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
On January 1, 2021, we adopted Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the tax basis of goodwill after a business combination, and the recognition of deferred tax liabilities for outside basis differences. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
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 777,010 stock options outstanding, 1,411,093 non-vested Restricted Stock awards; 553,277 non-vested Performance Stock awards; 1,444,767 non-vested RSUs; and 748,265 non-vested Performance RSUs. The Company does not currently have shares of common stock available for future award grants within existing incentive plans if all outstanding performance-based stock and RSUs were settled at maximum level. Due in part to the shortage of available shares for grants under our current incentive plans, the Company established the 2021 Ominous Incentive Plan (the “2021 Plan”) to be effective on June 9, 2021, provided the 2021 Plan has received the requisite shareholder approval. Should the 2021 Plan be approved by shareholders, the Company anticipates issuing additional grants during the current year.
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
|
|
|
842,010
|
|
|
$
|
4.40
|
|
|
5.14
|
|
Granted at market price
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Cancelled or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
(65,000
|
)
|
|
|
3.86
|
|
|
|
|
|
Outstanding at March 31, 2021
|
|
|
777,010
|
|
|
$
|
4.45
|
|
|
|
5.28
|
|
Options exercisable at March 31, 2021
|
|
|
608,260
|
|
|
$
|
3.66
|
|
|
|
4.16
|
|
At March 31, 2021, 777,010 stock options outstanding and 608,260 stock options exercisable had an exercise price lower than the market price of the Company’s common stock on that date. The aggregate intrinsic value of these stock options was $2.5 million and $2.4 million, respectively.
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
|
|
|
2,091,382
|
|
|
$
|
7.34
|
|
Granted at market price
|
|
|
58,086
|
|
|
|
7.62
|
|
Vested
|
|
|
(720,034
|
)
|
|
|
7.23
|
|
Cancelled
|
|
|
(18,341
|
)
|
|
|
6.79
|
|
Non-vested restricted stock at March 31, 2021
|
|
|
1,411,093
|
|
|
$
|
7.41
|
|
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
|
|
|
126,191
|
|
|
$
|
8.52
|
|
Granted at market price
|
|
|
1,373,308
|
|
|
|
7.33
|
|
Vested
|
|
|
(27,307
|
)
|
|
|
8.28
|
|
Cancelled
|
|
|
(27,425
|
)
|
|
|
8.56
|
|
Non-vested restricted stock units at March 31, 2021
|
|
|
1,444,767
|
|
|
$
|
7.39
|
|
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
|
|
|
69,349
|
|
|
$
|
8.07
|
|
Granted at market price
|
|
|
697,588
|
|
|
|
7.38
|
|
Vested
|
|
|
(11,763
|
)
|
|
|
8.99
|
|
Forfeited
|
|
|
(6,909
|
)
|
|
|
8.99
|
|
Non-vested performance RSUs at March 31, 2021
|
|
|
748,265
|
|
|
$
|
7.40
|
|
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
|
|
|
851,852
|
|
|
$
|
7.37
|
|
Granted at market price
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(184,947
|
)
|
|
|
7.13
|
|
Forfeited
|
|
|
(113,628
|
)
|
|
|
7.11
|
|
Non-vested performance stock at March 31, 2021
|
|
|
553,277
|
|
|
$
|
7.50
|
|
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 $328 thousand payroll tax expense resulting from the vesting of employees’ equity awards) resulting from stock options, Restricted Stock, RSUs, Performance RSUs and Performance Stock was recorded to the following line items of the Company’s condensed consolidated statement of comprehensive loss:
(In thousands)
|
|
Three Months
Ended March 31,
2021
|
|
Cost of revenues
|
|
$
|
250
|
|
Research and development
|
|
|
522
|
|
Selling, general and administrative
|
|
|
2,705
|
|
Stock-based compensation expense
|
|
$
|
3,477
|
|
A deferred tax asset totaling $683 thousand and $391 thousand, resulting from stock-based compensation expense associated with awards relating to the Company’s U.S. operations, was recorded for the three month periods ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was $27.8 million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation awards granted under the incentive plans. This expense is expected to be recognized over a weighted average period of 2.22 years.
