UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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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:
ZIX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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(State of Incorporation) |
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(I.R.S. Employer Identification Number) |
(Address of Principal Executive Offices)
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(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.
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).
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.
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Large accelerated filer |
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☒ |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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Emerging growth company |
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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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at May 4, 2021 |
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Common Stock, par value $0.01 per share |
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Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of Each Class |
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Trading Symbols(s) |
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Name of Exchange on Which Registered |
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INDEX
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Page Number |
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PART I — FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets at March 31, 2021 (unaudited) and December 31, 2020 |
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3 |
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4 |
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5 |
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7 |
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8 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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20 |
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Item 3. |
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27 |
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Item 4. |
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27 |
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Item 1. |
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28 |
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Item 1A. |
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28 |
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Item 2. |
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28 |
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Item 3. |
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28 |
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Item 4. |
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28 |
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Item 5. |
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28 |
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Item 6. |
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29 |
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2
ZIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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(In thousands, except share and par value data) |
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March 31, 2021 |
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December 31, 2020 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, net |
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Prepaid and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease assets |
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Intangible assets, net |
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Goodwill |
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Deferred tax assets |
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Deferred costs and other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Deferred revenue |
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Current portion of long-term debt |
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Operating lease liabilities, current |
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Finance lease liabilities, current |
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Total current liabilities |
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Long-term liabilities: |
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Deferred revenue |
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Noncurrent operating lease liabilities |
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Noncurrent finance lease liabilities |
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Long-term debt |
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Total long-term liabilities |
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Total liabilities |
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Commitments and contingencies (see Note 11) |
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Preferred stock: |
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Series A convertible preferred stock, $ outstanding in 2021 and in 2020 |
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Total preferred stock |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ issued and |
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Additional paid-in capital |
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Treasury stock, at cost; common shares in 2020 |
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( |
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Accumulated deficit |
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Accumulated other comprehensive income (loss) |
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Total stockholders’ equity |
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Total liabilities, preferred stock and stockholders’ equity |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
3
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
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Three Months Ended March 31, |
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(In thousands, except share and per share data) |
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2021 |
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2020 |
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Revenue |
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$ |
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$ |
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Cost of revenue |
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Gross margin |
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Operating expenses: |
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Research and development |
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Selling, general and administrative |
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Total operating expenses |
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Operating income (loss) |
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( |
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Other income (expense): |
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Investment and other income (expense) |
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Interest expense |
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Total other (expense) income |
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( |
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( |
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Loss before income taxes |
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( |
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Income tax benefit |
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Net loss |
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$ |
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$ |
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Deemed and accrued dividends on preferred stock |
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Net loss attributable to common stockholders |
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$ |
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$ |
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Basic loss per share attributable to common stockholders |
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$ |
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$ |
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Diluted loss per common share attributable to common stockholders |
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$ |
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$ |
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Basic weighted average common shares outstanding |
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Diluted weighted average common shares outstanding |
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Other comprehensive loss, net of tax |
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Foreign currency translation adjustments |
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( |
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( |
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Comprehensive loss |
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$ |
( |
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$ |
( |
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See notes to condensed consolidated financial statements
4
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Unaudited)
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Preferred Stock and Stockholders’ Equity |
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Preferred Stock |
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Common Stock |
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Additional |
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Accumulated Other |
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Total |
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(In thousands, except shares) |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-In Capital |
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Treasury Stock |
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Accumulated Deficit |
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Comprehensive Income (Loss) |
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Stockholders’ Equity |
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Balances, December 31, 2020, as reported |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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Accretion of beneficial conversion feature of Series A Preferred Shares (Participating) |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Accrued dividend on Series A preferred stock |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Net issuance of common stock upon exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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— |
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Net issuance of common stock upon vesting of restricted stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net issuance of common stock upon vesting of performance stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net issuance of restricted common stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net issuance of restricted performance common stock |
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— |
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— |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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Employee stock-based compensation costs |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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Adjustment from foreign currency translation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Balances, March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
5
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Unaudited)
Continued
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Preferred Stock and Stockholders’ Equity |
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Preferred Stock |
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Common Stock |
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Additional |
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Accumulated Other |
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Total |
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(In thousands, except shares) |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-In Capital |
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Treasury Stock |
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Accumulated Deficit |
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Comprehensive Income (Loss) |
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Stockholders’ Equity |
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Balances, December 31, 2019, as reported |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Cumulative effect adjustment from changes in accounting standard (Note 2) |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Balances, January 1, 2020, as reported |
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100,206 |
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83,393,514 |
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( |
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$ |
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Accretion of beneficial conversion feature of Series A Preferred Shares (Participating) |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Accrued dividend on Series A preferred stock |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Net issuance of common stock upon exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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Net issuance of common stock upon vesting of restricted stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net issuance of common stock upon vesting of performance stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net issuance of restricted common stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Net issuance of restricted performance common stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Employee stock-based compensation costs |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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Adjustment from foreign currency translation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Balances, March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
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|
See notes to condensed consolidated financial statements.
