customer relationships and evaluated our average
customer renewal terms. Based on these factors we have determined that 8 years, 4 years and 18 months are the appropriate amortization
periods to our new, add-on, and renewal sales commission expenses, respectively. We also perform subsequent assessments for impairment
of the related deferred cost asset when indicators present.
Following our acquisition of AppRiver in February 2019, we additionally evaluated AppRiver’s sales program to determine whether
capitalization of these expenses was appropriate. While we determined certain costs to acquire met the capitalization criteria, we also
determined renewal commissions earned were commensurate to the initial sales. Based on AppRiver’s primarily month-to-month
commitments the Company has chosen to apply the practical expedient approach to immediately recognize commission expenses associated
with the AppRiver program.
Internal Use Software — The Company capitalizes costs related to its cloud email security, productivity and compliance solutions
and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities
and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated
useful life, which is generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for
impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
In 2019, we capitalized $8.2 million of costs related to internal-use software. The Company expects our capitalization of these
costs to increase in the future.
Advertising Expense — Advertising costs are expensed as incurred. Our operations include advertising expense of $4.3 million,
$1.3 million, and $1.5 million in 2019, 2018, and 2017, respectively.
Stock-Based Compensation — We currently use the straight-line amortization method for recognizing stock option and restricted
stock compensation costs. The measurement and recognition of compensation expense for all share-based payment awards made to our
employees and directors are based on the estimated fair value of the awards on the grant dates. The grant date fair value is estimated
using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists.
Such cost is recognized over the period during which an employee or director is required to provide service in exchange for the award,
i.e., “the requisite service period” (which is usually the vesting period). We also estimate the number of instruments that will ultimately
be earned, rather than accounting for forfeitures as they occur.
Earnings Per Share (“EPS”) — Basic EPS is based on the weighted average number of common shares outstanding during each
period. Diluted EPS adjusts Basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the
treasury stock method.
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Topic 842 requires companies to generally recognize on
the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. We elected the available practical
expedients and adopted ASC 842 effective January 1, 2019, prospectively. The adoption of this standard resulted in the recognition of
right-to-use assets and lease liabilities of $4.8 million and $6.0 million, with no material impact on the results of operations and cash
flows. See below Note 8 “Leases" for additional information regarding our leases.
F-10
Recent Accounting Pronouncements Not Yet Adopted
Credit Losses
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update No. 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the
measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing
incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit
losses. We will adopt the new standard effective January 1, 2020 and do not expect the adoption of this guidance to have a material
impact on our consolidated financial statements.
Intangibles – Goodwill and Other
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment (ASU 2017-04) to simplify the subsequent measurement of goodwill. The guidance
removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will
now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The
accounting standard will be effective for reporting periods beginning after December 15, 2019 and is not expected to have a material
impact on the Company's consolidated financial position, results of operations and cash flows.
Income Taxes
In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us
in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new
guidance on our consolidated financial statements.
3. Stock Options and Stock-Based Employee Compensation
Below is a summary of common stock options outstanding at December 31, 2019:
Employee and Director Stock Option Plans:
2004 Stock Option Plan
2006 Director’s Stock Option Plan
2012 Incentive Plan
2018 Omnibus 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
105,000
25,000
626,385
—
756,385
105,000
25,000
595,135
—
—
—
— 4,180,776
725,135 4,180,776
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 employees and directors under various stock option plans. The plans require
the exercise price of options granted under these plans to equal or exceed the fair market value of the Company’s common stock on the
date of grant. The options, subject to termination of employment, generally expire ten years from the date of grant. Historically, our
employee options and equity awards typically vested pro-rata and annually over three or four years. Stock-based grants to employees,
officers and directors frequently contain accelerated vesting provisions upon the occurrence of a change of control, as defined in the
applicable option agreements.
Under the terms of the 2018 Omnibus Incentive Plan approved by our shareholders during our annual meeting held on June 6,
2018, (the “2018 Plan”), 6,000,000 shares are available for issuance. Awards issued under the 2018 Plan typically vest pro-rata and
annually over three or four years.
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 number of additional shares (not to exceed 1,327,000) underlying options outstanding under
certain of the Company’s prior equity plans that thereafter terminate or expire unexercised, or are cancelled, forfeited, or lapse for any
reason. Our shareholders approved an Amended and Restated 2012 Incentive Plan during our annual meeting held June 24, 2015,
increasing the number of shares available for grant by 3,600,000. Awards issued under the 2012 Plan typically vest pro-rata and annually
over three or four years.
F-11
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 subject to time-based vesting (“Restricted Stock”) and some of which
are subject to performance-based vesting (“Performance Stock”), and (iii) restricted stock units, some of which are subject to time-based
vesting (“RSUs”) and some of which are subject to performance-based vesting (“Performance RSUs”).
For the twelve months ended December 31, 2019, 2018, and 2017, respectively, the total stock-based compensation expense
resulting from stock options, Restricted Stock, RSUs, Performance RSUs, and Performance Stock was recorded to the following line
items of our consolidated statements of comprehensive income (loss):
(In thousands)
Cost of revenue
Research and development expenses
Selling, general and administrative expenses
Stock-based compensation expense
Year Ended December 31,
2018
2017
2019
$
$
569 $
1,056
4,626
6,251 $
327 $
469
2,522
3,318 $
304
374
2,196
2,874
Our stock-based compensation expense has increased yearly due to program expansion associated with our Company growth. A
deferred tax asset of $1.2 million, $673 thousand, and $824 thousand resulting from stock-based compensation expense associated with
awards relating to the Company’s U.S. operations, was recorded for the twelve months ended December 31, 2019, 2018, and 2017,
respectively. As of December 31, 2019, there was $11.4 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 1.6 years.
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 life of the options. We did not
grant options in 2019 or 2018. We granted 30,750 options in 2017.
The following weighted average assumptions were applied in determining the fair value of options granted during the respective
periods:
Risk-free interest rate
Expected option life (years)
Expected stock price volatility
Expected dividend yield
Fair value of options granted
Year Ended December 31,
2018
2019
2017
—
—
—
—
— $
—
—
—
—
— $
2.02 %
5.7
42 %
—
2.06
$
The assumptions used in the BSOPM valuation are critical as a change in any given factor could have a material impact on the
financial results of the Company. The weighted average grant-date fair value of awards of restricted stock and restricted stock units is
based on quoted market price of the Company’s common stock on the date of grant.
