##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 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
    
    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 þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer o Accelerated filer o Non-accelerated filer þ
 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 August 10, 2007Common Stock, par value $0.01 per share
    
    60,338,839




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##### 



INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at June 30, 2007 (unaudited) and December 31, 2006 (audited)
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006
    
    
    4Condensed Consolidated Statement of Stockholders Equity (Deficit) for the six months ended June 30, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II-OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Certification of President and CEO Pursuant to Section 302Certification of CFO and Treasurer Pursuant to Section 302Certification Pursuant to Section 906
  2




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##### Table of Contents



ZIX CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,436,000
    
    
    $
    12,783,000Restricted cash
    
    
    200,000
    
    
    
    Receivables, net
    
    
    811,000
    
    
    
    746,000Prepaid and other current assets
    
    
    1,746,000
    
    
    
    2,178,000Total current assets
    
    
    13,193,000
    
    
    
    15,707,000Restricted cash
    
    
    1,500,000
    
    
    
    35,000Property and equipment, net
    
    
    2,052,000
    
    
    
    2,404,000Intangible assets, net
    
    
    
    
    
    
    23,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Deferred financing costs and other assets
    
    
    125,000
    
    
    
    36,000Total assets
    
    $
    19,031,000
    
    
    $
    20,366,000LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    573,000
    
    
    $
    221,000Accrued expenses
    
    
    3,064,000
    
    
    
    3,079,000Deferred revenue
    
    
    11,296,000
    
    
    
    8,388,000Customer deposit
    
    
    6,000
    
    
    
    2,000,000Promissory note payable
    
    
    200,000
    
    
    
    2,661,000Short-term note payable
    
    
    104,000
    
    
    
    255,000Total current liabilities
    
    
    15,243,000
    
    
    
    16,604,000Long-term liabilities:Deferred revenue
    
    
    3,706,000
    
    
    
    2,496,000Promissory note payable
    
    
    1,293,000
    
    
    
    Deferred rent
    
    
    352,000
    
    
    
    339,000Total long-term liabilities
    
    
    5,351,000
    
    
    
    2,835,000Total liabilities
    
    
    20,594,000
    
    
    
    19,439,000Commitments and contingencies (see Note 16)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; 62,666,020 issued and
60,338,839 outstanding in 2007 and 61,966,020 issued and 59,638,839 outstanding in 2006
    
    
    627,000
    
    
    
    620,000Additional paid-in capital
    
    
    324,609,000
    
    
    
    322,330,000Treasury stock, at cost; 2,327,181 common shares in 2007 and 2006
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (315,292,000
    )
    
    
    (310,516,000
    )Total stockholders equity (deficit)
    
    
    (1,563,000
    )
    
    
    927,000Total liabilities and stockholders equity
    
    $
    19,031,000
    
    
    $
    20,366,000
  3




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##### Table of Contents



ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    5,555,000
    
    
    $
    4,209,000
    
    
    $
    10,942,000
    
    
    $
    8,104,000Cost of revenues
    
    
    2,647,000
    
    
    
    3,090,000
    
    
    
    5,500,000
    
    
    
    6,465,000Gross margin
    
    
    2,908,000
    
    
    
    1,119,000
    
    
    
    5,442,000
    
    
    
    1,639,000Operating expenses:Research and development expenses
    
    
    1,343,000
    
    
    
    1,626,000
    
    
    
    2,642,000
    
    
    
    3,221,000Selling, general and administrative expenses
    
    
    4,649,000
    
    
    
    6,549,000
    
    
    
    9,449,000
    
    
    
    13,141,000Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )
    
    
    (1,000,000
    )Loss on impairment of operating lease
    
    
    100,000
    
    
    
    
    
    
    
    100,000
    
    
    
    Total operating expenses
    
    
    6,092,000
    
    
    
    8,175,000
    
    
    
    10,191,000
    
    
    
    15,362,000Operating loss
    
    
    (3,184,000
    )
    
    
    (7,056,000
    )
    
    
    (4,749,000
    )
    
    
    (13,723,000
    )Other (expense) income:Investment and other income
    
    
    139,000
    
    
    
    294,000
    
    
    
    294,000
    
    
    
    511,000Interest expense
    
    
    (56,000
    )
    
    
    (477,000
    )
    
    
    (106,000
    )
    
    
    (895,000
    )Gain on derivative liabilities (See Note 13)
    