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
|
|
$
|
1,724
|
|
|
|
1,566
|
|
Income tax payments
|
|
|
35
|
|
|
|
44
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accrued and deemed dividends on Series A preferred stock
|
|
|
2,323
|
|
|
|
2,229
|
|
10
5. Receivables, net
(In thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Gross accounts receivables
|
|
$
|
32,352
|
|
|
$
|
30,188
|
|
Allowance for credit losses
|
|
|
(381
|
)
|
|
|
(478
|
)
|
Unpaid portion of deferred revenue
|
|
|
(15,093
|
)
|
|
|
(12,879
|
)
|
Note receivable
|
|
|
458
|
|
|
|
458
|
|
Allowance for note receivable
|
|
|
(458
|
)
|
|
|
(458
|
)
|
Receivables, net
|
|
$
|
16,878
|
|
|
$
|
16,831
|
|
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 $540 thousand. This was fully reserved at the time of the sale, as the note’s collectability was not assured. The note receivable is fully reserved at March 31, 2021.
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 1 to 12 years with the majority of leases having terms one to seven years, many of which include options to extend in various increments. Variable lease costs consist primarily of variable common area maintenance, taxes, insurance, parking and utilities. The Company’s leases do not have any residual value guarantees or restrictive covenants.
As the implicit rate is not readily determinable for most of the Company’s lease agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using the Company's weighted average interest rate of the term loan and delayed draw term loan.
The components of lease costs are as follows:
|
|
Three Months
ended March 31,
|
|
|
Three Months
ended March 31,
|
|
(In thousands)
|
|
2021
|
|
|
2020
|
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
215
|
|
|
$
|
378
|
|
Interest on lease liabilities
|
|
|
10
|
|
|
|
29
|
|
Operating lease costs
|
|
|
1,481
|
|
|
|
941
|
|
Short-term lease costs
|
|
|
534
|
|
|
|
400
|
|
Variable lease costs
|
|
|
287
|
|
|
|
217
|
|
Total lease costs
|
|
$
|
2,527
|
|
|
$
|
1,965
|
|
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
|
|
$
|
1,416
|
|
|
$
|
973
|
|
Operating cash flows related to finance leases
|
|
|
10
|
|
|
|
29
|
|
Financing cash flows related to finance leases
|
|
|
201
|
|
|
|
406
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
—
|
|
|
|
365
|
|
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
|
|
$
|
12,941
|
|
|
$
|
9,709
|
|
Total operating lease assets
|
|
|
|
$
|
12,941
|
|
|
$
|
9,709
|
|
|
|
|
March 31,
|
|
(In thousands)
|
|
Balance Sheet Classification
|
|
2021
|
|
Finance Leases
|
|
|
|
|
|
|
Finance lease right-of-use assets
|
|
|
|
$
|
3,362
|
|
Accumulated depreciation - finance leases
|
|
|
|
|
(2,680
|
)
|
Finance lease right-of-use assets, net
|
|
Property and equipment, net
|
|
$
|
682
|
|
Weighted average remaining lease term and weighted average discount rate are as follows:
Weighted Average Remaining Lease Term (Years)
|
|
2021
|
|
|
2020
|
|
Operating leases
|
|
|
2.93
|
|
|
|
4.12
|
|
Finance leases
|
|
|
1.17
|
|
|
|
1.78
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.33
|
%
|
|
|
5.82
|
%
|
Finance leases
|
|
|
6.11
|
%
|
|
|
6.15
|
%
|
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
|
|
$
|
14,898
|
|
|
$
|
4,265
|
|
|
$
|
8,355
|
|
|
$
|
2,278
|
|
|
$
|
—
|
|
Less imputed interest
|
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases
|
|
$
|
531
|
|
|
$
|
415
|
|
|
$
|
116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Less imputed interest
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $109 thousand upon commencement. The operating lease will commence in the second quarter of 2021 with a lease term of 3 years.
