zixi-10q_20170630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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

 

75-2216818

(State of Incorporation)

 

(I.R.S. Employer Identification Number)

 

2711 North 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)

 

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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act            

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 3, 2017

Common Stock, par value $0.01 per share

 

55,222,192

 

 

 


 

INDEX

 

 

 

 

 

Page

Number

PART I — FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2017 (unaudited) and December 31, 2016

 

3

 

 

Condensed Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2017 and 2016

 

4

 

 

Condensed Consolidated Statement of Stockholders’ Equity (unaudited) for the six months ended June 30, 2017

 

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2017 and 2016

 

6

 

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

20

Item 4.

 

Controls and Procedures

 

20

PART II — OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

20

Item 1A.

 

Risk Factors

 

21

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

Item 3.

 

Defaults Upon Senior Securities

 

21

Item 4.

 

Mine Safety Disclosures

 

21

Item 5.

 

Other Information

 

21

Item 6.

 

Exhibits

 

22

 

2


 

ZIX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and par value data)

 

June 30,

2017

 

 

December 31,

2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,508

 

 

$

26,457

 

Receivables, net

 

 

993

 

 

 

1,209

 

Prepaid and other current assets

 

 

2,845

 

 

 

2,829

 

Total current assets

 

 

33,346

 

 

 

30,495

 

Property and equipment, net

 

 

4,308

 

 

 

3,976

 

Intangible assets, net

 

 

4,934

 

 

 

 

Goodwill

 

 

6,488

 

 

 

2,161

 

Deferred tax assets

 

 

41,886

 

 

 

45,726

 

Total assets

 

$

90,962

 

 

$

82,358

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

730

 

 

$

355

 

Accrued expenses

 

 

4,726

 

 

 

4,365

 

Deferred revenue

 

 

25,738

 

 

 

25,773

 

Total current liabilities

 

 

31,194

 

 

 

30,493

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Deferred revenue

 

 

1,606

 

 

 

1,448

 

Deferred rent

 

 

1,270

 

 

 

1,347

 

Total long-term liabilities

 

 

2,876

 

 

 

2,795

 

Total liabilities

 

 

34,070

 

 

 

33,288

 

Commitments and contingencies (see Note 7)

 

 

 

 

 

 

 

 

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; 80,634,210 issued

   and 55,267,157 outstanding in 2017 and 78,913,266 issued and 53,643,139

   outstanding in 2016

 

 

778

 

 

 

769

 

Additional paid-in capital

 

 

379,784

 

 

 

374,386

 

Treasury stock, at cost; 25,367,053 common shares in 2017 and 25,270,127 common

   shares in 2016

 

 

(98,269

)

 

 

(97,770

)

Accumulated deficit

 

 

(225,401

)

 

 

(228,315

)

Total stockholders’ equity

 

 

56,892

 

 

 

49,070

 

Total liabilities and stockholders’ equity

 

$

90,962

 

 

$

82,358

 

 

See notes to condensed consolidated financial statements.

 

3


 

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands, except share and per share data)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

16,378

 

 

$

14,930

 

 

$

32,271

 

 

$

29,258

 

Cost of revenues

 

 

3,247

 

 

 

2,635

 

 

 

6,070

 

 

 

5,172

 

Gross margin

 

 

13,131

 

 

 

12,295

 

 

 

26,201

 

 

 

24,086

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,708

 

 

 

2,321

 

 

 

5,131

 

 

 

4,500

 

Selling, general and administrative

 

 

7,783

 

 

 

9,028

 

 

 

15,768

 

 

 

16,172

 

Total operating expenses

 

 

10,491

 

 

 

11,349

 

 

 

20,899

 

 

 

20,672

 

Operating income

 

 

2,640

 

 

 

946

 

 

 

5,302

 

 

 

3,414

 

Other income, net

 

 

66

 

 

 

50

 

 

 

145

 

 

 

109

 

Income before income taxes

 

 

2,706

 

 

 

996

 

 

 

5,447

 

 

 

3,523

 

Income tax expense

 

 

(1,567

)

 

 

(437

)

 

 

(2,533

)

 

 

(1,394

)

Net income

 

$

1,139

 

 

$

559

 

 

$

2,914

 

 

$

2,129

 

Basic income per common share

 

$

0.02

 

 

$

0.01

 

 

$

0.05

 

 

$

0.04

 

Diluted income per common share

 

$

0.02

 

 

$

0.01

 

 

$

0.05

 

 

$

0.04

 

Basic weighted average common shares outstanding

 

 

53,573,431

 

 

 

53,766,979

 

 

 

53,268,005

 

 

 

54,884,713

 

Diluted weighted average common shares outstanding

 

 

54,479,963

 

 

 

54,270,000

 

 

 

54,075,003

 

 

 

55,425,683

 

 

See notes to condensed consolidated financial statements.

