10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

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

For the transition period from                      to                     

Commission File Number: 0-17995

ZIX CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Texas	75-2216818
(State of Incorporation)	(I.R.S. Employer Identification Number)

2711 North Haskell Avenue

Suite 2200, LB 36

Dallas, Texas 75204-2960

(Address of Principal Executive Offices)

(214) 370-2000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit  such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

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

Class	Outstanding at August 4, 2020
Common Stock, par value $0.01 per share	57,032,787

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

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

INDEX

		Page Number
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets at June 30, 2020 (unaudited) and December 31, 2019	3
	Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and six months ended June 30, 2020  and 2019	4
	Condensed Consolidated Statement of Stockholders’ Equity (unaudited) for the three months ended March 31, 2020 and 2019 and June 30, 2020 and 2019, respectively	5
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	32

2

ZIX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)	June 30, 2020			December 31, 2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	14,057		$	13,349
Receivables, net		12,911			10,081
Prepaid and other current assets		5,612			4,984
Total current assets		32,580			28,414
Property and equipment, net		8,073			8,591
Operating lease assets		9,428			10,128
Intangible assets, net		140,089			145,876
Goodwill		170,694			171,209
Deferred tax assets		37,767			36,535
Deferred costs and other assets		12,308			11,968
Total assets	$	410,939		$	412,721
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	13,309		$	14,400
Accrued expenses		9,553			13,732
Deferred revenue		41,472			40,757
Current portion of long-term debt		1,850			1,850
Operating lease liabilities, current		2,657			2,947
Finance lease liabilities, current		956			1,338
Total current liabilities		69,797			75,024
Long-term liabilities:
Deferred revenue		1,560			2,524
Noncurrent operating lease liabilities		7,915			8,389
Noncurrent finance lease liabilities		353			716
Long-term debt		183,972			178,250
Total long-term liabilities		193,800			189,879
Total liabilities		263,597			264,903
Commitments and contingencies (see Note 11)
Preferred stock:
Series A convertible preferred stock, $1 par value; 100,206 shares designated, issued and outstanding in 2020 and in 2019		110,974			106,527
Total preferred stock		110,974			106,527
Stockholders’ equity:
Preferred stock, $1 par value, 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.01 par value, 175,000,000 shares authorized; 85,109,867 issued and 56,999,711 outstanding in 2020 and 83,393,514 issued and 55,640,397 outstanding in 2019		782			780
Additional paid-in capital		397,177			391,605
Treasury stock, at cost; 28,110,156 common shares in 2020 and 27,753,117 common shares in 2019		(112,880	)		(110,298	)
Accumulated deficit		(248,299	)		(240,995	)
Accumulated other comprehensive income (loss)		(412	)		199
Total stockholders’ equity		36,368			41,291
Total liabilities, preferred stock and stockholders’ equity	$	410,939		$	412,721

See notes to condensed consolidated financial statements.

3

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except share and per share data)	2020			2019			2020			2019
Revenue	$	53,337		$	45,916		$	105,771		$	75,215
Cost of revenue		28,258			20,304			54,337			31,443
Gross margin		25,079			25,612			51,434			43,772
Operating expenses:
Research and development		5,820			5,311			11,206			9,458
Selling, general and administrative		19,216			21,872			39,245			42,136
Total operating expenses		25,036			27,183			50,451			51,594
Operating income (loss)		43			(1,571	)		983			(7,822	)
Other income (expense):
Investment and other (expense) income		(7	)		9			(22	)		101
Interest expense		(2,508	)		(3,171	)		(5,155	)		(4,425	)
Total other (expense) income		(2,515	)		(3,162	)		(5,177	)		(4,324	)
Loss before income taxes		(2,472	)		(4,733	)		(4,194	)		(12,146	)
Income tax benefit		570			1,027			1,440			2,175
Net loss	$	(1,902	)	$	(3,706	)	$	(2,754	)	$	(9,971	)
Deemed and accrued dividends on preferred stock		2,218			3,371			4,447			5,804
Net loss attributable to common stockholders	$	(4,120	)	$	(7,077	)	$	(7,201	)	$	(15,775	)
Basic loss per share attributable to common stockholders	$	(0.08	)	$	(0.13	)	$	(0.13	)	$	(0.30	)
Diluted loss per common share attributable to common stockholders	$	(0.08	)	$	(0.13	)	$	(0.13	)	$	(0.30	)
Basic weighted average common shares outstanding		54,788,858			53,028,854			53,770,821			52,872,190
Diluted weighted average common shares outstanding		54,788,858			53,028,854			53,770,821			52,872,190
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		294			(56	)		(611	)		(88	)
Comprehensive income (loss)	$	(1,608	)	$	(3,762	)	$	(3,365	)	$	(10,059	)

See notes to condensed consolidated financial statements

4

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(Unaudited)

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

See notes to condensed consolidated financial statements.

5

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(Unaudited)

Continued

	Preferred Stock and Stockholders’ Equity
	Preferred Stock				Common Stock				Additional Paid-In		Treasury			Accumulated			Accumulated Other Comprehensive			Total Stockholders
(In thousands, except shares)	Shares		Amount		Shares		Amount		Capital		Stock			Deficit			Income (Loss)			Equity
Balances, December 31, 2018, as reported		—	$	—		81,715,330	$	779	$	384,940	$	(108,392	)	$	(216,364	)	$	(16	)	$	60,947
Issuance of Series A preferred stock in connection with private placement, net of issuance costs of $2,253		64,914		62,662		—		—		—		—			—			—			—
Issuance of Series B preferred stock in connection with private placement, net of issuance costs of $1,204		35,086		33,881		—		—		—		—			—			—			—
Beneficial conversion feature of Series A preferred stock		—		1,407		—		—		—		—			(1,407	)		—			(1,407	)
Accretion of beneficial conversion feature of Series A Preferred Shares (Participating)		—		12		—		—		—		—			(12	)		—			(12	)
Accrued dividend on Series A preferred stock		—		563		—		—		—		—			(563	)		—			(563	)
Accrued dividend on Series B preferred stock		—		380		—		—		—		—			(380	)		—			(380	)
Redemption Accretion of Series B preferred stock		—		71		—		—		—		—			(71	)		—			(71	)
Net issuance of common stock upon exercise of stock options		—		—		17,438		—		36		—			—			—			36
Net issuance of common stock upon vesting of restricted stock units		—		—		40,334		—		—		—			—			—			—
Net issuance of common stock upon vesting of performance stock units		—		—		5,777		—		—		—			—			—			—
Net issuance of restricted common stock		—		—		1,116,724		—		—		—			—			—			—
Net issuance of restricted performance common stock		—		—		392,500		—		—		—			—			—			—
Employee stock-based compensation costs		—		—		—		—		1,229		(1,340	)		—			—			(111	)
Adjustment from foreign currency translation		—		—		—		—		—		—			—			(32	)		(32	)
Net loss		—		—		—		—		—		—			(6,265	)		—			(6,265	)
Balances, March 31, 2019		100,000	$	98,976		83,288,103	$	779	$	386,205	$	(109,732	)	$	(225,062	)	$	(48	)	$	52,142
Issuance of Series A preferred stock for dividend on Series B preferred stock upon conversion to Series A preferred stock		206		—		—		—		—		—			—			—			—
Beneficial conversion feature of Series B preferred stock		—		1,067		—		—		—		—			(1,067	)		—			(1,067	)
Accretion of beneficial conversion feature of Series A Preferred Shares (Participating)		—		33		—		—		—		—			(33	)		—			(33	)
Accrued dividend on Series A preferred stock		—		1,505		—		—		—		—			(1,505	)		—			(1,505	)
Accrued dividend on Series B preferred stock		—		650		—		—		—		—			(650	)		—			(650	)
Redemption Accretion of Series B preferred stock		—		116		—		—		—		—			(116	)		—			(116	)
Net issuance of common stock upon exercise of stock options		—		—		40,000		—		144		—			—			—			144
Net issuance of common stock upon vesting of restricted stock units		—		—		3,333		—		—		—			—			—			—
Net issuance of common stock upon vesting of performance stock units		—		—		1,223		—		—		—			—			—			—
Net issuance of restricted common stock		—		—		16,000		—		—		—			—			—			—
Employee stock-based compensation costs		—		—		—		—		1,964		(474	)		—			—			1,490
Adjustment from foreign currency translation		—		—		—		—		—		—			—			(56	)		(56	)
Net loss		—		—		—		—		—		—			(3,706	)		—			(3,706	)
Balances, June 30, 2019		100,206	$	102,347		83,348,659	$	779	$	388,313	$	(110,206	)	$	(232,139	)	$	(104	)	$	46,643

See notes to condensed consolidated financial statements.

6

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
(In thousands)	2020			2019
Operating activities:
Net income (loss)	$	(2,754	)	$	(9,971	)
Non-cash items in net income (loss):
Depreciation and amortization		15,514			9,626
Amortization of debt issuance costs		649			354
Employee stock-based compensation costs		5,241			3,193
Noncash lease costs		1,551			(5,903	)
Changes in deferred taxes		(1,232	)		(2,008	)
Changes in operating assets and liabilities:
Receivables		(2,688	)		742
Prepaid and other current assets		(633	)		(617	)
Deferred costs and other assets		(316	)		(959	)
Accounts payable		(1,229	)		3,245
Deferred revenue		(302	)		233
Payment of acquisition related contingent consideration		—			(385	)
Accrued and other liabilities		(4,681	)		3,763
Net cash provided by operating activities		9,120			1,313
Investing activities:
Purchases of property, equipment and internal-use software		(9,316	)		(4,536	)
Acquisition of business, net of cash acquired		—			(283,245	)
Net cash used in investing activities		(9,316	)		(287,781	)
Financing activities:
Proceeds of long-term debt		6,000			185,000
Debt issuance cost		—			(6,443	)
Repayment of long term debt		(925	)		(438	)
Repayment of finance lease liabilities		(746	)		(770	)
Proceeds from issuance of Series A preferred stock, net of offering costs		—			96,588
Proceeds from exercise of stock options		334			180
Purchase of treasury shares		(2,582	)		(1,814	)
Payment of acquisition related contingent consideration		(1,125	)		(1,540	)
Net cash provided by (used in) financing activities		956			270,763
Effect of exchange rate on cash		(52	)		(81	)
Increase (decrease) in cash and cash equivalents		708			(15,786	)
Cash and cash equivalents, beginning of period		13,349			27,109
Cash and cash equivalents, end of period	$	14,057		$	11,323

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 2019 Annual Report on Form 10-K. These financial statements are unaudited, but have been prepared in the ordinary course of business for the purpose of providing information with respect to the covered interim periods.

Management of the Company believes that all adjustments necessary for a fair presentation for such periods have been included and are of a normal recurring nature. The results of operations for the three- and six-month periods ended June 30, 2020, 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

Credit Losses

On January 1, 2020, we adopted Accounting Standard Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments with a net increase of our receivables allowance and a related cumulative adjustment to our retained earnings recorded at the beginning of adoption. Upon adoption, we changed our impairment model to utilize a forward-looking current expected credit losses (CECL) model in place of the incurred loss impairment model for our accounting receivable balance. The cumulative effect adjustment from adoption was immaterial to our condensed consolidated financial statements.

Intangibles – Goodwill and Other

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04) to simplify the subsequent measurement of goodwill. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting standard became effective for us beginning January 1, 2020, and did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Income Taxes

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

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

Our stock-based awards include (i) stock options, (ii) restricted stock awards, some of which are subject to time-based vesting (“Restricted Stock”) and some of which are subject to performance-based vesting (“Performance Stock”), and (iii) restricted stock units, some of which are subject to time-based vesting (“RSUs”) and some of which are subject to performance-based vesting (“Performance RSUs”). As of June 30, 2020, the Company had 742,010 stock options outstanding, 2,090,745 non-vested Restricted Stock awards; 691,852 non-vested Performance Stock awards; 153,099 non-vested RSUs; 44,349 non-vested Performance RSUs and 2,388,054 shares of common stock available for grant.

8

Stock Option Activity   

The following is a summary of all stock option transactions during the three months ended June 30, 2020:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Yrs)
Outstanding at March 31, 2020		809,510		$	4.02	5.03
Granted at market price		—			—
Cancelled or expired		—			—
Exercised		(67,500	)		3.19
Outstanding at June 30, 2020		742,010		$	4.09		5.01
Options exercisable at June 30, 2020		642,010		$	3.52		4.32

At June 30, 2020, 742,010 stock options outstanding and 635,760 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 $2.2 million and $2.2 million, respectively.        

Restricted Stock Activity

The following is a summary of Restricted Stock activity during the three months ended June 30, 2020:

	Restricted Shares			Weighted Average Fair Value
Non-vested restricted stock at March 31, 2020		2,354,445		$	7.26
Granted at market price		86,015			6.04
Vested		(270,290	)		6.07
Cancelled		(79,425	)		7.22
Non-vested restricted stock at June 30, 2020		2,090,745		$	7.36

Restricted Stock Unit Activity

The following is a summary of all RSU activity during the three months ended June 30, 2020:

	Restricted Stock Units			Weighted Average Fair Value
Non-vested restricted stock units at March 31, 2020		238,643		$	8.26
Granted at market price		—			—
Vested		(85,544	)		7.61
Cancelled		—			—
Non-vested restricted stock units at June 30, 2020		153,099		$	8.62

Performance RSU Activity

The following is a summary of all Performance RSU activity during the three months ended June 30, 2020:

	Performance RSUs			Weighted Average Fair Value
Non-vested performance RSUs at March 31, 2020		77,197		$	8.28
Granted at market price		—			—
Vested		(32,848	)		7.54
Forfeited		—			—
Non-vested performance RSUs at June 30, 2020		44,349		$	8.84

9

Performance Stock Activity

The following is a summary of all Performance Stock activity during the three months ended June 30, 2020:

	Performance Stock			Weighted Average Fair Value
Non-vested performance stock at March 31, 2020		723,517		$	7.48
Granted at market price		—			—
Vested		(4,999	)		6.11
Forfeited		(26,666	)		6.76
Non-vested performance stock at June 30, 2020		691,852		$	7.52

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- and six-month periods ended June 30, 2020, the total stock-based employee compensation expense resulting from stock options, Restricted Stock, RSUs, Performance RSUs and Performance Stock was recorded to the following line items of the Company’s condensed consolidated statements of income:

(In thousands)	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Cost of revenues	$	836	$	1,008
Research and development		414		751
Selling, general and administrative		2,000		3,482
Stock-based compensation expense	$	3,250	$	5,241

A deferred tax asset totaling $948 thousand and $635 thousand, resulting from stock-based compensation expense associated with awards relating to the Company’s U.S. operations, was recorded for the six-month periods ended June 30, 2020 and 2019, respectively. As of June 30, 2020, there was $18.5 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 2.18 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, 2019.

4. Supplemental Cash Flow Information

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

	Six Months Ended June 30,
(In thousands)	2020		2019
Cash income tax payments	$	116	$	316
Cash paid for interest		4,649		3,922
Non-cash investing and financing activities:
Accrued and deemed dividends on Series A preferred stock		4,447		3,520
Accrued and deemed dividends on Series B preferred stock		—		2,284

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5. Receivables, net

(In thousands)	June 30, 2020			December 31, 2019
Gross accounts receivables	$	25,660		$	21,193
Allowance for credit losses	$	(391	)	$	—
Allowance for returns and doubtful accounts		—			(265	)
Unpaid portion of deferred revenue		(12,358	)		(10,847	)
Note receivable		458			458
Allowance for note receivable		(458	)		(458	)
Receivables, net	$	12,911		$	10,081

Prior to January 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. We maintained an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of our customers to make required payments. Subsequent to January 1, 2020, 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 June 30, 2020, 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 June 30, 2020.

6. Leases

Effective January 1, 2019, the Company adopted ASC 842, which requires recognition of a right-of-use asset and lease liability for all leases at the commencement date based on the present value of lease payments over the lease term. Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition practical expedients that does not require reassessment of (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and nonlease components, which consist principally of common area maintenance charges, for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.

The Company determines if a contract is or contains a lease at inception. The Company has operating leases for office spaces and data centers and finance leases for equipment. The Company has entered into lease contracts ranging from 1 to 12 years with the majority of leases having terms one to seven years, many of which include options to extend in various increments. Variable lease costs consist primarily of variable common area maintenance, taxes, insurance, parking and utilities. The Company’s leases do not have any residual value guarantees or restrictive covenants.

As the implicit rate is not readily determinable for most of the Company’s lease agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using the Company's weighted average interest rate of the term loan and delayed draw term loan.

