##### 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 September 30, 2010
 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 filerþ
    
    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 November 2, 2010Common Stock, par value $0.01 per share
    
    64,692,332




---



##### 



INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30,
2010 and 2009
    
    
    4Condensed Consolidated Statement of Stockholders Equity (Deficit) for the nine months ended
September 30, 2010
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. (Removed and Reserved)
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    20EX-31.1EX-31.2EX-32.1
  2




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,571,000
    
    
    $
    13,287,000Marketable securities
    
    
    
    
    
    
    25,000Receivables, net
    
    
    817,000
    
    
    
    760,000Prepaid and other current assets
    
    
    923,000
    
    
    
    1,142,000Total current assets
    
    
    21,311,000
    
    
    
    15,214,000Property and equipment, net
    
    
    2,282,000
    
    
    
    2,137,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Other assets
    
    
    133,000
    
    
    
    236,000Total assets
    
    $
    25,887,000
    
    
    $
    19,748,000LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    414,000
    
    
    $
    769,000Accrued expenses
    
    
    2,421,000
    
    
    
    3,124,000Deferred revenue
    
    
    16,378,000
    
    
    
    14,478,000License subscription note payable
    
    
    134,000
    
    
    
    126,000Total current liabilities
    
    
    19,347,000
    
    
    
    18,497,000Long-term liabilities:Deferred revenue
    
    
    1,716,000
    
    
    
    2,821,000License subscription note payable
    
    
    84,000
    
    
    
    186,000Deferred rent
    
    
    180,000
    
    
    
    233,000Total long-term liabilities
    
    
    1,980,000
    
    
    
    3,240,000Total liabilities
    
    
    21,327,000
    
    
    
    21,737,000Commitments and contingencies (see Note 8)Stockholders equity (deficit):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; 66,696,410 issued and
64,369,229 outstanding in 2010 and 66,053,772 issued and 63,726,591 outstanding in 2009
    
    
    667,000
    
    
    
    661,000Additional paid-in capital
    
    
    339,914,000
    
    
    
    337,352,000Treasury stock, at cost; 2,327,181 common shares in 2010 and 2009
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (324,514,000
    )
    
    
    (328,495,000
    )Total stockholders equity (deficit)
    
    
    4,560,000
    
    
    
    (1,989,000
    )Total liabilities and stockholders equity (deficit)
    
    $
    25,887,000
    
    
    $
    19,748,000
  3




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    9,040,000
    
    
    $
    7,835,000
    
    
    $
    26,371,000
    
    
    $
    22,462,000Cost of revenues
    
    
    1,888,000
    
    
    
    2,249,000
    
    
    
    5,714,000
    
    
    
    7,088,000Gross profit
    
    
    7,152,000
    
    
    
    5,586,000
    
    
    
    20,657,000
    
    
    
    15,374,000Operating expenses:Research and development
    
    
    1,317,000
    
    
    
    1,760,000
    
    
    
    4,072,000
    
    
    
    5,238,000Selling, general and administrative
    
    
    4,086,000
    
    
    
    4,557,000
    
    
    
    12,529,000
    
    
    
    14,429,000Total operating expenses
    
    
    5,403,000
    
    
    
    6,317,000
    
    
    
    16,601,000
    
    
    
    19,667,000Operating income (loss)
    
    
    1,749,000
    
    
    
    (731,000
    )
    
    
    4,056,000
    
    
    
    (4,293,000
    )Other income, net
    
    
    22,000
    
    
    
    35,000
    
    
    
    66,000
    
    
    
    176,000Income (loss) before income taxes
    
    
    1,771,000
    
    
    
    (696,000
    )
    
    
    4,122,000
    
    
    
    (4,117,000
    )Provision for income tax (expense) benefit
    
    
    (3,000
    )
    
    
    39,000
    
    
    
    (141,000
    )
    
    
    (7,000
    )Net income (loss)
    
    $
    1,768,000
    
    
    $
    (657,000
    )
    
    $
    3,981,000
    
    
    $
    (4,124,000
    )Basic income (loss) per common share
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.06
    
    
    $
    (0.07
    )Diluted income (loss) per common share
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.06
    
    
    $
    (0.07
    )Basic weighted average common shares outstanding
    
    
    64,148,452
    
    
    
    63,367,037
    
    
    
    63,973,102
    
    
    
    63,335,508Diluted weighted average common shares outstanding
    
    
    66,646,541
    
    
    
    63,367,037
    
    
    
    66,208,508
    
    
    
