##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2011
 o
    
    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
(State of Incorporation)
    
    75-2216818
(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 þ No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
 Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filero
    
    Smaller reporting companyo(Do not check if a smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
 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 May 4, 2011Common Stock, par value $0.01 per share
    
    66,392,948




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##### 



INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at March 31, 2011 (unaudited) and December 31, 2010
    
    
    3Condensed Consolidated Statements of Operations (unaudited) for the three months ended
March 31, 2011 and 2010
    
    
    4Condensed Consolidated Statement of Stockholders Equity (unaudited) for the three
months ended March 31, 2011
    
    
    5Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended
March 31, 2011 and 2010
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 1A. Risk Factors
    
    
    16Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. (Removed and Reserved)
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    18EX-31.1EX-31.2EX-32.1
  2




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2011
    
    
    2010(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,763,000
    
    
    $
    24,619,000Commercial paper
    
    
    2,290,000
    
    
    
    Receivables, net
    
    
    760,000
    
    
    
    1,344,000Prepaid and other current assets
    
    
    1,270,000
    
    
    
    1,115,000Deferred tax assets
    
    
    726,000
    
    
    
    1,056,000Total current assets
    
    
    26,809,000
    
    
    
    28,134,000Property and equipment, net
    
    
    2,125,000
    
    
    
    2,209,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Deferred tax assets
    
    
    34,631,000
    
    
    
    34,304,000Other assets
    
    
    11,000
    
    
    
    44,000Total assets
    
    $
    65,737,000
    
    
    $
    66,852,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    600,000
    
    
    $
    562,000Accrued expenses
    
    
    2,084,000
    
    
    
    2,282,000Deferred revenue
    
    
    15,793,000
    
    
    
    15,331,000License subscription note payable
    
    
    140,000
    
    
    
    137,000Total current liabilities
    
    
    18,617,000
    
    
    
    18,312,000Long-term liabilities:Deferred revenue
    
    
    1,291,000
    
    
    
    1,439,000License subscription note payable
    
    
    12,000
    
    
    
    49,000Deferred rent
    
    
    150,000
    
    
    
    165,000Total long-term liabilities
    
    
    1,453,000
    
    
    
    1,653,000Total liabilities
    
    
    20,070,000
    
    
    
    19,965,000Commitments and contingencies (see Note 8)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; 69,931,719 issued and
66,236,238 outstanding in 2011 and 69,505,919 issued and 67,178,738 outstanding in
2010
    
    
    699,000
    
    
    
    695,000Additional paid-in capital
    
    
    346,358,000
    
    
    
    344,981,000Treasury stock, at cost; 3,695,481 common shares in 2011 and 2,327,181 common shares in
2010
    
    
    (16,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (284,883,000
    )
    
    
    (287,282,000
    )Total stockholders equity
    
    
    45,667,000
    
    
    
    46,887,000Total liabilities and stockholders equity
    
    $
    65,737,000
    
    
    $
    66,852,000
  3




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ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended March 31,2011
    
    
    2010Revenues
    
    $
    9,271,000
    
    
    $
    7,479,000Cost of revenues
    
    
    1,817,000
    
    
    
    1,502,000Gross profit
    
    
    7,454,000
    
    
    
    5,977,000Operating expenses:Research and development
    
    
    1,313,000
    
    
    
    1,308,000Selling, general and administrative
    
    
    3,760,000
    
    
    
    4,228,000Total operating expenses
    
    
    5,073,000
    
    
    
    5,536,000Operating income
    
    
    2,381,000
    
    
    
    441,000Other income, net
    
    
    42,000
    
    
    
    29,000Income from continuing operations before income taxes
    
    
    2,423,000
    
    
    
    470,000Income tax (expense) benefit
    
    
    (24,000
    )
    
    
    54,000Income from continuing operations
    
    $
    2,399,000
    
    
    $
    524,000Income from discontinued operations before income taxes
    
    
    
    
    
    
    290,000Income tax expense
    
    
    
    
    
    
    (102,000
    )Income from discontinued operations
    
    $
    
    
    
    $
    188,000Net Income
    
    $
    2,399,000
    
    
    $
    712,000Basic income per common share:Income from continuing operations
    
    $
    0.04
    
    
    $
    0.01Income from discontinued operations
    
    
    
    
    
    
    0.00Net Income
    
    $
    0.04
    
    
    $
    0.01Diluted income per common share:Income from continuing operations
    
    $
    0.03
    
    
    $
    0.01Income from discontinued operations
    
    
    
    
    
    
    0.00Net Income
    
    $
    0.03
    
    
    $
    0.01Basic weighted average common shares outstanding
    
    
    67,182,916
    
    
    