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The components of lease costs are as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
(In thousands)	2020		2020
Finance lease costs:
Amortization of right-of-use asset	$	310	$	688
Interest on lease liabilities		24		53
Operating lease costs		942		1,883
Short-term lease costs		773		1,173
Variable lease costs		267		484
Total lease costs	$	2,316	$	4,281

Supplemental cash flow information related to leases are as follows:

	Six Months Ended June 30,
(In thousands)	2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	963
Operating cash flows from finance leases		54
Financing cash flows from finance leases		746
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		856
Finance leases		—

Supplemental balance sheet information related to lease are as follows:

		June 30,
(In thousands)	Balance Sheet Classification	2020
Operating Leases
Operating lease right-of-use assets	Operating lease assets	$	9,428
Total operating lease assets		$	9,428
		June 30,
(In thousands)	Balance Sheet Classification	2020
Finance Leases
Finance lease right-of-use assets		$	3,362
Accumulated depreciation - finance leases			(2,002	)
Finance lease right-of-use assets, net	Property and equipment, net	$	1,360

Weighted average remaining lease term and weighted average discount rate are as follows:

Weighted Average Remaining Lease Term (Years)
Operating leases	3.97
Finance leases	1.71
Weighted Average Discount Rate
Operating leases	5.79	%
Finance leases	6.14	%

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Maturities of lease liabilities are as follows:

	Payments Due by Period - Year Ending December 31, 2020
(In thousands)	Total			Year 1 (1)		Years 2 & 3		Years 4 & 5		Beyond 5 Years
Operating leases	$	11,828		$	1,767	$	5,563	$	4,331	$	167
Less imputed interest		(1,256	)
Total	$	10,572
Finance leases	$	1,366		$	624	$	736	$	6	$	—
Less imputed interest		(57	)
Total	$	1,309
(1) Year 1 excluding the six months ended June 30, 2020

During the six months ended June 30, 2020, we entered into an operating lease for an additional data center, which has not yet commenced and is expected to be added as a lease liability at a value of approximately $109 thousand. This operating lease is expected to commence in the third quarter of 2020 with a lease term of 3 years.

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) provides for borrowing in the form of a senior secured term loan facility in an aggregate principal amount of $175 million (the “Term Loan”), (2) provides 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) provides 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). As of June 30, 2020, the Company had an outstanding debt balance of $8.0 million attributable to the Revolving Facility. The Credit Facilities are secured by substantially all the assets of Zix and its wholly-owned domestic subsidiaries and guaranteed by substantially all of Zix’s wholly-owned domestic subsidiaries.

Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (1) the adjusted LIBO rate (as defined in the Credit Agreement) plus a margin ranging from 2.50% to 3.50% or (2) the alternate base rate (as defined in the Credit Agreement) plus a margin ranging from 1.50% to 2.50%. The applicable margin varies depending on the Company’s total net leverage ratio.

The Credit Facilities are scheduled to mature on February 20, 2024, unless extended in accordance with the terms of the Credit Agreement. The Credit Agreement includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its commitments thereunder, subject to the limits and conditions set forth in the Credit Agreement.  

Optional prepayments of borrowings under the Credit Facilities are permitted at any time and do not require any prepayment premium (other than reimbursement of the lenders’ breakage and redeployment costs in the case of a prepayment of LIBO rate 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:

• 5.00:1.00 for the fiscal quarters ending December 31, 2019 through June 30, 2020;

• 4.75:1.00 for the fiscal quarters ending September 30, 2020 through March 31, 2021;

• 4.50:1.00 for the fiscal quarters ending June 30, 2021 through December 31, 2021; and

• 4.25:1.00 for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter.

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The non-financial covenants restrict the Company’s ability and the ability of the Company’s restricted subsidiaries to, among other things, incur indebtedness, incur liens, merge with or acquire other entities, make investments, dispose of assets, enter into sale and leaseback transactions, make dividends, distributions or stock repurchases, prepay junior indebtedness, enter into transactions with affiliates, enter into restrictive agreements, and amend organizational documents or the terms of junior indebtedness.

The Credit Agreement contains events of default that Zix believes are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events occurs, all obligations under the Credit Agreement will immediately become due and payable. If any other event of default exists under the Credit Agreement, the lenders may accelerate the maturity of the Credit Facilities and exercise other rights and remedies, including foreclosure or other actions against the collateral. If any default exists under the Credit Agreement, or if the Company is unable to make any of the representations and warranties in the Credit Agreement at the applicable time, Zix will be unable to borrow additional funds or have letters of credit issued under the Credit Agreement.

Term Loan

As of June 30, 2020, the Company had $172.8 million in principal outstanding under the Term Loan. The Term Loan was fully drawn on February 20, 2019 in the amount of $175 million and requires quarterly payments of principal of $437.5 thousand beginning on June 30, 2019. In addition to other customary mandatory prepayment requirements, the Term Loan requires annual prepayments based on a percentage of Zix’s excess cash flow, which percentage will reduce if Zix’s total net leverage ratio decreases. Based on the calculation of excess cash flow and total net leverage ratio and for the year ended December 31, 2019, the Company is not required to make prepayment in addition to the quarterly installment.

At June 30, 2020, the Company had an outstanding debt balance of $168.0 million attributable to the Term Loan based on the 5.39% interest rate in effect during the three-month period ended on June 30, 2020. Included in the balance at June 30, 2020 is $4.8 million of unamortized debt issuance costs.  

Future principal payments under the Term Loan as of June 30, 2020, are as follows:

(In thousands)
Year Ending December 31,	Amount
2020	$	875
2021		1,750
2022		1,750
2023		1,750
2024		166,688
Total	$	172,813

Delayed Draw Term Loan Facility

At June 30, 2020, the Company had $9.9 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 starting 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, 2019, the Company is not required to make prepayment in addition to the quarterly installment.

At June 30, 2020, the Company had an outstanding debt balance of $9.9 million attributable to the Delayed Draw Term Loan Facility based on the 4.79% interest rate in effect during the three-months ended on June 30, 2020. Included in the balance at June 30, 2020 is $39 thousand of unamortized debt issuance costs.  

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Future principal payments under the Delayed Draw Term Loan Facility as of June 30, 2020 are as follows:

(In thousands)
Year Ending December 31,	Amount
2020	$	50
2021		100
2022		100
2023		100
2024		9,550
Total	$	9,900

Revolving Facility

The Company also has a Revolving Facility with the lenders, pursuant to which the lenders agreed to make a Revolving Facility available to the Company in an aggregate amount of up to $25 million. Proceeds from the Revolving Facility may be used for working capital and general business purposes, including the financing of permitted acquisitions, investments and restricted payments, subject to the conditions contained in the Credit Agreement. Zix is charged a commitment fee ranging from 0.25% to 0.50% per year on the daily amount of the unused portions of the commitments under the Revolving Facility.

As of June 30, 2020, the Company had an outstanding debt balance of $8.0 million attributable to the Revolving Facility. The undrawn balance of $17 million is available to fund working capital and for other general corporate purposes, including the financing of permitted acquisitions, investments and restricted payments, subject to the conditions contained in the Credit Agreement.  As of June 30, 2020, the Company has incurred $21 thousand and $43 thousand of commitment fees, and $98 thousand and $142 thousand of interest expense, for the three- and six-month periods ended on June 30, 2020, respectively.

As of June 30, 2020, 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 that 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 June 30, 2020, 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 June 30, 2020, the accretion of the Stated Value of Series A Preferred Stock is valued at $10.5 million.

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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.

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 of 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. Historically, our contracts have typically been one to three year contracts billed annually. We are increasingly moving toward a monthly billing model. This shift has been largely driven by our recent acquisition activity, including AppRiver. We 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

We operate as a single operating segment. In the six months ended June 30, 2020, we recorded revenue for our services in the following core industry verticals: 20% healthcare, 18% financial services, 3% government sector, and 59% as other.

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 and six months ended June 30, 2020, we increased our noncurrent deferred contract asset by $0.9 million and $2.1 million, respectively, resulting from commissions earned by our sales team during the three and six months ended June 30, 2020. We also amortized $0.9 million and $1.8 million of deferred cost, respectively as a selling and marketing expense in the related periods. Our deferred cost

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asset is assessed for impairment on a periodic basis. There were no impairment losses recognized on deferred contract cost assets for the three and six months ended June 30, 2020.

Our contract liabilities consist of deferred revenue representing future customer services that have been billed and collected. The $249 thousand decrease to our net deferred revenue in the six months ended June 30, 2020, is related to the timing of orders and payments in the normal course of business and our continued trend toward monthly subscriptions.   

Performance obligations

As of June 30, 2020, 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 $85.0 million. We expect to recognize approximately $41.6 million of revenue related to this backlog during the remainder of 2020, $30.4 million in 2021, and $13.0 million in periods thereafter.

Approximately $27.4 million of our $53.3 million revenue recognized in the three months ended June 30, 2020, was included in our performance obligation balance at the beginning of the period. Approximately $42.3 million of our $105.8 million recognized in the six months ended June 30, 2020, was included in our performance obligation balance at the beginning of the period.

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 and six months ended June 30, 2020 and 2019, respectively, are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Basic weighted average common shares		54,788,858		53,028,854		53,770,821		52,872,190
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		54,788,858		53,028,854		53,770,821		52,872,190

During each of the three and six months ended June 30, 2020, potential common shares of all securities were excluded from the calculation of diluted loss per share because the awards were anti-dilutive.     

11. Commitments and Contingencies  

We have not entered into any material, non-cancelable purchase commitments at June 30, 2020.

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

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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.

13. Goodwill

The following is a summary of the changes in the carrying amount of goodwill for the six-month period ended June 30, 2020 and 2019:

	Six Months Ended June 30,
(In thousands)	2020			2019
Opening balance	$	171,209		$	13,783
Additions		—			159,615
Acquisition adjustments		—			—
Effect of currency translation adjustment		(515	)		—
Goodwill	$	170,694		$	173,398

Our 2019 acquisitions of AppRiver and DeliverySlip resulted in the increase to our goodwill in the six months ended June 30, 2019. 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. 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. Related translation adjustments are recorded as a component of the accumulated other comprehensive income (loss).

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 and six months ended June 30, 2020, 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 gain of $294 thousand, net of $229 thousand in income tax expense and loss of $611 thousand, net of $25 thousand in income tax benefit, respectively.

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 $22.9 million reserve. Any reduction to this $22.9 million valuation allowance is based on an assessment of future utilization following accounting guidance, which relies largely on historical earnings. Using this methodology, and updating the future taxable earnings estimates based on first and second quarter 2020 actual earnings, the Company believes the deferred tax asset allowance as of December 31, 2019, will remain unchanged at December 31, 2020. For this reason, the Company has recognized its first and second quarter 2020 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. An increase or decrease to 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 DeliverySlip

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On May 7, 2019, the Company acquired certain assets of Cirius Messaging Inc. (“Seller”) and its wholly owned subsidiary DeliverySlip Inc.(“DeliverySlip”), related to the DeliverySlip product for a total purchase price of $13.8 million, including cash consideration of $11.4 million and a contingent consideration with an estimated fair value of $2.3 million at the acquisition date. The contingent consideration was paid in full  upon the completion of certain agreed upon requirements and a related $0.2 million loss on the contingent consideration was recognized in the year ended December 31, 2019. Included in the cash consideration, a holdback amount of $1.5 million was transferred to an escrow agent for the satisfaction of the Seller’s indemnity and other obligations under the purchase agreement. The acquisition was partially financed with proceeds of $10 million from the Delayed Draw Term Loan Facility.

The purchase of DeliverySlip expanded the Company’s product offering including email encryption, e-signatures and secure file solutions.

The Company incurred $1.2 million in acquisition-related costs with respect to the DeliverySlip acquisition, which were recorded within operating expenses during the twelve months ended December 31, 2019. Prior to the acquisition, approximately 90% of DeliverySlip’s revenue was generated from AppRiver Canada Inc, which became a subsidiary of the Company upon closing of the AppRiver acquisition (as described below). Revenue from additional acquired customers of DeliverySlip for the three and six months ended June 30, 2020 were immaterial.

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill.   The majority of the goodwill balance is expected to be deductible for tax purposes. The intangible asset we acquired from DeliverySlip is technology which we are amortizing over 6 years. The results of operations and the provisional fair values of the acquired assets and liabilities have been included in the accompanying condensed consolidated financial statements since our DeliverySlip acquisition on May 7, 2019.  

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

(In thousands)	Estimated Fair Value
Assets:
Technology	$	4,200
Goodwill		9,603
Total assets		13,803
Liabilities:
Deferred revenue	$	52
Total liabilities		52
Net assets recorded	$	13,751

Acquisition of AppRiver Companies

On February 20, 2019, Zix acquired 100% of the equity interest of AR Topco, LLC and its subsidiaries, including AppRiver LLC (“AppRiver” and collectively, the “AppRiver Companies”), for a total purchase price of $276.4 million, including cash consideration of $271.8 million, net of cash acquired , and subject to a customary working capital adjustment. This acquisition complements our strategy to accelerate our offerings into the cloud at the point of initial cloud application purchase and expand our customer base.

We financed the acquisition with proceeds from (1) cash on hand, (2) the proceeds from the Term Loan,  and (3) a private placement with an investment fund managed by True Wind Capital consisting of (i) 64,914 newly issued shares of Series A Convertible Preferred Stock, $1.00 par value per share, and (ii) 35,086 newly issued shares of Series B Convertible Preferred Stock, $1.00 par value per share in exchange for cash consideration in an aggregate amount of $100 million (which was reduced by $3 million in True Wind Capital’s costs that were reimbursed by the Company).

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AppRiver is a channel-first provider of cloud-based cyber security and productivity services, offering web protection, email encryption, secure archiving, and email continuity solutions. AppRiver also provides Microsoft Office 365 and Secure Hosted Exchange services, which serve as an effective lead generation tool for AppRiver’s solutions. The acquisition of AppRiver can accelerate our offerings into the cloud at the point of initial cloud application purchase. Because AppRiver currently services over 60,000 worldwide customers using a network of 4,500 Managed Service Providers, this acquisition can help us expand our customer base.

The Company incurred $10.8 million in acquisition-related costs which included $1.1 million, $9.6 million and $37 thousand recorded within the operating expenses for the twelve months ended December 31, 2018, December 31, 2019 and the six months ended June 30, 2020, respectively. Revenue from AppRiver was $33.6 and $66.6 million for the three and six months ended June 30, 2020, respectively, and due to the continued integration of the combined businesses, it was impracticable to determine earnings attributable to AppRiver.

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. The majority of the goodwill balance is expected to be deductible for tax purposes. The intangible assets we acquired from AppRiver consist of customer relationships, vendor relationships, trademarks/names, and internally developed software, which we are amortizing over 8 years, 3 years, 10 years, and 5-6 years, respectively. The results of operations and the provisional fair values of the acquired assets and liabilities have been included in the accompanying condensed consolidated financial statements since our AppRiver acquisition on February 20, 2019.

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

(In thousands)	Estimated Fair Value
Assets:
Current assets	$	12,200
Property and equipment		3,235
ROU assets		8,778
Customer relationships		91,000
Vendor relationships		1,000
Trademark/Names		4,400
Deferred tax assets		3,453
Internally developed software		41,100
Goodwill		147,518
Total assets		312,684
Liabilities:
Current liabilities	$	13,378
Deferred revenue		12,424
Operating lease liabilities		5,738
Finance lease liabilities		3,440
Total liabilities		34,980
Net assets recorded	$	277,704

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Pro Forma Financial Information (Unaudited)

The following unaudited pro forma financial information presents the combined results of operations for the three and six month periods ending June 30, 2020 and 2019, respectively, as though the DeliverySlip and AppRiver acquisitions 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 June 30,						Six Months Ended June 30,
(In thousands, except per share data)	2020			2019			2020			2019
Revenues	$	53,422		$	47,486		$	105,940		$	94,246
Net income		(1,740	)		453			(2,294	)		2,279
Basic income (loss) per share attributed to common shareholders	$	(0.07	)	$	(0.06	)	$	(0.13	)	$	(0.16	)
Diluted income (loss) per share attributed to common shareholders	$	(0.07	)	$	(0.06	)	$	(0.13	)	$	(0.16	)

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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, 2019. 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^® is a leading provider of cloud email security, productivity and compliance solutions. Trusted by the nation’s most influential institutions in healthcare, finance and government, Zix delivers a superior experience and easy-to-use solutions for email encryption and data loss prevention (“DLP”), advanced threat protection and archiving. As a leading provider of cloud-based cybersecurity, compliance, and productivity solutions for businesses of all sizes, we are focused on the protection of business communication, enabling our customers to better secure data and meet compliance needs. We serve organizations in many industries, with particular emphasis on the healthcare (including multiple major hospitals and several Blue Cross Blue Shield plans), financial services (including several U.S. Banks), and insurance and government (including divisions of the U.S. Treasury and the U.S. Securities and Exchange Commission (the “SEC”)) sectors.