 

4


 

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

Stockholders’ Equity

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury

 

 

Accumulated

 

 

Total

Stockholders’

 

(In thousands, except shares)

 

Shares

 

 

Amount

 

 

Capital

 

 

Stock

 

 

Deficit

 

 

Equity

 

Balances, December 31, 2016

 

 

78,913,266

 

 

$

769

 

 

$

374,386

 

 

$

(97,770

)

 

$

(228,315

)

 

$

49,070

 

Issuance of common stock upon

   exercise of stock options

 

 

915,543

 

 

 

9

 

 

 

4,119

 

 

 

 

 

 

 

 

 

4,128

 

Issuance of common stock upon

   vesting of restricted stock units

 

 

83,166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted common stock

 

 

650,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted performance

   common stock

 

 

71,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock-based

   compensation costs

 

 

 

 

 

 

 

 

1,279

 

 

 

(499

)

 

 

 

 

 

780

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,914

 

 

 

2,914

 

Balances, June 30, 2017

 

 

80,634,210

 

 

$

778

 

 

$

379,784

 

 

$

(98,269

)

 

$

(225,401

)

 

$

56,892

 

 

See notes to condensed consolidated financial statements.

 

5


 

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,914

 

 

$

2,129

 

Non-cash items in net income:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,296

 

 

 

1,098

 

Employee stock-based compensation costs

 

 

1,279

 

 

 

1,083

 

Changes in deferred taxes

 

 

2,231

 

 

 

1,145

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

460

 

 

 

(287

)

Prepaid and other current assets

 

 

(9

)

 

 

33

 

Accounts payable

 

 

322

 

 

 

336

 

Deferred revenue

 

 

(414

)

 

 

2,031

 

Accrued and other liabilities

 

 

(797

)

 

 

(26

)

Net cash provided by operating activities

 

 

7,282

 

 

 

7,542

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,266

)

 

 

(1,238

)

Acquisition of business, net of cash acquired

 

 

(6,594

)

 

 

 

Net cash used in investing activities

 

 

(7,860

)

 

 

(1,238

)

Net cash provided by (used in) financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

4,128

 

 

 

50

 

Purchase of treasury shares

 

 

(499

)

 

 

(14,290

)

Net cash provided by (used in) financing activities

 

 

3,629

 

 

 

(14,240

)

Increase (decrease) in cash and cash equivalents

 

 

3,051

 

 

 

(7,936

)

Cash and cash equivalents, beginning of period

 

 

26,457

 

 

 

28,664

 

Cash and cash equivalents, end of period

 

$

29,508

 

 

$

20,728

 

 

See notes to condensed consolidated financial statements.

 

 

6


 

ZIX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Basis of Presentation

The accompanying condensed consolidated financial statements of Zix Corporation (“Zix” the “Company,” “we,” “our,” “us”) should be read in conjunction with the audited consolidated financial statements included in the Company’s 2016 Annual Report on Form 10-K. These financial statements are unaudited, but have been prepared in the ordinary course of business for the purpose of providing information with respect to the covered interim periods. Management of the Company believes that all adjustments necessary for a fair presentation for such periods have been included and are of a normal recurring nature. The results of operations for the three and six-month periods ended June 30, 2017, are not necessarily indicative of the results to be expected for any future periods or for the full fiscal year.

 

 

2. Recent Accounting Standards and Pronouncements

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes most current revenue recognition guidance under U.S. Generally Accepted Accounting Principles (“GAAP”). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

The standard is effective for us beginning 2018, and requires using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We have begun an assessment of the guidance and expect our revenue to remain primarily unchanged. We are additionally analyzing the effect of the new guidance on the timing of our recognition of the incremental costs of obtaining contracts. Accordingly, we are still evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard.

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), which introduces a lessee model that brings most leases on the balance sheet. The new ASU eliminates the requirement in U.S. GAAP that entities use bright-line tests in determining lease classifications and requires lessors to provide additional transparency into their exposure to the changes in value of their residual assets and how they manage that exposure.

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

Accounting for Share-Based Payments

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

The standard became effective for us beginning 2017. We completed an evaluation of the impact of this new guidance in the first quarter 2017, which resulted in $414 thousand in previously unrecognized excess tax benefits being recorded on a modified retrospective basis through a cumulative-effect adjustment to retained earnings. The balance was fully reserved, resulting in a net zero impact to our retained earnings.