    63,790,368Diluted weighted average common shares outstanding
    
    
    70,006,906
    
    
    
    65,511,791
  4




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ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 Stockholders EquityAdditional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    EquityBalance, December 31, 2010
    
    
    69,505,919
    
    
    $
    695,000
    
    
    $
    344,981,000
    
    
    $
    (11,507,000
    )
    
    $
    (287,282,000
    )
    
    $
    46,887,000Issuance of common stock
upon exercise of stock
options
    
    
    410,800
    
    
    
    4,000
    
    
    
    1,235,000
    
    
    
    
    
    
    
    
    
    
    
    1,239,000Issuance of common stock
upon exercise of warrants
    
    
    15,000
    
    
    
    
    
    
    
    23,000
    
    
    
    
    
    
    
    
    
    
    
    23,000Employee stock-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    108,000
    
    
    
    
    
    
    
    
    
    
    
    108,000Non-employee stock-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    
    
    
    
    
    
    
    
    11,000Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,000,000
    )
    
    
    
    
    
    
    (5,000,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,399,000
    
    
    
    2,399,000Balance, March 31, 2011
    
    
    69,931,719
    
    
    $
    699,000
    
    
    $
    346,358,000
    
    
    $
    (16,507,000
    )
    
    $
    (284,883,000
    )
    
    $
    45,667,000
  5




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ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended March 31,2011
    
    
    2010Operating activities:Net income
    
    $
    2,399,000
    
    
    $
    712,000Non-cash items in net income:Depreciation and amortization
    
    
    331,000
    
    
    
    344,000Employee stock-based compensation costs
    
    
    108,000
    
    
    
    499,000Non-employee stock-based compensation costs
    
    
    11,000
    
    
    
    10,000Changes in deferred taxes
    
    
    5,000
    
    
    
    5,000Changes in operating assets and liabilities:Receivables
    
    
    584,000
    
    
    
    104,000Prepaid and other current assets
    
    
    (124,000
    )
    
    
    193,000Accounts payable
    
    
    (1,000
    )
    
    
    (73,000
    )Deferred revenue
    
    
    314,000
    
    
    
    1,653,000Accrued and other liabilities
    
    
    (213,000
    )
    
    
    (832,000
    )Net cash provided by operating activities
    
    
    3,414,000
    
    
    
    2,615,000Investing activities:Purchases of property and equipment
    
    
    (208,000
    )
    
    
    (379,000
    )Purchase of commercial paper
    
    
    (2,290,000
    )
    
    
    Net cash used in investing activities
    
    
    (2,498,000
    )
    
    
    (379,000
    )Financing activities:Proceeds from exercise of stock options
    
    
    1,239,000
    
    
    
    249,000Proceeds from exercise of warrants
    
    
    23,000
    
    
    
    Payment of license subscription note payable
    
    
    (34,000
    )
    
    
    (31,000
    )Purchase of treasury shares
    
    
    (5,000,000
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (3,772,000
    )
    
    
    218,000(Decrease) increase in cash and cash equivalents
    
    
    (2,856,000
    )
    
    
    2,454,000Cash and cash equivalents, beginning of period
    
    
    24,619,000
    
    
    
    13,287,000Cash and cash equivalents, end of period
    
    $
    21,763,000
    
    
    $
    15,741,000
  6




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ZIX CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation
  2. Recent Accounting Standards and Pronouncements
 Revenue Recognition
  3. Discontinued Operations
  4. Stock Options and Stock-based Employee Compensation
  Three Months Ended March 31,2011
    
    
    2010Cost of revenues
    
    $
    12,000
    
    
    $
    37,000Research and development
    
    
    13,000
    
    
    
    43,000Selling, general and administrative
    
    
    83,000
    
    
    
    357,000Discontinued Operations
    
    
    
    
    
    
    62,000Stock-based compensation expense
    
    $
    108,000
    
    
    $
    499,000
  7




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##### Table of Contents



Stock Option Activity
  Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (Yrs)
    
    
    ValueOutstanding at December 31, 2010
    
    
    7,646,892
    
    
    $
    4.42Granted at market price
    
    
    
    
    
    
    Cancelled or expired
    
    
    (95,090
    )
    
    $
    7.27Exercised
    
    
    (410,800
    )
    
    $
    3.02Outstanding at March 31, 2011
    
    
    7,141,002
    
    
    $
    4.46
    
    
    
    4.78
    
    
    $
    4,627,000Options exercisable at March 31, 2011
    
    
    6,637,149
    
    
    $
    4.66
    
    
    