Our email encryption and DLP capabilities enable the secure exchange of email that includes sensitive information. Through a comprehensive secure messaging service, called Email Encryption (formerly ZixEncrypt), we allow an enterprise to use policy-driven rules to determine which email messages should be sent securely or quarantined for review to comply with regulations or company-defined policies.

The main differentiation for Email Encryption in the marketplace is our exceptional ease of use. The best example of this is our ability to provide transparent delivery of encrypted email. Most email encryption solutions are focused on the sender. They typically introduce an added burden on recipients, often requiring additional user authentication with the creation of a new user identity and password. We designed our solution to alleviate the recipient’s burden by enabling the delivery of encrypted email automatically and transparently. Zix enables transparent delivery through (1) The Directory (formerly ZixDirectory®), the world’s largest email encryption community which is designed to share identities of our tens of millions of members, (2) Zix’s patented Best Method of Delivery®, which is designed to deliver email in the most secure, most convenient method possible for the recipient, and (3) Email Encryption, which automatically encrypts and decrypts messages with sensitive content. The result is secure, transparent encrypted email, such that secure email can be exchanged without any impact to administrators or extra steps for both senders and recipients. Our Email Encryption also addresses a business’s greatest source of data loss – corporate email– with an easy, straightforward DLP approach. By focusing strictly on the risks of email, Email Encryption simplifies DLP in comparison to other DLP solutions by decreasing complexity and cost, reducing deployment time from months to hours and minimizing impact on customer resources and workflow. In addition, Zix offers a convenient experience for both employees interacting with our solution and administrators managing the system.

Our Email Encryption solution enables DLP capabilities for email by combining proven policy and content scanning capabilities with quarantine functionality. The quarantine system and its intuitive interface allow administrators to (1) easily define policies and create custom lexicons for quarantining email messages, (2) conveniently manage quarantined messages using flexible searching and filtering options, (3) release or delete individual or multiple quarantined messages with one click, (4) review reports that monitor quarantine activities and trends and (5) automate custom notifications informing employees of quarantined messages.

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Email Encryption from Zix also provides greater visibility into an organization’s data risks in email by capturing data in outbound emails and highlighting violations that trigger policy filters to encrypt or quarantine. Through our interactive, real-time interface, companies can monitor their greatest vulnerabilities, generate reports for business executives and train employees about the sensitivity of their company’s data.

The solution is available as a hosted solution, as a multi-tenant solution, or as a physical or virtual on-premises appliance.

In March 2017, Zix acquired Greenview Data, Inc. (“Greenview”), an email security company. Zix’s acquisition of Greenview addresses increasing buyer demand for email security bundles by adding advanced threat protection, antivirus, anti-spam and archiving capabilities to its industry-leading email encryption. Greenview was a good fit for Zix’s business based on its employees’ expertise in email security and its emphasis on customer success, which align with Zix’s reputation for delivering industry-leading solutions and a superior experience.

Through the acquisition of Greenview, Zix launched two new solutions in April 2017 – ZixProtect^SM and ZixArchive^SM.  ZixProtect is now called Advanced Email Threat Protection while ZixArchive is called Information Archive. Advanced Email Threat Protection defends organizations from zero-day malware, ransomware, phishing, CEO fraud, W-2 phishing attacks, spam and viruses in email with multi-layer filtering techniques. Accuracy in protecting organizations from email threats is increased further with automated traffic analysis, machine learning and real-time threat analysis. The solution is available as a cloud-based service in a variety of bundles. Information Archive (formerly ZixArchive) is a low-cost, cloud-based email retention solution that easily enables user retrieval, compliance and eDiscovery. Available as a standalone or add-on solution for other products, Zix’s Information Archive includes policy-based retention, automatic indexing and flexible search capabilities for audit and legal requirements. With on-demand access through the cloud, organizations can conveniently share messages with employees, auditors and outside consultants or legal counsel, as well as revoke access when needed.

In April 2018, Zix acquired Erado, a unified archiving company. Erado strengthened Zix’s comprehensive archiving solutions with unified archiving, supervision, security, and messaging solutions for customers that demand bundled services. Erado’s long standing focus on helping its customers comply with FINRA and SEC regulations helped further strengthen Zix’s offerings for customers with compliance requirements. This acquisition also expanded Zix’s cloud-based email archiving capabilities into more than 50 content channels, including social media, instant message, mobile, web, audio and video.

On February 20, 2019, Zix acquired AppRiver, a leading provider of cloud-based cybersecurity solutions for Small and Medium Businesses (“SMB”).  The combined company creates one of the leading cloud based security solutions providers, particularly for the small and mid-size enterprise market. This acquisition further strengthened that alignment by bolstering our security offerings, expanding our go-to-market channels, and providing a stronger cloud platform to drive even more value for our customers and partners. In addition, we now can directly offer Microsoft’s substantial catalog of productivity and Microsoft Office 365 cloud email solutions.

On May 7, 2019, Zix acquired DeliverySlip, expanding our portfolio with additional email encryption, e-signatures, and secure file sharing solutions.

Our business operations and service offerings are supported by the ZixData Center™, which is PCI DSS 3.2 certified for applicable services, SOC2 accredited and SOC 3 certified. The operations of the ZixData Center are independently audited annually to maintain AICPA SOC3 certification in the areas of security, confidentiality, integrity and availability. Auditors also produce a SOC2 report on the effectiveness of operational controls used over the audit period.

Our company was incorporated as a corporation in Texas in 1988. Originally named Amtech Corporation, we changed our name to ZixIt® Corporation in 1999 when we entered the encrypted email market. In 2002, we became Zix Corporation, and in 2017, the Company rebranded to Zix.

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 crisis 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 and second quarter 2020 financial results, Zix has taken steps to insure 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;

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• Moving over 95% of our employees to remote work arrangements while maintaining the integrity of our data center operations and providing continued phenomenal support for our customers;

• Maintaining effective governance and internal controls in a remote work environment;

• Implementing a reduction in force of approximately 6%, completed through both voluntary and involuntary separation;

• Slowing our hiring plans, and reducing planned travel and conference expenses;

• 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 included in Part II – Item 1A of this quarterly report.

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 the recent 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. 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, 2019. 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, 2019.

Results of Operations

Second Quarter 2020 Summary of Operations

Financial

• Revenue for the quarter ended June 30, 2020, was $53.3 million, compared with $45.9 million for the same period in 2019, representing a 16% increase.

• Gross margin for the quarter ended June 30, 2020, was $25.1 million (or 47% of revenues), compared with $25.6 million (or 56% of revenues) for the comparable period in 2019. The period over period margin decline as a percentage of revenues is attributable to the effect of the increasing percentage of revenue associated with AppRiver sales of Microsoft Office365 and hosted exchange products.  

• Net loss for the quarter ended June 30, 2020, was $1.9 million, compared with net loss of $3.7 million in the comparable period in 2019.

• Net loss attributable to common shareholders for the quarter ended June 30, 2020, was $4.1 million, compared with net loss attributable to common shareholders of $7.1 million in the comparable period in 2019. The Company’s net loss attributable to common shareholders includes a deemed and accrued dividend to preferred shareholders of $2.2 million and $3.4 million for the three-month period ended June 30, 2020 and 2019, respectively.

• Net loss per diluted share was $0.08 for the quarter ended June 30, 2020, compared with a net loss of $0.13 in the comparable period in 2019.

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• Ending cash and cash equivalents were $14.1 million on June 30, 2020, compared with $11.3 million on June 30, 2019, and $13.3 million on December 31, 2019.

Operations

• Total billings for the quarter ended June 30, 2020, were $52.1 million, compared with $46.3 million for the same period in 2019, representing a 13% increase.

• The annual recurring revenue value of our customer subscriptions as of June 30, 2020, was $215.9 million, compared with $193.7 million for the same period in 2019, representing an increase of $22.2 million.

• Net cash provided by operations in the six months ended June 30, 2020, was $9.1 million, compared with $1.3 million provided by operations for the same period in 2019, representing a $7.8 million increase.

• As of June 30, 2020, backlog was $85.0 million, compared with $91.4 million as of June 30, 2019, representing a 7% decrease.

Revenues

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

	Three Months Ended June 30,				3-month Variance 2020 vs. 2020					Six Months Ended June 30,				6-month Variance 2020 vs. 2019
(in thousands)	2020		2019		$		%			2020		2019		$		%
Revenues	$	53,337	$	45,916	$	7,421		16	%	$	105,771	$	75,215	$	30,556		41	%

The increase in revenue was primarily related to AppRiver growth of $6.5 million and $28.5 million to the three and six months ended June 30, 2020, respectively. AppRiver’s contribution to our first six months 2019 revenue was impacted by the February 20, 2019, acquisition date, contributing $27.2 million and $38.1 million in revenue to the three and six months ended June 30, 2019, respectively. As our Company continues to integrate our sales teams and product offerings to a single secure cloud platform, distinguishing revenue between AppRiver and legacy Zix sales is expected to become less meaningful. We are growing our revenue with continued success in our subscription-based business model with both steady additions to the subscriber base and a high rate of existing customer renewals and the realization of previously contracted revenue in our backlog. In the first six months of 2020, we categorized our revenue in the following core industry verticals: 20% healthcare, 18% financial services, 3% government, and 59% as other. In the first six months of 2019, excluding our AppRiver and Erado sales, we categorized our revenue in the following core industry verticals: 47% healthcare, 28% financial services, 8% government sector and 17% 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 at 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 June 30,				Variance 2020 vs. 2020
(in thousands)	2020		2019		$		%
Annual Recurring Revenue	$	215,914	$	193,715	$	22,199		11	%

Backlog

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

As of June 30, 2020, total backlog was $85.0 million, and we expect approximately 72% of the total backlog, or approximately $61.5 million, to be recognized as revenue during the next twelve months. As of June 30, 2020, the backlog was comprised of the following elements: $43.0 million of deferred revenue that has been billed and paid, $12.4 million billed but unpaid, and approximately $29.6 million of unbilled contracts. The backlog at June 30, 2020, was 7% lower than the $91.4 million backlog at the

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end of the second quarter 2019, and 5% lower than the ending backlog of $89.4 million at December 31, 2019. Our decrease in backlog is the result of timing of our customer contracts and our continued trend toward monthly subscriptions.

Cost of Revenues

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

	Three Months Ended June 30,				3-month Variance 2020 vs. 2020					Six Months Ended June 30,				6-month Variance 2020 vs. 2019
(in thousands)	2020		2019		$		%			2020		2019		$		%
Cost of revenues	$	28,258	$	20,304	$	7,954		39	%	$	54,337	$	31,443	$	22,894		73	%

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 2020 compared to 2019 reflected in the table above resulted primarily from revenue increases from Microsoft Office365 and hosted exchange products which are associated with lower profit margins. We expect our costs of revenue to remain at higher levels than we have historically incurred. We additionally incurred increases in depreciation, amortization, average headcount and other expenses.

Research and Development Expenses

The following table sets forth the quarter-over-quarter comparison of our research and development expenses:

	Three Months Ended June 30,				3-month Variance 2020 vs. 2020					Six Months Ended June 30,				6-month Variance 2020 vs. 2019
(in thousands)	2020		2019		$		%			2020		2019		$		%
Research and development expenses	$	5,820	$	5,311	$	509		10	%	$	11,206	$	9,458	$	1,748		18	%

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 2020 compared to 2019 reflected in the table above resulted primarily from amortization of previously capitalized internal use software due to project completions. For the six months ended June 30, 2020, we incurred increases in headcount expense as compared to the same period 2019 attributable to our AppRiver acquisition in February 2019.

Selling and Marketing Expenses

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

	Three Months Ended June 30,				3-month Variance 2020 vs. 2019					Six Months Ended June 30,				6-month Variance 2020 vs. 2019
(in thousands)	2020		2019		$		%			2020		2019		$		%
Selling and marketing expenses	$	14,458	$	14,077	$	381		3	%	$	28,799	$	24,011	$	4,788		20	%

Selling and marketing expenses consist primarily of salary, commissions, travel, stock-based compensation and employee benefits for selling and marketing personnel as well as costs associated with promotional activities and advertising. The increase in the three months ended June 30, 2020, compared to the same period in 2019, was due primarily to increases in commission and headcount expense, offset by COVID-19 related reductions in travel. In addition to the items noted above, our six-month increase in spending is attributable to the amortization of intangible assets acquired in our acquisition of AppRiver.

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General and Administrative Expenses

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

	Three Months Ended June 30,				3-month Variance 2020 vs. 2019						Six Months Ended June 30,				6-month Variance 2020 vs. 2019
(in thousands)	2020		2019		$			%			2020		2019		$			%
General and administrative expenses	$	4,758	$	7,795	$	(3,037	)		(39	)%	$	10,446	$	18,125	$	(7,679	)		(42	)%

General and administrative expenses consist primarily of salary and bonuses, travel, stock-based compensation and benefits for administrative and executive personnel as well as fees for professional services and other general corporate activities. The decrease in the three and six months ended June 30, 2020, compared with the same periods in 2019 resulted primarily from reduction in acquisition and integration costs associated with our acquisitions of AppRiver and of DeliverySlip, in February 2019 and May 2019, respectively. During the second quarter 2020 the Company also incurred COVID-19 related reductions in headcount and travel expense, offset by an increase to stock-based compensation costs related to accelerated equity award vesting with voluntary terminations.

Other Income (Expense)

Our other income (expense) consists primarily of interest expense associated with our debt. In February 2019, we entered into a credit agreement with a syndicate of lenders and SunTrust Bank. During the three and six months ended June 30, 2020, we recorded interest expense of $2.5 million and $5.1 million, respectively associated with this debt. At June 30, 2020, our outstanding debt balance was $185.8 million based on a weighted effective interest rate of 5.34% for the three months ended June 30, 2020. See above Note 7 “Long-term Debt” for additional information regarding our debt.

Provision for Income Taxes

The provision for income taxes was a $570 thousand and $1.0 million benefit for the three-month periods ended June 30, 2020 and 2019, respectively, and a $1.4 million and $2.2 million benefit for each of the six months ended June 30, 2020 and 2019, 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 $22.9 million reserve because of the uncertainty of future taxable income levels sufficient to utilize our net operating losses and credits. Our June 30, 2020, provision benefit of $1.4 million includes $1.2 million in deferred taxes and a $337 thousand tax benefit related to the return of federal Alternative Minimum Tax credits, offset by $73 thousand in state taxes then payable based on gross revenues. Our June 30, 2019, provision benefit of $2.2 million includes $2.0 million in deferred taxes and a $170 thousand benefit related to the return of federal Alternative Minimum Tax credits.

No tax penalty-related charges were accrued or recognized for the three-month periods ended June 30, 2020 and 2019. 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 June 30, 2020. We are currently subject to a three year statute of limitations by major tax jurisdictions.

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At June 30, 2020, 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 $37.8 million of its U.S. net deferred tax assets. The majority of this unreserved portion related to $32.9 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 $4.2 million relating to temporary differences between GAAP and tax-related expense and $628 thousand relating to U.S. state income tax credits and net operating loss carryovers.

Any reduction to the $22.9 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 and second quarter 2020 actual earnings, the Company believes the deferred tax asset allowance as of December 31, 2019, will remain unchanged at December 31, 2020. For this reason, the Company has recognized its first and second quarter 2020 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 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. 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. An increase or decrease to 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 $239 million which begin to expire in 2021.

Net Income (Loss)

Our net loss for the three months ended June 30, 2020, of $1.9 million was an improvement of $1.8 million compared to our net loss of $3.7 million for the same period last year. The improvement in our net loss was primarily due to revenue growth and the completion of prior year acquisition and integration related costs associated with our AppRiver purchase, offset by current year increases in our costs of revenues, research and development, and selling and marketing activities.

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 (under which $8 million was drawn as of June 30, 2020. Therefore the undrawn balance of $17 million was 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) 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 crisis.  During the first six months of 2020, net cash provided by operations was $9.1 million, an increase of $7.8 million compared with the $1.3 million of net cash provided by operations in the first six months of 2019. This year over year improvement is attributable to increased spending in the prior year associated with due diligence, banking and other fees associated with our AppRiver acquisition in February 2019. At June 30, 2020, our cash and cash equivalents totaled $14.1 million, an increase of $708 thousand from the December 31, 2019 balance, and we had outstanding debt of $185.8 million.

Sources and Uses of Cash Summary

	Six Months Ended June 30,
(In thousands)	2020			2019
Net cash provided by operations	$	9,120		$	1,313
Net cash used in investing activities	$	(9,316	)	$	(287,781	)
Net cash provided by (used in) financing activities	$	956		$	270,763

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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 six months 2020 consisted of $9.3 million for capital expenditures, which includes $7.3 million in capitalized internal-use software and $2.0 million for computer and networking equipment. Our investing activities in the first six months of 2019 consisted of $283.2 million, net of cash acquired, used in the acquisitions of AppRiver and DeliverySlip, and $4.5 million for capital expenditures, which include $3.0 million in capitalized internal-use software, and $1.5 million for computer and networking equipment.

