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zixi-10q_20200930.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 September 30, 2020

☐	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 2300, 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 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 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.

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	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 November 5, 2020
Common Stock, par value $0.01 per share		56,991,250

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class		Trading Symbols(s)		Name of Exchange on Which Registered
Common Stock, par value $0.01 per share		ZIXI		NASDAQ Global Market

INDEX

		Page Number
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets at September 30, 2020 (unaudited) and December 31, 2019	3
	Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2020 and 2019	4
	Condensed Consolidated Statement of Stockholders’ Equity (unaudited) for the three months ended March 31, 2020 and 2019, June 30, 2020 and 2019, and September 30, 2020 and 2019, respectively	5
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31

ZIX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)	September 30, 2020			December 31, 2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	23,662		$	13,349
Receivables, net		15,328			10,081
Prepaid and other current assets		3,966			4,984
Total current assets		42,956			28,414
Property and equipment, net		7,852			8,591
Operating lease assets		8,332			10,128
Intangible assets, net		137,367			145,876
Goodwill		170,930			171,209
Deferred tax assets		36,689			36,535
Deferred costs and other assets		12,461			11,968
Total assets	$	416,587		$	412,721
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,717		$	14,400
Accrued expenses		11,473			13,732
Deferred revenue		41,095			40,757
Current portion of long-term debt		1,850			1,850
Operating lease liabilities, current		2,195			2,947
Finance lease liabilities, current		780			1,338
Total current liabilities		75,110			75,024
Long-term liabilities:
Deferred revenue		1,263			2,524
Noncurrent operating lease liabilities		7,113			8,389
Noncurrent finance lease liabilities		188			716
Long-term debt		183,830			178,250
Total long-term liabilities		192,394			189,879
Total liabilities		267,504			264,903
Commitments and contingencies (see Note 11)

Preferred stock:
Series A convertible preferred stock, $1 par value; 100,206 shares designated, issued and outstanding in 2020 and in 2019		113,241			106,527
Total preferred stock		113,241			106,527

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; 85,127,484 issued and 56,992,265 outstanding in 2020 and 83,393,514 issued and 55,640,397 outstanding in 2019		782			780
Additional paid-in capital		399,285			391,605
Treasury stock, at cost; 28,135,219 common shares in 2020 and 27,753,117 common shares in 2019		(113,015	)		(110,298	)
Accumulated deficit		(251,291	)		(240,995	)
Accumulated other comprehensive income (loss)		81			199
Total stockholders’ equity		35,842			41,291
Total liabilities, preferred stock and stockholders’ equity	$	416,587		$	412,721

See notes to condensed consolidated financial statements.

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except share and per share data)	2020			2019			2020			2019
Revenue	$	54,840		$	47,833		$	160,611		$	123,049
Cost of revenue		27,928			21,422			82,265			52,865
Gross margin		26,912			26,411			78,346			70,184
Operating expenses:
Research and development		5,720			5,590			16,926			15,048
Selling, general and administrative		18,813			19,592			58,058			61,729
Total operating expenses		24,533			25,182			74,984			76,777
Operating income (loss)		2,379			1,229			3,362			(6,593	)
Other income (expense):
Investment and other income		127			14			104			115
Interest expense		(2,035	)		(2,973	)		(7,190	)		(7,398	)
Total other expense		(1,908	)		(2,959	)		(7,086	)		(7,283	)
Income (loss) before income taxes		471			(1,730	)		(3,724	)		(13,876	)
Income tax (expense) benefit		(1,196	)		133			244			2,308
Net loss	$	(725	)	$	(1,597	)	$	(3,480	)	$	(11,568	)

Deemed and accrued dividends on preferred stock		2,267			2,090			6,714			7,894
Net loss attributable to common stockholders	$	(2,992	)	$	(3,687	)	$	(10,194	)	$	(19,462	)

Basic loss per share attributable to common stockholders	$	(0.05	)	$	(0.07	)	$	(0.19	)	$	(0.37	)
Diluted loss per common share attributable to common stockholders	$	(0.05	)	$	(0.07	)	$	(0.19	)	$	(0.37	)
Basic weighted average common shares outstanding		54,999,114			53,148,078			53,933,721			52,965,163
Diluted weighted average common shares outstanding		54,999,114			53,148,078			53,933,721			52,965,163

Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		493			35			(118	)		(52	)
Comprehensive loss	$	(232	)	$	(1,562	)	$	(3,598	)	$	(11,620	)

See notes to condensed consolidated financial statements

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(Unaudited)

	Preferred Stock and Stockholders’ Equity
	Preferred Stock				Common Stock					Additional Paid-In		Treasury			Accumulated			Accumulated Other Comprehensive			Total Stockholders
(In thousands, except shares)	Shares		Amount		Shares			Amount		Capital		Stock			Deficit			Income (Loss)			Equity
Balances, December 31, 2019, as reported		100,206	$	106,527		83,393,514		$	780	$	391,605	$	(110,298	)	$	(240,995	)	$	199		$	41,291
Cumulative effect adjustment from changes in accounting standard (Note 2)															$	(103	)					(103	)
Balances, January 1, 2020		100,206		106,527		83,393,514			780		391,605		(110,298	)		(241,098	)		199			41,188
Accretion of beneficial conversion feature of Series A Preferred Shares (Participating)		—		48		—			—		—		—			(48	)		—			(48	)
Accrued dividend on Series A preferred stock		—		2,181		—			—		—		—			(2,181	)		—			(2,181	)
Net issuance of common stock upon exercise of stock options		—		—		46,875			1		116		—			—			—			117
Net issuance of common stock upon vesting of restricted stock units		—		—		30,084			—		—		—			—			—			—
Net issuance of common stock upon vesting of performance stock units		—		—		16,062			—		—		—			—			—			—
Net issuance of restricted common stock		—		—		1,062,683			—		—		—			—			—			—
Net issuance of restricted performance common stock		—		—		404,746			—		—		—			—			—			—
Employee stock-based compensation costs		—		—		—			—		1,989		(1,785	)		—			—			204
Adjustment from foreign currency translation		—		—		—			—		—		—			—			(905	)		(905	)
Net loss		—		—		—			—		—		—			(853	)		—			(853	)
Balances, March 31, 2020		100,206	$	108,756		84,953,964		$	781	$	393,710	$	(112,083	)	$	(244,180	)	$	(706	)	$	37,522
Accretion of beneficial conversion feature of Series A Preferred Shares (Participating)		—		47		—			—		—		—			(47	)		—			(47	)
Accrued dividend on Series A preferred stock		—		2,171		—			—		—		—			(2,171	)		—			(2,171	)
Net issuance of common stock upon exercise of stock options		—		—		67,500			1		216		—			—			—			217
Net issuance of common stock upon vesting of restricted stock units		—		—		75,631			—		—		—			—			—			—
Net issuance of common stock upon vesting of performance stock units		—		—		32,848			—		—		—			—			—			—
Net issuance of restricted common stock		—		—		6,590			—		—		—			—			—			—
Net issuance of restricted performance common stock		—		—		(26,666	)		—		—		—			—			—			—
Employee stock-based compensation costs		—		—		—			—		3,251		(797	)		—			—			2,454
Adjustment from foreign currency translation		—		—		—			—		—		—			—			294			294
Net loss		—		—		—			—		—		—			(1,902	)		—			(1,902	)
Balances, June 30, 2020		100,206	$	110,974		85,109,867		$	782	$	397,177	$	(112,880	)	$	(248,299	)	$	(412	)	$	36,368
Accretion of beneficial conversion feature of Series A Preferred Shares (Participating)		—		48		—			—		—		—