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 $175 million (the “Term Loan”), (2) provided for a senior secured delayed draw term loan facility in an aggregate principal amount of $10 million (the “Delayed Draw Term Loan Facility”), and (3) provided for a senior secured revolving credit facility in an aggregate principal amount of $25 million, up to $5 million of which is available for letters of credit (the “Revolving Facility” and, together with the Term Loan and the Delayed Draw Term Loan Facility, the “Credit Facilities”). On February 20, 2019, the Term Loan was borrowed in full to pay a portion of the purchase price in connection with the AppRiver acquisition (described below in Note 16 “Acquisitions”) including certain fees, costs and expenses related thereto. On May 2, 2019, the Delayed Draw Term Loan Facility was borrowed in full to pay a portion of the purchase price in connection with the DeliverySlip acquisition (described below in Note 16 “Acquisitions”), including certain fees, costs and expenses related thereto. On November 5, 2020, the Company amended its Credit Agreement to, among other things, borrow an incremental $35.0 million term loan (the “Incremental Term Loan”). The Incremental Term Loan has the same interest rate, maturity date, amortization schedule, collateral and other terms as the existing Term Loan and Delayed Draw Term Loan. The Company used the proceeds of the Incremental Term Loan to fund the acquisition of CloudAlly (described below in Note 16 “Acquisitions”) and to repay all existing borrowing under the Revolving Facility. As of March 31, 2021, the Company had no outstanding debt attributable to the Revolving Facility. The Credit Facilities are secured by substantially all the assets of Zix and its wholly-owned domestic subsidiaries and guaranteed by substantially all of Zix’s wholly-owned domestic subsidiaries.
Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (1) the adjusted LIBOR rate (as defined in the Credit Agreement) plus a margin ranging from 2.50% to 3.50% or (2) the alternate base rate (as defined in the Credit Agreement) plus a margin ranging from 1.50% to 2.50%. The applicable margin varies depending on the Company’s total net leverage ratio. One-week and 2-month U.S dollar LIBOR and all remaining U.S dollar LIBOR settings are set to be phased out at December 31, 2021 and June 30, 2023, respectively. We are currently reviewing how the LIBOR rate phase out will affect us, but we do not expect the impact to be material.
The Credit Facilities are scheduled to mature on February 20, 2024, unless extended in accordance with the terms of the Credit Agreement. The Credit Agreement includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its commitments thereunder, subject to the limits and conditions set forth in the Credit Agreement.
Optional prepayments of borrowings under the Credit Facilities are permitted at any time and do not require any prepayment premium (other than reimbursement of the lenders’ breakage and redeployment costs in the case of a prepayment of LIBOR borrowings).
The Credit Agreement contains various financial, operational, and legal covenants. The financial covenant is tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The financial covenant requires the Company to maintain a maximum total net leverage ratio of:
|
•
|
4.75:1.00 for the fiscal quarters ending September 30, 2020 through March 31, 2021;
|
|
•
|
4.50:1.00 for the fiscal quarters ending June 30, 2021 through December 31, 2021; and
|
|
•
|
4.25:1.00 for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter.
|
The non-financial covenants restrict the Company’s ability and the ability of the Company’s restricted subsidiaries to, among other things, incur indebtedness, incur liens, merge with or acquire other entities, make investments, dispose of assets, enter into sale and leaseback transactions, make dividends, distributions or stock repurchases, prepay junior indebtedness, enter into transactions with affiliates, enter into restrictive agreements, and amend organizational documents or the terms of junior indebtedness.
The Credit Agreement contains events of default that Zix believes are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events occurs, all obligations under the Credit Agreement will immediately become due and payable. If any other event of default exists under the Credit Agreement, the lenders may accelerate the maturity of the Credit Facilities and exercise other rights and remedies, including foreclosure or other actions against the collateral. If any default exists under the Credit Agreement, or if the Company is unable to make any of the representations and warranties in the Credit Agreement at the applicable time, Zix will be unable to borrow additional funds or have letters of credit issued under the Credit Agreement.