Financing activities in the first six months of 2020 include $6.0 million drawn from our Revolving Facility and $334 thousand received from the exercise of stock options. We used $2.6 million to repurchase common stock related to the tax impact of vesting restricted awards, $1.1 million for contingent consideration payment associated with our acquisition of Erado, $925 thousand for principle payments of our long-term debt, and $746 thousand for payments on our finance leases. Cash received from financing activities in the first six months of 2019 includes $178.6 million, net of issuance costs, incurred as debt, $96.6 million, net of issuance costs, raised through the private purchase of preferred stock, and $180 thousand received from the exercise of stock options. The proceeds from our debt and preferred stock issuance were used to fund our AppRiver acquisition in February 2019 and our DeliverySlip acquisition in May 2019. In addition to these items, we used $1.8 million to repurchase common stock related to the tax impact of vesting restricted awards, and $1.5 million for contingent consideration payments associated with our acquisitions of Greenview and Erado. We also used $770 thousand for payments on our finance leases and $438 thousand for principle payments of our long-term debt.

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 June 30, 2020. 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		180,000		481
$3.50 - $4.99		462,010		1,754		455,760		1,730
$8.00 - $9.50		100,000		803		6,250		50
Total		742,010	$	3,038		642,010	$	2,261

Off-Balance Sheet Arrangements

None.

Contractual Obligations, Contingent Liabilities and Commitments  

We have not entered into any material, non-cancelable purchase commitments at June 30, 2020.

We have severance agreements with certain employees which would require the Company to pay approximately $5.1 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, 2019.

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

29

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 June 30, 2020.

Changes in Internal Controls over Financial Reporting

During the six months ended June 30, 2020, 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.

30

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, 2019 and Part II Item 1A, “Risk Factors” of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. Except as disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended March 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, 2019 and our Quarterly Report on Form 10-Q for the quarterly period ended March 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, 2019.

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
April 1, 2020 to April 30, 2020		12,137	$	5.57		—	$	—
May 1, 2020 to May 31, 2020		98,092	$	6.11		—	$	—
June 1, 2020 to June 30, 2020		12,916	$	7.06		—	$	—
Total		123,145	$	6.16		—	$	—

1 Of the total number of shares purchased for the one-month periods ended April 30, 2020, May 31, 2020, and June 30, 2020, respectively; 63,853 shares of Restricted Stock, 1,218 shares of Performance Stock, 40,488 units of RSUs and 17,586 PUs were withheld by us upon the vesting of outstanding Restricted Stock, Performance Stock, RSUs and PUs. 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 PUs 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.

31

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	Stock Purchase Agreement, dated as of April 2, 2018, by and among Craig Brauff, Julie Lomax Brauff, Shari Wood-Richardson, as Trustee of the Alexandra Brauff Gift Trust U/A 12/21/12, Shari Wood-Richardson, as Trustee of the Courtney Brauff Gift Trust U/A 12/21/12, Julie A. Lomax, as Trustee of the Julie Lomax Gift Trust U/A 12/21/12, and Zix Corporation. Filed as Exhibit 2.1 to Zix Corporation’s Current Report on Form 8-K, filed on April 2, 2018, and incorporated herein by reference.
2.2	Securities Purchase Agreement, dated as of January 14, 2019, by and among Zix Corporation, AR Topco, LLC, AppRiver Marlin Blocker Corp., AppRiver Holdings, LLC, AppRiver Marlin Topco, L.P., AppRiver Management Holding, LLC, Marlin Equity IV, L.P. and Marlin Topco GP, LLC, as the sellers’ representative. Filed as Exhibit 2.2 to Zix Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018, and incorporated herein by reference.
3.1	Restated Articles of Incorporation of Zix Corporation, as filed with the Texas Secretary of State on November 10, 2005. Filed as Exhibit 3.1 to Zix Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005, and incorporated herein by reference.
3.2	Second Amended and Restated Bylaws of Zix Corporation, dated November 1, 2016. Filed as Exhibit 3.2 to Zix Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, and incorporated herein by reference.
3.3	Certificate of Designations of Series A Convertible Preferred Stock, as filed with the Texas Secretary of State on February 15, 2019. Filed as Exhibit 3.1 to Zix Corporation’s Current Report on Form 8-K, filed on February 22, 2019, and incorporated herein by reference.
3.4	Certificate of Designations of Series B Convertible Preferred Stock, as filed with the Texas Secretary of State on February 15, 2019. Filed as Exhibit 3.2 to Zix Corporation’s Current Report on Form 8-K, filed on February 22, 2019, and incorporated herein by reference.
31.1*	Certification of David J. Wagner, President and Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of David E. Rockvam, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of CEO and CFO, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.

32

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: August 6, 2020	By:	/s/ DAVID E. ROCKVAM
		David E. Rockvam
		Chief Financial Officer (Principal Financial
		Officer and Principal Accounting Officer)

33

EX-31.1

Exhibit 31.1

CERTIFICATION

I, David J. Wagner, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Zix Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2020	/s/ DAVID. J. WAGNER
	David J. Wagner
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, David E. Rockvam, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Zix Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2020	/s/ DAVID E. ROCKVAM
	David E. Rockvam
	Chief Financial Officer (Principal Financial Officer
	and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CEO AND CFO PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

August 6, 2020

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Ladies and Gentlemen:

The certifications set forth below are being submitted in connection with the Quarterly Report on Form 10-Q (the “Report”) of Zix Corporation for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

David J. Wagner, the chief executive officer, and David E. Rockvam, the chief financial officer of Zix Corporation, each certifies that to the best of his knowledge and in the respective capacities as an officer of Zix Corporation:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Zix Corporation.

/s/ DAVID J. WAGNER

Name: David J. Wagner

Title: President and Chief Executive Officer

/s/ DAVID E. ROCKVAM

Name: David E. Rockvam

Title: Chief Financial Officer

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Aug. 04, 2020
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
Trading Symbol	ZIXI
Entity Registrant Name	ZIX CORP
Entity Central Index Key	0000855612
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Common Stock, Shares Outstanding		57,032,787
Entity Current Reporting Status	Yes
Entity Shell Company	false
Entity Interactive Data Current	Yes
Security Exchange Name	NASDAQ
Entity File Number	0-17995
Entity Tax Identification Number	75-2216818
Entity Address, Address Line One	2711 North Haskell Avenue
Entity Address, Address Line Two	Suite 2200, LB 36
Entity Address, City or Town	Dallas
Entity Address, State or Province	TX
Entity Address, Postal Zip Code	75204-2960
City Area Code	214
Local Phone Number	370-2000
Title of 12(b) Security	Common Stock, par value $0.01 per share
Entity Incorporation, State or Country Code	TX
Document Quarterly Report	true
Document Transition Report	false

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Current assets:
Cash and cash equivalents	$ 14,057	$ 13,349
Receivables, net	12,911	10,081
Prepaid and other current assets	5,612	4,984
Total current assets	32,580	28,414
Property and equipment, net	8,073	8,591
Operating lease assets	9,428	10,128
Intangible assets, net	140,089	145,876
Goodwill	170,694	171,209
Deferred tax assets	37,767	36,535
Deferred costs and other assets	12,308	11,968
Total assets	410,939	412,721
Current liabilities:
Accounts payable	13,309	14,400
Accrued expenses	9,553	13,732
Deferred revenue	41,472	40,757
Current portion of long-term debt	1,850	1,850
Operating lease liabilities, current	2,657	2,947
Finance lease liabilities, current	956	1,338
Total current liabilities	69,797	75,024
Long-term liabilities:
Deferred revenue	1,560	2,524
Noncurrent operating lease liabilities	7,915	8,389
Noncurrent finance lease liabilities	353	716
Long-term debt	183,972	178,250
Total long-term liabilities	193,800	189,879
Total liabilities	263,597	264,903
Commitments and contingencies (see Note 11)
Preferred stock:
Convertible preferred stock	110,974	106,527
Stockholders’ equity:
Preferred stock, $1 par value, 10,000,000 shares authorized; none issued and outstanding
Common stock, $0.01 par value, 175,000,000 shares authorized; 85,109,867 issued and 56,999,711 outstanding in 2020 and 83,393,514 issued and 55,640,397 outstanding in 2019	782	780
Additional paid-in capital	397,177	391,605
Treasury stock, at cost; 28,110,156 common shares in 2020 and 27,753,117 common shares in 2019	(112,880)	(110,298)
Accumulated deficit	(248,299)	(240,995)
Accumulated other comprehensive income (loss)	(412)	199
Total stockholders’ equity	36,368	41,291
Total liabilities, preferred stock and stockholders’ equity	410,939	412,721
Series A Convertible Preferred Stock [Member]
Preferred stock:
Convertible preferred stock	$ 110,974	$ 106,527

XML

Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Jun. 30, 2020	Dec. 31, 2019
Preferred stock, par value	$ 1	$ 1
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	175,000,000	175,000,000
Common stock, shares issued	85,109,867	83,393,514
Common stock, shares outstanding	56,999,711	55,640,397
Treasury stock, shares	28,110,156	27,753,117
Series A Convertible Preferred Stock [Member]
Convertible Preferred stock, par value	$ 1	$ 1
Convertible Preferred stock, shares designated	100,206	100,206
Convertible Preferred stock, shares issued	100,206	100,206
Convertible Preferred stock, shares outstanding	100,206	100,206

XML

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Income Statement [Abstract]
Revenue	$ 53,337	$ 45,916	$ 105,771	$ 75,215
Cost of revenue	28,258	20,304	54,337	31,443
Gross margin	25,079	25,612	51,434	43,772
Operating expenses:
Research and development	5,820	5,311	11,206	9,458
Selling, general and administrative	19,216	21,872	39,245	42,136
Total operating expenses	25,036	27,183	50,451	51,594
Operating income (loss)	43	(1,571)	983	(7,822)
Other income (expense):
Investment and other (expense) income	(7)	9	(22)	101
Interest expense	(2,508)	(3,171)	(5,155)	(4,425)
Total other (expense) income	(2,515)	(3,162)	(5,177)	(4,324)
Loss before income taxes	(2,472)	(4,733)	(4,194)	(12,146)
Income tax benefit	570	1,027	1,440	2,175
Net loss	(1,902)	(3,706)	(2,754)	(9,971)
Deemed and accrued dividends on preferred stock	2,218	3,371	4,447	5,804
Net loss attributable to common stockholders	$ (4,120)	$ (7,077)	$ (7,201)	$ (15,775)
Basic loss per share attributable to common stockholders	$ (80.00)	$ (130)	$ (130)	$ (300)
Diluted loss per common share attributable to common stockholders	$ (80.00)	$ (130)	$ (130)	$ (300)
Basic weighted average common shares outstanding	54,788,858	53,028,854	53,770,821	52,872,190
Diluted weighted average common shares outstanding	54,788,858	53,028,854	53,770,821	52,872,190
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments	$ 294	$ (56)	$ (611)	$ (88)
Comprehensive income (loss)	$ (1,608)	$ (3,762)	$ (3,365)	$ (10,059)

XML

Condensed Consolidated Statement of Preferred Stock and Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Total	Cumulative Effect, Period of Adoption, Adjustment [Member]	Series A Convertible Preferred Stock [Member]	Series B Convertible Preferred Stock [Member]	Preferred Stock [Member]	Preferred Stock [Member] Series A Convertible Preferred Stock [Member]	Preferred Stock [Member] Series B Convertible Preferred Stock [Member]	Common Stock [Member]	Additional Paid-In Capital [Member]	Treasury Stock [Member]	Accumulated Deficit [Member]	Accumulated Deficit [Member] Cumulative Effect, Period of Adoption, Adjustment [Member]	Accumulated Deficit [Member] Series A Convertible Preferred Stock [Member]	Accumulated Deficit [Member] Series B Convertible Preferred Stock [Member]	Accumulated Other Comprehensive Income (Loss) [Member]
Beginning balances at Dec. 31, 2018	$ 60,947							$ 779	$ 384,940	$ (108,392)	$ (216,364)				$ (16)
Beginning balances, shares at Dec. 31, 2018								81,715,330
Issuance of preferred stock in connection with private placement						$ 62,662	$ 33,881
Issuance of preferred stock in connection with private placement, shares						64,914	35,086
Beneficial conversion feature of preferred stock			$ (1,407)			$ 1,407							$ (1,407)
Accretion of beneficial conversion feature of Preferred Shares (Participating)			(12)			12							(12)
Accrued dividend on preferred stock			(563)	$ (380)		563	$ 380						(563)	$ (380)
Redemption accretion of preferred stock				(71)			71							(71)
Net issuance of common stock upon exercise of stock options	36								36
Net issuance of common stock upon exercise of stock options, shares								17,438
Net issuance of common stock upon vesting of restricted stock units								40,334
Net issuance of common stock upon vesting of performance stock units								5,777
Net issuance of restricted common stock								1,116,724
Net issuance of restricted performance common stock								392,500
Employee stock-based compensation costs	(111)								1,229	(1,340)
Adjustment from foreign currency translation	(32)														(32)
Net loss	(6,265)										(6,265)
Ending balances at Mar. 31, 2019	52,142							$ 779	386,205	(109,732)	(225,062)				(48)
Ending balances, shares at Mar. 31, 2019					100,000
Ending balances at Mar. 31, 2019					$ 98,976
Ending balances, shares at Mar. 31, 2019								83,288,103
Beginning balances at Dec. 31, 2018	60,947							$ 779	384,940	(108,392)	(216,364)				(16)
Beginning balances, shares at Dec. 31, 2018								81,715,330
Adjustment from foreign currency translation	(88)
Net loss	(9,971)
Ending balances at Jun. 30, 2019	46,643							$ 779	388,313	(110,206)	(232,139)				(104)
Ending balances, shares at Jun. 30, 2019					100,206
Ending balances at Jun. 30, 2019					$ 102,347
Ending balances, shares at Jun. 30, 2019								83,348,659
Beginning balances at Mar. 31, 2019	52,142							$ 779	386,205	(109,732)	(225,062)				(48)
Beginning balances, shares at Mar. 31, 2019					100,000
Beginning balances at Mar. 31, 2019					$ 98,976
Beginning balances, shares at Mar. 31, 2019								83,288,103
Issuance of Series A preferred stock for dividend on Series B preferred stock upon conversion to Series A preferred, shares					206
Beneficial conversion feature of preferred stock				(1,067)			1,067							(1,067)
Accretion of beneficial conversion feature of Preferred Shares (Participating)			(33)			33							(33)
Accrued dividend on preferred stock			$ (1,505)	(650)		1,505	650						(1,505)	(650)
Redemption accretion of preferred stock				$ (116)			$ 116							$ (116)
Net issuance of common stock upon exercise of stock options	144								144
Net issuance of common stock upon exercise of stock options, shares								40,000
Net issuance of common stock upon vesting of restricted stock units								3,333
Net issuance of common stock upon vesting of performance stock units								1,223
Net issuance of restricted common stock								16,000
Employee stock-based compensation costs	1,490								1,964	(474)
Adjustment from foreign currency translation	(56)														(56)
Net loss	(3,706)										(3,706)
Ending balances at Jun. 30, 2019	46,643							$ 779	388,313	(110,206)	(232,139)				(104)
Ending balances, shares at Jun. 30, 2019					100,206
Ending balances at Jun. 30, 2019					$ 102,347
Ending balances, shares at Jun. 30, 2019								83,348,659
Beginning balances at Dec. 31, 2019	41,291							$ 780	391,605	(110,298)	(240,995)				199
Beginning balances, shares at Dec. 31, 2019			100,206		100,206
Beginning balances at Dec. 31, 2019	106,527		$ 106,527		$ 106,527
Beginning balances, shares at Dec. 31, 2019								83,393,514
Cumulative effect adjustment from changes in accounting standard (Note 2) at Dec. 31, 2019		$ (103)										$ (103)
Beginning balances, as adjusted at Dec. 31, 2019	41,188				$ 106,527			$ 780	391,605	(110,298)	(241,098)				199
Accretion of beneficial conversion feature of Preferred Shares (Participating)			(48)			48							(48)
Accrued dividend on preferred stock			$ (2,181)			2,181							(2,181)
Net issuance of common stock upon exercise of stock options	117							$ 1	116
Net issuance of common stock upon exercise of stock options, shares								46,875
Net issuance of common stock upon vesting of restricted stock units								30,084
Net issuance of common stock upon vesting of performance stock units								16,062
Net issuance of restricted common stock								1,062,683
Net issuance of restricted performance common stock								404,746
Employee stock-based compensation costs	204								1,989	(1,785)
Adjustment from foreign currency translation	(905)														(905)
Net loss	(853)										(853)
Ending balances at Mar. 31, 2020	37,522							$ 781	393,710	(112,083)	(244,180)				(706)
Ending balances, shares at Mar. 31, 2020					100,206
Ending balances at Mar. 31, 2020					$ 108,756
Ending balances, shares at Mar. 31, 2020								84,953,964
Beginning balances at Dec. 31, 2019	41,291							$ 780	391,605	(110,298)	(240,995)				199
Beginning balances, shares at Dec. 31, 2019			100,206		100,206
Beginning balances at Dec. 31, 2019	106,527		$ 106,527		$ 106,527
Beginning balances, shares at Dec. 31, 2019								83,393,514
Cumulative effect adjustment from changes in accounting standard (Note 2) at Dec. 31, 2019		$ (103)										$ (103)
Beginning balances, as adjusted at Dec. 31, 2019	41,188				$ 106,527			$ 780	391,605	(110,298)	(241,098)				199
Adjustment from foreign currency translation	(611)
Net loss	(2,754)
Ending balances at Jun. 30, 2020	36,368							$ 782	397,177	(112,880)	(248,299)				(412)
Ending balances, shares at Jun. 30, 2020			100,206		100,206
Ending balances at Jun. 30, 2020	110,974		$ 110,974		$ 110,974
Ending balances, shares at Jun. 30, 2020								85,109,867
Beginning balances at Mar. 31, 2020	37,522							$ 781	393,710	(112,083)	(244,180)				(706)
Beginning balances, shares at Mar. 31, 2020					100,206
Beginning balances at Mar. 31, 2020					$ 108,756
Beginning balances, shares at Mar. 31, 2020								84,953,964
Accretion of beneficial conversion feature of Preferred Shares (Participating)			(47)			47							(47)
Accrued dividend on preferred stock			$ (2,171)			$ 2,171							$ (2,171)
Net issuance of common stock upon exercise of stock options	$ 217							$ 1	216
Net issuance of common stock upon exercise of stock options, shares	67,500							67,500
Net issuance of common stock upon vesting of restricted stock units								75,631
Net issuance of common stock upon vesting of performance stock units								32,848
Net issuance of restricted common stock								6,590
Net issuance of restricted performance common stock								(26,666,000)
Employee stock-based compensation costs	$ 2,454								3,251	(797)
Adjustment from foreign currency translation	294														294
Net loss	(1,902)										(1,902)
Ending balances at Jun. 30, 2020	36,368							$ 782	$ 397,177	$ (112,880)	$ (248,299)				$ (412)
Ending balances, shares at Jun. 30, 2020			100,206		100,206
Ending balances at Jun. 30, 2020	$ 110,974		$ 110,974		$ 110,974
Ending balances, shares at Jun. 30, 2020								85,109,867