F-12
Stock Option Activity
The following is a summary of all stock option transactions for the three years ended December 31, 2019:
Outstanding at January 1, 2017
Granted at market price
Cancelled or expired
Exercised
Outstanding at December 31, 2017
Granted at market price
Cancelled or expired
Exercised
Outstanding at December 31, 2018
Granted at market price
Cancelled or expired
Exercised
Outstanding at December 31, 2019
Options exercisable at December 31, 2019
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Yrs)
3.78
4.96
4.71
4.51
3.11
0.00
4.04
1.83
3.23
0.00
0.00
2.48
3.39
3.38
4.46
4.38
Shares
1,960,279 $
30,750 $
(37,412 ) $
(932,303 ) $
1,021,314 $
— $
(7,480 ) $
(90,011 ) $
923,823 $
— $
— $
(167,438 ) $
756,385 $
725,135 $
At December 31, 2019, all 756,385 options outstanding and all 725,135 options exercisable had an exercise price lower than the
market value of the Company’s common stock. The aggregate intrinsic value of these options was $2.6 million and $2.5 million,
respectively. At December 31, 2018, 923,823 options outstanding and 817,573 options exercisable had an exercise price lower than the
market value of the Company’s common stock. The aggregate intrinsic value of these options was $2.3 million and $2.1 million,
respectively.
The total intrinsic value of options exercised during the years ended December 31, 2019 and 2018, was $987 thousand and $334
thousand, respectively.
Summarized information about stock options outstanding at December 31, 2019, is as follows:
Range of Exercise Prices
$2.00 - $3.49
$3.50 - $4.99
Options Outstanding
Weighted Average
Remaining
Contractual Life
Weighted
Average
Exercise Price
Number
Exercisable
Options Exercisable
2.60 $
5.64 $
4.46 $
2.76 294,375 $
3.80 430,760 $
3.39 725,135 $
Weighted
Average
Exercise Price
2.76
3.80
3.38
Number
Outstanding
294,375
462,010
756,385
There were 817,573 and 832,376 exercisable options at December 31, 2018 and 2017, respectively.
F-13
Restricted Stock Activity
The following is a summary of all Restricted Stock activity during the three years ended December 31, 2019:
Non-vested restricted stock at January 1, 2017
Granted at market price
Vested
Cancelled
Non-vested restricted stock at December 31, 2017
Granted at market price
Vested
Cancelled
Non-vested restricted stock at December 31, 2018
Granted at market price
Vested
Cancelled
Non-vested restricted stock at December 31, 2019
Restricted
Shares
689,242 $
665,623 $
(251,956 ) $
(20,000 ) $
1,082,909 $
842,546 $
(419,452 ) $
(151,003 ) $
1,355,000 $
1,236,579 $
(560,497 ) $
(119,000 ) $
1,912,082 $
Weighted
Average
Fair Value
3.94
5.02
4.00
4.96
4.57
4.53
4.44
4.77
4.71
7.36
4.66
7.00
6.26
Restricted Stock Unit Activity
The following is a summary of all RSU activity during the three years ended December 31, 2019:
Non-vested restricted stock units at January 1, 2017
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
Granted at market price
Vested
Cancelled
Non-vested restricted stock units at December 31, 2019
Restricted
Stock Units
Weighted
Average
Fair Value
158,086 $
54,500 $
(126,167 ) $
— $
86,419 $
36,500 $
(50,751 ) $
— $
72,168 $
131,294 $
(63,387 ) $
— $
140,075 $
3.92
4.96
4.07
—
4.36
4.57
4.18
—
4.59
8.19
5.21
—
7.59
F-14
Performance RSU Activity
The following is a summary of all Performance RSU activity during the three years ended December 31, 2019:
Non-vested performance RSUs at January 1, 2017
Granted at market price
Vested
Forfeited
Non-vested performance RSUs at December 31, 2017
Granted at market price
Vested
Forfeited
Non-vested performance RSUs at December 31, 2018
Granted at market price
Vested
Forfeited
Non-vested performance RSUs at December 31, 2019
Restricted
Stock Units
Weighted
Average
Fair Value
90,831 $
11,500 $
(20,999 ) $
(41,668 ) $
39,664 $
5,500 $
(32,665 ) $
— $
12,499 $
50,000 $
(7,000 ) $
— $
55,499 $
3.81
4.96
4.08
3.83
3.98
4.04
3.91
0.00
4.20
8.84
4.08
0.00
8.39
Performance Stock Activity
The following is a summary of all Performance Stock activity during the three years ended December 31, 2019:
Non-vested performance stock at January 1, 2017
Granted at market price
Vested
Forfeited
Non-vested performance stock at December 31, 2017
Granted at market price
Vested
Forfeited
Non-vested performance stock at December 31, 2018
Granted at market price
Vested
Forfeited
Non-vested performance stock at December 31, 2019
Restricted
Stock Units
Weighted
Average
Fair Value
121,500 $
112,112 $
—
(40,502 ) $
193,110 $
153,723 $
(77,874 ) $
(13,333 ) $
255,626 $
417,500 $
(123,558 ) $
(75,000 ) $
474,568 $
3.61
4.96
—
3.61
4.39
4.04
4.26
4.50
4.22
7.15
4.15
7.15
6.38
The weighted average grant-date fair value of awards of Restricted Stock, RSUs, Performance RSU’s, and Performance Stock is
based on the quoted market price of the Company’s common stock on the date of grant.
4. Supplemental Cash Flow Information
Supplemental information relating to interest and taxes:
(In thousands)
Interest payments
Income tax payments
2019
Year Ended December 31,
2018
2017
$
$
9,181 $
493 $
— $
1,115 $
—
636
F-15
5. Receivables, net
(In thousands)
Gross accounts receivables
Allowance for returns and doubtful accounts
Unpaid portion of deferred revenue
Note receivable
Allowance for note receivable
Receivables, net
December 31,
2019
2018
$
$
21,193 $
(265 )
(10,847 )
458
(458 )
10,081 $
14,135
(277 )
(10,670 )
458
(458 )
3,188
The allowance for doubtful accounts includes all specific accounts receivable which we believe are likely not collectable based
on known information. The reduction for the unpaid portion of deferred revenue represents future customer service or maintenance
obligations which have been billed to customers, but remain unpaid as of the respective balance sheet dates. Deferred revenue on our
consolidated balance sheets represents future customer service or maintenance obligations which have been billed and collected as of
the respective balance sheet dates.