    63,335,508
  4




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
 Stockholders Equity (Deficit)Additional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Equity (Deficit)Balance, December 31, 2009
    
    
    66,053,772
    
    
    $
    661,000
    
    
    $
    337,352,000
    
    
    $
    (11,507,000
    )
    
    $
    (328,495,000
    )
    
    $
    (1,989,000
    )Issuance of common stock upon exercise
of stock options
    
    
    642,638
    
    
    
    6,000
    
    
    
    1,026,000
    
    
    
    
    
    
    
    
    
    
    
    1,032,000Employee stock-based compensation costs
    
    
    
    
    
    
    
    
    
    
    1,506,000
    
    
    
    
    
    
    
    
    
    
    
    1,506,000Non-employee stock-based compensation
costs
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    30,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,981,000
    
    
    
    3,981,000Balance, September 30, 2010
    
    
    66,696,410
    
    
    $
    667,000
    
    
    $
    339,914,000
    
    
    $
    (11,507,000
    )
    
    $
    (324,514,000
    )
    
    $
    4,560,000
  5




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30,2010
    
    
    2009Operating activities:Net income (loss)
    
    $
    3,981,000
    
    
    $
    (4,124,000
    )Non-cash items in net income (loss):Depreciation and amortization
    
    
    1,047,000
    
    
    
    987,000Employee stock-based compensation costs
    
    
    1,506,000
    
    
    
    2,473,000Non-employee stock-based compensation costs
    
    
    30,000
    
    
    
    24,000Changes in deferred taxes
    
    
    6,000
    
    
    
    5,000Changes in operating assets and liabilities:Receivables
    
    
    (57,000
    )
    
    
    (205,000
    )Prepaid and other assets
    
    
    330,000
    
    
    
    256,000Accounts payable
    
    
    (411,000
    )
    
    
    168,000Deferred revenue
    
    
    795,000
    
    
    
    (258,000
    )Accrued expenses and other liabilities
    
    
    (756,000
    )
    
    
    357,000Net cash provided by (used in) operating activities
    
    
    6,471,000
    
    
    
    (317,000
    )Investing activities:Purchases of property and equipment
    
    
    (1,150,000
    )
    
    
    (852,000
    )Sales of marketable securities
    
    
    25,000
    
    
    
    Restricted cash and marketable securities, net
    
    
    
    
    
    
    3,000Net cash used in investing activities
    
    
    (1,125,000
    )
    
    
    (849,000
    )Financing activities:Proceeds from exercise of stock options
    
    
    1,032,000
    
    
    
    13,000Proceeds from exercise of warrants
    
    
    
    
    
    
    339,000Payment of license subscription note payable
    
    
    (94,000
    )
    
    
    (39,000
    )Net cash provided by financing activities
    
    
    938,000
    
    
    
    313,000Increase (decrease) in cash and cash equivalents
    
    
    6,284,000
    
    
    
    (853,000
    )Cash and cash equivalents, beginning of period
    
    
    13,287,000
    
    
    
    13,245,000Cash and cash equivalents, end of period
    
    $
    19,571,000
    
    
    $
    12,392,000
  6




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ZIX CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
  2. Recent Accounting Standards and Pronouncements
 To be adopted beyond 2010:
  International Financial Reporting Standards
 3. Segment Information
    7




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##### Table of Contents



Three Months Ended September 30, 2010
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    8,548,000
    
    
    $
    492,000
    
    
    $
    
    
    
    $
    9,040,000Cost of revenues
    
    
    1,662,000
    
    
    
    226,000
    
    
    
    
    
    
    
    1,888,000Gross profit
    
    
    6,886,000
    
    
    
    266,000
    
    
    
    
    
    
    
    7,152,000Direct expenses
    
    
    3,607,000
    
    
    
    116,000
    
    
    
    
    
    
    
    3,723,000Segment contribution
    
    
    3,279,000
    
    
    
    150,000
    
    
    
    
    
    
    
    3,429,000Unallocated (expense) incomeGeneral and administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,680,000
    )
    
    
    (1,680,000
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    22,000
    
    
    
    22,000Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (1,658,000
    )
    
    
    (1,658,000
    )Income (loss) before provision for income taxes
    
    $
    3,279,000
    
    
    $
    150,000
    
    
    $
    (1,658,000
    )
    
    $
    1,771,000
 Three Months Ended September 30, 2009
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    6,685,000
    
    
    $
    1,150,000
    
    
    $
    
    
    