 

 

7


 

3. Stock- Based Awards and Stock-Based Employee Compensation Expense

Our stock-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”). As of June 30, 2017, the Company had 1,075,486 stock options outstanding, 1,157,303 non-vested Restricted Stock awards; 193,110 non-vested Performance Stock awards; 129,420 non-vested RSUs; 60,663 non-vested Performance RSUs and 1,174,894 shares of common stock available for grant.

Stock Option Activity   

The following is a summary of all stock option transactions during the three months ended June 30, 2017:

 

 

 

Options

 

 

Weighted

Average

Exercise Price

 

 

Weighted Average

Remaining

Contractual Term

(Yrs)

 

Outstanding at March 31, 2017

 

 

1,902,521

 

 

$

3.82

 

 

 

 

 

Granted at market price

 

 

 

 

 

 

 

 

 

 

Cancelled or expired

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(827,035

)

 

 

4.63

 

 

 

 

 

Outstanding at June 30, 2017

 

 

1,075,486

 

 

$

3.19

 

 

 

5.63

 

Options exercisable at June 30, 2017

 

 

833,672

 

 

$

3.00

 

 

 

4.69

 

 

At June 30, 2017, all 1,075,486 stock options outstanding and all 833,672 stock options exercisable had an exercise price lower than the market price of the Company’s common stock on that date. The aggregate intrinsic value of these stock options were $2.7 million and $2.2 million, respectively. The Company did not record an excess tax benefit for the three and six month periods ended June 30, 2017, related to the exercise of stock options.  The Company did not record an excess tax benefit in the three month period ended June 30, 2016, but did record a $2 thousand excess tax benefit for the six month period ended June 30, 2016, related to the exercise of 19,812 stock options.

Restricted Stock Activity

The following is a summary of Restricted Stock activity during the three months ended June 30, 2017:

 

 

 

Restricted

Shares

 

 

Weighted

Average

Fair Value

 

Non-vested restricted stock at March 31, 2017

 

 

1,140,125

 

 

$

4.52

 

Granted at market price

 

 

50,000

 

 

 

5.46

 

Vested

 

 

(32,822

)

 

 

3.87

 

Cancelled

 

 

 

 

 

 

Non-vested restricted stock at June 30, 2017

 

 

1,157,303

 

 

$

4.57

 

 

The Company did not record an excess tax benefit for the three and six month periods ended June 30, 2017, related to Restricted Stock awards that vested.  The Company did not record an excess tax benefit for the three month period ended June 30, 2016, but did record a $32 thousand excess tax benefit for the six month period ended June 30, 2016, related to 168,750 Restricted Stock awards that vested.

8


 

Restricted Stock Unit Activity

The following is a summary of all RSU activity during the three months ended June 30, 2017:

 

 

 

Restricted

Stock Units

 

 

Weighted

Average

Fair Value

 

Non-vested restricted stock units at March 31, 2017

 

 

129,420

 

 

$

4.39

 

Granted at market price

 

 

 

 

 

 

Vested

 

 

 

 

 

 

Cancelled

 

 

 

 

 

 

Non-vested restricted stock units at June 30, 2017

 

 

129,420

 

 

$

4.39

 

 

The Company did not record an excess tax benefit for the three and six month periods ended June 30, 2017, related to RSUs that vested.  The Company did not record an excess tax benefit for the three month period ended June 30, 2016, but did record a $5 thousand excess tax benefit for the six month period ended June 30, 2016, related to 133,664 RSUs that vested.

Performance RSU Activity

The following is a summary of all Performance RSU activity during the three months ended June 30, 2017:

 

 

 

Performance

RSUs

 

 

Weighted

Average

Fair Value

 

Non-vested performance RSUs at March 31, 2017

 

 

60,663

 

 

$

4.02

 

Granted at market price

 

 

 

 

 

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Non-vested performance RSUs at June 30, 2017

 

 

60,663

 

 

$

4.02

 

 

The Company did not record an excess tax benefit for the three and six month periods ended June 30, 2017. The Company did not record an excess tax benefit for the three month period ended June 30, 2016, but did record a $12 thousand excess tax benefit for the six month period ended June 30, 2016, related to 77,428 Performance RSUs that vested.

 

Performance Stock Activity

The following is a summary of all Performance Stock activity during the three months ended June 30, 2017:

 

 

 

Performance

Stock

 

 

Weighted

Average

Fair Value

 

Non-vested performance stock at March 31, 2017

 

 

193,110

 

 

$

4.39

 

Granted at market price

 

 

 

 

 

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Non-vested performance stock at June 30, 2017

 

 

193,110

 

 

$

4.39

 

 

The Company did not record an excess tax benefit for each of the three and six month periods ended June 30, 2017, and 2016.