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Condensed Consolidated Statement of Preferred Stock and Stockholders' Equity (Parenthetical) (Unaudited) - USD ($) $ in Thousands		3 Months Ended
	Feb. 20, 2019	Mar. 31, 2019
Series A Convertible Preferred Stock [Member]
Preferred stock, net of issuance costs	$ 2,300	$ 2,253
Series B Convertible Preferred Stock [Member]
Preferred stock, net of issuance costs	$ 1,200	$ 1,204

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Operating activities:
Net income (loss)	$ (2,754)	$ (9,971)
Non-cash items in net income (loss):
Depreciation and amortization	15,514	9,626
Amortization of debt issuance costs	649	354
Employee stock-based compensation costs	5,241	3,193
Noncash lease costs	1,551	(5,903)
Changes in deferred taxes	(1,232)	(2,008)
Changes in operating assets and liabilities:
Receivables	(2,688)	742
Prepaid and other current assets	(633)	(617)
Deferred costs and other assets	(316)	(959)
Accounts payable	(1,229)	3,245
Deferred revenue	(302)	233
Payment of acquisition related contingent consideration		(385)
Accrued and other liabilities	(4,681)	3,763
Net cash provided by operating activities	9,120	1,313
Investing activities:
Purchases of property, equipment and internal-use software	(9,316)	(4,536)
Acquisition of business, net of cash acquired		(283,245)
Net cash used in investing activities	(9,316)	(287,781)
Financing activities:
Proceeds of long-term debt	6,000	185,000
Debt issuance cost		(6,443)
Repayment of long term debt	(925)	(438)
Repayment of finance lease liabilities	(746)	(770)
Proceeds from exercise of stock options	334	180
Purchase of treasury shares	(2,582)	(1,814)
Payment of acquisition related contingent consideration	(1,125)	(1,540)
Net cash provided by (used in) financing activities	956	270,763
Effect of exchange rate on cash	(52)	(81)
Increase (decrease) in cash and cash equivalents	708	(15,786)
Cash and cash equivalents, beginning of period	13,349	27,109
Cash and cash equivalents, end of period	$ 14,057	11,323
Series A Convertible Preferred Stock [Member]
Financing activities:
Proceeds from issuance of preferred stock, net of offering costs		$ 96,588

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Basis of Presentation

6 Months Ended

Jun. 30, 2020

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Basis of Presentation

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 2019 Annual Report on Form 10-K. These financial statements are unaudited, but have been prepared in the ordinary course of business for the purpose of providing information with respect to the covered interim periods.

Management of the Company believes that all adjustments necessary for a fair presentation for such periods have been included and are of a normal recurring nature. The results of operations for the three- and six-month periods ended June 30, 2020, 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.

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Recent Accounting Standards and Pronouncements

6 Months Ended

Jun. 30, 2020

Accounting Changes And Error Corrections [Abstract]

Recent Accounting Standards and Pronouncements

2. Recent Accounting Standards and Pronouncements

Credit Losses

On January 1, 2020, we adopted Accounting Standard Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments with a net increase of our receivables allowance and a related cumulative adjustment to our retained earnings recorded at the beginning of adoption. Upon adoption, we changed our impairment model to utilize a forward-looking current expected credit losses (CECL) model in place of the incurred loss impairment model for our accounting receivable balance. The cumulative effect adjustment from adoption was immaterial to our condensed consolidated financial statements.

Intangibles – Goodwill and Other

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04) to simplify the subsequent measurement of goodwill. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting standard became effective for us beginning January 1, 2020, and did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Income Taxes

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

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Stock- Based Awards and Stock-Based Employee Compensation Expense

6 Months Ended

Jun. 30, 2020

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock- Based Awards and Stock-Based Employee Compensation Expense

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

Our stock-based awards include (i) stock options, (ii) restricted stock awards, some of which are subject to time-based vesting (“Restricted Stock”) and some of which are subject to performance-based vesting (“Performance Stock”), and (iii) restricted stock units, some of which are subject to time-based vesting (“RSUs”) and some of which are subject to performance-based vesting (“Performance RSUs”). As of June 30, 2020, the Company had 742,010 stock options outstanding, 2,090,745 non-vested Restricted Stock awards; 691,852 non-vested Performance Stock awards; 153,099 non-vested RSUs; 44,349 non-vested Performance RSUs and 2,388,054 shares of common stock available for grant.

Stock Option Activity   

The following is a summary of all stock option transactions during the three months ended June 30, 2020:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Yrs)
Outstanding at March 31, 2020		809,510		$	4.02	5.03
Granted at market price		—			—
Cancelled or expired		—			—
Exercised		(67,500	)		3.19
Outstanding at June 30, 2020		742,010		$	4.09		5.01
Options exercisable at June 30, 2020		642,010		$	3.52		4.32

At June 30, 2020, 742,010 stock options outstanding and 635,760 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 $2.2 million and $2.2 million, respectively.        

Restricted Stock Activity

The following is a summary of Restricted Stock activity during the three months ended June 30, 2020:

	Restricted Shares			Weighted Average Fair Value
Non-vested restricted stock at March 31, 2020		2,354,445		$	7.26
Granted at market price		86,015			6.04
Vested		(270,290	)		6.07
Cancelled		(79,425	)		7.22
Non-vested restricted stock at June 30, 2020		2,090,745		$	7.36

Restricted Stock Unit Activity

The following is a summary of all RSU activity during the three months ended June 30, 2020:

	Restricted Stock Units			Weighted Average Fair Value
Non-vested restricted stock units at March 31, 2020		238,643		$	8.26
Granted at market price		—			—
Vested		(85,544	)		7.61
Cancelled		—			—
Non-vested restricted stock units at June 30, 2020		153,099		$	8.62

Performance RSU Activity

The following is a summary of all Performance RSU activity during the three months ended June 30, 2020:

	Performance RSUs			Weighted Average Fair Value
Non-vested performance RSUs at March 31, 2020		77,197		$	8.28
Granted at market price		—			—
Vested		(32,848	)		7.54
Forfeited		—			—
Non-vested performance RSUs at June 30, 2020		44,349		$	8.84

Performance Stock Activity

The following is a summary of all Performance Stock activity during the three months ended June 30, 2020:

	Performance Stock			Weighted Average Fair Value
Non-vested performance stock at March 31, 2020		723,517		$	7.48
Granted at market price		—			—
Vested		(4,999	)		6.11
Forfeited		(26,666	)		6.76
Non-vested performance stock at June 30, 2020		691,852		$	7.52

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- and six-month periods ended June 30, 2020, the total stock-based employee compensation expense resulting from stock options, Restricted Stock, RSUs, Performance RSUs and Performance Stock was recorded to the following line items of the Company’s condensed consolidated statements of income:

(In thousands)	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Cost of revenues	$	836	$	1,008
Research and development		414		751
Selling, general and administrative		2,000		3,482
Stock-based compensation expense	$	3,250	$	5,241

A deferred tax asset totaling $948 thousand and $635 thousand, resulting from stock-based compensation expense associated with awards relating to the Company’s U.S. operations, was recorded for the six-month periods ended June 30, 2020 and 2019, respectively. As of June 30, 2020, there was $18.5 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 2.18 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, 2019.

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Supplemental Cash Flow Information

6 Months Ended

Jun. 30, 2020

Supplemental Cash Flow Elements [Abstract]

Supplemental Cash Flow Information

4. Supplemental Cash Flow Information

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

	Six Months Ended June 30,
(In thousands)	2020		2019
Cash income tax payments	$	116	$	316
Cash paid for interest		4,649		3,922
Non-cash investing and financing activities:
Accrued and deemed dividends on Series A preferred stock		4,447		3,520
Accrued and deemed dividends on Series B preferred stock		—		2,284

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Receivables, Net

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Receivables, Net

5. Receivables, net

(In thousands)	June 30, 2020			December 31, 2019
Gross accounts receivables	$	25,660		$	21,193
Allowance for credit losses	$	(391	)	$	—
Allowance for returns and doubtful accounts		—			(265	)
Unpaid portion of deferred revenue		(12,358	)		(10,847	)
Note receivable		458			458
Allowance for note receivable		(458	)		(458	)
Receivables, net	$	12,911		$	10,081

Prior to January 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. We maintained an allowance for uncollectible accounts receivable for estimated losses resulting from the failure or inability of our customers to make required payments. Subsequent to January 1, 2020, 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 June 30, 2020, 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 June 30, 2020.

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Leases

6 Months Ended

Jun. 30, 2020

Leases [Abstract]

Leases

6. Leases

Effective January 1, 2019, the Company adopted ASC 842, which requires recognition of a right-of-use asset and lease liability for all leases at the commencement date based on the present value of lease payments over the lease term. Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition practical expedients that does not require reassessment of (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and nonlease components, which consist principally of common area maintenance charges, for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.

The Company determines if a contract is or contains a lease at inception. The Company has operating leases for office spaces and data centers and finance leases for equipment. The Company has entered into lease contracts ranging from 1 to 12 years with the majority of leases having terms one to seven years, many of which include options to extend in various increments. Variable lease costs consist primarily of variable common area maintenance, taxes, insurance, parking and utilities. The Company’s leases do not have any residual value guarantees or restrictive covenants.

As the implicit rate is not readily determinable for most of the Company’s lease agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using the Company's weighted average interest rate of the term loan and delayed draw term loan.

The components of lease costs are as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
(In thousands)	2020		2020
Finance lease costs:
Amortization of right-of-use asset	$	310	$	688
Interest on lease liabilities		24		53
Operating lease costs		942		1,883
Short-term lease costs		773		1,173
Variable lease costs		267		484
Total lease costs	$	2,316	$	4,281

Supplemental cash flow information related to leases are as follows:

	Six Months Ended June 30,
(In thousands)	2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	963
Operating cash flows from finance leases		54
Financing cash flows from finance leases		746
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		856
Finance leases		—

Supplemental balance sheet information related to lease are as follows:

		June 30,
(In thousands)	Balance Sheet Classification	2020
Operating Leases
Operating lease right-of-use assets	Operating lease assets	$	9,428
Total operating lease assets		$	9,428
		June 30,
(In thousands)	Balance Sheet Classification	2020
Finance Leases
Finance lease right-of-use assets		$	3,362
Accumulated depreciation - finance leases			(2,002	)
Finance lease right-of-use assets, net	Property and equipment, net	$	1,360

Weighted average remaining lease term and weighted average discount rate are as follows:

Weighted Average Remaining Lease Term (Years)
Operating leases	3.97
Finance leases	1.71
Weighted Average Discount Rate
Operating leases	5.79	%
Finance leases	6.14	%

Maturities of lease liabilities are as follows:

	Payments Due by Period - Year Ending December 31, 2020
(In thousands)	Total			Year 1 (1)		Years 2 & 3		Years 4 & 5		Beyond 5 Years
Operating leases	$	11,828		$	1,767	$	5,563	$	4,331	$	167
Less imputed interest		(1,256	)
Total	$	10,572
Finance leases	$	1,366		$	624	$	736	$	6	$	—
Less imputed interest		(57	)
Total	$	1,309
(1) Year 1 excluding the six months ended June 30, 2020

During the six months ended June 30, 2020, we entered into an operating lease for an additional data center, which has not yet commenced and is expected to be added as a lease liability at a value of approximately $109 thousand. This operating lease is expected to commence in the third quarter of 2020 with a lease term of 3 years.

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Long-term Debt

6 Months Ended

Jun. 30, 2020

Debt Disclosure [Abstract]

Long-term Debt

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) provides for borrowing in the form of a senior secured term loan facility in an aggregate principal amount of $175 million (the “Term Loan”), (2) provides 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) provides 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). As of June 30, 2020, the Company had an outstanding debt balance of $8.0 million attributable to the Revolving Facility. The Credit Facilities are secured by substantially all the assets of Zix and its wholly-owned domestic subsidiaries and guaranteed by substantially all of Zix’s wholly-owned domestic subsidiaries.

Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (1) the adjusted LIBO rate (as defined in the Credit Agreement) plus a margin ranging from 2.50% to 3.50% or (2) the alternate base rate (as defined in the Credit Agreement) plus a margin ranging from 1.50% to 2.50%. The applicable margin varies depending on the Company’s total net leverage ratio.

The Credit Facilities are scheduled to mature on February 20, 2024, unless extended in accordance with the terms of the Credit Agreement. The Credit Agreement includes procedures for additional financial institutions to become lenders, or for any existing lender to increase its commitments thereunder, subject to the limits and conditions set forth in the Credit Agreement.  

Optional prepayments of borrowings under the Credit Facilities are permitted at any time and do not require any prepayment premium (other than reimbursement of the lenders’ breakage and redeployment costs in the case of a prepayment of LIBO rate 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:

• 5.00:1.00 for the fiscal quarters ending December 31, 2019 through June 30, 2020;

• 4.75:1.00 for the fiscal quarters ending September 30, 2020 through March 31, 2021;

• 4.50:1.00 for the fiscal quarters ending June 30, 2021 through December 31, 2021; and

• 4.25:1.00 for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter.

The non-financial covenants restrict the Company’s ability and the ability of the Company’s restricted subsidiaries to, among other things, incur indebtedness, incur liens, merge with or acquire other entities, make investments, dispose of assets, enter into sale and leaseback transactions, make dividends, distributions or stock repurchases, prepay junior indebtedness, enter into transactions with affiliates, enter into restrictive agreements, and amend organizational documents or the terms of junior indebtedness.

The Credit Agreement contains events of default that Zix believes are customary for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events occurs, all obligations under the Credit Agreement will immediately become due and payable. If any other event of default exists under the Credit Agreement, the lenders may accelerate the maturity of the Credit Facilities and exercise other rights and remedies, including foreclosure or other actions against the collateral. If any default exists under the Credit Agreement, or if the Company is unable to make any of the representations and warranties in the Credit Agreement at the applicable time, Zix will be unable to borrow additional funds or have letters of credit issued under the Credit Agreement.