13
Term Loan and Incremental Term Loan (“Combined Term Loan”)
As of March 31, 2021, the Company had $206.3 million in principal outstanding under the Term Loan. The Term Loan was fully drawn on February 20, 2019 in the amount of $175 million, and requires quarterly payments of principal of $437 thousand beginning on June 30, 2019. The Incremental Loan was fully drawn on November 5, 2020 in the amount of $35.0 million, and requires quarterly payments of principal of $89 thousand beginning on December 31, 2020. In addition to other customary mandatory prepayment requirements, the Term Loan requires annual prepayments based on a percentage of Zix’s excess cash flow, which percentage will reduce if Zix’s total net leverage ratio decreases. Based on the calculation of excess cash flow and total net leverage ratio and for the year ended December 31, 2020, the Company is not required to make prepayment in addition to the quarterly installment.
At March 31, 2021, the Company had an outstanding debt balance of $201.7 million attributable to the Combined Term Loan based on the 4.00% interest rate in effect during the three-month period ended on March 31, 2021. Included in the balance at March 31, 2020 is $4.6 million of unamortized debt issuance costs.
Future principal payments under the Combined Term Loan as of March 31, 2021 are as follows:
(In thousands)
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
Amount
|
|
2021
|
|
|
|
|
1,579
|
|
2022
|
|
|
|
|
2,105
|
|
2023
|
|
|
|
|
2,105
|
|
2024
|
|
|
|
|
200,533
|
|
|
|
|
|
|
206,322
|
|
Delayed Draw Term Loan Facility
At March 31, 2021, the Company had $9.8 million in principal outstanding under the Delayed Draw Term Loan Facility. The Delayed Draw Term Loan Facility was fully drawn on May 2, 2019 in the amount of $10 million to fund the DeliverySlip acquisition. The Delayed Draw Term Loan Facility requires 1.00% per annum amortization of the original principal amount borrowed, payable in equal quarterly installments of $25 thousand beginning on September 30, 2019. In addition to other customary mandatory prepayment requirements, the Delayed Draw Term Loan Facility requires annual prepayments based on a percentage of Zix’s excess cash flow, which percentage reduces if Zix’s total net leverage ratio decreases. Based on the calculation of excess cash flow and total net leverage ratio and for the year ended December 31, 2020, the Company is not required to make prepayment in addition to the quarterly installment.
At March 31, 2021, the Company had an outstanding debt balance of $9.8 million attributable to the Delayed Draw Term Loan Facility based on the 3.41% interest rate in effect during the three month period ended March 31, 2021. Included in the balance at March 31, 2021 is $39 thousand of unamortized debt issuance costs.
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
|
|
|
|
|
75
|
|
2022
|
|
|
|
|
100
|
|
2023
|
|
|
|
|
100
|
|
2024
|
|
|
|
|
9,550
|
|
|
|
|
|
|
9,825
|
|
Revolving Facility
The Company also has a Revolving Facility with the lenders, pursuant to which the lenders agreed to make a Revolving Facility available to the Company in an aggregate amount of up to $25 million. Proceeds from the Revolving Facility may be used for working capital and general business purposes, including the financing of permitted acquisitions, investments and restricted payments, subject, in both cases, to the conditions contained in the Credit Agreement. Zix is charged a commitment fee ranging from 0.25% to 0.50% per year on the daily amount of the unused portions of the commitments under the Revolving Facility.
14
As of March 31, 2021, the Company had no outstanding debt attributable to the Revolving Facility. The undrawn balance of $25 million is available to fund working capital and for other general corporate purposes, including the financing of permitted acquisitions, investments and restricted payments, subject to the conditions contained in the Credit Agreement. The Company incurred $23 thousand of commitment fees for the three month period ended March 31, 2021.
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 $100 million of shares of convertible Preferred Stock (as defined below) at a price of $1,000 per share (the “Stated Value”). 64,914 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) were issued for proceeds of $62.7 million, net of issuance costs of $2.3 million, and 35,086 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, the “Preferred Stock”) were issued for proceeds of $33.9 million, net of issuance costs of $1.2 million. The Preferred Stock is classified outside of stockholders’ equity in temporary equity because the shares contain certain redemption features which require redemption upon a change in control. The Series A Preferred Stock can be immediately converted to common stock.
