GAAP/Non-GAAP

Reconciliation and Other

Management Metrics

2nd Quarter 2020

Use of Non-GAAP Financial Information

Use of Non-GAAP Financial Information

The Company occasionally utilizes financial measures and terms not calculated in accordance with generally accepted accounting principles in the United States ("GAAP") in order to provide investors with an alternative method for assessing our operating results in a manner that enables investors to more thoroughly evaluate our current performance as compared to past performance. We also believe these Non-GAAP measures provide investors with a more informed baseline for modeling the Company's future financial performance. Management uses these Non-GAAP financial measures to make operational and investment decisions, to evaluate the Company's performance, to forecast and to determine compensation. Further, management utilizes these performance measures for purposes of comparison with its business plan and individual operating budgets and allocation of resources. We believe that our investors should have access to, and that we are obligated to provide, the same set of tools that we use in analyzing our results. These Non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We have provided definitions below for certain Non-GAAP financial measures, together with an explanation of why management uses these measures and why management believes that these Non- GAAP financial measures are useful to investors. In addition, in our earnings release we have provided tables to reconcile the Non- GAAP financial measures utilized to GAAP financial measures.

Adjusted Non-GAAP Measures

Our Non-GAAP measures adjust GAAP Cost of revenue, Gross profit, Research and development expense, Selling and marketing expense, General and administrative expense, Operating income, Net income, Net income per share - diluted, and EBITDA for non- cash stock-based compensation expense, strategic consulting, acquisition, integration and litigation costs, intangible amortization costs, executive separation payments, and non-cash tax expense to derive Non-GAAP adjusted Cost of revenue, adjusted Gross profit, adjusted Research and development expense, adjusted Selling and marketing expense, adjusted General and administrative expense, adjusted Operating income, adjusted Net income, adjusted Net income excluding deferred tax (benefit) expense, adjusted Net income per share - diluted, adjusted Net income excluding deferred tax (benefit) expense diluted, and adjusted EBITDA. We provide a reconciliation of these adjusted Non-GAAP measures to GAAP Gross profit, Operating income, Net income, adjusted Net income excluding deferred tax (benefit) expense, Net income per share - diluted, adjusted Net income excluding deferred tax (benefit) expense diluted and EBITDA.

Our forward-looking adjusted Non-GAAP earnings per share information consistently excludes non-cashstock-based compensation

expense. Additionally, the adjusted Non-GAAP earnings per share will consistently exclude litigation expenses, non-cash tax

expense and non-recurring items that impact our ongoing business. See items (A) through (E) below for further information on the

current quarter's reconciling items.

2

Reconciliation of GAAP to Non-GAAP Financial Measures

2nd Quarter 2020 (Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Revenue:

GAAP revenue

$

53,337,000

$

45,916,000

$

105,771,000

$

75,215,000

Cost of revenue

GAAP cost of revenue

$

28,258,000

$

20,304,000

$

54,337,000

$

31,443,000

Stock-based compensation charges (1)

(A)

(836,000)

(163,000)

(1,008,000)

(267,000)

Strategic consulting and litigation costs (2)

(B)

(56,000)

(243,000)

(115,000)

(272,000)

Intangible Amortization (3)

(C)

(2,339,000)

(1,893,000)

(4,946,000)

(2,528,000)

Corporate separation payment (4)

(D)

(867,000)

(3,000)

(867,000)

(52,000)

Non-GAAP adjusted cost of revenue

$

24,160,000

$

18,002,000

$

47,401,000

$

28,324,000

Gross profit:

GAAP gross profit

$

25,079,000

$

25,612,000

$

51,434,000

$

43,772,000

Stock-based compensation charges (1)

(A)

836,000

163,000

1,008,000

267,000

Strategic consulting and litigation costs (2)

(B)

56,000

243,000

115,000

272,000

Intangible Amortization (3)

(C)

2,339,000

1,893,000

4,946,000

2,528,000

Corporate separation payment (4)