6
ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31, |
|
|||||
|
(In thousands) |
|
2021 |
|
|
2020 |
|
||
|
Operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Non-cash items in net loss: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs |
|
|
|
|
|
|
|
|
|
Employee stock-based compensation costs |
|
|
|
|
|
|
|
|
|
Noncash lease costs |
|
|
|
|
|
|
|
|
|
Changes in deferred taxes |
|
|
( |
) |
|
|
( |
) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Receivables |
|
|
( |
) |
|
|
( |
) |
|
Prepaid and other current assets |
|
|
|
|
|
|
|
|
|
Deferred costs and other assets |
|
|
|
|
|
|
( |
) |
|
Accounts payable |
|
|
( |
) |
|
|
|
|
|
Deferred revenue |
|
|
( |
) |
|
|
|
|
|
Earn-out payment |
|
|
( |
) |
|
|
— |
|
|
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 |
|
|
— |
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
Repayment of finance lease liabilities |
|
|
( |
) |
|
|
( |
) |
|
Purchase of treasury shares |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by (used in) financing activities |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
|
|
|
$ |
|
|
See notes to condensed consolidated financial statements.
7
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” or “us”) should be read in conjunction with the audited consolidated financial statements included in the Company’s 2020 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-month period ended March 31, 2021, are not necessarily indicative of the results to be expected for any future periods or for the full fiscal year.
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 reported amounts and disclosures. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the recent coronavirus (COVID-19) and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts of the COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates.
2. Recent Accounting Standards and Pronouncements
Income Taxes
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 March 31, 2021, the Company had
8
Stock Option Activity
The following is a summary of all stock option transactions during the three months ended March 31, 2021:
|
|
|
Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (Yrs) |
|
|||
|
Outstanding at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
Granted at market price |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
Options exercisable at March 31, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
|
At March 31, 2021,
Restricted Stock Activity
The following is a summary of Restricted Stock activity during the three months ended March 31, 2021:
|
|
|
Restricted Shares |
|
|
Weighted Average Fair Value |
|
||
|
Non-vested restricted stock at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
Granted at market price |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Cancelled |
|
|
( |
) |
|
|
|
|
|
Non-vested restricted stock at March 31, 2021 |
|
|
|
|
|
$ |
|
|
Restricted Stock Unit Activity
The following is a summary of all RSU activity during the three months ended March 31, 2021:
|
|
|
Restricted Stock Units |
|
|
Weighted Average Fair Value |
|
||
|
Non-vested restricted stock units at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
Granted at market price |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Cancelled |
|
|
( |
) |
|
|
|
|
|
Non-vested restricted stock units at March 31, 2021 |
|
|
|
|
|
$ |
|
|
Performance RSU Activity
The following is a summary of all Performance RSU activity during the three months ended March 31, 2021:
|
|
|
Performance RSUs |
|
|
Weighted Average Fair Value |
|
||
|
Non-vested performance RSUs at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
Granted at market price |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
Non-vested performance RSUs at March 31, 2021 |
|
|
|
|
|
$ |
|
|
9
Performance Stock Activity
The following is a summary of all Performance Stock activity during the three months ended March 31, 2021:
|
|
|
Performance Stock |
|
|
Weighted Average Fair Value |
|
||
|
Non-vested performance stock at December 31, 2020 |
|
|
|
|
|
$ |
|
|
|
Granted at market price |
|
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
Non-vested performance stock at March 31, 2021 |
|
|
|
|
|
$ |
|
|
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.
Stock-Based Compensation Expense
For the three month period ended March 31, 2021, the total stock-based employee compensation expense (excluding $
|
(In thousands) |
|
Three Months Ended March 31, 2021 |
|
|
|
Cost of revenues |
|
$ |
|
|
|
Research and development |
|
|
|
|
|
Selling, general and administrative |
|
|
|
|
|
Stock-based compensation expense |
|
$ |
|
|
A deferred tax asset totaling $
For additional information regarding the Company’s Equity Awards and Stock-based Employee Compensation, see Note 3, Stock Options and Stock-Based Employee Compensation of the “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the year ended December 31, 2020.
4. Supplemental Cash Flow Information
Supplemental cash flow information relating to taxes, interest and non-cash activities:
|
|
|
Three Months Ended March 31, |
|
|||||
|
(In thousands) |
|
2021 |
|
|
2020 |
|
||
|
Interest payments |
|
$ |
|
|
|
|
|
|
|
Income tax payments |
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
Accrued and deemed dividends on Series A preferred stock |
|
|
|
|
|
|
|
|
10
5. Receivables, net
|
(In thousands) |
|
March 31, 2021 |
|
|
December 31, 2020 |
|
||
|
Gross accounts receivables |
|
$ |
|
|
|
$ |
|
|
|
Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
Unpaid portion of deferred revenue |
|
|
( |
) |
|
|
( |
) |
|
Note receivable |
|
|
|
|
|
|
|
|
|
Allowance for note receivable |
|
|
( |
) |
|
|
( |
) |
|
Receivables, net |
|
$ |
|
|
|
$ |
|
|
Accounts receivable are recorded at cost less an allowance for credit losses. We estimate losses on receivables at the reporting date based on expected losses resulting from the inability of our customers to make required payments, including our historical experience of actual losses and the aging of such receivables. These receivables have been pooled by shared risk characteristics. Based on known information we may also establish specific reserves for customers in an adverse financial condition or adjust our expectations of changes in conditions that may impact the collectability of outstanding receivables. As of March 31, 2021, based on available information to date, the Company assessed no material impact related to potential losses caused by COVID-19.