    $
    7,835,000Cost of revenues
    
    
    1,179,000
    
    
    
    1,070,000
    
    
    
    
    
    
    
    2,249,000Gross profit
    
    
    5,506,000
    
    
    
    80,000
    
    
    
    
    
    
    
    5,586,000Direct expenses
    
    
    2,882,000
    
    
    
    1,460,000
    
    
    
    
    
    
    
    4,342,000Segment contribution (loss)
    
    
    2,624,000
    
    
    
    (1,380,000
    )
    
    
    
    
    
    
    1,244,000Unallocated (expense) incomeGeneral and administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,975,000
    )
    
    
    (1,975,000
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    35,000
    
    
    
    35,000Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (1,940,000
    )
    
    
    (1,940,000
    )Income (loss) before provision for income taxes
    
    $
    2,624,000
    
    
    $
    (1,380,000
    )
    
    $
    (1,940,000
    )
    
    $
    (696,000
    )
  Nine Months Ended September 30, 2010
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    24,221,000
    
    
    $
    2,150,000
    
    
    $
    
    
    
    $
    26,371,000Cost of revenues
    
    
    4,734,000
    
    
    
    980,000
    
    
    
    
    
    
    
    5,714,000Gross profit
    
    
    19,487,000
    
    
    
    1,170,000
    
    
    
    
    
    
    
    20,657,000Direct expenses
    
    
    11,016,000
    
    
    
    542,000
    
    
    
    
    
    
    
    11,558,000Segment contribution
    
    
    8,471,000
    
    
    
    628,000
    
    
    
    
    
    
    
    9,099,000Unallocated (expense) incomeGeneral and administrative expense
    
    
    
    
    
    
    
    
    
    
    (5,043,000
    )
    
    
    (5,043,000
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    66,000
    
    
    
    66,000Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (4,977,000
    )
    
    
    (4,977,000
    )Income (loss) before provision for income taxes
    
    $
    8,471,000
    
    
    $
    628,000
    
    
    $
    (4,977,000
    )
    
    $
    4,122,000
 Nine Months Ended September 30, 2009
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    19,306,000
    
    
    $
    3,156,000
    
    
    $
    
    
    
    $
    22,462,000Cost of revenues
    
    
    3,280,000
    
    
    
    3,808,000
    
    
    
    
    
    
    
    7,088,000Gross profit
    
    
    16,026,000
    
    
    
    (652,000
    )
    
    
    
    
    
    
    15,374,000Direct expenses
    
    
    8,617,000
    
    
    
    5,054,000
    
    
    
    
    
    
    
    13,671,000Segment contribution (loss)
    
    
    7,409,000
    
    
    
    (5,706,000
    )
    
    
    
    
    
    
    1,703,000Unallocated (expense) incomeGeneral and administrative expense
    
    
    
    
    
    
    
    
    
    
    (5,996,000
    )
    
    
    (5,996,000
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    176,000
    
    
    
    176,000Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (5,820,000
    )
    
    
    (5,820,000
    )Income (loss) before provision for income taxes
    
    $
    7,409,000
    
    
    $
    (5,706,000
    )
    
    $
    (5,820,000
    )
    
    $
    (4,117,000
    )
 Depreciation and amortization expense:
  Nine Months EndedSeptember 30,2010
    
    
    2009Email Encryption
    
    $
    819,000
    
    
    $
    596,000e-Prescribing
    
    
    109,000
    
    
    
    259,000Unallocated
    
    
    119,000
    
    
    
    132,000Total depreciation expense
    
    $
    1,047,000
    
    
    $
    987,000
 8




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##### Table of Contents



Allocated costs:
   Other segment information:
   September 30, 2010
    
    
    December 31, 2009Total assets:Email Encryption
    
    $
    3,997,000
    
    
    $
    3,781,000e-Prescribing
    
    
    220,000
    
    
    
    416,000Corporate
    
    
    21,670,000
    
    
    
    15,551,000Total assets
    
    $
    25,887,000
    
    
    $
    19,748,000
 4. Stock Options and Stock-based Employee Compensation
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2010
    
    
    2010Cost of revenues
    
    $
    49,000
    
    
    $
    150,000Research and development
    
    
    50,000
    
    
    
    148,000Selling, general and administrative
    
    
    431,000
    
    
    
    1,208,000Stock-based compensation expense
    
    $
    530,000
    
    
    $
    1,506,000
  9




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##### Table of Contents



Stock Option Activity
  Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (Yrs)
    