On June 5, 2019, Shareholders approved the conversion of the outstanding shares of Series B Preferred Stock into shares of Series A Preferred Stock. Each share of Series B Preferred Stock was converted into the number of shares of Series A Preferred Stock equal to the liquidation preference of such share of Series B Preferred Stock divided by the accreted value of a share of Series A Preferred Stock on the date of conversion plus cash in lieu of fractional shares. On June 6, 2019, all the outstanding shares of Series B Preferred Stock were converted into 35,292 shares of Series A Preferred Stock. As of March 31, 2021, no shares of Series B Preferred Stock are outstanding.
The conversion option of the Series A Preferred Stock was determined to have a beneficial conversion feature valued at $2.5 million, excluding the additional beneficial conversion feature accrued for the deemed dividend, and was recorded to additional paid-in capital and as a discount to the Series A Preferred Stock. This resulting discount was immediately amortized as the Series A Preferred Stock has no set redemption date but is currently convertible.
Dividends
The Stated Value of the Series A Preferred Stock accretes at a fixed rate of 8% per annum, compounded quarterly (“Series A Preferred Dividend”). Apart from the Series A Preferred Dividend, the holders of Series A Preferred Stock are also entitled to receive any dividends paid on our common stock on an "as converted" basis. No dividend may be paid on our common stock until such dividend is paid on the Series A Preferred Stock. All calculations of the Accreted Value (as defined below) of Series A Preferred Stock will be computed on the basis of a 360-day year of twelve 30-day months. As of March 31, 2021, the accretion of the Stated Value of Series A Preferred Stock is valued at $17.3 million.
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
At any time, each Series A Preferred Stock holder may elect to convert each share of such holders’ then-outstanding Series A Preferred Stock into (i) the number of shares of common stock equal to the product of (a) the Accreted Value with respect to such share on the conversion date multiplied by (b) the conversion rate (currently 166.11) as of the applicable conversion date divided by (c) 1,000 plus (ii) cash in lieu of fractional shares.
Optional Redemption by Zix
At any time after the fourth anniversary of the Closing Date, Zix may redeem the Series A Preferred Stock for an amount per share of Series A Preferred Stock equal to the Accreted Value per share of the Series A Preferred Stock to be redeemed as of the applicable redemption date multiplied by 1.50.
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 one to three year contracts billed annually. We are increasingly moving to a monthly subscription model. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by our Company from a customer (e.g., sales, use, value added, and some excise taxes).
Disaggregation of Revenue
In the three months ended March 31, 2021, we recorded revenue for our services in the following core industry verticals: 20% healthcare, 17% financial services, 3% government sector, and 60% as other.
We operate as a single operating segment. Revenue generated from our email encryption and security solutions represented 100% of our revenues in the three months ended March 31, 2021 and 2020, respectively.
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 $754 thousand resulting from commissions earned by our sales team during the three months ended March 31, 2021. We also amortized $1.1 million of deferred cost as a selling and marketing expense in the same period. Our deferred cost asset is assessed for impairment on a periodic basis. There were no impairment losses recognized on deferred contract cost assets for the three months ended March 31, 2021.
Our contract liabilities consist of deferred revenue representing future customer services which have been billed and collected. The $79 thousand decrease to our net deferred revenue in the three months ended March 31, 2021, is related to the timing of orders and payments.
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 $82.9 million. We expect to recognize approximately $55.0 million of revenue related to this backlog during the remainder of 2021, $19.8 million in 2022, and $8.1 million in periods thereafter.
Approximately $27.2 million of our $60.0 million revenue recognized in the three months ended March 31, 2021, was included in our performance obligation balance at the beginning of the period.