The reduction for the unpaid portion of deferred revenue represents future customer service or maintenance obligations that 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 that 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 $
6. Leases
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
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:
|
|
|
Three Months ended March 31, |
|
|
Three Months ended March 31, |
|
||
|
(In thousands) |
|
2021 |
|
|
2020 |
|
||
|
Finance lease costs: |
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
$ |
|
|
|
$ |
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
Operating lease costs |
|
|
|
|
|
|
|
|
|
Short-term lease costs |
|
|
|
|
|
|
|
|
|
Variable lease costs |
|
|
|
|
|
|
|
|
|
Total lease costs |
|
$ |
|
|
|
$ |
|
|
11
Supplemental cash flow information related to leases are as follows:
|
|
|
Three Months ended March 31, |
|
|
Three Months ended March 31, |
|
||
|
(In thousands) |
|
2021 |
|
|
2020 |
|
||
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
Operating cash flows from 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 are as follows:
|
|
|
|
March 31, |
|
|
March 31, |
|
|||
|
(In thousands) |
|
Balance Sheet Classification |
|
2021 |
|
|
2020 |
|
||
|
Operating Leases |
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets |
|
Operating lease assets |
|
$ |
|
|
|
$ |
|
|
|
Total operating lease assets |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
March 31, |
|
||
|
(In thousands) |
|
Balance Sheet Classification |
|
2021 |
|
|
|
Finance Leases |
|
|
|
|
|
|
|
Finance lease right-of-use assets |
|
|
|
$ |
|
|
|
Accumulated depreciation - finance leases |
|
|
|
|
( |
) |
|
Finance lease right-of-use assets, net |
|
Property and equipment, net |
|
$ |
|
|
Weighted average remaining lease term and weighted average discount rate are as follows:
|
Weighted Average Remaining Lease Term (Years) |
|
2021 |
|
|
2020 |
|
||
|
Operating leases |
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
|
% |
|
|
|
% |
|
Finance leases |
|
|
|
% |
|
|
|
% |
Maturities of lease liabilities are as follows:
|
|
|
Payments Due by Period - Year Ending December 31, 2021 |
|
|||||||||||||||||
|
(In thousands) |
|
Total |
|
|
Year 1 (1) |
|
|
Years 2 & 3 |
|
|
Years 4 & 5 |
|
|
Beyond 5 Years |
|
|||||
|
Operating leases |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
Less imputed interest |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
Less imputed interest |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Year 1 excluding the three months ended March 31, 2021 |
|
|||||||||||||||||||
In 2020, we entered into an operating lease for an additional data center, which has not yet commenced due to Covid-19 and is expected to be added as a right-of-use asset and a lease liability at a value of approximately $
12
7. 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 $
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
The Credit Facilities are scheduled to mature on
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:
|
|
• |
|
|
|
• |
|
|
|
• |
|
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.
13
Term Loan and Incremental Term Loan (“Combined Term Loan”)
As of March 31, 2021, the Company had $
At March 31, 2021, the Company had an outstanding debt balance of $
Future principal payments under the Combined Term Loan as of March 31, 2021 are as follows:
|
(In thousands) |
|
|
|
|
|
|
|
Year Ending December 31, |
|
|
|
Amount |
|
|
|
2021 |
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delayed Draw Term Loan Facility
At March 31, 2021, the Company had $
At March 31, 2021, the Company had an outstanding debt balance of $
Future principal payments under the Delayed Draw Term Loan Facility as of March 31, 2021 are as follows:
|
(In thousands) |
|
|
|
|
|
|
|
Year Ending December 31, |
|
|
|
Amount |
|
|
|
2021 |
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $
14
As of March 31, 2021, the Company had
As of March 31, 2021, 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.
8. 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 $
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
The conversion option of the Series A Preferred Stock was determined to have a beneficial conversion feature valued at $
Dividends
The Stated Value of the Series A Preferred Stock accretes at a fixed rate of
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.
15
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
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.