    
    ValueOutstanding at June 30, 2010
    
    
    9,648,929
    
    
    $
    4.21Granted at market price
    
    
    2,000
    
    
    $
    2.28Cancelled or expired
    
    
    (411,062
    )
    
    $
    5.74Exercised
    
    
    (333,542
    )
    
    $
    1.70Outstanding at September 30, 2010
    
    
    8,906,325
    
    
    $
    4.23
    
    
    
    5.36
    
    
    $
    3,485,000Options exercisable at September 30, 2010
    
    
    8,107,663
    
    
    $
    4.43
    
    
    
    5.02
    
    
    $
    2,781,000
   5. Supplemental Cash Flow Information
  Nine Months EndedSeptember 30,2010
    
    
    2009Cash paid for interest
    
    $
    17,000
    
    
    $
    13,000Cash income tax payments
    
    $
    217,000
    
    
    $
    203,000Non-cash investing and financing activities:Assets sold to customers as part of their subscription service
    
    $
    14,000
    
    
    $
    2,000Payables related to purchases of fixed assets
    
    $
    56,000
    
    
    $
    233,000Issuance of license subscription note payable
    
    $
    
    
    
    $
    390,000Amounts reclassified from Notes payable to Accounts payable
    
    $
    
    
    
    $
    19,000
 6. Receivables, net
 September 30,
    
    
    December 31,2010
    
    
    2009Receivables
    
    $
    837,000
    
    
    $
    786,000Allowance for returns and doubtful accounts
    
    
    (20,000
    )
    
    
    (26,000
    )Note receivable
    
    
    484,000
    
    
    
    484,000Allowance for note receivable
    
    
    (484,000
    )
    
    
    (484,000
    )Receivables, net
    
    $
    817,000
    
    
    $
    760,000
   7. Earnings Per Share and Potential Dilution
  10




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##### Table of Contents



Three Months ended September 30,
    
    
    Nine Months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    1,768,000
    
    
    $
    (657,000
    )
    
    $
    3,981,000
    
    
    $
    (4,124,000
    )Basic weighted average shares
    
    
    64,148,452
    
    
    
    63,367,037
    
    
    
    63,973,102
    
    
    
    63,335,508Effect of dilutive securities:Employee and director stock options
    
    
    861,059
    
    
    
    
    
    
    
    786,136
    
    
    
    Warrants
    
    
    1,637,030
    
    
    
    
    
    
    
    1,449,270
    
    
    
    Potential dilutive common shares
    
    
    66,646,541
    
    
    
    63,367,037
    
    
    
    66,208,508
    
    
    
    63,335,508Net earnings (loss) per shareBasic
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.06
    
    
    $
    (0.07
    )Diluted
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    0.06
    
    
    $
    (0.07
    )
  8. Commitments and contingencies
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    Years 2 & 3
    
    
    Beyond 3 YearsOperating leases
    
    $
    3,954,000
    
    
    $
    1,178,000
    
    
    $
    1,889,000
    
    
    $
    887,000License subscription note payable
    
    
    218,000
    
    
    
    134,000
    
    
    
    84,000
    
    
    
    Total cash obligations
    
    
    4,172,000
    
    
    
    1,312,000
    
    
    
    1,973,000
    
    
    
    887,000Interest on obligations
    
    
    16,000
    
    
    
    14,000
    
    
    
    2,000
    
    
    
    Total
    
    $
    4,188,000
    
    
    $
    1,326,000
    
    
    $
    1,975,000
    
    
    $
    887,000
  Claims and Proceedings
  9. Fair Value Measurements
   11




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
  Overview
 SM SM
 SM
 Critical Accounting Policies and Estimates
  Summary of Significant Accounting
Policies Critical Accounting Policies and
Estimates
 Results of Operations
 Third Quarter 2010 Summary of Operations
 Financial
 
    
    Revenue for the quarter ended September 30, 2010, was $9,040,000 compared with $7,835,000 for
the same period in 2009 representing a 15% increase.
 
    
    Gross profit for the quarter ended September 30, 2010, was $7,152,000 or 79% of revenues
compared with $5,586,000 or 71% of revenues for the comparable period in 2009.
 12




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##### Table of Contents



Email Encryption gross profit was $6,886,000 or 81% of revenues compared with $5,506,000 or
82% of revenues for the comparable period in 2009. The slight decline in gross margin percentage
is due to the increase in allocated costs previously absorbed by the e-Prescribing segment.e-Prescribing gross profit was $266,000 or 54% of revenues compared with gross profit of
$80,000 or 7% of revenues for the comparable period in 2009.
    