The note receivable represents the remaining outstanding balance of an original note related to the sale of a product line in 2005
in the amount of $540 thousand. This was fully reserved at the time of the sale as the note’s collectability was not assured. The note
receivable is fully reserved at December 31, 2019 and 2018.
6. Prepaid and other current assets
(In thousands)
December 31,
2019
2018
Prepaid insurance, maintenance, software licenses and
other
Tax-related
Prepaid and other current assets
$
$
4,881 $
103
4,984 $
2,460
716
3,176
7. Property and Equipment
(In thousands)
Computer and office equipment and software
Leasehold improvements
Furniture and fixtures
Finance lease right-of-use assets
Less accumulated depreciation
Property and equipment, net
December 31,
2019
2018
$
$
30,335 $
7,794
2,733
3,362 $
44,224
(35,633 )
8,591 $
26,762
6,834
2,181
—
35,777
(31,853 )
3,924
Our operations include depreciation expense related to property and equipment of $5.0 million, $2.4 million, and $2.4 million in
2019, 2018, and 2017, respectfully.
F-16
8. Leases
Effective January 1, 2019, the Company adopted ASC 842, which requires recognition of a right-of-use asset and lease liability
for all leases at the commencement date based on the present value of lease payments over the lease term. Additional qualitative and
quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively
and elected the package of transition practical expedients that does not require reassessment of (1) whether any existing or expired
contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available
practical expedients to not separate lease and non-lease components, which consist principally of common area maintenance charges,
for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.
The Company determines if a contract is or contains a lease at inception. The Company has operating leases for office spaces and
data centers and finance leases for equipment. The Company has entered into lease contracts ranging from 1 to 12 years with the majority
of leases having terms one to seven years, many of which include options to extend in various increments. Variable lease costs consist
primarily of variable common area maintenance, taxes, insurance, parking and utilities. The Company’s leases do not have any residual
value guarantees or restrictive covenants.
As the implicit rate is not readily determinable for most of the Company’s lease agreements, the Company uses an estimated
incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using
the Company's weighted average interest rate of the term loan and delayed draw term loan.
The components of lease costs are as follows:
(In thousands)
Finance lease costs:
Amortization of right-of-use asset
Interest on lease liabilities
Operating lease costs
Short-term lease costs
Variable lease costs
Total lease costs
Supplemental cash flow information related to leases is as follows:
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows related to operating leases
Operating cash flows related to finance leases
Financing cash flows related to finance leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
Finance leases
Supplemental balance sheet information related to leases is as follows:
$
$
$
Year Ended
December 31,
2019
1,330
151
3,490
2,236
773
7,980
Year Ended
December 31,
2019
2,410
151
1,707
7,999
3,362
(In thousands)
Operating Leases
Operating lease right-of-use asset
Total operating lease assets
Balance Sheet Classification
Operating lease assets
December 31,
2019
$
$
10,128
10,128
F-17
(In thousands)
Finance Leases
Finance lease right-of-use assets
Accumulated depreciation - finance leases
Finance lease right-of-use assets, net
$
Property and equipment, net
$
Balance Sheet Classification
December 31,
2019
Weighted average remaining lease term and weighted average discount rate are as follows:
Weighted Average Remaining Lease Term (Years)
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
Maturities of lease liabilities are as follows:
Payments Due by Year Ending December 31, 2020
3,362
(1,320 )
2,042
4.18
1.92
5.86 %
6.15 %
(In thousands)
Operating leases
Less imputed interest
Total
Finance leases
Less imputed interest
Total
Total
$ 12,807 $ 3,519 $
Year 1
Years 2 & 3 Years 4 & 5 Beyond 5 Years
—
5,102 $
4,186 $
(1,471 )
$ 11,336
$ 2,165 $ 1,423 $
736 $
6 $
—
(111 )
$ 2,054
9. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018, are as follows:
(In thousands)
Opening balance
Additions
Acquisition adjustments
Effect of currency translation adjustment
Goodwill
Year Ended December 31,
2018
2019
$
$
13,783 $
157,121
—
305
171,209 $
8,469
6,215
(901 )
—
13,783
Our 2019 acquisitions of DeliverySlip (as defined herein) and AppRiver (as defined herein) resulted in the addition to our goodwill
balance in 2019. Our 2018 acquisition of Erado (as defined herein) resulted in the addition to our goodwill balance in 2018. Our 2018
acquisition adjustments to goodwill reflect the appropriate reallocation of excess purchase price from goodwill to acquired assets and
liabilities related to our 2017 Greenview and EMS (as defined herein) purchases. We evaluate goodwill for impairment annually in the
fourth quarter, or when there is reason to believe that the value has been diminished or impaired. There were no impairment indicators
to the goodwill recorded as of December 31, 2019.
F-18
Our other intangible assets consist of the following:
(In thousands)
Internal use software
Internally-developed hosting arrangement
Trademarks and other
Technology
Customer relationships
Vendor relationship
Effect of currency translation adjustment
Intangible assets, net
(In thousands)
Internal use software
Internally-developed hosting arrangement
Trademarks and other
Technology
Customer relationships
Intangible assets, net
Gross Carrying
Amount
December 31, 2019
Accumulated
Amortization
Net Carrying
Amount
$
1,456 $
9,487
5,091
52,905
98,879
1,000
(504 ) $
(1,258 )
(587 )
(9,836 )
(10,597 )
(278 )
$
168,818 $
(23,060 ) $
952
8,229
4,504
43,069
88,282
722
118
145,876
Gross Carrying
Amount
December 31, 2018
Accumulated
Amortization
Net Carrying
Amount
$
$
1,189 $
1,520
691
7,604
7,870
18,874 $
(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, 2019, 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,
2019
$
$
7,132
1,478
10,827
19,437
The following table summarizes our estimated future amortization expense:
(In thousands)
Amortization expense
2020
25,580
2021
25,506 $
2022
23,686 $
2023
21,095 $
$
2024
Thereafter
Total
16,906 $
32,985 $ 145,758
10. Accrued Expenses
(In thousands)
Employee compensation and benefits
Professional fees
Taxes
Other
Total accrued expenses
December 31,
2019
2018
$
$
7,231 $
1,576
575
4,350
13,732 $
5,122
1,289
113
3,223
9,747
F-19
11. Long-term Debt
On February 20, 2019, the Company entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders and
SunTrust Bank as administrative agent, which (1) provided for borrowing in the form of a senior secured term loan facility in an
aggregate principal amount of $175 million (the “Term Loan”), (2) provided for a senior secured delayed draw term loan facility in an
aggregate principal amount of $10 million (the “Delayed Draw Term Loan Facility”), and (3) provided for 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 (the “Revolving
Facility” and, together with the Term Loan and the Delayed Draw Term Loan Facility, the “Credit Facilities”). 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 (described below
in Note 22 “Acquisitions”), including certain fees, costs and expenses related thereto. On May 2, 2019, the Delayed Draw Term Loan
Facility was borrowed in full to pay a portion of the purchase price in connection with the DeliverySlip acquisition (described below in
Note 22 “Acquisitions”), including certain fees, costs and expenses related thereto. As of December 31, 2019, the Company had an
outstanding debt balance of $2.0 million attributable to the Revolving Facility. The Credit Facilities are secured by substantially all the
assets of Zix and its wholly-owned domestic subsidiaries and guaranteed by substantially all of Zix’s wholly-owned domestic
subsidiaries.
Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (1) the adjusted LIBOR rate (as defined
in the Credit Agreement) plus a margin ranging from 2.50% to 3.50% or (2) the alternate base rate (as defined in the Credit Agreement)
plus a margin ranging from 1.50% to 2.50%. The applicable margin varies depending on the Company’s total net leverage ratio.
The Credit Facilities are scheduled to mature on February 20, 2024, unless extended in accordance with the terms of the Credit
Agreement. The Credit Agreement includes procedures for additional financial institutions to become lenders, or for any existing lender
to increase its commitments thereunder, subject to the limits and conditions set forth in the Credit Agreement.
Optional prepayments of borrowings under the Credit Facilities are permitted at any time and do not require any prepayment
premium (other than reimbursement of the lenders’ breakage and redeployment costs in the case of a prepayment of LIBOR borrowings).
The Credit Agreement contains various financial, operational, and legal covenants. The financial covenant is tested on a quarterly
basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The financial covenant requires the
Company to maintain a maximum total net leverage ratio of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
5.00:1.00 for the fiscal quarters ending December 31, 2019 through June 30, 2020;
4.75:1.00 for the fiscal quarters ending September 30, 2020 through March 31, 2021;
4.50:1.00 for the fiscal quarters ending June 30, 2021 through December 31, 2021; and
4.25:1.00 for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter.
The non-financial covenants restrict the Company’s ability and the ability of the Company’s restricted subsidiaries 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, enter into restrictive agreements, and amend organizational documents or the terms of junior indebtedness.
The Credit Agreement contains events of default that Zix believes are customary for a secured credit facility. If an event of default
relating to bankruptcy or other insolvency events occurs, all obligations under the Credit Agreement will immediately become due and
payable. If any other event of default exists under the Credit Agreement, the lenders may accelerate the maturity of the Credit Facilities
and exercise other rights and remedies, including foreclosure or other actions against the collateral. If any default exists under the Credit
Agreement, or if the Company is unable to make any of the representations and warranties in the Credit Agreement at the applicable
time, Zix will be unable to borrow additional funds or have letters of credit issued under the Credit Agreement.
Term Loan
As of December 31, 2019, the Company had $173.7 million in principal outstanding under the Term Loan. The Term Loan was
fully drawn on February 20, 2019 in the amount of $175 million, and requires quarterly payments of principal of $437.5 thousand
beginning on June 30, 2019. In addition to other customary mandatory prepayment requirements, the Term Loan requires annual
prepayments based on a percentage of Zix’s excess cash flow, which percentage will reduce if Zix’s total net leverage ratio decreases.
F-20
At December 31, 2019, the Company had an outstanding debt balance of $168.2 million attributable to the Term Loan based on
the 6.32% interest rate in effect during the period from February 20, 2019 through December 31, 2019. Included in the balance at
December 31, 2019 is $5.5 million of unamortized debt issuance costs.
Based on the calculation of excess cash flow and total net leverage ratio and for the year ended December 31, 2019, the Company
is not required to make prepayment in addition to the quarterly installment.
Future scheduled principal payments under the Term Loan as of December 31, 2019 are as follows:
(In thousands)
Year Ending December 31,
2020
2021
2022
2023
2024
Total
Amount
1,750
1,750
1,750
1,750
166,688
173,688
Delayed Draw Term Loan Facility
At December 31, 2019, the Company had $10 million in principal outstanding under the Delayed Draw Term Loan Facility. The
Delayed Draw Term Loan Facility was fully drawn on May 2, 2019 in the amount of $10 million to fund the DeliverySlip acquisition.
The Delayed Draw Term Loan Facility requires 1.00% per annum amortization of the original principal amount borrowed, payable in
equal quarterly installments of $25 thousand beginning on September 30, 2019. In addition to other customary mandatory prepayment
requirements, the Delayed Draw Term Loan Facility requires annual prepayments based on a percentage of Zix’s excess cash flow,
which percentage reduces if Zix’s total net leverage ratio decreases.
At December 31, 2019, the Company had an outstanding debt balance of $9.9 million attributable to the Delayed Draw Term
Loan Facility based on the 5.67% interest rate in effect during the period from May 2, 2019 through December 31, 2019. Included in
the balance at December 31, 2019 is $49 thousand of unamortized debt issuance costs.
Based on the calculation of excess cash flow and total net leverage ratio and for the year ended December 31, 2019, the Company
is not required to make prepayment in addition to the quarterly installment.
Future scheduled principal payments under the Delayed Draw Term Loan Facility as of September 30, 2019 are as follows:
(In thousands)
Year Ending December 31,
Amount
2020
2021
2022
2023
2024
Total
100
100
100
100
9,550
9,950
Revolving Facility
The Company also has a Revolving Facility with the lenders, pursuant to which the lenders agreed to make a Revolving Facility
available to the Company in an aggregate amount of up to $25 million. Proceeds from the Revolving Facility may be used for working
capital and general business purposes, including the financing of permitted acquisitions, investments and restricted payments, subject to
the conditions contained in the Credit Agreement. Zix is charged a commitment fee ranging from 0.25% to 0.50% per year on the daily
amount of the unused portions of the commitments under the Revolving Facility.