    
    
    
    
    
    2,930,000
    
    
    
    
    
    
    
    2,930,000Loss on extinguishment of debt
    
    
    
    
    
    
    (871,000
    )
    
    
    (178,000
    )
    
    
    (871,000
    )Total other (expense) income
    
    
    83,000
    
    
    
    1,876,000
    
    
    
    10,000
    
    
    
    1,675,000Loss before income taxes
    
    
    (3,101,000
    )
    
    
    (5,180,000
    )
    
    
    (4,739,000
    )
    
    
    (12,048,000
    )Income taxes benefit (expense)
    
    
    (34,000
    )
    
    
    94,000
    
    
    
    (37,000
    )
    
    
    88,000Net loss
    
    $
    (3,135,000
    )
    
    $
    (5,086,000
    )
    
    $
    (4,776,000
    )
    
    $
    (11,960,000
    )Basic and diluted loss per common share
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    (0.08
    )
    
    $
    (0.22
    )Basic and diluted weighted average common
shares outstanding
    
    
    60,338,839
    
    
    
    59,200,723
    
    
    
    60,110,662
    
    
    
    54,453,902
  4




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##### Table of Contents



ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
  Stockholders EquityAdditional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    Equity (Deficit)Balance, January 1, 2007
    
    
    61,966,020
    
    
    $
    620,000
    
    
    $
    322,330,000
    
    
    $
    (11,507,000
    )
    
    $
    (310,516,000
    )
    
    $
    927,000Common stock issued upon restructure of
promissory note payable
    
    
    700,000
    
    
    
    7,000
    
    
    
    1,386,000
    
    
    
    
    
    
    
    
    
    
    
    1,393,000Employee share-based compensation costs
    
    
    
    
    
    
    
    
    
    
    826,000
    
    
    
    
    
    
    
    
    
    
    
    826,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    66,000
    
    
    
    
    
    
    
    
    
    
    
    66,000Other
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,776,000
    )
    
    
    (4,776,000
    )Balance, June 30, 2007
    
    
    62,666,020
    
    
    $
    627,000
    
    
    $
    324,609,000
    
    
    $
    (11,507,000
    )
    
    $
    (315,292,000
    )
    
    $
    (1,563,000
    )
  5




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##### Table of Contents



ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months Ended June 30,2007
    
    
    2006Operating activities:Net loss
    
    $
    (4,776,000
    )
    
    $
    (11,960,000
    )Non-cash items in net loss:Depreciation and amortization
    
    
    881,000
    
    
    
    1,545,000Amortization of debt discount / premium, financing costs and other
    
    
    16,000
    
    
    
    686,000Value of additional warrants issued
    
    
    
    
    
    
    10,000Loss on extinguishment of debt
    
    
    178,000
    
    
    
    871,000Gain on derivative liabilities
    
    
    
    
    
    
    (2,930,000
    )Loss on impairment of operating lease
    
    
    100,000
    
    
    
    Employee share-based compensation costs
    
    
    826,000
    
    
    
    1,440,000Non-employee share-based compensation costs
    
    
    66,000
    
    
    
    Customer deposit forfeiture
    
    
    (2,000,000
    )
    
    
    (1,000,000
    )Changes in deferred taxes
    
    
    (89,000
    )
    
    
    (87,000
    )Common stock issued to employees and non-employee in lieu of cash
    
    
    
    
    
    
    187,000Changes in operating assets and liabilities:Receivables
    
    
    (65,000
    )
    
    
    (360,000
    )Prepaid and other current assets
    
    
    436,000
    
    
    
    443,000Accounts payable
    
    
    385,000
    
    
    
    (393,000
    )Deferred revenue
    
    
    4,118,000
    
    
    
    1,149,000Accrued and other liabilities
    
    
    (64,000
    )
    
    
    (205,000
    )Net cash provided (used) by operating activities
    
    
    12,000
    
    
    
    (10,604,000
    )Investing activities:Purchases of property and equipment
    
    
    (543,000
    )
    
    
    (692,000
    )Restricted cash investments, net
    
    
    (1,665,000
    )
    
    
    5,100,000Net cash provided (used) by investing activities
    
    
    (2,208,000
    )
    
    
    4,408,000Financing activities:Proceeds from private placement of common stock
    
    
    
    
    
    
    11,817,000Payment of expenses relating to private placement of common stock
    
    
    