    Net income for the quarter ended September 30, 2010, was $1,768,000 compared with a net loss
of $657,000 for the comparable period in 2009. Included in net income for the quarter ended
September 30, 2010, was approximately $176,000 of non recurring severance costs related
primarily to the departure of our Chief Financial Officer.
    
    Ending cash and cash equivalents were $19,571,000 on September 30, 2010, compared with
$13,287,000 on December 31, 2009.
 Operations
 
    
    For the Email Encryption service, new first year orders (NFYOs) for the quarter ended
September 30, 2010, were $2,201,000. The Email Encryption backlog was $46,583,000 at September
30, 2010.
    
    The wind down of our e-Prescribing business is progressing well. We have worked out
appropriate resolutions with all of our major customers in this business and have protected
our brand in the important healthcare vertical market. As reported in our October 25, 2010,
press release, we expect this business to generate a small amount of profit for 2010.
 Revenues
  Three Months Ended
    
    
    3-month Variance
    
    
    Nine Months Ended
    
    
    9-month VarianceSeptember 30,
    
    
    2010 vs. 2009
    
    
    September 30,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Email Encryption
    
    $
    8,548,000
    
    
    $
    6,685,000
    
    
    $
    1,863,000
    
    
    
    28
    %
    
    $
    24,221,000
    
    
    $
    19,306,000
    
    
    $
    4,915,000
    
    
    
    25
    %e-Prescribing
    
    
    492,000
    
    
    
    1,150,000
    
    
    
    (658,000
    )
    
    
    (57
    %)
    
    
    2,150,000
    
    
    
    3,156,000
    
    
    
    (1,006,000
    )
    
    
    (32
    %)Total revenues
    
    $
    9,040,000
    
    
    $
    7,835,000
    
    
    $
    1,205,000
    
    
    
    15
    %
    
    $
    26,371,000
    
    
    $
    22,462,000
    
    
    $
    3,909,000
    
    
    
    17
    %
  Revenue Indicators  Backlog and Orders
 Email Encryption Backlog 
  Email Encryption Orders 
 13




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##### Table of Contents



e-Prescribing 
 Cost of Revenues
  Three Months Ended
    
    
    3-month Variance
    
    
    Nine Months Ended
    
    
    9-month VarianceSeptember 30,
    
    
    2010 vs. 2009
    
    
    September 30,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Email Encryption
    
    $
    1,662,000
    
    
    $
    1,179,000
    
    
    $
    483,000
    
    
    
    41
    %
    
    $
    4,734,000
    
    
    $
    3,280,000
    
    
    $
    1,454,000
    
    
    
    44
    %e-Prescribing
    
    
    226,000
    
    
    
    1,070,000
    
    
    
    (844,000
    )
    
    
    (79
    %)
    
    
    980,000
    
    
    
    3,808,000
    
    
    
    (2,828,000
    )
    
    
    (74
    %)Total cost of revenues
    
    $
    1,888,000
    
    
    $
    2,249,000
    
    
    $
    (361,000
    )
    
    
    (16
    %)
    
    $
    5,714,000
    
    
    $
    7,088,000
    
    
    $
    (1,374,000
    )
    
    
    (19
    %)
    Email Encryption 
 e-Prescribing 
 14




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##### Table of Contents



Research and Development Expenses
  Three Months Ended
    
    
    3-month Variance
    
    
    Nine Months Ended
    
    
    9-month VarianceSeptember 30,
    
    
    2010 vs. 2009
    
    
    September 30,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Email Encryption
    
    $
    1,261,000
    
    
    $
    886,000
    
    
    $
    375,000
    
    
    
    42
    %
    
    $
    3,818,000
    
    
    $
    2,510,000
    
    
    $
    1,308,000
    
    
    
    52
    %e-Prescribing
    
    
    56,000
    
    
    
    874,000
    
    
    
    (818,000
    )
    
    
    (94
    %)
    
    
    254,000
    
    
    
    2,728,000
    
    
    
    (2,474,000
    )
    
    
    (91
    %)Total Research
and development
    
    $
    1,317,000
    
    
    $
    1,760,000
    
    
    $
    (443,000
    )
    
    
    (25
    %)
    
    $
    4,072,000
    
    
    $
    5,238,000
    
    
    $
    (1,166,000
    )
    
    
    (22
    %)
    Selling, General and Administrative Expenses
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    9-month VarianceThree Months Ended September 30,
    