9. 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
Disaggregation of Revenue
In the three months ended March 31, 2021, we recorded revenue for our services in the following core industry verticals:
We operate as a operating segment. Revenue generated from our email encryption and security solutions represented
Contract balances
Our contract assets include our accounts receivables, discussed above in Footnote 5 “Receivables, net”, and the deferred cost associated with commissions earned by our sales team on securing new, add-on, and renewal contract orders. During the three months ended March 31, 2021, we increased our noncurrent deferred contract asset by $
Our contract liabilities consist of deferred revenue representing future customer services which have been billed and collected. The $
Performance obligations
As of March 31, 2021, 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 $
Approximately $
16
10. Earnings (Loss) Per Share and Potential Dilution
Basic earnings (loss) per share are computed using the weighted average number of common shares outstanding for the applicable period under the Treasury Stock method. The dilutive effect of potential common shares outstanding is included in diluted earnings (loss) per share.
|
|
|
Three Months ended March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Basic weighted average common shares |
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
Employee and director stock options |
|
|
— |
|
|
|
— |
|
|
Restricted Stock |
|
|
— |
|
|
|
— |
|
|
RSUs |
|
|
— |
|
|
|
— |
|
|
Performance RSUs |
|
|
— |
|
|
|
— |
|
|
Performance Stock |
|
|
— |
|
|
|
— |
|
|
Series A Preferred Shares |
|
|
— |
|
|
|
— |
|
|
Series B Preferred Shares |
|
|
— |
|
|
|
— |
|
|
Dilutive weighted average common shares |
|
|
|
|
|
|
|
|
The following table presents the potentially dilutive common shares outstanding that were excluded from the computation of dilutive net loss per share of common stock for the periods presented because including them would have been anti-dilutive:
|
|
|
Three Months ended March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Stock options to purchase common stock |
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
|
|
|
|
|
|
|
|
RSUs |
|
|
|
|
|
|
|
|
|
Performance RSUs |
|
|
|
|
|
|
|
|
|
Performance Stock |
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
Potential dilutive common shares |
|
|
|
|
|
|
|
|
11. Commitments and Contingencies
We have not entered into any material, non-cancelable purchase commitments at March 31, 2021.
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.
12. 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.
17
13. Goodwill
The following is a summary of the changes in the carrying amount of goodwill for the three month periods ended March 31, 2021 and 2020:
|
|
|
Three Months ended March 31, |
|
|||||
|
(In thousands) |
|
2021 |
|
|
2020 |
|
||
|
Opening balance |
|
$ |
|
|
|
$ |
|
|
|
Acquisition adjustments |
|
|
|
|
|
|
— |
|
|
Effect of currency translation adjustment |
|
|
( |
) |
|
|
( |
) |
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
The increase to our goodwill in the three months ended March 31, 2021 is due to fair value adjustment of our acquired intangible assets and deferred revenue liability as well as the final working capital adjustment of our CloudAlly acquisition completed on November 5, 2020. See below Note 16 “Acquisitions” for additional information regarding our acquisitions.
We evaluate goodwill for impairment annually in the fourth quarter, or when there is a reason to believe that the value has been diminished or impaired. There were
14. Other Comprehensive 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 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, United Kingdom, Switzerland and Spain. For the three months ended March 31, 2021, movements in currency exchange rates and the related impact on the translation of the balance sheets of our foreign subsidiaries was the primary cause of our foreign currency translation loss of $
15. 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 $
16. Acquisitions
Acquisition of CloudAlly
On November 5, 2020, Zix acquired
Founded in 2011, CloudAlly, based in Israel, is a pioneer of enterprise-grade, software-as-a-service (SaaS) cloud backup and recovery solutions. The company offers a robust suite of award-winning, ISO 27001 certified and GDPR/HIPAA compliant solutions for Microsoft Office 365, Google Workspace (formerly G Suite), SharePoint, OneDrive, Salesforce, Box and Dropbox. CloudAlly is a channel-first provider, serving more than
18
The Company incurred $
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 CloudAlly are technology, customer relationships, and trademarks/names which we are each amortizing over a
The following table summarizes the current estimated fair value of acquired assets and liabilities:
|
(In thousands) |
|
Provisional Fair Value |
|
|
|
Assets: |
|
|
|
|
|
Current assets |
|
$ |
|
|
|
Property and equipment |
|
|
|
|
|
ROU assets |
|
|
|
|
|
Trademark/Names |
|
|
|
|
|
Technology |
|
|
|
|
|
Customer relationships |
|
|
|
|
|
Goodwill |
|
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
Current liabilities |
|
$ |
|
|
|
Deferred revenue |
|
|
|
|
|
Operating lease liabilities |
|
|
|
|
|
Deferred tax liability |
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
|
|
Net assets recorded |
|
$ |
|
|
Pro Forma Financial Information (Unaudited)
The following unaudited pro forma financial information presents the combined results of operations for the three month periods ending March 31, 2021 and 2020, respectively, as though the CloudAlly acquisition that occurred during the reporting period had occurred as of the beginning of the period presented, with adjustments, such as amortization expense of intangible assets and acquisition-related transaction costs, to give effect to pro forma events that are directly attributable to the acquisitions. 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 respective acquisitions had occurred at the beginning of the period presented, nor are they indicative of future results of operations:
|
|
|
Three Months Ended March 31, |
|
|||||
|
(In thousands, except per share data) |
|
2021 |
|
|
2020 |
|
||
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
Net income |
|
|
( |
) |
|
|
( |
) |
|
Basic income per share attributed to common shareholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
Diluted income per share attributed to common shareholders |
|
$ |
( |
) |
|
$ |
( |
) |
19
|
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 related to how privacy and data security law mandates may affect demand for Zix’s products, business disruptions, uncertainty and market instability stemming from the COVID-19 pandemic as well as governmental actions related thereto, and those risks additionally described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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.