(D)

867,000

3,000

867,000

52,000

Non-GAAP adjusted gross profit

$

29,177,000

$

27,914,000

$

58,370,000

$

46,891,000

Research and development expense

GAAP research and development expense

$

5,820,000

$

5,311,000

$

11,206,000

$

9,458,000

Stock-based compensation charges (1)

(A)

(414,000)

(296,000)

(752,000)

(470,000)

Strategic consulting and litigation costs (2)

(B)

(26,000)

(164,000)

(132,000)

(335,000)

Intangible Amortization (3)

(C)

(76,000)

(76,000)

(152,000)

(152,000)

Non-GAAP adjusted research and development expense

$

5,176,000

$

4,800,000

$

10,042,000

$

8,265,000

Selling and marketing expense

GAAP selling and marketing expense

$

14,541,000

$

14,077,000

$

28,882,000

$

24,011,000

Stock-based compensation charges (1)

(A)

(767,000)

(686,000)

(1,311,000)

(1,118,000)

Strategic consulting and litigation costs (2)

(B)

(13,000)

(341,000)

(52,000)

(742,000)

Intangible Amortization (3)

(C)

(3,108,000)

(3,110,000)

(6,227,000)

(4,251,000)

Non-GAAP adjusted selling and marketing expense

$

10,214,000

$

9,779,000

$

20,853,000

$

17,261,000

General and administrative expense

GAAP general and administrative expense

$

4,675,000

$

7,795,000

$

10,363,000

$

18,125,000

Stock-based compensation charges (1)

(A)

(1,233,000)

(819,000)

(2,170,000)

(1,338,000)

Strategic consulting and litigation costs (2)

(B)

(26,000)

(2,052,000)

(202,000)

(8,469,000)

Corporate separation payment (4)

(D)

(109,000)

(449,000)

(109,000)

(689,000)

Non-GAAP adjusted general and administrative expense

$

3,307,000

$

4,475,000

$

7,882,000

$

7,629,000

Note - referenced footnotes (1) - (4) can be found on the following page and (A) - (D) on page 4

3

Reconciliation of GAAP to Non-GAAP Financial Measures

2nd Quarter 2020 (Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Operating income:

GAAP operating income

$

43,000

$

(1,571,000)

$

983,000

$

(7,822,000)

Stock-based compensation charges (1)

(A)

3,250,000

1,964,000

5,241,000

3,193,000

Strategic consulting and litigation costs (2)

(B)

121,000

2,800,000

501,000

9,818,000

Intangible Amortization (3)

(C)

5,523,000

5,079,000

11,325,000

6,931,000

Corporate separation payment (4)

(D)

1,543,000

588,000

1,543,000

1,616,000

Non-GAAP adjusted operating income

$

10,480,000

$

8,860,000

$

19,593,000

$

13,736,000

Adjusted Operating Margin

19.6%

19.3%

18.5%

18.3%

Net income:

GAAP net (loss) income

$

(1,902,000)

$

(3,706,000)

$

(2,754,000)

$

(9,971,000)

Stock-based compensation charges (1)

(A)

3,250,000

1,964,000

5,241,000

3,193,000

Strategic consulting and litigation costs (2)

(B)

121,000

2,800,000

501,000

9,818,000

Intangible Amortization (3)

(C)

5,523,000

5,079,000

11,325,000

6,931,000

Corporate separation payment (4)

(D)

1,543,000

588,000

1,543,000

1,616,000

Non-GAAP adjusted net income

$

8,535,000

$

6,725,000

$

15,856,000

$

11,587,000

Deferred tax (benefit) expense

(574,000)

(904,000)

(1,207,000)

(2,008,000)

Non-GAAP adjusted net income excluding deferred tax (benefit) expense

$

7,961,000

$

5,821,000

$

14,649,000

$

9,579,000

Deemed and accrued dividends on preferred stock

(2,218,000)