Term Loan

As of June 30, 2020, the Company had $172.8 million in principal outstanding under the Term Loan. The Term Loan was fully drawn on February 20, 2019 in the amount of $175 million and requires quarterly payments of principal of $437.5 thousand beginning on June 30, 2019. In addition to other customary mandatory prepayment requirements, the Term Loan requires annual prepayments based on a percentage of Zix’s excess cash flow, which percentage will reduce if Zix’s total net leverage ratio decreases. Based on the calculation of excess cash flow and total net leverage ratio and for the year ended December 31, 2019, the Company is not required to make prepayment in addition to the quarterly installment.

At June 30, 2020, the Company had an outstanding debt balance of $168.0 million attributable to the Term Loan based on the 5.39% interest rate in effect during the three-month period ended on June 30, 2020. Included in the balance at June 30, 2020 is $4.8 million of unamortized debt issuance costs.  

Future principal payments under the Term Loan as of June 30, 2020, are as follows:

(In thousands)
Year Ending December 31,	Amount
2020	$	875
2021		1,750
2022		1,750
2023		1,750
2024		166,688
Total	$	172,813

Delayed Draw Term Loan Facility

At June 30, 2020, the Company had $9.9 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 starting 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, 2019, the Company is not required to make prepayment in addition to the quarterly installment.

At June 30, 2020, the Company had an outstanding debt balance of $9.9 million attributable to the Delayed Draw Term Loan Facility based on the 4.79% interest rate in effect during the three-months ended on June 30, 2020. Included in the balance at June 30, 2020 is $39 thousand of unamortized debt issuance costs.  

Future principal payments under the Delayed Draw Term Loan Facility as of June 30, 2020 are as follows:

(In thousands)
Year Ending December 31,	Amount
2020	$	50
2021		100
2022		100
2023		100
2024		9,550
Total	$	9,900

Revolving Facility

The Company also has a Revolving Facility with the lenders, pursuant to which the lenders agreed to make a Revolving Facility available to the Company in an aggregate amount of up to $25 million. Proceeds from the Revolving Facility may be used for working capital and general business purposes, including the financing of permitted acquisitions, investments and restricted payments, subject to the conditions contained in the Credit Agreement. Zix is charged a commitment fee ranging from 0.25% to 0.50% per year on the daily amount of the unused portions of the commitments under the Revolving Facility.

As of June 30, 2020, the Company had an outstanding debt balance of $8.0 million attributable to the Revolving Facility. The undrawn balance of $17 million is available to fund working capital and for other general corporate purposes, including the financing of permitted acquisitions, investments and restricted payments, subject to the conditions contained in the Credit Agreement.  As of June 30, 2020, the Company has incurred $21 thousand and $43 thousand of commitment fees, and $98 thousand and $142 thousand of interest expense, for the three- and six-month periods ended on June 30, 2020, respectively.

As of June 30, 2020, 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.

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Preferred Stock

6 Months Ended

Jun. 30, 2020

Equity [Abstract]

Preferred Stock

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 that 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 June 30, 2020, 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 June 30, 2020, the accretion of the Stated Value of Series A Preferred Stock is valued at $10.5 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.

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 of 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.  

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Revenue from Contracts with Customers

6 Months Ended

Jun. 30, 2020

Revenue From Contract With Customer [Abstract]

Revenue from Contracts with Customers

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. Historically, our contracts have typically been one to three year contracts billed annually. We are increasingly moving toward a monthly billing model. This shift has been largely driven by our recent acquisition activity, including AppRiver. We 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

We operate as a single operating segment. In the six months ended June 30, 2020, we recorded revenue for our services in the following core industry verticals: 20% healthcare, 18% financial services, 3% government sector, and 59% as other.

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 and six months ended June 30, 2020, we increased our noncurrent deferred contract asset by $0.9 million and $2.1 million, respectively, resulting from commissions earned by our sales team during the three and six months ended June 30, 2020. We also amortized $0.9 million and $1.8 million of deferred cost, respectively as a selling and marketing expense in the related periods. Our deferred cost

asset is assessed for impairment on a periodic basis. There were no impairment losses recognized on deferred contract cost assets for the three and six months ended June 30, 2020.

Our contract liabilities consist of deferred revenue representing future customer services that have been billed and collected. The $249 thousand decrease to our net deferred revenue in the six months ended June 30, 2020, is related to the timing of orders and payments in the normal course of business and our continued trend toward monthly subscriptions.   

Performance obligations

As of June 30, 2020, 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 $85.0 million. We expect to recognize approximately $41.6 million of revenue related to this backlog during the remainder of 2020, $30.4 million in 2021, and $13.0 million in periods thereafter.

Approximately $27.4 million of our $53.3 million revenue recognized in the three months ended June 30, 2020, was included in our performance obligation balance at the beginning of the period. Approximately $42.3 million of our $105.8 million recognized in the six months ended June 30, 2020, was included in our performance obligation balance at the beginning of the period.

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Earnings (Loss) Per Share and Potential Dilution

6 Months Ended

Jun. 30, 2020

Earnings Per Share [Abstract]

Earnings (Loss) Per Share and Potential Dilution

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 and six months ended June 30, 2020 and 2019, respectively, are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Basic weighted average common shares		54,788,858		53,028,854		53,770,821		52,872,190
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		54,788,858		53,028,854		53,770,821		52,872,190

During each of the three and six months ended June 30, 2020, potential common shares of all securities were excluded from the calculation of diluted loss per share because the awards were anti-dilutive.     

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2020

Commitments And Contingencies Disclosure [Abstract]

Commitments and Contingencies

11. Commitments and Contingencies  

We have not entered into any material, non-cancelable purchase commitments at June 30, 2020.

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.

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Fair Value Measurements

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

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.

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Goodwill

6 Months Ended

Jun. 30, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Goodwill

13. Goodwill

The following is a summary of the changes in the carrying amount of goodwill for the six-month period ended June 30, 2020 and 2019:

	Six Months Ended June 30,
(In thousands)	2020			2019
Opening balance	$	171,209		$	13,783
Additions		—			159,615
Acquisition adjustments		—			—
Effect of currency translation adjustment		(515	)		—
Goodwill	$	170,694		$	173,398

Our 2019 acquisitions of AppRiver and DeliverySlip resulted in the increase to our goodwill in the six months ended June 30, 2019. 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.

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Other Comprehensive Income (Loss)

6 Months Ended

Jun. 30, 2020

Other Comprehensive Income Loss Tax [Abstract]

Other Comprehensive Income (Loss)

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. 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. Related translation adjustments are recorded as a component of the accumulated other comprehensive income (loss).

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 and six months ended June 30, 2020, 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 gain of $294 thousand, net of $229 thousand in income tax expense and loss of $611 thousand, net of $25 thousand in income tax benefit, respectively.

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Income Taxes

6 Months Ended

Jun. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

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 $22.9 million reserve. Any reduction to this $22.9 million valuation allowance is based on an assessment of future utilization following accounting guidance, which relies largely on historical earnings. Using this methodology, and updating the future taxable earnings estimates based on first and second quarter 2020 actual earnings, the Company believes the deferred tax asset allowance as of December 31, 2019, will remain unchanged at December 31, 2020. For this reason, the Company has recognized its first and second quarter 2020 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. An increase or decrease to 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.

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Acquisitions

6 Months Ended

Jun. 30, 2020

Business Combinations [Abstract]

Acquisitions

16. Acquisitions

Acquisition of DeliverySlip

On May 7, 2019, the Company acquired certain assets of Cirius Messaging Inc. (“Seller”) and its wholly owned subsidiary DeliverySlip Inc.(“DeliverySlip”), related to the DeliverySlip product for a total purchase price of $13.8 million, including cash consideration of $11.4 million and a contingent consideration with an estimated fair value of $2.3 million at the acquisition date. The contingent consideration was paid in full  upon the completion of certain agreed upon requirements and a related $0.2 million loss on the contingent consideration was recognized in the year ended December 31, 2019. Included in the cash consideration, a holdback amount of $1.5 million was transferred to an escrow agent for the satisfaction of the Seller’s indemnity and other obligations under the purchase agreement. The acquisition was partially financed with proceeds of $10 million from the Delayed Draw Term Loan Facility.

The purchase of DeliverySlip expanded the Company’s product offering including email encryption, e-signatures and secure file solutions.

The Company incurred $1.2 million in acquisition-related costs with respect to the DeliverySlip acquisition, which were recorded within operating expenses during the twelve months ended December 31, 2019. Prior to the acquisition, approximately 90% of DeliverySlip’s revenue was generated from AppRiver Canada Inc, which became a subsidiary of the Company upon closing of the AppRiver acquisition (as described below). Revenue from additional acquired customers of DeliverySlip for the three and six months ended June 30, 2020 were immaterial.

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill.   The majority of the goodwill balance is expected to be deductible for tax purposes. The intangible asset we acquired from DeliverySlip is technology which we are amortizing over 6 years. The results of operations and the provisional fair values of the acquired assets and liabilities have been included in the accompanying condensed consolidated financial statements since our DeliverySlip acquisition on May 7, 2019.  

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

(In thousands)	Estimated Fair Value
Assets:
Technology	$	4,200
Goodwill		9,603
Total assets		13,803
Liabilities:
Deferred revenue	$	52
Total liabilities		52
Net assets recorded	$	13,751

Acquisition of AppRiver Companies

On February 20, 2019, Zix acquired 100% of the equity interest of AR Topco, LLC and its subsidiaries, including AppRiver LLC (“AppRiver” and collectively, the “AppRiver Companies”), for a total purchase price of $276.4 million, including cash consideration of $271.8 million, net of cash acquired , and subject to a customary working capital adjustment. This acquisition complements our strategy to accelerate our offerings into the cloud at the point of initial cloud application purchase and expand our customer base.

We financed the acquisition with proceeds from (1) cash on hand, (2) the proceeds from the Term Loan,  and (3) a private placement with an investment fund managed by True Wind Capital consisting of (i) 64,914 newly issued shares of Series A Convertible Preferred Stock, $1.00 par value per share, and (ii) 35,086 newly issued shares of Series B Convertible Preferred Stock, $1.00 par value per share in exchange for cash consideration in an aggregate amount of $100 million (which was reduced by $3 million in True Wind Capital’s costs that were reimbursed by the Company).

AppRiver is a channel-first provider of cloud-based cyber security and productivity services, offering web protection, email encryption, secure archiving, and email continuity solutions. AppRiver also provides Microsoft Office 365 and Secure Hosted Exchange services, which serve as an effective lead generation tool for AppRiver’s solutions. The acquisition of AppRiver can accelerate our offerings into the cloud at the point of initial cloud application purchase. Because AppRiver currently services over 60,000 worldwide customers using a network of 4,500 Managed Service Providers, this acquisition can help us expand our customer base.

The Company incurred $10.8 million in acquisition-related costs which included $1.1 million, $9.6 million and $37 thousand recorded within the operating expenses for the twelve months ended December 31, 2018, December 31, 2019 and the six months ended June 30, 2020, respectively. Revenue from AppRiver was $33.6 and $66.6 million for the three and six months ended June 30, 2020, respectively, and due to the continued integration of the combined businesses, it was impracticable to determine earnings attributable to AppRiver.

We accounted for the acquisition as the purchase of a business and recorded the excess purchase price as goodwill. The majority of the goodwill balance is expected to be deductible for tax purposes. The intangible assets we acquired from AppRiver consist of customer relationships, vendor relationships, trademarks/names, and internally developed software, which we are amortizing over 8 years, 3 years, 10 years, and 5-6 years, respectively. The results of operations and the provisional fair values of the acquired assets and liabilities have been included in the accompanying condensed consolidated financial statements since our AppRiver acquisition on February 20, 2019.

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

(In thousands)	Estimated Fair Value
Assets:
Current assets	$	12,200
Property and equipment		3,235
ROU assets		8,778
Customer relationships		91,000
Vendor relationships		1,000
Trademark/Names		4,400
Deferred tax assets		3,453
Internally developed software		41,100
Goodwill		147,518
Total assets		312,684
Liabilities:
Current liabilities	$	13,378
Deferred revenue		12,424
Operating lease liabilities		5,738
Finance lease liabilities		3,440
Total liabilities		34,980
Net assets recorded	$	277,704

Pro Forma Financial Information (Unaudited)

The following unaudited pro forma financial information presents the combined results of operations for the three and six month periods ending June 30, 2020 and 2019, respectively, as though the DeliverySlip and AppRiver acquisitions 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 June 30,						Six Months Ended June 30,
(In thousands, except per share data)	2020			2019			2020			2019
Revenues	$	53,422		$	47,486		$	105,940		$	94,246
Net income		(1,740	)		453			(2,294	)		2,279
Basic income (loss) per share attributed to common shareholders	$	(0.07	)	$	(0.06	)	$	(0.13	)	$	(0.16	)
Diluted income (loss) per share attributed to common shareholders	$	(0.07	)	$	(0.06	)	$	(0.13	)	$	(0.16	)

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Recent Accounting Standards and Pronouncements (Policies)

6 Months Ended

Jun. 30, 2020

Accounting Changes And Error Corrections [Abstract]

Credit Losses

Credit Losses

On January 1, 2020, we adopted Accounting Standard Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments with a net increase of our receivables allowance and a related cumulative adjustment to our retained earnings recorded at the beginning of adoption. Upon adoption, we changed our impairment model to utilize a forward-looking current expected credit losses (CECL) model in place of the incurred loss impairment model for our accounting receivable balance. The cumulative effect adjustment from adoption was immaterial to our condensed consolidated financial statements.

Intangibles – Goodwill and Other

Intangibles – Goodwill and Other

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04) to simplify the subsequent measurement of goodwill. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting standard became effective for us beginning January 1, 2020, and did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Income Taxes

Income Taxes

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

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Stock- Based Awards and Stock-Based Employee Compensation Expense (Tables)

6 Months Ended

Jun. 30, 2020

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Summary of All Stock Option Transactions

The following is a summary of all stock option transactions during the three months ended June 30, 2020:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Yrs)
Outstanding at March 31, 2020		809,510		$	4.02	5.03
Granted at market price		—			—
Cancelled or expired		—			—
Exercised		(67,500	)		3.19
Outstanding at June 30, 2020		742,010		$	4.09		5.01
Options exercisable at June 30, 2020		642,010		$	3.52		4.32

Summary of Restricted Stock Activity

The following is a summary of Restricted Stock activity during the three months ended June 30, 2020:

	Restricted Shares			Weighted Average Fair Value
Non-vested restricted stock at March 31, 2020		2,354,445		$	7.26
Granted at market price		86,015			6.04
Vested		(270,290	)		6.07
Cancelled		(79,425	)		7.22
Non-vested restricted stock at June 30, 2020		2,090,745		$	7.36

Summary of All Restricted Stock Unit Activity

The following is a summary of all RSU activity during the three months ended June 30, 2020:

	Restricted Stock Units			Weighted Average Fair Value
Non-vested restricted stock units at March 31, 2020		238,643		$	8.26
Granted at market price		—			—
Vested		(85,544	)		7.61
Cancelled		—			—
Non-vested restricted stock units at June 30, 2020		153,099		$	8.62

Summary of All Performance RSU Activity

The following is a summary of all Performance RSU activity during the three months ended June 30, 2020:

	Performance RSUs			Weighted Average Fair Value
Non-vested performance RSUs at March 31, 2020		77,197		$	8.28
Granted at market price		—			—
Vested		(32,848	)		7.54
Forfeited		—			—
Non-vested performance RSUs at June 30, 2020		44,349		$	8.84

Summary of All Performance Stock Activity

The following is a summary of all Performance Stock activity during the three months ended June 30, 2020:

	Performance Stock			Weighted Average Fair Value
Non-vested performance stock at March 31, 2020		723,517		$	7.48
Granted at market price		—			—
Vested		(4,999	)		6.11
Forfeited		(26,666	)		6.76
Non-vested performance stock at June 30, 2020		691,852		$	7.52

Summary of Total Stock-based Employee Compensation Expense Resulting from Stock Options, Restricted Stock, RSUs, Performance RSUs, and Performance Stock

For the three- and six-month periods ended June 30, 2020, the total stock-based employee compensation expense resulting from stock options, Restricted Stock, RSUs, Performance RSUs and Performance Stock was recorded to the following line items of the Company’s condensed consolidated statements of income:

(In thousands)	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Cost of revenues	$	836	$	1,008
Research and development		414		751
Selling, general and administrative		2,000		3,482
Stock-based compensation expense	$	3,250	$	5,241

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Supplemental Cash Flow Information (Tables)

6 Months Ended

Jun. 30, 2020

Supplemental Cash Flow Elements [Abstract]

Supplemental Cash Flow Information Relating to Taxes and Non-Cash Activities

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

	Six Months Ended June 30,
(In thousands)	2020		2019
Cash income tax payments	$	116	$	316
Cash paid for interest		4,649		3,922
Non-cash investing and financing activities:
Accrued and deemed dividends on Series A preferred stock		4,447		3,520
Accrued and deemed dividends on Series B preferred stock		—		2,284