    4.49
    
    
    $
    3,689,000
  5. Supplemental Cash Flow Information
  Three Months Ended March 31,2011
    
    
    2010Cash paid for interest
    
    $
    4,000
    
    
    $
    6,000Cash income tax payments
    
    $
    59,000
    
    
    $
    64,000Non-cash investing and financing activities:Payables related to purchases of fixed assets
    
    $
    38,000
    
    
    $
    2,000
 6. Receivables, net
 March 31,
    
    
    December 31,2011
    
    
    2010Receivables
    
    $
    784,000
    
    
    $
    1,376,000Allowance for returns and doubtful accounts
    
    
    (24,000
    )
    
    
    (32,000
    )Note receivable
    
    
    472,000
    
    
    
    476,000Allowance for note receivable
    
    
    (472,000
    )
    
    
    (476,000
    )Receivables, net
    
    $
    760,000
    
    
    $
    1,344,000
   7. Earnings Per Share and Potential Dilution
  March 31,2011
    
    
    2010Basic weighted average shares
    
    
    67,182,916
    
    
    
    63,790,368Effect of dilutive securities:Employee and director stock options
    
    
    1,323,280
    
    
    
    623,917Warrants
    
    
    1,500,710
    
    
    
    1,097,506Potential dilutive common shares
    
    
    70,006,906
    
    
    
    65,511,791
 8




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##### Table of Contents



8. Commitments and contingencies
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    Years 2 & 3
    
    
    Beyond 3 YearsOperating leases
    
    $
    4,174,000
    
    
    $
    1,303,000
    
    
    $
    2,100,000
    
    
    $
    771,000License subscription note payable
    
    
    152,000
    
    
    
    140,000
    
    
    
    12,000
    
    
    
    Total cash obligations
    
    
    4,326,000
    
    
    
    1,443,000
    
    
    
    2,112,000
    
    
    
    771,000Interest on obligations
    
    
    8,000
    
    
    
    8,000
    
    
    
    
    
    
    
    Total
    
    $
    4,334,000
    
    
    $
    1,451,000
    
    
    $
    2,112,000
    
    
    $
    771,000
  Claims and Proceedings
  9. Fair Value Measurements
   10. Commercial Paper
  11. Common Stock Repurchase Program
  9




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##### Table of Contents



12. Income Taxes
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
  Overview
 ® ®
 SM
 Critical Accounting Policies and Estimates
  Summary of Significant Accounting
Policies Critical Accounting Policies and
Estimates
 10




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Results of Operations
 First Quarter 2011 Summary of Operations
 Financial
 
    
    Revenue for the quarter ended March 31, 2011, was $9,271,000 compared with $7,479,000 for the
same period in 2010, representing a 24% increase.
    
    Gross profit for the quarter ended March 31, 2011, was $7,454,000 or 80% of revenues compared
with $5,977,000 or 80% of revenues for the comparable period in 2010.
    
    Net income for the quarter ended March 31, 2011, was $2,399,000 compared with net income of
$712,000 in the comparable period in 2010.
    
    Ending cash, cash equivalents and commercial paper were $24,053,000 on March 31, 2011,
compared with $24,619,000 on December 31, 2010.
 Operations
 
    
    For the Email Encryption service, new first year orders (NFYOs) for the quarter ended March
31, 2011, were $1,492,000. As of March 31, 2011, backlog was $49,652,000.
 Revenues
  Three Months Ended
    
    
    3-month VarianceMarch 31,
    
    
    2011 vs. 20102011
    
    
    2010
    
    
    $
    
    
    %Email Encryption revenues
    
    $
    9,271,000
    
    
    $
    7,479,000
    
    
    
    1,792,000
    
    
    
    24
    %
  Revenue Indicators  Backlog, Orders and Deployments
 Backlog 
  Email Encryption Orders 
 11




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Cost of Revenues
  Three Months Ended
    
    
    3-month VarianceMarch 31,
    
    
    2011 vs. 20102011
    
    
    2010
    
    
    $
    
    
    %Cost of revenues
    
    $
    1,817,000
    
    
    $
    1,502,000
    
    
    $
    315,000
    
    
    
    21
    %
  Research and Development Expenses
  Three Months Ended
    
    
    3-month VarianceMarch 31,
    
    
    2011 vs. 20102011
    
    
    2010
    
    
    $
    
    
    %Research and development expenses
    
    $
    1,313,000
    
    
    $
    1,308,000
    
    
    $
    5,000
    
    
    
    
  Selling, General and Administrative Expenses
  Three Months Ended
    
    
    3-month VarianceMarch 31,
    
    
    2011 vs. 20102011
    
    
    2010
    
    
    $
    
    
    %Selling, general and administrative expenses
    
    $
    3,760,000
    
    
    $
    4,228,000
    
    
    $
    (468,000
    )
    