Overview
Zix® (the “Company,” “we,” “our,” or “us”) is a leading cloud provider of 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, data loss prevention (“DLP”), advanced threat protection, unified archiving and cloud data backup. 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 major U.S. Banks), and insurance and government (including 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®), an 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) policy-based encryption, which automatically encrypts and decrypts messages with sensitive content. 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 and minimizing impact on customer resources and workflow.
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.
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.
20
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 now 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 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.
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 Advanced Threat Protection 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, information rights management, e-signatures, and secure file sharing solutions.
On November 5, 2020, Zix acquired CloudAlly, a pioneer of enterprise-grade, software-as-a-service (SaaS) cloud backup and recovery solutions. CloudAlly provides a secure cloud data backup solution for critical business information, including backup services for Microsoft O365 cloud email, Google applications, and Salesforce.
Our business operations and service offerings are supported by the ZixData Center™, which is ISO 27001 certified, SOC2 accredited and SOC 3 certified for applicable services. The operations of the ZixData Center are independently audited annually to maintain ISO 27001 certification covering numerous categories and controls and 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.
Impacts of COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel strain of the coronavirus (“COVID-19”) to be a pandemic. The pandemic has resulted in significant, unpredictable, and rapidly changing impacts on the United States and global economies. The COVID-19 pandemic and government responses have included limiting the operations of non-essential businesses and may result in long-term harm or permanent closures impacting our customers and our vendors. While COVID-19 had a minimal impact to our first quarter 2021 financial results, Zix has taken steps to ensure the resilience of our company, while protecting the email security of our customers and the health of our employees, including the following actions:
|
|
• |
Offering healthy email checks and evaluating other efficiency solutions for our customers; |
|
|
• |
Working with partners and customers to provide more flexible billing schedules; |
|
|
• |
Moving over 95% of our employees to remote work arrangements while maintaining the integrity of our data center operations and providing continued support for our customers; |
|
|
• |
Maintaining effective governance and internal controls in a remote work environment; |
|
|
• |
Reducing executive salaries and fees to our Board of Directors; |
|
|
• |
Implementing a reduction in force of approximately 6%, completed through both voluntary and involuntary separation; |
21
|
|
• |
Slowing our hiring plans, and reducing planned travel and conference expenses; and |
|
|
• |
Continued review and adjustment of other operating expenses for potential savings, including reduction of excess capacities in our network data centers; |
We have continued to provide our cloud email security, productivity and compliance solutions services to our customers and vendors during this ongoing pandemic. The full extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for consumer products. See the additional risk factor regarding COVID-19 included in Part I – Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2020.
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. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from COVID-19 and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts of COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. 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, 2020. 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, 2020.
Results of Operations
First Quarter 2021 Summary of Operations
Financial
|
|
• |
Revenue for the quarter ended March 31, 2021, was $60.0 million, compared with $52.4 million for the same period in 2020, representing a 14% increase. |
|
|
• |
Gross margin for the quarter ended March 31, 2021, was $26.9 million (or 45% of revenues), compared with $26.4 million (or 50% of revenues) for the comparable period in 2020. |
|
|
• |
Net loss for the quarter ended March 31, 2021, was $2.5 million, compared with net loss of $0.9 million in the comparable period in 2020. |
|
|
• |
Net loss attributable to common shareholders for the quarter ended March 31, 2021, was $4.8 million, compared with net loss attributable to common shareholders of $3.1 million in the comparable period in 2020. The Company’s net loss attributable to common shareholders includes a deemed and accrued dividend to preferred shareholders of $2.3 million and $2.2 million, for the three month periods ended March 31 2021 and 2020, respectively |
|
|
• |
Net loss per diluted share was $0.09 for the quarter ended March 31, 2021, compared with net loss per diluted share of $0.06 in the comparable period in 2020. |
|
|
• |
Ending cash and cash equivalents were $23.7 million on March 31, 2021, compared with $16.3 million on March 31, 2020, and $21.4 million on December 31, 2020. |
22
Operations
|
|
• |
Total billings for the quarter ended March 31, 2021, were $62.3 million, compared with $55.8 million for the same period in 2020, representing a 12% increase. |
|
|
• |
The annual recurring revenue value of our customer subscriptions as of March 31, 2021, was $243.6 million, compared with $214.3 million for the same period in 2020, representing an increase of $29.2 million. |
|
|
• |
Net cash provided by operations in the three months ended March 31, 2021, was $10.7 million, compared with $4.4 thousand provided by operations for the same period in 2020, representing a $6.3 million increase |
|
|
• |
As of March 31, 2021, backlog was $82.9 million, compared with $88.5 million as of March 31, 2020, representing a 6% 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 March 31, |
|
|
3-month Variance 2021 vs. 2020 |
|
||||||||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Revenues |
|
$ |
60,015 |
|
|
$ |
52,434 |
|
|
$ |
7,581 |
|
|
|
14 |
% |
Our revenue increase is the result of 10% growth in our core business due to 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. Our CloudAlly business, acquired in November 2020, additionally contributed $2.3 million to our first quarter 2021 revenue. In the first three months of 2021, excluding our CloudAlly business, we categorized our revenue in the following core industry verticals: 20% healthcare, 17% financial services, 3% government sector, and 60% as other. In the first three months of 2020, we categorized our revenue in the following core industry verticals: 20% healthcare, 18% financial services, 3% government sector, and 59% as other.