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Receivables, Net (Tables)

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Summary of Net Receivables

(In thousands)	June 30, 2020			December 31, 2019
Gross accounts receivables	$	25,660		$	21,193
Allowance for credit losses	$	(391	)	$	—
Allowance for returns and doubtful accounts		—			(265	)
Unpaid portion of deferred revenue		(12,358	)		(10,847	)
Note receivable		458			458
Allowance for note receivable		(458	)		(458	)
Receivables, net	$	12,911		$	10,081

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Leases (Tables)

6 Months Ended

Jun. 30, 2020

Leases [Abstract]

Schedule of Components of Lease Costs

The components of lease costs are as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
(In thousands)	2020		2020
Finance lease costs:
Amortization of right-of-use asset	$	310	$	688
Interest on lease liabilities		24		53
Operating lease costs		942		1,883
Short-term lease costs		773		1,173
Variable lease costs		267		484
Total lease costs	$	2,316	$	4,281

Schedule of Supplemental Cash Flow Information Related to Leases

Supplemental cash flow information related to leases are as follows:

	Six Months Ended June 30,
(In thousands)	2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	963
Operating cash flows from finance leases		54
Financing cash flows from finance leases		746
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		856
Finance leases		—

Schedule of Supplemental Balance Sheet Information Related to Lease

Supplemental balance sheet information related to lease are as follows:

		June 30,
(In thousands)	Balance Sheet Classification	2020
Operating Leases
Operating lease right-of-use assets	Operating lease assets	$	9,428
Total operating lease assets		$	9,428
		June 30,
(In thousands)	Balance Sheet Classification	2020
Finance Leases
Finance lease right-of-use assets		$	3,362
Accumulated depreciation - finance leases			(2,002	)
Finance lease right-of-use assets, net	Property and equipment, net	$	1,360

Schedule of Weighted Average Remaining Lease Term and Weighted Average Discount Rate

Weighted average remaining lease term and weighted average discount rate are as follows:

Weighted Average Remaining Lease Term (Years)
Operating leases	3.97
Finance leases	1.71
Weighted Average Discount Rate
Operating leases	5.79	%
Finance leases	6.14	%

Schedule of Maturities of Lease Liabilities

Maturities of lease liabilities are as follows:

	Payments Due by Period - Year Ending December 31, 2020
(In thousands)	Total			Year 1 (1)		Years 2 & 3		Years 4 & 5		Beyond 5 Years
Operating leases	$	11,828		$	1,767	$	5,563	$	4,331	$	167
Less imputed interest		(1,256	)
Total	$	10,572
Finance leases	$	1,366		$	624	$	736	$	6	$	—
Less imputed interest		(57	)
Total	$	1,309
(1) Year 1 excluding the six months ended June 30, 2020

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Long-term Debt (Tables)

6 Months Ended

Jun. 30, 2020

Term Loan [Member]

Schedule of Future Scheduled Principal Payments

Future principal payments under the Term Loan as of June 30, 2020, are as follows:

(In thousands)
Year Ending December 31,	Amount
2020	$	875
2021		1,750
2022		1,750
2023		1,750
2024		166,688
Total	$	172,813

Senior Secured Delayed Draw Term Loan Facility [Member]

Schedule of Future Scheduled Principal Payments

Future principal payments under the Delayed Draw Term Loan Facility as of June 30, 2020 are as follows:

(In thousands)
Year Ending December 31,	Amount
2020	$	50
2021		100
2022		100
2023		100
2024		9,550
Total	$	9,900

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Earnings (Loss) Per Share and Potential Dilution (Tables)

6 Months Ended

Jun. 30, 2020

Earnings Per Share [Abstract]

Computations of Basic and Diluted Earnings (Loss) Per Share

The computations for basic and diluted earnings (loss) per share for the three and six months ended June 30, 2020 and 2019, respectively, are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Basic weighted average common shares		54,788,858		53,028,854		53,770,821		52,872,190
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		54,788,858		53,028,854		53,770,821		52,872,190

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Goodwill (Tables)

6 Months Ended

Jun. 30, 2020

Goodwill And Intangible Assets Disclosure [Abstract]

Schedule of Changes in Carrying Amount of Goodwill

The following is a summary of the changes in the carrying amount of goodwill for the six-month period ended June 30, 2020 and 2019:

	Six Months Ended June 30,
(In thousands)	2020			2019
Opening balance	$	171,209		$	13,783
Additions		—			159,615
Acquisition adjustments		—			—
Effect of currency translation adjustment		(515	)		—
Goodwill	$	170,694		$	173,398

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Acquisitions (Tables)

6 Months Ended

Jun. 30, 2020

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations for the three and six month periods ending June 30, 2020 and 2019, respectively, as though the DeliverySlip and AppRiver acquisitions 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 June 30,						Six Months Ended June 30,
(In thousands, except per share data)	2020			2019			2020			2019
Revenues	$	53,422		$	47,486		$	105,940		$	94,246
Net income		(1,740	)		453			(2,294	)		2,279
Basic income (loss) per share attributed to common shareholders	$	(0.07	)	$	(0.06	)	$	(0.13	)	$	(0.16	)
Diluted income (loss) per share attributed to common shareholders	$	(0.07	)	$	(0.06	)	$	(0.13	)	$	(0.16	)

Delivery Slip Inc. [Member]

Summary of Estimated Fair Value of Acquired Assets and Liabilities

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

(In thousands)	Estimated Fair Value
Assets:
Technology	$	4,200
Goodwill		9,603
Total assets		13,803
Liabilities:
Deferred revenue	$	52
Total liabilities		52
Net assets recorded	$	13,751

AppRiver Companies [Member]

Summary of Estimated Fair Value of Acquired Assets and Liabilities

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

(In thousands)	Estimated Fair Value
Assets:
Current assets	$	12,200
Property and equipment		3,235
ROU assets		8,778
Customer relationships		91,000
Vendor relationships		1,000
Trademark/Names		4,400
Deferred tax assets		3,453
Internally developed software		41,100
Goodwill		147,518
Total assets		312,684
Liabilities:
Current liabilities	$	13,378
Deferred revenue		12,424
Operating lease liabilities		5,738
Finance lease liabilities		3,440
Total liabilities		34,980
Net assets recorded	$	277,704

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Stock- Based Awards and Stock-Based Employee Compensation Expense - Additional Information (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Mar. 31, 2020	Jun. 30, 2019
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding	742,010	809,510
Shares of common stock available for grant	2,388,054
Options, options exercisable	642,010
Deferred tax assets, tax deferred expense compensation and benefits employee compensation	$ 948		$ 635
Total unrecognized stock-based compensation related to non-vested stock-based compensation awards	$ 18,500
The number of years over which expense is expected to be recognized	2 years 2 months 4 days
Restricted Stock [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Non-vested stock	2,090,745	2,354,445
Restricted Stock Units (RSUs) [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Non-vested stock	153,099	238,643
Non-vested Performance Stock Awards [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Non-vested stock	691,852	723,517
Non-vested Performance RSUs [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Non-vested stock	44,349	77,197
Employee and Director Stock Options [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Options outstanding	742,010
Options, options exercisable	635,760
Aggregate intrinsic value of options outstanding	$ 2,200
Aggregate intrinsic value of options exercisable	$ 2,200

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Stock- Based Awards and Stock-Based Employee Compensation Expense - Summary of All Stock Option Transactions (Detail) - $ / shares	3 Months Ended
	Jun. 30, 2020	Mar. 31, 2020
Share Based Compensation Arrangement By Share Based Payment Award Options Outstanding Roll Forward
Options, Outstanding, Beginning Balance	809,510
Options, Granted at market price	0
Options, Cancelled or expired	0
Options, Exercised	(67,500)
Options, Outstanding Ending Balance	742,010	809,510
Options, Options Exercisable	642,010
Weighted Average Exercise Price, Outstanding, Beginning Balance	$ 4.02
Weighted Average Exercise Price, Granted at market price	0
Weighted Average Exercise Price, Cancelled or expired	0
Weighted Average Exercise Price, Exercised	3.19
Weighted Average Exercise Price, Outstanding, Ending Balance	4.09	$ 4.02
Weighted Average Exercise Price, Options Exercisable	$ 3.52
Weighted Average Remaining Contractual Term, Outstanding	5 years 3 days	5 years 10 days
Weighted Average Remaining Contractual Term, Options exercisable	4 years 3 months 25 days

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Stock- Based Awards and Stock-Based Employee Compensation Expense - Summary of Restricted Stock Activity (Detail) - Restricted Stock [Member]	3 Months Ended
	Jun. 30, 2020 $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares, Non-vested, Beginning balance | shares	2,354,445
Shares, Granted at market price | shares	86,015
Shares, Vested | shares	(270,290)
Shares, Cancelled | shares	(79,425)
Shares, Non-vested, Ending balance | shares	2,090,745
Weighted Average Fair Value, Non-vested, Beginning balance | $ / shares	$ 7.26
Weighted Average Fair Value, Granted at market price | $ / shares	6.04
Weighted Average Fair Value, Vested | $ / shares	6.07
Weighted Average Fair Value, Cancelled | $ / shares	7.22
Weighted Average Fair Value, Non-vested, Ending balance | $ / shares	$ 7.36

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Stock- Based Awards and Stock-Based Employee Compensation Expense - Summary of All Restricted Stock Unit Activity (Detail) - Restricted Stock Units (RSUs) [Member]	3 Months Ended
	Jun. 30, 2020 $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares, Non-vested, Beginning balance | shares	238,643
Shares, Granted at market price | shares	0
Shares, Vested | shares	(85,544)
Shares, Cancelled | shares	0
Shares, Non-vested, Ending balance | shares	153,099
Weighted Average Fair Value, Non-vested, Beginning balance | $ / shares	$ 8.26
Weighted Average Fair Value, Granted at market price | $ / shares	0
Weighted Average Fair Value, Vested | $ / shares	7.61
Weighted Average Fair Value, Cancelled | $ / shares	0
Weighted Average Fair Value, Non-vested, Ending balance | $ / shares	$ 8.62

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Stock- Based Awards and Stock-Based Employee Compensation Expense - Summary of All Performance RSU Activity (Detail) - Non-vested Performance RSUs [Member]	3 Months Ended
	Jun. 30, 2020 $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares, Non-vested, Beginning balance | shares	77,197
Shares, Granted at market price | shares	0
Shares, Vested | shares	(32,848)
Shares, Cancelled | shares	0
Shares, Non-vested, Ending balance | shares	44,349
Weighted Average Fair Value, Non-vested, Beginning balance | $ / shares	$ 8.28
Weighted Average Fair Value, Granted at market price | $ / shares	0
Weighted Average Fair Value, Vested | $ / shares	7.54
Weighted Average Fair Value, Cancelled | $ / shares	0
Weighted Average Fair Value, Non-vested, Ending balance | $ / shares	$ 8.84

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Stock- Based Awards and Stock-Based Employee Compensation Expense - Summary of All Performance Stock Activity (Details) - Performance Stock [Member]	3 Months Ended
	Jun. 30, 2020 $ / shares shares
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Shares, Non-vested, Beginning balance | shares	723,517
Shares, Granted at market price | shares	0
Shares, Vested | shares	(4,999)
Shares, Cancelled | shares	(26,666)
Shares, Non-vested, Ending balance | shares	691,852
Weighted Average Fair Value, Non-vested, Beginning balance | $ / shares	$ 7.48
Weighted Average Fair Value, Granted at market price | $ / shares	0
Weighted Average Fair Value, Vested | $ / shares	6.11
Weighted Average Fair Value, Cancelled | $ / shares	6.76
Weighted Average Fair Value, Non-vested, Ending balance | $ / shares	$ 7.52

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Stock- Based Awards and Stock-Based Employee Compensation Expense - Summary of Total Stock-based Employee Compensation Expense Resulting from Stock Options, Restricted Stock, RSUs, Performance RSUs, and Performance Stock (Detail) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2020
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation expense	$ 3,250	$ 5,241
Cost of Revenues [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation expense	836	1,008
Research and Development [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation expense	414	751
Selling, General and Administrative [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Stock-based compensation expense	$ 2,000	$ 3,482

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Supplemental Cash Flow Information - Supplemental Cash Flow Information Relating to Taxes and Non-Cash Activities (Detail) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Supplemental Cash Flow [Line Items]
Cash income tax payments			$ 116	$ 316
Cash paid for interest			4,649	3,922
Non-cash investing and financing activities:
Accrued and deemed dividends on preferred stock	$ 2,218	$ 3,371	4,447	5,804
Series A Convertible Preferred Stock [Member]
Non-cash investing and financing activities:
Accrued and deemed dividends on preferred stock			$ 4,447	3,520
Series B Convertible Preferred Stock [Member]
Non-cash investing and financing activities:
Accrued and deemed dividends on preferred stock				$ 2,284

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Receivables, Net - Summary of Net Receivables (Detail) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Accounts Notes And Loans Receivable Net Current [Abstract]
Gross accounts receivables	$ 25,660	$ 21,193
Allowance for credit losses	(391)
Allowance for returns and doubtful accounts		(265)
Unpaid portion of deferred revenue	(12,358)	(10,847)
Note receivable	458	458
Allowance for note receivable	(458)	(458)
Receivables, net	$ 12,911	$ 10,081

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Receivables, Net - Additional Information (Detail) $ in Thousands	6 Months Ended
	Jun. 30, 2020 USD ($)
Receivables [Abstract]
Note receivable on a product line	$ 540
Date of note receivable, reserved	Jun. 30, 2020

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Leases - Additional Information (Detail) $ in Thousands	6 Months Ended
	Jun. 30, 2020 USD ($)
Lessee Lease Description [Line Items]
Lessee, operating lease, variable lease payment, terms and conditions	Variable lease costs consist primarily of variable common area maintenance, taxes, insurance, parking and utilities.
Lessee, operating lease, existence of option to extend	true
Operating lease liability	$ 109
Lessee, operating lease, lease not yet commenced, term of contract	3 years
Minimum [Member]
Lessee Lease Description [Line Items]
Lessee, operating lease, term of contract	1 year
Lessee, majority operating lease, term of contract	1 year
Maximum [Member]
Lessee Lease Description [Line Items]
Lessee, operating lease, term of contract	12 years
Lessee, majority operating lease, term of contract	7 years

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Leases - Schedule of Components of Lease Costs (Detail) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2020
Finance lease costs:
Amortization of right-of-use asset	$ 310	$ 688
Interest on lease liabilities	24	53
Operating lease costs	942	1,883
Short-term lease costs	773	1,173
Variable lease costs	267	484
Total lease costs	$ 2,316	$ 4,281

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Leases - Schedule of Supplemental Cash Flow Information Related to Leases (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$ 963
Operating cash flows from finance leases	54
Financing cash flows from finance leases	746	$ 770
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$ 856

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Leases - Schedule of Supplemental Balance Sheet Information Related to Lease (Detail) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Assets And Liabilities Lessee [Abstract]
Operating lease right-of-use assets	$ 9,428	$ 10,128
Operating Lease, Right-of-Use Asset, Statement of Financial Position [Extensible List]	zixi:OperatingLeaseAssetMember
Operating lease assets	$ 9,428	$ 10,128
Finance lease right-of-use assets	3,362
Accumulated depreciation - finance leases	(2,002)
Finance lease right-of-use assets, net	$ 1,360
Finance Lease, Right-of-Use Asset, Statement of Financial Position [Extensible List]	us-gaap:PropertyPlantAndEquipmentMember

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Leases - Schedule of Weighted Average Remaining Lease Term and Weighted Average Discount Rate (Detail)	Jun. 30, 2020
Lease Cost [Abstract]
Operating leases, weighted average remaining lease term (years)	3 years 11 months 19 days
Finance leases, weighted average remaining lease term (years)	1 year 8 months 15 days
Operating leases, weighted average discount rate	5.79%
Finance leases, weighted average discount rate	6.14%

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Leases - Schedule of Maturities of Lease Liabilities (Detail) $ in Thousands	Jun. 30, 2020 USD ($)
Operating Lease Liabilities Payments Due [Abstract]
Operating leases	$ 11,828
Less imputed interest	(1,256)
Total	10,572
Finance leases	1,366
Less imputed interest	(57)
Total	1,309
Operating lease payments due, Year 1	1,767
Operating lease payments due, Years 2 & 3	5,563
Operating lease payments due, Years 4 & 5	4,331
Operating lease payments due, beyond 5 years	167
Finance lease payments due, Year 1	624
Finance lease payments due, Years 2 & 3	736
Finance lease payments due, Years 4 & 5	$ 6