 

The weighted average grant-date fair value of awards of Restricted Stock, RSUs, Performance RSUs and Performance Stock is based on the quoted market price of the Company’s common stock on the date of grant.

9


 

Stock-Based Compensation Expense

For the three and six month periods ended June 30, 2017, the total stock-based employee compensation expense resulting from stock options, Restricted Stock, RSUs, Performance RSUs and Performance Stock was recorded to the following line items of the Company’s condensed consolidated statements of income:

 

(In thousands)

 

Three Months

Ended June 30,

2017

 

 

Six Months

Ended June 30,

2017

 

Cost of revenues

 

$

77

 

 

$

148

 

Research and development

 

 

97

 

 

 

177

 

Selling, general and administrative

 

 

515

 

 

 

954

 

Stock-based compensation expense

 

$

689

 

 

$

1,279

 

 

A deferred tax asset totaling $374 thousand and $303 thousand, resulting from stock-based compensation expense associated with awards relating to the Company’s U.S. operations, was recorded for the six month periods ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was $6.1 million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation awards granted under the incentive plans. This expense is expected to be recognized over a weighted average period of 1.70 years.

For additional information regarding the Company’s Equity Awards and Stock-based Employee Compensation, see Note 3 to the consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

 

4. Supplemental Cash Flow Information

Supplemental cash flow information relating to taxes and non-cash activities:

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2017

 

 

2016

 

Cash income tax payments

 

$

349

 

 

$

354

 

 

 

5. Receivables, net

 

(In thousands)

 

June 30,

2017

 

 

December 31,

2016

 

Gross accounts receivables

 

$

10,153

 

 

$

8,417

 

Allowance for returns and doubtful accounts

 

 

(243

)

 

 

(91

)

Unpaid portion of deferred revenue

 

 

(8,917

)

 

 

(7,117

)

Note receivable

 

 

458

 

 

 

458

 

Allowance for note receivable

 

 

(458

)

 

 

(458

)

Receivables, net

 

$

993

 

 

$

1,209

 

 

The allowance for doubtful accounts includes all specific accounts receivable which we believe are likely not collectible based on known information. In addition, we record 2.5% of all accounts receivable greater than 90 days past due, net of those accounts specifically reserved, as a general allowance against accounts that could potentially become uncollectible.

The reduction for 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 June 30, 2017.

 

 

10


 

6. Earnings Per Share and Potential Dilution

Basic earnings per share are computed using the weighted average number of common shares outstanding for the applicable period. The dilutive effect of potential common shares outstanding is included in diluted earnings per share. The computations for basic and diluted earnings per share for the three and six months ended June 30, 2017 and 2016, are as follows:

 

 

 

Three Months ended June 30,

 

 

Six Months ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic weighted average shares

 

 

53,573,431

 

 

 

53,766,979

 

 

 

53,268,005

 

 

 

54,884,713

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee and director stock options

 

 

457,714

 

 

 

304,993

 

 

 

418,470

 

 

 

320,346

 

Restricted stock

 

 

313,577

 

 

 

119,264

 

 

 

270,569

 

 

 

121,287

 

RSUs

 

 

42,283

 

 

 

49,076

 

 

 

51,154

 

 

 

64,664

 

Performance RSUs

 

 

29,054

 

 

 

12,786

 

 

 

22,169

 

 

 

23,204

 

Performance Stock

 

 

63,904

 

 

 

16,902

 

 

 

44,636

 

 

 

11,469

 

Potential dilutive common shares

 

 

54,479,963

 

 

 

54,270,000

 

 

 

54,075,003

 

 

 

55,425,683

 

 

During the three months ended June 30, 2017, no weighted average shares     were excluded from the calculation of diluted earnings per share as anti-dilutive. During the six months ended June 30, 2017, weighted average shares related to 120,529 stock options, 127,856 shares of Restricted Stock, 9,487 RSUs, 3,003 Performance RSUs, and 29,274 shares of Performance Stock were excluded from the calculation of diluted earnings per share because these awards were anti-dilutive.

 

 

7. Commitments and contingencies  

A summary of our fixed contractual obligations and commitments at June 30, 2017, is as follows:

 

 

 

Payments Due by Period

 

(In thousands)

 

Total

 

 

1 Year

 

 

Years 2 & 3

 

 

Years 4 & 5

 

 

Beyond 5 Years

 

Operating leases

 

$

8,825

 

 

$

1,496

 

 

$

2,661

 

 

$

2,144

 

 

$

2,524

 

 

We have not entered into any material, non-cancelable purchase commitments at June 30, 2017.