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 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. 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:
|
|
|
As of March 31, |
|
|
Variance 2021 vs. 2020 |
|
||||||||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Annual Recurring Revenue |
|
$ |
243,554 |
|
|
$ |
214,315 |
|
|
$ |
29,239 |
|
|
|
14 |
% |
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 March 31, 2021, total backlog was $82.9 million, and we expect approximately 76% of the total backlog, or approximately $63.1 million, to be recognized as revenue during the next twelve months. As of March 31, 2021, the backlog was comprised of the following elements: $41.5 million of deferred revenue that has been billed and paid, $15.1 million billed but unpaid, and approximately $26.3 million of unbilled contracts. The backlog at March 31, 2021, was 6% lower than the $88.5 million backlog at the end of the first quarter 2020, and 1% lower than the ending backlog of $83.4 million at December 31, 2020. Our decrease in backlog is the result of timing of our customer contracts and our continued shift toward a monthly subscription model.
23
Cost of Revenues
The following table sets forth the quarter-over-quarter comparison of the cost of revenues:
|
|
|
Three Months Ended March 31, |
|
|
3-month Variance 2021 vs. 2020 |
|
||||||||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Cost of revenues |
|
$ |
33,138 |
|
|
$ |
26,079 |
|
|
$ |
7,059 |
|
|
|
27 |
% |
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 associated with the resale of Microsoft Office365 and hosted exchange products, and the amortization of Company-owned, customer-based computer appliances. The increases in 2021 compared to 2020 reflected in the table above result from our sales of Microsoft Office365 and hosted exchange products, which comprise 53% of total Company revenue earned in the first quarter of 2021.
Research and Development Expenses
The following table sets forth the quarter-over-quarter comparison of our research and development expenses:
|
|
|
Three Months Ended March 31, |
|
|
3-month Variance 2021 vs. 2020 |
|
||||||||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Research and development expenses |
|
$ |
6,060 |
|
|
$ |
5,386 |
|
|
$ |
674 |
|
|
|
13 |
% |
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 2021 compared to 2020 reflected in the table above resulted primarily from the amortization of previously capitalized internal use software due to project completions.
Selling and Marketing Expenses
The following table sets forth the quarter-over-quarter comparison of our selling and marketing expenses:
|
|
|
Three Months Ended March 31, |
|
|
3-month Variance 2021 vs. 2020 |
|
||||||||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
Selling and marketing expenses |
|
$ |
14,922 |
|
|
$ |
14,341 |
|
|
$ |
581 |
|
|
|
4 |
% |
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 March 31, 2021, compared to the same period in 2020, was due primarily to increases in commissions and stock-based compensation expense, offset by decreases in travel and advertising.
General and Administrative Expenses
The following table sets forth the quarter-over-quarter comparison of our general and administrative expenses:
|
|
|
Three Months Ended March 31, |
|
|
3-month Variance 2021 vs. 2020 |
|
||||||||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||
|
General and administrative expenses |
|
$ |
6,375 |
|
|
$ |
5,688 |
|
|
$ |
687 |
|
|
|
12 |
% |
24
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 increase in the three months ended March 31, 2021, compared with the same period in 2020 resulted primarily from increases in our stock based compensation expense.
Other Income (Expense)
Our other income (expense) consists primarily of interest expense associated with our debt. During the three months ended March 31, 2021 and 2020, we recorded interest expense of $2.1 million and $2.6 million, respectively associated with this debt. At March 31, 2021, our outstanding debt balance was $211.5 million based on 3.97% effective interest rate during the period. See above Note 7 “Long-term Debt” for additional information regarding our debt.
Provision for Income Taxes
The provision for income taxes was a $103 thousand and an $870 thousand benefit for the three month periods ended March 31, 2021 and 2020, respectively. 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 $24.2 million reserve because of the uncertainty of future taxable income levels sufficient to utilize our net operating losses and credits. Our March 31, 2021, provision benefit of $103 thousand included $279 thousand deferred taxes benefit, offset by state taxes payable based on gross revenues. Our March 31, 2020, provision benefit of $870 thousand included $633 thousand in deferred taxes, and a $337 thousand tax benefit related to the return of federal Alternative Minimum Tax credits, all of which was offset by $100 thousand in state taxes then payable based on gross revenues.