As of December 31, 2019, the Company had an outstanding debt balance of $2.0 million attributable to the Revolving Facility .
The undrawn balance of $23 million is available to fund working capital and for other general corporate purposes, including the financing
of permitted acquisitions, investments and restricted payments, subject to the conditions contained in the Credit Agreement. As of
December 31, 2019, the Company has accrued $97 thousand of commitment fees for the period ended December 31, 2019.
F-21
As of December 31, 2019, the estimated fair value of the Credit Facilities approximated their carrying value and the Company
was in compliance with all covenants in the Credit Agreement.
12. Preferred Stock
On February 20, 2019, (the “Original Issuance Date” or “Closing Date”), Zix consummated a private placement pursuant to an
investment agreement with an investment fund managed by True Wind Capital and issued an aggregate of $100 million of shares of
convertible Preferred Stock (as defined below) at a price of $1,000 per share (the “Stated Value”). 64,914 shares of Series A Convertible
Preferred Stock (the “Series A Preferred Stock”) were issued for proceeds of $62.7 million, net of issuance costs of $2.3 million, and
35,086 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock” and, together with the Series A Preferred Stock,
the “Preferred Stock”) were issued for proceeds of $33.9 million, net of issuance costs of $1.2 million. The Preferred Stock is classified
outside of stockholders’ equity in temporary equity because the shares contain certain redemption features which require redemption
upon a change in control. The Series A Preferred Stock can be immediately converted to common stock.
On June 5, 2019, Shareholders approved the conversion of the outstanding shares of Series B Preferred Stock into shares of Series
A Preferred Stock. Each share of Series B Preferred Stock was converted into the number of shares of Series A Preferred Stock equal
to the liquidation preference of such share of Series B Preferred Stock divided by the accreted value of a share of Series A Preferred
Stock on the date of conversion plus cash in lieu of fractional shares. On June 6, 2019, all the outstanding shares of Series B Preferred
Stock were converted into 35,292 shares of Series A Preferred Stock. As of December 31, 2019, no shares of Series B Preferred Stock
are outstanding.
The conversion option of the Series A Preferred Stock was determined to have a beneficial conversion feature. As of December
31, 2019, the beneficial conversion feature was valued at $2.5 million, excluding the additional beneficial conversion feature accrued
for the deemed dividend during the quarter then ended, and was recorded to additional paid-in capital and as a discount to the Series A
Preferred Stock. This resulting discount was immediately amortized as the Series A Preferred Stock has no set redemption date but is
currently convertible.
Dividends
The Stated Value of the Series A Preferred Stock accretes at a fixed rate of 8% per annum, compounded quarterly (“Series A
Preferred Dividend”). Apart from the Series A Preferred Dividend, the holders of Series A Preferred Stock are also entitled to receive
any dividends paid on our common stock on an "as converted" basis. No dividend may be paid on our common stock until such dividend
is paid on the Series A Preferred Stock. All calculations of the Accreted Value (as defined below) of Series A Preferred Stock will be
computed on the basis of a 360-day year of twelve 30-day months.
As of December 31, 2019, the accretion of the Stated Value of Series A Preferred Stock is valued at $6.3 million, including the
accretion attributable to the converted Series A Preferred Stock from Series B Preferred Stock, and the accretion of the beneficial
conversion feature is valued at $134 thousand. As of June 6, 2019, the accrued dividend on the Series B Preferred Stock, valued at $1.2
million, was converted to Series A Preferred Stock along with the Stated Value of the Series B Preferred Stock. Upon conversion of
Series B Preferred Stock to Series A Preferred Stock on June 6, 2019, all remaining dividend calculations are based on the terms of the
Series A Preferred Dividend for the converted Series A Preferred Stock.
Voting Rights
Holders of Series A Preferred Stock are entitled to vote, together with the holders of common stock on all matters submitted to a
vote of the holders of our common stock. Each holder of Series A Preferred Stock shall be entitled to the number of votes equal to the
largest number of whole shares of common stock into which all shares of Series A Preferred Stock held by such holder could be
converted. The vote or consent of the holders of at least a majority of the shares of Series A Preferred Stock outstanding will be necessary
for effecting or validating any of the following actions: (i) any amendment, alteration or repeal of Zix’s Articles of Incorporation or
Series A Certification of Designations that would adversely affect the rights, preferences, privileges or power of the Series A Preferred
Stock; (ii) any amendment or alteration to Zix’s Articles of Incorporation or any other action to authorize or create, or increase the
number of authorized or issued shares of capital stock of the Company convertible into shares of, or ranking senior to, or on a parity
basis with, the Series A Preferred Stock as to dividend rights or liquidation rights; (iii) the issuance of shares of Series A Preferred Stock
after the Original Issuance Date other than in connection with the conversion of Series B Preferred Stock that was issued on the Original
Issuance Date; (iv) any action that would cause the Company to cease to be treated as a domestic corporation for U.S. federal income
tax purposes; and (v) the incurrence of any indebtedness of the Company that would cause Zix to exceed a specified leverage ratio.
F-22
Liquidation Preference
The Series A Preferred Stock has a liquidation preference equal to the greater of (i) the Stated Value per share as it has accreted
as of such date (the “Accreted Value”) and (ii) the amount such holder would have received if the Series A Preferred Stock had converted
into common stock immediately prior to such liquidation.
Conversion
At any time, each Series A Preferred Stock holder may elect to convert each share of such holders’ then-outstanding Series A
Preferred Stock into (i) the number of shares of common stock equal to the product of (a) the Accreted Value with respect to such share
on the conversion date multiplied by (b) the conversion rate (initially 166.11) as of the applicable conversion date divided by (c) 1,000
plus (ii) cash in lieu of fractional shares.
Optional Redemption by Zix
At any time after the fourth anniversary of the Closing Date, Zix may redeem the Series A Preferred Stock for an amount per
share of Series A Preferred Stock equal to the Accreted Value per share of the Series A Preferred Stock to be redeemed as of the
applicable redemption date multiplied by 1.50.
13. Revenue from Contracts with Customers
Accounting policies
Our Company provides message security solutions as subscription services in which we recognize revenue as our services are
rendered. Our customer contracts historically have ranged from one to three-year contracts billed annually. We are increasingly moving
to a monthly subscription model. This shift has been largely driven by our recent acquisition activity, including AppRiver. We exclude
from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent
with a specific revenue-producing transaction and collected by our Company from a customer (e.g., sales, use, value added, and some
excise taxes).