Claims and Proceedings

We are from time to time involved in legal claims, litigation, and other legal proceedings. Although we may incur significant expenses in those matters, we expect no material adverse effect on our operations or financial results from current or concluded legal proceedings.

 

 

8. 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.

For certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables, and accounts payable, the fair values approximate the carrying values due to the short-term maturities of these instruments. The carrying values of other current assets and accrued expenses are also not recorded at fair value, but approximate fair values primarily due to their short-term nature.

 

 

9. Common Stock 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 share repurchase program will expire May 31, 2018. No shares have been repurchased under this program or during the three and six month periods ended June 30, 2017.

11


 

 During the three months ended June 30, 2016, the Company repurchased 2,269,588 shares of our common stock at an aggregate cost of $8.8 million under a $15.0 million share repurchase program authorized by our board of directors in January 2016. During the three months ended March 31, 2016, the Company repurchased 1,303,484 shares at an aggregate cost of $5.2 million under the same program.   

 

 

10. Income Taxes

The operating losses incurred by the Company’s U.S. operations in past years and the resulting net operating losses for U.S. Federal tax purposes are subject to a $46.4 million reserve. Any reduction to this $46.4 million valuation allowance is based on an assessment of future utilization following accounting guidance, which relies largely on historical earnings. Using this methodology, and updating the future taxable earnings estimates based on first and second quarter 2017 actual earnings, the Company believes the deferred tax asset allowance as of December 31, 2016, will remain unchanged at December 31, 2017. For this reason, the Company has recognized its first and second quarter 2017 federal deferred tax provision in full. If in prospective periods we conclude our future U.S. federal taxable estimate established at the end of the year will exceed the prior year estimate, the Company will offset its federal deferred tax provision by reducing its valuation allowance by an equal amount, thereby eliminating from its deferred tax provision federal taxes in excess of the estimated Alternative Minimum Tax from the Company’s financial statements. The Company will continue to reevaluate the need for its valuation allowance each quarter, following the same assessment methodology described above. Adjusting our valuation allowance could have a significant impact on operating results for each period that it becomes more likely than not that an additional portion of our deferred tax assets will or will not be realized.

Our deferred taxes at June 30, 2017, include the recognition of a $494 thousand excess tax deficiency related to stock options exercised during this period. As required by our 2017 implementation of ASU 2016-09, all excess tax benefits and deficiencies are recognized in the period they become deductible on our income tax return. They are not anticipated when determining our annual estimated effective tax rate, but are instead discrete items in the reporting period in which they occur.

 

 

11. Acquisitions

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. The Company may additionally be required to pay earnout consideration in cash of up to $1.6 million based on achievement of certain sales milestones of Greenview products by December 31, 2018. Contingent consideration is considered a Level 3 fair value measurement. The Company is in the process of assessing the fair value for this contingent consideration, which was not complete as of June 30, 2017.

We accounted for the acquisition as the purchase of a business and have initially recorded the excess purchase price as goodwill. The goodwill from this transaction is not deductible for tax purposes. The results of operations and the provisional fair values of the acquired assets and liabilities assumed have been included in the accompanying condensed consolidated financial statements since our March 15, 2017, acquisition date.

12


 

The following table summarizes the provisional fair value of acquired assets and liabilities:

 

(In thousands)

 

Provisional Fair

Value

 

Assets:

 

 

 

 

Current assets

 

$

334

 

Property and equipment

 

 

255

 

Intangible assets

 

 

5,040

 

Goodwill

 

 

4,327

 

Total assets

 

 

9,956

 

 

 

 

 

 

Liabilities:

 

 

 

 

Deferred revenue

 

$

537

 

Other current liabilities

 

 

114

 

Deferred tax liability

 

 

1,609

 

Total liabilities

 

 

2,260

 

 

 

 

 

 

Net assets recorded

 

$

7,696

 

 

The following unaudited pro forma financial information presents the combined results of operations for the three and six month periods ending June 30, 2017, and 2016, respectively, as though the Greenview acquisition that occurred during the reporting period had occurred as of the beginning of the comparable prior reporting period, 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 period presented, nor are they indicative of future results of operations:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands, except per share data)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

16,378

 

 

$

15,600

 

 

$

32,818

 

 

$

30,597

 

Net income

 

 

1,359

 

 

 

417

 

 

 

3,116

 

 

 

1,845

 

Basic income per common share

 

$

0.03

 

 

$

0.01

 

 

$

0.06

 

 

$

0.03

 

Diluted income per common share

 

$

0.02

 

 

$

0.01

 

 

$

0.06

 

 

$

0.03

 

 

The Company is in the process of determining the valuation of certain property, equipment and intangible assets and liabilities, which may result in further refinement of the allocation of the purchase price for Greenview.