No tax penalty-related charges were accrued or recognized for the three month periods ended March 31, 2021 and 2020. Additionally, we have not taken a tax position that would have a material effect on our financial statements or our effective tax rate for the three-month period ended March 31, 2021. We are currently subject to a three-year statute of limitations by major tax jurisdictions.
At March 31, 2021, the Company partially reserved its U.S. net deferred tax assets due to the uncertainty of future taxable income being sufficient to utilize net loss carryforwards prior to their expiration, as noted above. The Company did not reserve $32.9 million of its U.S. net deferred tax assets. The majority of this unreserved portion related to $26.3 million in 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 $5.2 million relating to temporary differences between GAAP and tax-related expense, Federal R&D credits of $1.9 million, and $975 thousand relating to U.S. state income tax credits and net operating loss carryovers. These items are offset by a $1.5 million Israeli deferred tax liability.
Any reduction or increase to the $24.2 million valuation allowance related to our deferred tax asset would be 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 quarter 2021 actual earnings, the Company believes the deferred tax asset allowance as of December 31, 2020, will remain unchanged at December 31, 2021. For this reason, the Company has recognized its first quarter 2021 federal deferred tax provision in full. If in future periods we conclude our future U.S. federal taxable estimate established at the end of the year will either fail to meet or exceed the prior year estimate, the Company will offset its federal deferred tax provision by increasing or reducing its valuation allowance accordingly by an equal amount, thereby eliminating from its deferred tax provision federal taxes from the Company’s financial statements. Significant judgment is required in determining any valuation allowance recorded against the deferred tax asset. In assessing the need for such an allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. 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 during which it becomes more likely than not that an additional portion of our deferred tax assets will or will not be realized.
We have determined that utilization of existing net operating losses against future taxable income is not currently subject to limitation 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 future taxable income. The Company currently has U.S. federal net operating loss carryforwards of approximately $232 million which begin to expire in 2021.
25
Net Loss
Our net loss for the three months ended March 31, 2021, of $2.5 million was a decline of $1.7 million compared to our net loss of $853 thousand for the same period last year. The decline in our net loss was primarily due to increases in our operating expenses, offset by increased revenue.
Liquidity and Capital Resources
Overview
Based on our performance over the last four quarters and current expectations, including our assessment of the COVID-19 potential impact to our Company, we believe our cash and cash equivalents, cash generated from operations, and availability under our $25 million Revolving Facility (which was undrawn as of March 31, 2021 and available to fund working capital and for other general corporate purposes, including the financing of permitted acquisitions, investments, and restricted payments, subject, in both cases, to the conditions contained in the Credit Agreement) will satisfy our working capital needs, capital expenditure requirements, 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 and quarterly reviews, and we will continue to monitor our position to protect our Company against uncertainties related to the COVID-19 pandemic. During the first three months of 2021, net cash provided by operations was $10.7 million, an increase of $6.3 million compared with the $4.4 million of net cash provided by operations in the first three months of 2021. At March 31, 2021, our cash and cash equivalents totaled $23.7 million, an increase of $2.4 million from the December 31, 2020 balance, and we had outstanding debt of $211.5 million.
Sources and Uses of Cash Summary
|
|
|
Three Months Ended March 31, |
|
|||||
|
(In thousands) |
|
2021 |
|
|
2020 |
|
||
|
Net cash provided by operations |
|
$ |
10,674 |
|
|
$ |
4,407 |
|
|
Net cash used in investing activities |
|
$ |
(5,318 |
) |
|
$ |
(5,007 |
) |
|
Net cash provided by (used in) financing activities |
|
$ |
(2,604 |
) |
|
$ |
3,466 |
|
Our primary source of liquidity from our operations is the collection of revenue in advance from our customers and collection of accounts receivable from our customers, net of the timing of payments to our vendors and service providers.
Our investing activities in the first three months of 2021 consisted of $5.3 million for capital expenditures, which includes $4.5 million in capitalized internal-use software, $459 thousand related to purchases of computer and networking equipment, and $339 thousand related to our CloudAlly acquisition. Our investing activities in the first three months of 2020 consisted of $3.9 million in capitalized internal-use software, and $1.1 million for computer and networking equipment.
Financing activities in the first three months of 2021 include using $2.1 million in the repurchase of common stock related to the tax impact of vesting restricted awards, $551 thousand for principal payments of our long-term debt, and $201 thousand for payments on our finance leases. This usage was offset by $253 thousand received from the exercise of stock options. Financing activities in the first three months of 2020 included $6.0 million drawn from our Revolving Facility and $117 thousand received from the exercise of stock options. We used $1.8 million in the repurchase of common stock related to the tax impact of vesting restricted awards, $460 thousand for principal payments of our long-term debt, and $406 thousand for payments on our finance leases.