Disaggregation of Revenue
In 2019, we recorded revenue for our services in the following core industry verticals: 23% healthcare, 19% financial services,
4% government sector, and 54% as other.
We operate as a single operating segment. Revenue generated from our email encryption and security solutions represented 100%
of our revenue in 2019 and 2018.
Contract balances
Our contract assets include our accounts receivable, 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 on January
1, 2018, we recorded a cumulative effect adjustment, 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
deferred commission asset balance of $415 thousand. During the twelve months ended December 31, 2019 and 2018, we increased our
noncurrent deferred contract asset by $5.5 million, and $4.9 million, respectively, resulting from commissions earned by our sales team
during the twelve months ended December 31, 2018. During the twelve months ended December 31, 2019 and 2018, we also amortized
$3.0 million and $2.2 million, respectively of deferred cost, as a selling and marketing expense in the related periods. Our deferred cost
asset is assessed for impairment on a periodic basis. There were no impairment losses recognized on deferred contract cost assets for
each of the twelve months ended December 31, 2019 and 2018.
Our contract liabilities consist of deferred revenue representing future customer services which have been billed and collected.
The $11.1 million increase to our net deferred revenue in the twelve months ended December 31, 2019, is primarily related to our
AppRiver acquisition in February 2019. The $2.7 million increase to our net deferred revenue in the twelve months ended December
31, 2018, is related to the timing of orders and payments as well as growth of revenue.
Performance obligations
As of December 31, 2019, the aggregate amount of the transaction prices allocated to remaining service performance obligations,
which represents the transaction price of firm orders less inception to date revenue, was $89.4 million. We expect to recognize
approximately $62.4 million of revenue related to this backlog in 2020, and $27.0 million in periods thereafter. Approximately $47.3
million of our $173.4 million revenue recognized in the twelve months ended December 31, 2019, was included in our performance
obligation balance at the beginning of the period.
F-23
14. Fair Value Measurements
FASB guidance regarding fair value measurement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical
assets or liabilities; Level 2, defined as inputs other than quoted prices for similar assets and liabilities in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring
an entity to develop its own assumptions.
The Company recorded a $2.3 million liability for the estimated fair value of contingent consideration in our DeliverySlip
acquisition. The Company determined the fair value of the contingent payment based on the probability of attainment of certain agreed
upon requirements. Any changes to the variables and assumptions could significantly impact the estimated fair values recorded for the
liability, resulting in significant changes to the Consolidated Statements of Comprehensive Income (Loss). The fair value measurements
are based on significant inputs not observable in the market and thus represent Level 3 measurements, which reflect the Company’s own
assumptions concerning the achievement of the sales milestones in measuring the fair value of the acquisition-related contingent earn-
out lability.
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 inputs for the year ended December 31, 2019:
(In thousands)
Balance at December 31, 2018
Additions during the period
Payments during the period
Adjustments to fair value during the period recorded in General and
Administrative expenses
Balance at December 31, 2019
Fair Value
Measurements
Using Significant
Unobservable
Inputs (Level 3)
1,164
2,303
(3,300 )
$
$
211
378
15. 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 effect of potential common shares outstanding is included in diluted earnings per share. The
computations for basic and diluted earnings per share for the years ended December 31, 2019, 2018, and 2017, are as follows:
Basic weighted average shares
Effect of dilutive securities:
Employee and director stock options
Restricted Stock
RSUs
Performance RSUs
Performance Stock
Potential dilutive common shares
Year Ended December 31,
2018
53,025,152 52,591,714 53,430,492
2017
2019
—
—
—
—
—
53,025,152 53,481,295 53,430,492
347,167
409,871
24,369
9,367
98,807
—
—
—
—
—
For the year ended December 31, 2019, 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, 2018, weighted average shares related to
73,313 stock options; 131,774 shares of Restricted Stock, 6,084 RSUs, 917 Performance RSUs, and 18,536 shares of Performance Stock
were excluded from the calculation of diluted earnings per share because these awards were anti-dilutive. For the year ended December
31, 2017, potential common shares of all securities were excluded from the calculation of diluted earnings per share because the awards
were anti-dilutive.
16. Significant Customers
In 2019, 2018, and 2017, no single customer accounted for 10% or more of our revenues.
F-24
17. Commitments and Contingencies
Our principal commitments consist primarily of obligations under operating and financing leases, which include among others,
certain leases of our offices, colocations and servers as well as contractual commitment related network infrastructure and data center
operations. Refer to Note 8 “Leases” for our commitments to settle contractual obligations in cash as of December 31, 2019.
Claims and Proceedings
We are subject to legal proceedings, claims, and litigation against our business. While the outcome of these matters is currently
not determinable and the costs and expenses of defending these matters may be significant, we currently do not expect that the ultimate
costs to resolve these matters will have a material adverse effect on our consolidated financial statements.
18. Other Comprehensive Income (Loss)
The assets and liabilities of international subsidiaries are translated from the respective local currency to the U.S. dollar using
exchange rates at the balance sheet date. Related translation adjustments are recorded as a component of the accumulated other
comprehensive income (loss). Our Consolidated Statement of Comprehensive Income (Loss) of international subsidiaries are translated
from the local currency to the U.S. dollar using average exchange rates for the period covered by the income statements.
We are exposed to fluctuations in the foreign currency exchange rates as a result of our net investments and operations in Canada.
For fiscal year 2019, movements in currency exchange rates and the related impact on the translation of the balance sheets of our
subsidiary in Canada was the primary cause of our foreign currency translation gain of $215 thousand, net of $16 thousand in income
taxes. For fiscal year 2018 and 2017, foreign currency translation adjustments were immaterial.
19. Income Taxes
Components of the income taxes are as follows:
(In thousands)
Current:
U.S.
State
Foreign
Deferred
Federal
Foreign
Income tax (benefit) expense
2019
2018
2017
$
$
(341 ) $
216
9
(794 ) $
725
71
183
(196 )
156
(4,365 )
3
(4,478 ) $
(4,722 )
—
(4,720 ) $
18,461
2
18,606
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) which significantly changed U.S. tax
law. The Tax Act, among other things, lowered the federal statutory corporate income tax rate from 34% to 21% effective January 1,
2018. The Company completed its assessment of the impact to 2018 noting no changes from what it disclosed in 2017. The Company’s
income tax expense (benefit) for 2019, 2018 and 2017, respectively, reflect tax expense (benefit) based on statutory rates in 2019, 2018,
and 2017.