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Statements in this report which are not purely historical facts or which necessarily depend upon future events, including statements about trends, uncertainties, hopes, beliefs, anticipations, expectations, plans, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. 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 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Any of these risk factors could have a material adverse effect on our business, financial condition or financial results and reduce the value of an investment in our securities. We may not succeed in addressing these and other risks associated with an investment in our securities, with our business and with our achieving any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to us on the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

13


 

Overview

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

ZixEncryptSM (formerly ZixGateway® and ZixQuarantine®) bundles email encryption and DLP capabilities to enable the secure exchange of email that includes sensitive information. Through a comprehensive secure messaging service, ZixEncrypt allows 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 ZixEncrypt 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 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 by (1) ZixDirectory®, the world’s largest email encryption community which is designed to share identities of our tens of millions of members (growing by approximately 170,000 members per week), (2) Zix’s patented Best Method of Delivery®, which is designed to deliver email in the most secure, most convenient method possible for the recipient, and (3) ZixEncrypt, 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. Zix delivers more than 1,400,000 encrypted messages on a typical business day. Of those messages, approximately 70% are exchanged transparently between senders and recipients.

ZixEncrypt also addresses business’s greatest source of data loss – corporate email– with an easy, straightforward DLP approach. By focusing strictly on the risks of email, ZixEncrypt 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.

ZixEcrypt 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.

ZixEncrypt 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.

ZixEncrypt is available as a physical or virtual on-premises appliance or as a hosted solution.

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

Unlike other BYOD solutions, ZixOne meets employee demands of convenience, control and privacy while giving companies the ability to secure corporate data and meet compliance needs. With seamless access to work email in a secure, simple-to-use environment, employees can stay productive while preserving device independence. A BYOD solution that is acceptable to employees and yet provides strong data protection for corporate data solves one of today’s greatest IT management challenges.

ZixOne is available as a standalone solution and easily integrates with ZixEncrypt as an add-on solution. A feature in ZixOne is the ability to encrypt an email from your mobile device with the simple slide of an “Encrypt” button, ensuring that sensitive information is secured either by the user or through automatic policies of ZixEncrypt.

14


 

In March 2017, Zix acquired Greenview Data Inc. (“Greenview”), an email security company. Zix’s acquisition of Greenview addresses increasing buyer demand for email security bundles by adding advanced threat protection, antivirus, anti-spam and archiving capabilities to its industry-leading email encryption. Greenview is a good fit for Zix’s business based on its 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 – ZixProtect and ZixArchive.  ZixProtect defends organizations from zero-day malware, ransomware, phishing, CEO fraud, W-2 phishing attacks, spam and viruses in email with multi-layer filtering techniques. Accuracy in protecting organizations from email threats is increased further with automated traffic analysis, machine learning and real-time threat analysts.

ZixProtect is available as a cloud-based service in three bundles. ZixProtect Essentials includes email threat protection and business email continuity to enable access to emails during service disruption; ZixProtect Plus combines email threat protection and business email continuity with automatic email encryption; and ZixProtect Premium delivers a comprehensive email security solution with email threat protection, business email continuity, email encryption and data loss prevention.

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 ZixEncrypt or ZixProtect bundles, ZixArchive 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.

Our business operations and service offerings are supported by the ZixData Center™, a PCI DSS 3.2 certified, SOC2 accredited and SOC 3 certified facility. The operations of the ZixData Center are independently audited annually to maintain SOC3 certification in the areas of security, confidentiality, integrity and availability. Auditors also produce a SOC2 report on the effectiveness of operational controls used over the audit period. The ZixData Center is staffed 24 hours a day and has a track record that exceeds 99.99% availability.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most subjective judgments.

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. We discuss our Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.

Results of Operations

Second Quarter 2017 Summary of Operations

Financial

Revenue for the quarter ended June 30, 2017, was $16.4 million compared with $14.9 million for the same period in 2016, representing a 10% increase.

Gross margin for the quarter ended June 30, 2017, was $13.1 million or 80% of revenues compared with $12.3 million or 82% of revenues for the comparable period in 2016.

Net income for the quarter ended June 30, 2017, was $1.1 million compared with net income of $0.6 million in the comparable period in 2016, representing a 104% increase.

Net income per diluted share was $0.02 for the quarter ended June 30, 2017, compared with net income per diluted share of $0.01 in the comparable period in 2016.

Ending cash and cash equivalents were $29.5 million on June 30, 2017, compared with $20.7 million on June 30, 2016, and $26.5 million on December 31, 2016.