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Long-term Debt - Additional Information (Detail)			3 Months Ended	4 Months Ended	6 Months Ended
	May 02, 2019 USD ($)	Feb. 20, 2019 USD ($)	Jun. 30, 2020 USD ($)	Jun. 30, 2019	Jun. 30, 2020 USD ($)
Debt Instrument [Line Items]
Outstanding debt balance			$ 168,000,000.0		$ 168,000,000.0
Interest rate				5.39%
Unamortized debt issuance costs			4,800,000		4,800,000
interest expense			98,000		142,000
Revolving Facility [Member]
Debt Instrument [Line Items]
Outstanding debt balance			8,000,000.0		$ 8,000,000.0
Senior Secured Delayed Draw Term Loan Facility [Member]
Debt Instrument [Line Items]
Delayed draw term loan facility fully drawn date					May 02, 2019
Principal outstanding			9,900,000		$ 9,900,000
Lines of credit, drawn amount	$ 10,000,000
Senior Secured Delayed Draw Term Loan Facility [Member] | 6.04% Interest Rate Effect From May 2, 2019 Through June 30, 2019 [Member]
Debt Instrument [Line Items]
Outstanding debt balance			9,900,000		$ 9,900,000
Interest rate					4.79%
Unamortized debt issuance costs			39,000		$ 39,000
Term Loan [Member]
Debt Instrument [Line Items]
Principal outstanding			172,813,000		172,813,000
Lines of credit, drawn amount		$ 175,000,000
Debt instrument quarterly payment, principal amount					437,500
Credit Agreement [Member]
Debt Instrument [Line Items]
Credit facility maturity date		Feb. 20, 2024
Credit Agreement [Member] | Revolving Facility [Member]
Debt Instrument [Line Items]
Outstanding debt balance			8,000,000.0		8,000,000.0
Undrawn balance					17,000,000
Commitment fees			21,000		$ 43,000
Credit Agreement [Member] | Maximum [Member] | December 31, 2019 through June 30, 2020 [Member]
Debt Instrument [Line Items]
Maximum total net leverage ratio		5.00
Credit Agreement [Member] | Maximum [Member] | September 30, 2020 through March 31, 2021 [Member]
Debt Instrument [Line Items]
Maximum total net leverage ratio		4.75
Credit Agreement [Member] | Maximum [Member] | June 30, 2021 through December 31, 2021 [Member]
Debt Instrument [Line Items]
Maximum total net leverage ratio		4.50
Credit Agreement [Member] | Maximum [Member] | March 31, 2022 and Each Fiscal Quarter Thereafter [Member]
Debt Instrument [Line Items]
Maximum total net leverage ratio		4.25
Credit Agreement [Member] | Maximum [Member] | LIBO Rate [Member]
Debt Instrument [Line Items]
Debt instrument bear interest rate		3.50%
Credit Agreement [Member] | Maximum [Member] | Alternate Base Rate [Member]
Debt Instrument [Line Items]
Debt instrument bear interest rate		2.50%
Credit Agreement [Member] | Maximum [Member] | Revolving Facility [Member]
Debt Instrument [Line Items]
Percentage of commitment fee unused portions					0.50%
Credit Agreement [Member] | Minimum [Member] | LIBO Rate [Member]
Debt Instrument [Line Items]
Debt instrument bear interest rate		2.50%
Credit Agreement [Member] | Minimum [Member] | Alternate Base Rate [Member]
Debt Instrument [Line Items]
Debt instrument bear interest rate		1.50%
Credit Agreement [Member] | Minimum [Member] | Revolving Facility [Member]
Debt Instrument [Line Items]
Percentage of commitment fee unused portions					0.25%
Credit Agreement [Member] | Senior Secured Delayed Draw Term Loan Facility [Member]
Debt Instrument [Line Items]
Debt instrument quarterly payment, principal amount					$ 25,000
Amortization payments percentage of original aggregate principal amount					1.00%
Credit Agreement [Member] | Syndicate of Lenders and SunTrust Bank [Member] | Senior Secured Revolving Credit Facility [Member] | Maximum [Member]
Debt Instrument [Line Items]
Aggregate principal amount			$ 25,000,000		$ 25,000,000
AppRiver Companies [Member] | Credit Agreement [Member] | Syndicate of Lenders and SunTrust Bank [Member] | Senior Secured Term Loan Facility [Member]
Debt Instrument [Line Items]
Aggregate principal amount		$ 175,000,000
AppRiver Companies [Member] | Credit Agreement [Member] | Syndicate of Lenders and SunTrust Bank [Member] | Senior Secured Delayed Draw Term Loan Facility [Member]
Debt Instrument [Line Items]
Aggregate principal amount		10,000,000
AppRiver Companies [Member] | Credit Agreement [Member] | Syndicate of Lenders and SunTrust Bank [Member] | Senior Secured Revolving Credit Facility [Member]
Debt Instrument [Line Items]
Aggregate principal amount		25,000,000
AppRiver Companies [Member] | Credit Agreement [Member] | Syndicate of Lenders and SunTrust Bank [Member] | Senior Secured Revolving Credit Facility [Member] | Maximum [Member]
Debt Instrument [Line Items]
Aggregate principal amount		$ 5,000,000
Delivery Slip Acquisition [Member] | Credit Agreement [Member] | Senior Secured Delayed Draw Term Loan Facility [Member]
Debt Instrument [Line Items]
Delayed draw term loan facility fully drawn date		May 02, 2019

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Long-term Debt - Schedule of Future Scheduled Principal Payments Under Term Loan (Detail) $ in Thousands	Jun. 30, 2020 USD ($)
Term Loan [Member]
Debt Instrument [Line Items]
2020	$ 875
2021	1,750
2022	1,750
2023	1,750
2024	166,688
Total	172,813
Senior Secured Delayed Draw Term Loan Facility [Member]
Debt Instrument [Line Items]
2020	50
2021	100
2022	100
2023	100
2024	9,550
Total	$ 9,900

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Preferred Stock - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended	6 Months Ended
	Feb. 20, 2019	Mar. 31, 2019	Jun. 30, 2020	Dec. 31, 2019	Jun. 06, 2019
Temporary Equity [Line Items]
Preferred stock, shares outstanding			0	0
Beneficial conversion feature, valued			$ 2,500
Series A Convertible Preferred Stock [Member]
Temporary Equity [Line Items]
Convertible Preferred stock, par value			$ 1	$ 1
Convertible Preferred stock, shares issued	64,914		100,206	100,206
Issuance of preferred stock in connection with private placement	$ 62,700
Preferred stock, net of issuance costs	$ 2,300	$ 2,253
Preferred stock, number of shares converted					35,292
Series B Convertible Preferred Stock [Member]
Temporary Equity [Line Items]
Convertible Preferred stock, shares issued	35,086
Issuance of preferred stock in connection with private placement	$ 33,900
Preferred stock, net of issuance costs	1,200	$ 1,204
Preferred stock, shares outstanding			0
Series A Preferred Stock [Member]
Temporary Equity [Line Items]
Preferred stock accretion percentage			8.00%
Accretion of stated value of preferred stock			$ 10,500
Preferred stock conversion description			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 of 166.11 as of the applicable conversion date divided by (c) 1,000 plus (ii) cash in lieu of fractional shares.
True Wind Capital [Member]
Temporary Equity [Line Items]
Aggregate purchase price of preferred stock issued in private placement	$ 100,000
Convertible Preferred stock, par value	$ 1,000

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Revenue from Contracts with Customers - Additional Information (Detail)	3 Months Ended		6 Months Ended
	Jun. 30, 2020 USD ($)	Jun. 30, 2019 USD ($)	Jun. 30, 2020 USD ($) Segment	Jun. 30, 2019 USD ($)
Disaggregation Of Revenue [Line Items]
Number of operating segment | Segment			1
Increased noncurrent deferred contract asset	$ 900,000		$ 2,100,000
Impairment losses recognized on deferred contract cost assets	0		0
Amortization of deferred cost	900,000		1,800,000
Revenue remaining service performance obligations	85,000,000.0		85,000,000.0
Revenue recognized performance obligation	27,400,000		42,300,000
Revenue recognized	$ 53,337,000	$ 45,916,000	105,771,000	$ 75,215,000
AppRiver Companies [Member]
Disaggregation Of Revenue [Line Items]
Increase to net deferred revenue			$ 249,000
Healthcare [Member]
Disaggregation Of Revenue [Line Items]
Revenue in precentage			20.00%
Financial Services [Member]
Disaggregation Of Revenue [Line Items]
Revenue in precentage			18.00%
Government Sector [Member]
Disaggregation Of Revenue [Line Items]
Revenue in precentage			3.00%
Other [Member]
Disaggregation Of Revenue [Line Items]
Revenue in precentage			59.00%
Minimum [Member]
Disaggregation Of Revenue [Line Items]
Subscription services contracts period			1 year
Maximum [Member]
Disaggregation Of Revenue [Line Items]
Subscription services contracts period			3 years

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Revenue from Contracts with Customers - Additional Information (Detail 1) $ in Millions	Jun. 30, 2020 USD ($)
Disaggregation Of Revenue [Line Items]
Revenue remaining service performance obligations	$ 85.0
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2020-07-01
Disaggregation Of Revenue [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period	6 months
Revenue remaining service performance obligations	$ 41.6
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2021-01-01
Disaggregation Of Revenue [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period	1 year
Revenue remaining service performance obligations	$ 30.4
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date: 2022-01-01
Disaggregation Of Revenue [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period	0 years
Revenue remaining service performance obligations	$ 13.0

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Earnings (Loss) Per Share and Potential Dilution - Computations of Basic and Diluted Earnings (Loss) Per Share (Detail) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Weighted Average Number of Shares [Line Items]
Basic weighted average common shares	54,788,858	53,028,854	53,770,821	52,872,190
Dilutive weighted average common shares	54,788,858	53,028,854	53,770,821	52,872,190

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Goodwill - Schedule of Changes in Carrying Amount of Goodwill (Detail) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Goodwill Roll Forward
Opening balance	$ 171,209	$ 13,783
Additions		159,615
Effect of currency translation adjustment	(515)
Goodwill	$ 170,694	$ 173,398

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Goodwill - Additional Information (Detail) - USD ($)	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Goodwill And Intangible Assets Disclosure [Abstract]
Goodwill impairment	$ 0	$ 0

XML

Other Comprehensive Income (Loss) - Additional Information (Detail) - USD ($) $ in Thousands	3 Months Ended				6 Months Ended
	Jun. 30, 2020	Mar. 31, 2020	Jun. 30, 2019	Mar. 31, 2019	Jun. 30, 2020	Jun. 30, 2019
Accumulated Other Comprehensive Income Loss [Line Items]
Foreign currency translation loss, net of tax	$ (294)	$ 905	$ 56	$ 32	$ 611	$ 88
Canada [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Foreign currency translation loss, net of tax	294				611
Foreign currency translation loss, tax amount	$ 229				$ 25

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Income Taxes - Additional Information (Detail) $ in Millions	Jun. 30, 2020 USD ($)
Income Tax Disclosure [Abstract]
Operating loss carryforwards	$ 22.9

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Acquisitions - Additional Information (Detail)				3 Months Ended	6 Months Ended		12 Months Ended
	May 07, 2019 USD ($)	May 06, 2019	Feb. 20, 2019 USD ($) Customer ServiceProvider $ / shares shares	Jun. 30, 2020 USD ($) $ / shares	Jun. 30, 2020 USD ($) $ / shares	Jun. 30, 2019 USD ($)	Dec. 31, 2019 USD ($) $ / shares	Dec. 31, 2018 USD ($)
Business Acquisition [Line Items]
Cash consideration						$ 283,245,000
Series A Convertible Preferred Stock [Member]
Business Acquisition [Line Items]
Preferred stock, par value | $ / shares				$ 1	$ 1		$ 1
True Wind Capital [Member]
Business Acquisition [Line Items]
Preferred stock, par value | $ / shares			$ 1,000
Investment agreement aggregate cash consideration			$ 100,000,000
Delivery Slip Inc. [Member] | AppRiver Companies [Member]
Business Acquisition [Line Items]
Revenue generated from AppRiver Canada Inc		90.00%
Delivery Slip Inc. [Member]
Business Acquisition [Line Items]
Cash consideration	$ 11,400,000
Total purchase price	13,800,000
Contingent consideration liability	2,300,000
Loss on business combination contingent consideration							$ 200,000
Cash consideration paid through escrow deposit	1,500,000
Business combination, acquisition related costs							1,200
Intangible assets, estimated useful live					6 years
Delivery Slip Inc. [Member] | Senior Secured Delayed Draw Term Loan Facility [Member]
Business Acquisition [Line Items]
Aggregate principal amount	$ 10,000,000
AppRiver Companies [Member]
Business Acquisition [Line Items]
Total purchase price			$ 276,400,000
Business combination, acquisition related costs					$ 10,800,000
Percentage of equity interest acquired			100.00%
Cash consideration			$ 271,800,000
Number of customers | Customer			60,000
Number of managed service providers | ServiceProvider			4,500
Business combination, revenue				$ 33,600,000	66,600,000
AppRiver Companies [Member] | Customer Relationships [Member]
Business Acquisition [Line Items]
Intangible assets, estimated useful live			8 years
AppRiver Companies [Member] | Vendor Relationships [Member]
Business Acquisition [Line Items]
Intangible assets, estimated useful live			3 years
AppRiver Companies [Member] | Trademark/names [Member]
Business Acquisition [Line Items]
Intangible assets, estimated useful live			10 years
AppRiver Companies [Member] | Internally Developed Software [Member] | Minimum [Member]
Business Acquisition [Line Items]
Intangible assets, estimated useful live			5 years
AppRiver Companies [Member] | Internally Developed Software [Member] | Maximum [Member]
Business Acquisition [Line Items]
Intangible assets, estimated useful live			6 years
AppRiver Companies [Member] | Operating Expenses [Member]
Business Acquisition [Line Items]
Business combination, acquisition related costs					$ 37,000,000		$ 9,600,000	$ 1,100,000
AppRiver Companies [Member] | True Wind Capital [Member] | Series A Convertible Preferred Stock [Member] | Private Placement [Member]
Business Acquisition [Line Items]
Preferred stock, shares, new issue | shares			64,914
Preferred stock, par value | $ / shares			$ 1.00
AppRiver Companies [Member] | True Wind Capital [Member] | Series B Convertible Preferred Stock [Member] | Private Placement [Member]
Business Acquisition [Line Items]
Preferred stock, shares, new issue | shares			35,086
Preferred stock, par value | $ / shares			$ 1.00
AppRiver Companies [Member] | True Wind Capital [Member] | Series A and B Convertible Preferred Stock [Member] | Private Placement [Member]
Business Acquisition [Line Items]
Investment agreement aggregate cash consideration			$ 100,000,000
Reduction in costs, that were reimbursed			$ 3,000,000

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Acquisitions - Summary of Estimated Fair Value of Acquired Assets and Liabilities (Detail) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019	Jun. 30, 2019	May 07, 2019	Feb. 20, 2019	Dec. 31, 2018
Assets:
Goodwill	$ 170,694	$ 171,209	$ 173,398			$ 13,783
Delivery Slip Acquisition [Member]
Assets:
Goodwill				$ 9,603
Total assets				13,803
Liabilities:
Deferred revenue				52
Total liabilities				52
Net assets recorded				13,751
Delivery Slip Acquisition [Member] | Technology [Member]
Assets:
Intangible assets				$ 4,200
AppRiver Companies [Member]
Assets:
Current assets					$ 12,200
Property and equipment					3,235
ROU assets					8,778
Goodwill					147,518
Total assets					312,684
Deferred tax assets					3,453
Liabilities:
Current liabilities					13,378
Deferred revenue					12,424
Operating lease liabilities					5,738
Total liabilities					34,980
Finance lease liabilities					3,440
Net assets recorded					277,704
AppRiver Companies [Member] | Trademark/names [Member]
Assets:
Intangible assets					4,400
AppRiver Companies [Member] | Customer Relationships [Member]
Assets:
Intangible assets					91,000
AppRiver Companies [Member] | Vendor Relationships [Member]
Assets:
Intangible assets					1,000
AppRiver Companies [Member] | Internally Developed Software [Member]
Assets:
Intangible assets					$ 41,100

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Acquisitions - Unaudited Pro Forma Financial Information (Detail) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Business Acquisition Pro Forma Information [Abstract]
Revenues	$ 53,422	$ 47,486	$ 105,940	$ 94,246
Net income	$ (1,740)	$ 453	$ (2,294)	$ 2,279
Basic income (loss) per share attributed to common shareholders	$ (0.07)	$ (0.06)	$ (0.13)	$ (0.16)
Diluted income (loss) per share attributed to common shareholders	$ (0.07)	$ (0.06)	$ (0.13)	$ (0.16)