A reconciliation of the expected U.S. tax expense (benefit) 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- deferreds
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 (benefit) expense
2019
2018
2017
$
$
(3,943 ) $
—
(295 )
—
(37 )
(507 )
517
(213 )
(4,478 ) $
2,260 $
—
(7,841 )
—
111
815
68
(133 )
(4,720 ) $
3,587
12,473
—
2,064
890
(129 )
159
(438 )
18,606
F-25
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Components of our U.S. deferred income taxes as of
December 31, 2019 and 2018 are as follows:
(In thousands)
Deferred tax assets:
Nondeductible
U.S. net operating loss carryforwards
State net operating loss carryforwards
Intangible assets
Tax credit carryforwards
Stock-based compensation
Depreciable assets
Interest expense
Other assets
Total deferred tax assets
Deferred tax liabilities:
Intangible assets
Revenue recognition
Prepaid expenses
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
$
2019
2018
116 $
49,657
572
1,135
5,151
1,574
1,209
1,611
1,521
62,546
113
46,826
71
—
5,703
976
822
30
908
55,449
—
(2,976 )
(997 )
58,573
(22,022 )
36,551 $
(1,128 )
(2,300 )
(572 )
51,449
(22,667 )
28,782
$
The Company has partially reserved its U.S. net deferred tax assets in 2019, 2018, and 2017 due to the uncertainty of future taxable
income. The Company has U.S. federal net operating loss carryforwards of approximately $236 million which begin to expire in 2021.
The Company has state credits totaling $1.7 million which can be utilized through 2026 and state net operating losses that have various
expiration dates. The Company also has tax credit carryforwards of approximately $3.5 million consisting of business tax credits that
began to expire in 2020 and alternative minimum tax credits which will be refunded through 2021 in accordance with the new tax law
effective 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 carryforwards against any future taxable income.
The Company or one of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and in the
Canadian federal and provincial jurisdictions. We have not taken a tax position that, if challenged, would have a material effect on the
financial statements or the effective tax rate for the twelve-months ended December 31, 2019, or during the prior three years. We have
determined it is not reasonably possible for the amounts of unrecognized tax benefits to significantly increase or decrease within the
next twelve months. We are currently subject to a three-year statute of limitations by major tax jurisdictions.
20. Employee Benefit Plan
401(k) Plan — We have a retirement savings plan structured under Section 401(k) of the Internal Revenue Code covering
substantially all of our U.S. employees. Under the plan, contributions are voluntarily made by employees, and we may provide
contributions based on the employees’ contributions. Our operating income includes $1.2 million, $618 thousand, and $512 thousand in
2019, 2018, and 2017, respectively, for net contributions from operations to this plan.
21. 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. The Company did not
repurchase shares during the year ended December 31, 2019. 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-26
22. Acquisitions
DeliverySlip
On May 7, 2019, the Company acquired certain assets of Cirius Messaging Inc. (“Seller”) and its wholly owned subsidiary
DeliverySlip Inc.(“DeliverySlip”), related to the DeliverySlip product for a total purchase price of $13.8 million, including cash
consideration of $11.4 million and a contingent consideration with an estimated fair value of $2.3 million at the acquisition date. The
contingent consideration was paid in full upon the completion of certain agreed upon requirements and a related $0.2 million loss on the
contingent consideration was recognized in the year ended December 31, 2019. Included in the cash consideration, a holdback amount
of $1.5 million was transferred to an escrow agent for the satisfaction of the Seller’s indemnity and other obligations under the purchase
agreement. The acquisition was partially financed with proceeds of $10 million from the Delayed Draw Term Loan Facility. The
purchase of DeliverySlip expanded the Company’s product offering including email encryption, e-signatures and secure file solutions.
The Company incurred $1.2 million in acquisition-related costs with respect to the DeliverySlip acquisition, which were recorded
within operating expenses during the twelve months end December 31, 2019. Prior to the acquisition, approximately 90% of
DeliverySlip’s revenue was generated from AppRiver Canada Inc, which became a subsidiary of the Company upon closing of the
AppRiver acquisition (as described below). Revenue from additional acquired customers of DeliverySlip for the twelve months ended
December 31, 2019 were immaterial.
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 yet finalized. The majority of the goodwill balance is expected to be deductible for tax purposes. The
intangible asset we acquired from DeliverySlip is technology which we are amortizing over 6 years. The results of operations and the
provisional fair values of the acquired assets and liabilities have been included in the accompanying condensed consolidated financial
statements since the DeliverySlip acquisition closed on May 7, 2019. Certain estimated values are not yet finalized and subject to
revision as additional information becomes available and more detailed analyses are completed.
The following table summarizes the current estimated fair value of acquired assets and liabilities:
(In thousands)
Assets:
Technology
Goodwill
Total assets
Liabilities:
Deferred revenue
Total liabilities
Net assets recorded
Provisional Fair
Value
$
$
$
4,200
9,603
13,803
52
52
13,751
AppRiver Companies
On February 20, 2019, Zix acquired 100% of the equity interest of AR Topco, LLC and its subsidiaries, including AppRiver LLC
(“AppRiver” and collectively, the “AppRiver Companies”), for a total purchase price of $277.7 million, following a working capital
adjustment. The purchase price included cash consideration of $273.1 million, net of cash acquired. This acquisition complements our
strategy to accelerate our offerings into the cloud at the point of initial cloud application purchase and expand our customer base.
We financed the acquisition with proceeds from (1) cash on hand, (2) the proceeds from the Term Loan, and (3) a private placement
with an investment fund managed by True Wind Capital consisting of (i) 64,914 newly issued shares of Series A Convertible Preferred
Stock, $1.00 par value per share, and (ii) 35,086 newly issued shares of Series B Convertible Preferred Stock, $1.00 par value per share,
in exchange for cash consideration in an aggregate amount of $100 million (which was reduced by $3 million in True Wind Capital’s
costs that were reimbursed by the Company).