26
Options of Zix Common Stock
We have significant stock 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 from additional option activity is not certain. The following table summarizes the options that were outstanding as of March 31, 2021. The vested shares are a subset of the outstanding shares. The value of the shares is the number of shares multiplied by the exercise price for each share.
|
|
|
Summary of Outstanding Options |
|
|||||||||||||
|
Exercise Price Range |
|
Outstanding Options |
|
|
Total Value of Outstanding Options (In thousands) |
|
|
Vested Options (included in outstanding options) |
|
|
Total Value of Vested Options (In thousands) |
|
||||
|
$2.00 - $3.49 |
|
|
180,000 |
|
|
$ |
481,000 |
|
|
|
180,000 |
|
|
$ |
481,000 |
|
|
$3.50 - $4.99 |
|
|
397,010 |
|
|
|
1,503,567 |
|
|
|
397,010 |
|
|
|
1,503,567 |
|
|
$5.00 - $6.49 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$6.50 - $7.99 |
|
|
100,000 |
|
|
|
670,000 |
|
|
|
6,250 |
|
|
|
41,875 |
|
|
$8.00 - $9.50 |
|
|
100,000 |
|
|
|
803,000 |
|
|
|
25,000 |
|
|
|
200,750 |
|
|
Total |
|
|
777,010 |
|
|
$ |
3,457,567 |
|
|
|
608,260 |
|
|
$ |
2,227,192 |
|
Off-Balance Sheet Arrangements
None.
Contractual Obligations, Contingent Liabilities and Commitments
We have not entered into any material, non-cancelable purchase commitments at March 31, 2021.
We have severance agreements with certain employees which would require the Company to pay approximately $5.6 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.
|
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2020.
|
ITEM 4. |
CONTROLS AND PROCEDURES |
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated 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 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.
Changes in Internal Controls over Financial Reporting
During the three months ended March 31, 2021, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
27
PART II — OTHER INFORMATION
|
ITEM 1. |
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 condensed consolidated financial statements.
|
ITEM 1A. |
Risk Factors |
See Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. There have been no material changes in our risk factors from those disclosed in such Annual Report on Form 10-K. The risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, should be read in conjunction with the considerations set forth above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
|
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
|
|
(a) |
None. |
|
|
(b) |
None. |
|
|
(c) |
Purchases of Equity Securities by the Issuer |
|
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share (1) |
|
|
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs |
|
|
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
|
||||
|
January 1, 2021 to January 31, 2021 |
|
|
8,929 |
|
|
$ |
8.36 |
|
|
|
— |
|
|
$ |
— |
|
|
February 1, 2021 to February 28, 2021 |
|
|
26,732 |
|
|
$ |
7.44 |
|
|
|
— |
|
|
$ |
— |
|
|
March 1, 2021 to March 31, 2021 |
|
|
252,645 |
|
|
$ |
7.22 |
|
|
|
— |
|
|
$ |
— |
|
|
Total |
|
|
288,306 |
|
|
$ |
7.27 |
|
|
|
— |
|
|
$ |
— |
|
|
1 |
Of the total number of shares purchased for the one month periods ended January 31, 2021, February 28, 2021 and March 31, 2021, 219,383 shares of Restricted Stock, 53,594 shares of Performance Stock, 9,031 units of RSUs and 6,298 units of Performance RSUs represent shares of Restricted Stock and Performance Stock as well as units of RSUs and Performance RSUs withheld by us upon the vesting of outstanding Restricted Stock, Performance Stock, RSUs and Performance RSUs. These shares and units were withheld by us to satisfy the minimum statutory tax withholding for the employees for whom Restricted Stock, Performance Stock, RSUs and Performance RSUs vested during the period, which is required upon vesting. |
|
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
|
ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
|
ITEM 5. |
OTHER INFORMATION |
None.
28
|
ITEM 6. |
EXHIBITS |
a. Exhibits
The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q:
|
Exhibit No. |
|
Description of Exhibits |
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
2.2 |
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
3.4 |
|
|
|
|
|
|
|
31.1* |
|
|
|
|
|
|
|
31.2* |
|
|
|
|
|
|
|
32.1** |
|
|
|
|
|
|
|
101.1* |
|
101. INS Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document 101. SCH Inline XBRL Taxonomy Extension Schema Document 101. CAL Inline XBRL Calculation Linkbase Document 101. LAB Inline XBRL Taxonomy Label Linkbase Document 101. DEF Inline XBRL Taxonomy Linkbase Document 101. PRE Inline XBRL Taxonomy Presentation Linkbase Document |
|
|
|
|
|
104* |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
|
* |
Filed herewith. |
|
** |
Furnished herewith. |
29
SIGNATURES
Pursuant to the requirements 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.
|
|
|
ZIX CORPORATION |
||
|
|
|
|
|
|
|
Date: May 6, 2021 |
|
By: |
|
/s/ DAVID E. ROCKVAM |
|
|
|
|
|
David E. Rockvam |
|
|
|
|
|
Chief Financial Officer (Principal Financial |
|
|
|
|
|
Officer and Principal Accounting Officer) |
30