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. The computations for basic and diluted earnings (loss) per share for the three months ended March 31, 2021 and 2020, respectively, are as follows:
|
|
Three Months ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Basic weighted average common shares
|
|
|
54,536,103
|
|
|
|
53,496,042
|
|
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
|
|
|
54,536,103
|
|
|
|
53,496,042
|
|
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
|
|
|
777,010
|
|
|
|
809,510
|
|
Restricted Stock
|
|
|
1,411,093
|
|
|
|
2,354,445
|
|
RSUs
|
|
|
1,444,767
|
|
|
|
238,643
|
|
Performance RSUs
|
|
|
748,265
|
|
|
|
77,197
|
|
Performance Stock
|
|
|
553,277
|
|
|
|
723,517
|
|
Preferred Stock
|
|
|
19,513,022
|
|
|
|
18,030,446
|
|
Potential dilutive common shares
|
|
|
24,447,434
|
|
|
|
22,233,758
|
|
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
|
|
$
|
195,013
|
|
|
$
|
171,209
|
|
Acquisition adjustments
|
|
|
729
|
|
|
|
—
|
|
Effect of currency translation adjustment
|
|
|
(754
|
)
|
|
|
(832
|
)
|
Goodwill
|
|
$
|
194,988
|
|
|
$
|
170,377
|
|
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 no impairments to goodwill during the periods presented above.
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 $1.3 million, net of $7 thousand in income tax expense.
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 $24.2 million reserve. Any reduction to this $24.2 million valuation allowance is based on an assessment of future utilization following accounting guidance, which relies largely on historical earnings. Using this methodology, and updating the future taxable earnings estimates based on first 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 prospective periods we conclude our future U.S. federal taxable estimate established at the end of the year will exceed the prior year estimate, the Company will offset its federal deferred tax provision by reducing its valuation allowance by an equal amount, thereby eliminating from its deferred tax provision federal taxes from the Company’s financial statements. The Company will continue to reevaluate the need for its valuation allowance each quarter, following the same assessment methodology described above. Adjusting our valuation allowance could have a significant impact on operating results for each period that it becomes more likely than not that an additional portion of our deferred tax assets will or will not be realized.
16. Acquisitions
Acquisition of CloudAlly
On November 5, 2020, Zix acquired 100% of the equity interest of CloudAlly Ltd. (“CloudAlly”) and its parent holding company for a total purchase price of $30.8 million, following a working capital adjustment. The purchase price included cash consideration of $30.4 million, net of cash acquired. The Company used a portion of the proceeds of the Incremental Term Loan (as defined in Note 7) to fund the acquisition of CloudAlly.
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 5,000 customers, 500,000 users and supported by 300 Managed Service Provider (MSP) partners.
18
The Company incurred $2.0 million in acquisition-related costs which included $1.8 million and $158 thousand recorded within the operating expenses during the twelve months ended December 31, 2020 and the three months ended March 31, 2021, respectively. Revenue from CloudAlly was $2.3 million for the three months ended March 31, 2021, and due to the continued integration of the combined business, it was impractical to determine earnings attributable to CloudAlly.
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 4 year period. The results of operations and the provisional fair values of the acquired assets and liabilities have been included in the accompanying condensed consolidated financial statements since the CloudAlly acquisition closed on November 5, 2020. Certain estimated values are not yet finalized and subject to revision as additional information becomes available and more detailed analyses are completed.
The following table summarizes the current estimated fair value of acquired assets and liabilities:
(In thousands)
|
|
Provisional Fair
Value
|
|
Assets:
|
|
|
|
|
Current assets
|
|
$
|
1,385
|
|
Property and equipment
|
|
|
116
|
|
ROU assets
|
|
|
5,080
|
|
Trademark/Names
|
|
|
200
|
|
Technology
|
|
|
6,300
|
|
Customer relationships
|
|
|
3,500
|
|
Goodwill
|
|
|
23,041
|
|
Total assets
|
|
|
39,622
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Current liabilities
|
|
$
|
654
|
|
Deferred revenue
|
|
|
1,400
|
|
Operating lease liabilities
|
|
|
5,080
|
|
Deferred tax liability
|
|
|
1,646
|
|
Total liabilities
|
|
|
8,780
|
|
|
|
|
|
|
Net assets recorded
|
|
$
|
30,842
|
|
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
|
|
$
|
60,060
|
|
|
$
|
54,381
|
|
Net income
|
|
|
(2,267
|
)
|
|
|
(1,278
|
)
|
Basic income per share attributed to common shareholders
|
|
$
|
(0.08
|
)
|
|
$
|
(0.07
|
)
|
Diluted income per share attributed to common shareholders
|
|
$
|
(0.08
|
)
|
|
$
|
(0.07
|
)
|
19