F-27
AppRiver is a channel-first provider of cloud-based cyber security and productivity services, offering web protection, email
encryption, secure archiving, and email continuity solutions. AppRiver also provides Microsoft Office 365 and Secure Hosted Exchange
services, which serve as an effective lead generation tool for AppRiver’s solutions. The acquisition of AppRiver can accelerate our
offerings 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 also help us expand our customer base.
The Company incurred $10.7 million in acquisition-related costs which included $1.1 million and $9.6 million recorded within
operating expenses for the twelve months ended December 31, 2018, and for the twelve months ended December 31, 2019. Revenue
from AppRiver was $97.8 million for the twelve months ended December 31, 2019, and due to the continued integration of the combined
businesses, it was impracticable to determine earnings attributable to AppRiver.
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 yet finalized. The majority of the goodwill balance is expected to be deductible for tax purposes. The
intangible assets we acquired from AppRiver consist of customer relationships, vendor relationships, trademarks/names, and internally
developed software, which we are amortizing over 8 years, 3 years, 10 years, and 5-6 years, respectively. The results of operations and
the provisional fair values of the acquired assets and liabilities have been included in the accompanying condensed consolidated financial
statements since the AppRiver acquisition closed on February 20, 2019.
The following table summarizes the current estimated fair value of acquired assets and liabilities:
(In thousands)
Assets:
Current assets
Property and equipment
ROU assets
Customer relationships
Vendor relationships
Trademark/Names
Internally developed software
Deferred tax asset
Goodwill
Total assets
Liabilities:
Current liabilities
Deferred revenue
Operating lease liabilities
Total liabilities
Net assets recorded
Estimated Fair
Value
$
$
12,200
3,235
8,778
91,000
1,000
4,400
41,100
3,453
147,518
312,684
13,378
12,424
9,178
34,980
$
277,704
F-28
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 unified archiving, supervision, security, and messaging solutions for 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 offering for customers with compliance requirements. This acquisition also expands Zix’s cloud-based email
archiving capabilities into more than 50 content channels, including social media, instant message, mobile, web, audio, and video.
The purchase price includes a holdback of $2.3 million for the satisfaction of certain indemnification claims by the Company, 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 subject to an outstanding claim for indemnification, was released to the selling shareholders upon 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.
The Company incurred $334 thousand in acquisition-related costs which were recorded within operating expenses during the
twelve months ended December 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 purposes. The intangible assets we acquired from Erado consist of trademarks, internally
developed software, and customer relationships, which we are amortizing over an estimated useful life of 5 years, 10 years, 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 $3.8 million for the
twelve months ended December 31, 2019. Revenue 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 impracticable to determine the earnings.
The following table summarizes the estimated fair value of acquired assets and liabilities:
(In thousands)
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
Entelligence Messaging Server
On September 13, 2017, the Company 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 encryption suite by offering 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 December 31, 2018 and 2017,
respectively.
F-29
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 years ended December 31, 2019, 2018 and 2017, respectively, and due to the continued
integration of the combined businesses, it was impracticable to determine the earnings.
The following table summarizes the estimated fair value of acquired assets and liabilities:
(In thousands)
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
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,
subject to a customary post-closing adjustment 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 claims of the Company, if any, during
the two-year period following the closing of the acquisition, after which the balance, if any, will be distributed to the selling shareholders.
Because sales of Greenview products met certain sales milestones by December 31, 2018 and by December 31, 2017, the Company was
contractually obligated to pay earn-out consideration in cash of $800 thousand in each of the first quarters in 2019 and 2018. Contingent
consideration is considered a Level 3 fair value measurement.
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 software, and customer relationships, which we are amortizing over an estimated useful life of 5 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
December 31, 2018 and 2017, respectively. Due to the integration of the combined businesses, it was impracticable to determine revenue
for the year ended December 31, 2019. Revenue from Greenview was $3.4 million and $2.4 million for the year ended December 31,
2018 and 2017, respectively. Due to the continued integration of the combined businesses, it was impracticable to determine the earnings
for the years ended December 31, 2019, 2018, or 2017.
F-30
The following table summarizes the estimated fair value of acquired assets and liabilities:
(In thousands)
Assets:
Current assets
Property and equipment
Trademark/names
Technology
Customer relationships
Goodwill
Total assets
Liabilities:
Deferred revenue
Other current liabilities
Deferred tax liability
Total liabilities
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
Pro Forma Financial Information (Unaudited)
The following unaudited pro forma financial information presents the combined results of operations for the twelve month periods
ending December 31, 2019, and 2018, respectively, as though the DeliverySlip, AppRiver, Erado, EMS and Greenview acquisitions that
occurred during the reporting period had occurred as of the beginning of the earliest period presented, with adjustments to give effect 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 information 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:
(In thousands, except per share data)
Revenues
Net income (loss)
Basic income (loss) per common share
Diluted income (loss) per common share
23. Quarterly Results of Operations (Unaudited)
Twelve Months Ended December 31,
2019
2018
$
$
$
194,313 $
19,783
0.17 $
0.17 $
162,610
19,207
0.20
0.20
The following is a summary of the quarterly results of operations for the years ended December 31, 2019 and 2018:
(In thousands except per share data)
2019
Revenues
Gross margin
Net income (loss)
Basic net income (loss) attributable to common
stockholders*
Diluted net income (loss) attributable to common
stockholders*
Comprehensive (Loss) Income
2018
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
$
29,300 $
18,161
(6,265 )
45,916 $
25,612
(3,706 )
47,833 $
26,411
(1,597 )
50,380
26,337
(3,079 )
(0.17 )
(0.13 )
(0.07 )
(0.10 )
(0.17 )
(6,297 )
(0.13 )
(3,762 )
(0.07 )
(1,562 )
$
16,654 $
13,140
1,892
0.04
0.04
—
17,500 $
13,694
1,840
0.04
0.03
—
17,876 $
14,006
2,455
0.05
0.05
—
(0.10 )
(2,812 )
18,448
14,451
9,257
0.18
0.17
9,224
*
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 differences.
F-31
(cid:3)
Zix Corporation
Corporate Information*
Board of Directors
Robert C. Hausmann
Chairman of the Board,
Zix Corporation
Operating Partner,
Thoma Bravo
Mark J. Bonney
Consultant
Maryclaire “Marcy” Campbell
Vice President and General Manager North
America and Australia Sales and Head of Global
Sales Operations
PayPal Holdings
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
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 24, 2020.
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, 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, 2019, are available without charge (i)
at www.zix.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.