(3,371,000)

(4,447,000)

(5,804,000)

Adjusted Net income attributable to common stockholders

$

5,743,000

$

2,450,000

$

10,202,000

$

3,775,000

Diluted net income per common share:

GAAP net income per share before deemed dividends

$

(0.03)

$

(0.07)

$

(0.05)

$

(0.19)

Adjustments per share

(A-D)

$

0.19

$

0.20

$

0.34

$

0.41

Non-GAAP adjusted net income per share before deemed dividends

$

0.16

$

0.13

$

0.29

$

0.22

Deferred tax (benefit) expense impact to Non-GAAP adjusted net income before deemed d

(E)

$

(0.01)

$

(0.02)

$

(0.02)

$

(0.04)

Non-GAAP adjusted net income before deemed dividends per share excluding deferred tax (ben

$

0.15

$

0.11

$

0.27

$

0.18

Deemed dividends per share impact to Non-GAAP adjusted net income

$

(0.04)

$

(0.06)

$

(0.08)

$

(0.11)

Adjusted Net income per share attributable to common stockholders

$

0.10

$

0.05

$

0.19

$

0.07

Shares used to compute Non-GAAP adjusted net income per share - diluted

54,788,858

53,028,854

53,770,821

52,872,190

Note - referenced footnotes (1) - (4) can be found on the following page and (A) - (E) on page 4

4

Reconciliation of GAAP to Non-GAAP Financial Measures

2nd Quarter 2020 (Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Reconciliation of Net income to EBITDA and Adjusted EBITDA:

(F)

Net income

$

(1,902,000)

$

(3,706,000)

$

(2,754,000)

$

(9,971,000)

Income tax provision

(570,000)

(1,027,000)

(1,440,000)

(2,175,000)

Interest expense

2,508,000

3,171,000

5,155,000

4,425,000

Depreciation

1,285,000

1,551,000

2,597,000

2,236,000

Amortization

6,436,000

5,385,000

12,917,000

7,390,000

EBITDA

7,757,000

5,374,000

16,475,000

1,905,000

Adjustments:

Stock-based compensation charges (1)

(A)

3,250,000

1,964,000

5,241,000

3,193,000

Strategic consulting and litigation costs (2)

(B)

121,000

2,800,000

501,000

9,818,000

Corporate separation payment (4)

(D)

1,543,000

588,000

1,543,000

1,616,000

Adjusted EBITDA

$

12,671,000

$

10,726,000

$

23,760,000

$

16,532,000

Adjusted EBITDA margin

23.8%

23.4%

22.5%

22.0%

(1) Stock-based compensation charges are included as follows:

Cost of revenues

$

836,000

$

163,000

$

1,008,000

$

267,000

Research and development

414,000

296,000

752,000

470,000

Selling and marketing

767,000

686,000

1,311,000

1,118,000

General and administrative

1,233,000

819,000

2,170,000

1,338,000

$

3,250,000

$

1,964,000

$

5,241,000

$

3,193,000

(2) Strategic consulting, acquisition, integration and litigation costs are included as follows:

Cost of revenues

56,000

243,000

115,000

272,000

Research and development

26,000

164,000

132,000

335,000

Selling and marketing

13,000

341,000

52,000

742,000

General and administrative

26,000

2,052,000

202,000

8,469,000

$

121,000

$

2,800,000

$

501,000

$

9,818,000

(3) Intangible Amortization is included as follows:

Cost of revenues

2,339,000

1,893,000

4,946,000

2,528,000

Research and development

76,000

76,000

152,000

152,000

Selling and marketing

3,108,000

3,110,000

6,227,000

4,251,000

$

5,523,000

$

5,079,000

$

11,325,000

$

6,931,000

(4) Corporate separation payment is included as follows:

Cost of revenues

867,000

3,000

867,000

52,000

Research and development

128,000

(25,000)