15


 

Operations

New first year orders (“NFYOs”) for the quarter ended June 30, 2017, were $2.6 million, compared with $3.0 million for the same period in 2016, representing a 13% decrease.

Total orders for the quarter ended June 30, 2017, were $15.7 million, compared with $20.4 million for the same period in 2016, representing a 23% decrease.

The annual contract value of our customer subscriptions as of June 30, 2017, was $65.2 million, compared to $59.5 million for the same period in 2016, representing a 10% increase.

Net cash provided by operations in the six months ended June 30, 2017, was $7.3 million, compared to $7.5 million for the same period in 2016, representing a 3% decrease.

As of June 30, 2017, backlog was $77.8 million, compared with $80.9 million as of June 30, 2016, representing a 4% decrease.

Revenues

Our Company provides subscription-based services. The following table sets forth the quarter-over-quarter comparison of the Company’s revenues:

 

 

 

Three Months Ended June 30,

 

 

3-month Variance

2017 vs. 2016

 

 

Six Months ended June 30,

 

 

6-month Variance

2017 vs. 2016

 

(in thousands)

 

2017

 

 

2016

 

 

$

 

 

%

 

 

2017

 

 

2016

 

 

$

 

 

%

 

Revenues

 

$

16,378

 

 

$

14,930

 

 

$

1,448

 

 

 

10

%

 

$

32,271

 

 

$

29,258

 

 

$

3,013

 

 

 

10

%

 

The increase in revenue was due to the growth inherent in a successful subscription-based business model with steady additions to the subscriber base coupled with a high rate of existing customer renewals and the realization of previously contracted revenue in our backlog. In the first six months of 2017, excluding our Greenview sales, we categorized our revenue in the following core industry verticals: 51% healthcare, 28% financial services, 7% government sector, and 14% as other.  In the first six months of 2016, we categorized our revenue in the following core industry verticals: 52% healthcare, 28% financial services, 7% government sector, and 13% as other.    

Revenue Indicators — Backlog and Orders

Backlog — Our end-user order backlog is comprised of contractually binding agreements that we expect to amortize into revenue as the services are performed. The timing of revenue is affected by both the length of time required to deploy a service and the length of the service contract.

As of June 30, 2017, total backlog was $77.8 million and we expect approximately 60% of the total backlog, or approximately $46.4 million, to be recognized as revenue during the next twelve months. As of June 30, 2017, the backlog was comprised of the following elements: $27.3 million of deferred revenue that has been billed and paid, $8.9 million billed but unpaid, and approximately $41.6 million of unbilled contracts. The backlog at June 30, 2017, was 4% lower than the $80.9 million backlog at the end of the second quarter 2016, and 5% lower than the ending backlog of $81.7 million at December 31, 2016. Our decrease in backlog reflects the shorter term contractual commitment generally associated with our new customer pricing as a component of a higher touch strategy, as well as the loss of a large customer in the first quarter 2017.

Orders — Total orders were $15.7 million and $20.4 million for the three-month periods ended June 30, 2017 and 2016, respectively, representing a 23% decrease year-over-year. Total orders include contract renewals, NFYOs, and in the case of new multi-year contracts, amounts attributable to the years beyond the first year of service. As noted above, our decrease in total orders is reflective of our move away from such multi-year contracts in our selling approach. NFYOs were $2.6 million and $3.0 million for the three-month periods ended June 30, 2017 and 2016, respectively, representing a 13% decrease year-over-year. Our 2017 decrease in NFYOs is the result of a single $640 thousand order secured in April 2016.

16


 

Cost of Revenues

The following table sets forth the quarter-over-quarter comparison of the cost of revenues:

 

 

 

Three Months Ended June 30,

 

 

3-month Variance

2017 vs. 2016

 

 

Six Months ended June 30,

 

 

6-month Variance

2017 vs. 2016

 

(in thousands)

 

2017

 

 

2016

 

 

$

 

 

%

 

 

2017

 

 

2016

 

 

$

 

 

%

 

Cost of revenues

 

$

3,247

 

 

$

2,635

 

 

$

612

 

 

 

23

%

 

$

6,070

 

 

$

5,172

 

 

$

898

 

 

 

17

%

 

Cost of revenues is comprised of costs related to operating and maintaining the ZixData Center, a field deployment team, customer service and support and the amortization of Company-owned, customer-based computer appliances. The increases in 2017 compared to 2016 reflected in the table above resulted primarily from increases in average headcount expense, which now include our ZixProtect support team gained in the Greenview acquisition in March 2017. We are also incurring costs associated with leased equipment currently supporting Greenview customers, and we are amortizing expense resulting from the acquisition of Greenview’s internally developed software. 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 the quarter-over-quarter comparison of our research and development expenses:

 

 

 

Three Months Ended June 30,

 

 

3-month Variance

2017 vs. 2016

 

 

Six Months ended June 30,

 

 

6-month Variance

2017 vs. 2016

 

(in thousands)

 

2017

 

 

2016

 

 

$

 

 

%

 

 

2017

 

 

2016

 

 

$

 

 

%

 

Research and development

   expenses

 

$

2,708

 

 

$

2,321

 

 

$

387

 

 

 

17

%

 

$

5,131

 

 

$

4,500

 

 

$

631

 

 

 

14

%

 

Research and development expenses consist primarily of salary, benefits, and stock-based compensation for our development staff, independent development contractor expenses, and other direct and indirect costs associated with enhancing our existing products and services and developing new products and services. The increase in 2017 compared to 2016 reflected in the table above resulted primarily from an increase in average headcount, which now includes ZixProtect R&D employees gained in the Greenview acquisition in March 2017.

Selling and Marketing Expenses

The following table sets forth the quarter-over-quarter comparison of our selling and marketing expenses:

 

 

 

Three Months Ended June 30,

 

 

3-month Variance

2017 vs. 2016

 

 

Six Months ended June 30,

 

 

6-month Variance

2017 vs. 2016

 

(in thousands)

 

2017

 

 

2016

 

 

$

 

 

%

 

 

2017

 

 

2016

 

 

$

 

 

%

 

Selling and marketing

   expenses

 

$

5,222

 

 

$

5,083

 

 

$

139

 

 

 

3

%

 

$

10,395

 

 

$

9,492

 

 

$

903

 

 

 

10

%

 

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 increase in the three months ended June 30, 2017, compared to the same period in 2016, resulted primarily from higher payroll and stock-based compensation costs, including expense associated with enhancing our customer success teams, additional travel, and amortization expense resulting from the acquisition of Greenview’s customer base and brand. These costs were offset by decreased advertising and promotional expense.

The six month variance in selling and marketing expense resulted primarily from higher payroll and stock-based compensation costs, including costs related to the enhancement of our product management team, travel, and the amortization expense resulting from the acquisition of Greenview intangible assets noted above. We additionally incurred a higher bad debt expense year over year.  

17


 

General and Administrative Expenses

The following table sets forth the quarter-over-quarter comparison of our general and administrative expenses:

 

 

 

Three Months Ended June 30,

 

 

3-month Variance

2017 vs. 2016

 

 

Six Months ended June 30,

 

 

6-month Variance

2017 vs. 2016

 

(in thousands)

 

2017

 

 

2016

 

 

$

 

 

%

 

 

2017

 

 

2016

 

 

$

 

 

%

 

General and administrative

   expenses

 

$

2,561

 

 

$

3,945

 

 

$

(1,384

)

 

 

(35

)%

 

$

5,373

 

 

$

6,680

 

 

$

(1,307

)

 

 

(20

)%

 

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 decrease in the three months ended June 30, 2017, compared to the same period in 2016 resulted primarily from a $1.2 million reduction in legal fees specific to intellectual property litigation, decreased expenses related to 2016 CFO separation pay and related acceleration of equity, as well as decreases in broker and other professional fees. These decreases were offset by increased headcount expenses and the addition of the Greenview office.

The decrease in the six months ended June 30, 2017, compared to the same period 2016, resulted primarily from a $1.7 million reduction in legal fees specific to intellectual property litigation, decreases in expenses related to 2016 CFO separation, as well as decreases in broker and other professional fees. These reductions were offset by Greenview acquisition costs, as well as increased headcount, and Greenview office expenses.

Provision for Income Taxes

The provision for income taxes was $1.6 million and $437 thousand for the three-month periods ended June 30, 2017 and 2016, respectively, and $2.5 million and $1.4 million for each of the six months ended June 30, 2017 and 2016. The operating losses incurred by the Company’s U.S. operations in past years and the resulting net operating losses for U.S. Federal income tax purposes are subject to a $46.4 million reserve because of the uncertainty of future taxable income levels sufficient to utilize our net operating losses and credits. Our June 30, 2017, provision of $2.5 million includes $2.2 million in deferred taxes, $151 thousand in state taxes currently payable based on gross revenues, $89 thousand related to the federal Alternative Minimum Tax, and $61 thousand in taxes related to our Canadian operations. Our June 30, 2016, provision of $1.4 million included $1.1 million in deferred taxes, $98 thousand in state taxes then payable based on gross revenues, $65 thousand related to the federal Alternative Minimum Tax, and $86 thousand in taxes related to our Canadian operations.