    
    (11
    %)
  Interest Expense
  Investment and Other Income
  12




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Provision for Income Taxes
        Net Income
  13




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Liquidity and Capital Resources
 Overview
     Sources and Uses of Cash Summary
 Three Months Ended March 31,2011
    
    
    2010Net cash provided by operations
    
    $
    3,414,000
    
    
    $
    2,615,000Net cash used in investing activities
    
    $
    (2,498,000
    )
    
    $
    (379,000
    )Net cash (used in) provided by financing activities
    
    $
    (3,772,000
    )
    
    $
    218,000
    Options and Warrants of ZixCorp Common Stock
  Summary of Outstanding Options and WarrantsVested SharesTotal Value of
    
    
    (included in
    
    
    Total Value ofExercise Price Range
    
    Outstanding Shares
    
    
    Outstanding Shares
    
    
    Outstanding shares)
    
    
    Vested Shares$1.11 - $1.99
    
    
    3,981,124
    
    
    $
    6,119,000
    
    
    
    3,731,239
    
    
    $
    5,725,000$2.00 - $3.49
    
    
    1,110,151
    
    
    
    2,868,000
    
    
    
    856,433
    
    
    
    2,337,000$3.50 - $4.99
    
    
    2,662,355
    
    
    
    11,809,000
    
    
    
    2,662,105
    
    
    
    11,808,000$5.00 - $5.99
    
    
    515,927
    
    
    
    2,624,000
    
    
    
    515,927
    
    
    
    2,624,000$6.00 - $8.99
    
    
    620,816
    
    
    
    4,052,000
    
    
    
    620,816
    
    
    
    4,052,000$9.00 - $11.50
    
    
    814,292
    
    
    
    8,734,000
    
    
    
    814,292
    
    
    
    8,734,000Total
    
    
    9,704,665
    
    
    $
    36,206,000
    
    
    
    9,200,812
    
    
    $
    35,280,000
 14




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##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    Years 2 & 3
    
    
    Beyond 3 YearsOperating leases
    
    $
    4,174,000
    
    
    $
    1,303,000
    
    
    $
    2,100,000
    
    
    $
    771,000License subscription note payable
    
    
    152,000
    
    
    
    140,000
    
    
    
    12,000
    
    
    
    Total cash obligations
    
    
    4,326,000
    
    
    
    1,443,000
    
    
    
    2,112,000
    
    
    
    771,000Interest on obligations
    
    
    8,000
    
    
    
    8,000
    
    
    
    
    
    
    
    Total
    
    $
    4,334,000
    
    
    $
    1,451,000
    
    
    $
    2,112,000
    
    
    $
    771,000
   15




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  Changes in Internal Controls over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (a)
    
    None.(b)
    
    None.(c)
    
    Purchases of Equity Securities by the Issuer
 Maximum Number (or ApproximateTotal Number of
    
    
    Dollar Value) of SharesShares Purchased as
    
    
    (or Units) that Maypart of Publicly
    
    
    Yet Be PurchasedTotal Number of Shares
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Under the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs1
    
    
    ProgramsMarch 1, 2011 to 

March 31, 2011
    
    
    1,368,300
    
    
    $
    3.65
    
    
    
    1,368,300
    
    
    
    Total
    
    
    1,368,300
    
    
    $
    3.65
    
    
    
    1,368,300
    
    
    $
    10,000,000
 
 1
    
    The shares were repurchased under the $15
million stock repurchase program announced March 7, 2011. No shares were
purchased other than through publicly announced programs during the periods
shown. 16




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##### Table of Contents



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. (Removed and Reserved)
 
 ITEM 5. OTHER INFORMATION
  17




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##### Table of Contents



ITEM 6. EXHIBITS
 a. Exhibits
  Exhibit No.
    
    Description of Exhibits3.1
    
    
    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
    
    
    Amended and Restated Bylaws of Zix Corporation, dated February 4, 2009. Filed as Exhibit
3.1 to Zix Corporations Current Report on Form 8-K, dated February 10, 2009, and
incorporated herein by reference.31.1*
    
    
    Certification of Richard D. Spurr, President and Chief Executive Officer of the Company,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    Certification of Richard D. Spurr, Principal Financial Officer of the Company, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.32.1**
    
    
    Certification of CEO and PFO pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 18




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##### Table of Contents



SIGNATURES
  ZIX CORPORATIONDate: May 6, 2011
    By:
    /s/ MICHAEL W. ENGLISHMichael W. EnglishPrincipal Accounting Officer 19