128,000

236,000

Selling and marketing

439,000

161,000

439,000

639,000

General and administrative

109,000

449,000

109,000

689,000

$

1,543,000

$

588,000

$

1,543,000

$

1,616,000

(5) Net Income tax components:

Current tax (benefit)/expense

4,000

(123,000)

(233,000)

(167,000)

Deferred tax (benefit)/expense

(574,000)

(904,000)

(1,207,000)

(2,008,000)

$

(570,000)

$

(1,027,000)

$

(1,440,000)

$

(2,175,000)

Note - referenced footnotes (1) - (4) can be found on the following page and (A) - (D) on page 4

5

Use of Non-GAAP Financial Information

This presentation includes Non-GAAP measures. Our Non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations of these measures, see items (A) through (F) below.

Items (A) through (F) on the "Reconciliation of GAAP to Non-GAAP Financial Measures" table are listed to the right of certain categories under "Gross profit," "Operating income," "Net income," "Net income excluding deferred tax (benefit) expense," "Net income per share - diluted," "Net income per share excluding deferred tax (benefit) expense- diluted" and "EBITDA" and correspond to the categories explained in further detail below under (A) through (F).

  1. Non-cashstock-based compensation charges relating to stock option grants, restricted stock, restricted stock units, and performance units awarded to employees and accounted for in accordance with Share-Based Payment accounting guidance. See (1) on previous page for breakdown of stock-based compensation. Because of varying valuation methodologies, subjective assumptions and varying award types, the Company believes that the exclusion of stock-based compensation charges provides for more accurate comparisons to our peer companies and for a more accurate comparison of our financial results to previous periods. Additionally, the Company believes it is useful to investors to understand the specific impact of non-cashstock-based compensation charges on our operating results.
  2. Strategic consulting, acquisition, integration and litigation costs. See item (2) on previous page for breakdown of strategic consulting, acquisition, integration and legal costs. The Company's management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.
  3. Intangible amortization costs. See item (3) on previous page. The Company's management excludes amortization expenses associated with the acquisition of intangible assets when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.
  4. Corporate separation payment relating to employment termination benefits agreement. See item (4) on previous page. The Company's management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends and therefore excludes these charges on our adjusted operating results.
  5. Deferred tax expense represents the non-cash tax expense included in the GAAP tax provision, including the current period utilization of deferred tax assets created in previous periods. The remaining provision for income taxes represents expected cash taxes to be paid.
  6. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA adds back stock-based

compensation charges and non-recurring litigation expenses.

6

Historical Data

Revenue (in thousands) (Unaudited)

Three Months Ended

Three Months Ended

Three Months Ended

Three Months Ended

Three Months Ended

06/30/20

03/31/2020

12/31/2019

09/30/2019

06/30/2019

Zix Email Security

$53,337

$52,434

$50,380

$47,833

$45,916

Additional Metrics (in thousands) (Unaudited)

Three Months

Three Months

Three Months

Three Months

Three Months

Ended 03/31/20

Ended 03/31/20

Ended 12/31/19

Ended 09/30/19

Ended 06/30/19

GAAP Gross Profit

$25,079

47%

$26,355

50%

$26,337

52%

$26,411

55%

$25,612

56%

GAAP Operating (Loss) Income

$43

0%

$940

2%

($2,548)

(5%)

$1,229

3%

($1,571)

(3%)

EBITDA

$7,757

15%

$8,718

17%

$5,585

11%

$7,919

17%

$5,374

12%

Non-GAAP Gross Profit

$29,177

55%

$29,192

56%

$29,237

58%

$28,529

60%

$27,914

61%

Non-GAAP Operating Income

$10,480

20%

$9,113

17%

$9,499

19%

$9,624

20%

$8,860

19%

Adjusted EBITDA

$12,671

24%

$11,089

21%

$11,463

23%

$11,501

24%

$10,726

23%

7

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Zix Corporation published this content on 04 August 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 05 August 2020 21:16:14 UTC