    
    2010 vs. 2009
    
    
    Nine Months Ended September 30,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2010
    
    
    $
    
    
    %Email Encryption Selling and marketing expenses
    
    $
    2,119,000
    
    
    $
    1,850,000
    
    
    $
    269,000
    
    
    
    15
    %
    
    $
    6,500,000
    
    
    $
    5,641,000
    
    
    $
    859,000
    
    
    
    15
    %e-Prescribing Selling and marketing expenses
    
    
    47,000
    
    
    
    561,000
    
    
    
    (514,000
    )
    
    
    (92
    %)
    
    
    223,000
    
    
    
    2,250,000
    
    
    
    (2,027,000
    )
    
    
    (90
    %)Corporate General and administrative expenses
    
    
    1,920,000
    
    
    
    2,146,000
    
    
    
    (226,000
    )
    
    
    (11
    %)
    
    
    5,806,000
    
    
    
    6,538,000
    
    
    
    (732,000
    )
    
    
    (11
    %)Total Selling, general and administrative expenses
    
    $
    4,086,000
    
    
    $
    4,557,000
    
    
    $
    (471,000
    )
    
    
    (10
    )%
    
    $
    12,529,000
    
    
    $
    14,429,000
    
    
    $
    (1,900,000
    )
    
    
    (13
    %)
   15




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##### Table of Contents



Other Income, net
   Provision for Income Tax Expense (Benefit)
    16




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##### Table of Contents



Net Income
  Liquidity and Capital Resources
 Overview
    Sources and Uses of Cash Summary
 Nine Months EndedSeptember 30,2010
    
    
    2009Net cash provided by (used in) operations
    
    $
    6,471,000
    
    
    $
    (317,000
    )Net cash used in investing activities
    
    $
    (1,125,000
    )
    
    $
    (849,000
    )Net cash provided by financing activities
    
    $
    938,000
    
    
    $
    313,000
  ZixGateway ®
 17




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##### Table of Contents



Liquidity Summary
  Options and Warrants of ZixCorp Common Stock
  Summary of Outstanding Options and WarrantsVestedTotal Value
    
    
    (included in
    
    
    Total Value ofExercise Price Range
    
    Outstanding
    
    
    Outstanding
    
    
    Outstanding)
    
    
    Vested$1.11 - $1.99
    
    
    6,659,243
    
    
    $
    10,215,000
    
    
    
    6,305,719
    
    
    $
    9,670,000$2.00 - $3.49
    
    
    1,571,190
    
    
    
    4,184,000
    
    
    
    1,234,977
    
    
    
    3,474,000$3.50 - $4.99
    
    
    3,115,681
    
    
    
    13,824,000
    
    
    
    3,006,756
    
    
    
    13,310,000$5.00 - $5.99
    
    
    515,927
    
    
    
    2,624,000
    
    
    
    515,927
    
    
    
    2,624,000$6.00 - $8.99
    
    
    631,816
    
    
    
    4,123,000
    
    
    
    631,816
    
    
    
    4,123,000$9.00 - $19.99
    
    
    887,381
    
    
    
    9,670,000
    
    
    
    887,381
    
    
    
    9,670,000$20.00 - $21.38
    
    
    18,750
    
    
    
    401,000
    
    
    
    18,750
    
    
    
    401,000Total
    
    
    13,399,988
    
    
    $
    45,041,000
    
    
    
    12,601,326
    
    
    $
    43,272,000
 Off-Balance Sheet Arrangements
  Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    Years 2 & 3
    
    
    Beyond 3 YearsOperating leases
    
    $
    3,954,000
    
    
    $
    1,178,000
    
    
    $
    1,889,000
    
    
    $
    887,000Debt (long-term and short-term)
    
    
    234,000
    
    
    
    148,000
    
    
    
    86,000
    
    
    
    Total
    
    $
    4,188,000
    
    
    $
    1,326,000
    
    
    $
    1,975,000
    
    
    $
    887,000
   18




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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
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    (Removed and Reserved)
 
 ITEM 5.
    
    OTHER INFORMATION
  19




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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 Michael W. English, Principal Accounting
Officer of the Company, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1**
    
    Certification of Richard D. Spurr, President and Chief
Executive Officer of the Company, and Michael W. English,
Principal Accounting Officer of the Company, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 20




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##### Table of Contents



SIGNATURES
  ZIX CORPORATIONDate: November 5, 2010
    By:
    /s/ MICHAEL W. ENGLISHMichael W. EnglishPrincipal Accounting Officer 21