    
    
    
    (814,000
    )Payment of convertible debt
    
    
    
    
    
    
    (5,000,000
    )Payment of premium on convertible debt
    
    
    
    
    
    
    (200,000
    )Payment of short-term notes payable, capital leases and other
    
    
    (151,000
    )
    
    
    (278,000
    )Net cash provided (used) by financing activities
    
    
    (151,000
    )
    
    
    5,525,000Decrease in cash and cash equivalents
    
    
    (2,347,000
    )
    
    
    (671,000
    )Cash and cash equivalents, beginning of period
    
    
    12,783,000
    
    
    
    20,240,000Cash and cash equivalents, end of period
    
    $
    10,436,000
    
    
    $
    19,569,000
  6




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##### Table of Contents



ZIX CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation
  2. Recent Accounting Standards and Pronouncements
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
  3. Company Overview and Liquidity
  ®
  7




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##### Table of Contents



8




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##### Table of Contents




    
    As of June 30, 2007, total cash on hand was $12,136,000 (including $1,700,000 of
restricted cash);
    
    Cash receipts for the next twelve months are projected to be approximately
$30,600,000 based on current contracted billings and estimated contract renewals, prepay
amounts and estimated new business; and
    
    Operating spending including debt payments and capital asset purchases for the next
twelve months is projected to be approximately $34,700,000 based on the Companys
organization and order and deployment rates as of June 30, 2007.
  4. Revenue and Significant Customers
 Software
Revenue Recognition, Modification of SOP 97-2, Software Revenue Recognition, With respect
to Certain Transactions, Revenue Arrangements with Multiple Deliverables, Revenue Recognition in
Financial Statements,
  9




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##### Table of Contents



5. Segment Information
    10




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##### Table of Contents



Three Months Ended June 30, 2007
    
    
    Three Months Ended June 30, 2006Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    4,120,000
    
    
    $
    1,435,000
    
    
    $
    
    
    
    $
    5,555,000
    
    
    $
    3,369,000
    
    
    $
    840,000
    
    
    $
    
    
    
    $
    4,209,000Cost of revenues
    
    
    1,031,000
    
    
    
    1,616,000
    
    
    
    
    
    
    
    2,647,000
    
    
    
    1,319,000
    
    
    
    1,771,000
    
    
    
    
    
    
    
    3,090,000Gross margin (loss)
    
    
    3,089,000
    
    
    
    (181,000
    )
    
    
    
    
    
    
    2,908,000
    
    
    
    2,050,000
    
    
    
    (931,000
    )
    
    
    
    
    
    
    1,119,000Direct expenses
    
    
    2,743,000
    
    
    
    1,762,000
    
    
    
    
    
    
    
    4,505,000
    
    
    
    2,897,000
    
    
    
    2,745,000
    
    
    
    
    
    
    
    5,642,000Segment contribution (loss)
    
    
    346,000
    
    
    
    (1,943,000
    )
    
    
    
    
    
    
    (1,597,000
    )
    
    
    (847,000
    )
    
    
    (3,676,000
    )
    
    
    
    
    
    
    (4,523,000
    )Unallocated (expense) / incomeMarketing, general and
administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,487,000
    )
    
    
    (1,487,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,533,000
    )
    
    
    (2,533,000
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (871,000
    )
    
    
    (871,000
    )Gain on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,930,000
    
    
    
    2,930,000Operating lease impairment charge
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (100,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investment and other income
    
    
    
    
    
    
    
    
    
    
    139,000
    
    
    
    139,000
    
    
    
    
    
    
    
    
    
    
    
    294,000
    
    
    
    294,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (56,000
    )
    
    
    (56,000
    )
    
    
    
    
    
    
    
    
    
    
    (477,000
    )
    
    
    (477,000
    )Total
    
    
    
    
    
    
    
    
    
    
    (1,504,000
    )
    
    
    (1,504,000
    )
    
    
    
    
    
    
    
    
    
    
    (657,000
    )
    
    
    (657,000
    )Income (loss) before income taxes
    
    $
    346,000
    
    
    $
    (1,943,000
    )
    
    $
    (1,504,000
    )
    
    $
    (3,101,000
    )
    
    $
    (847,000
    )
    
    $
    (3,676,000
    )
    
    $
    (657,000
    )
    
    $
    (5,180,000
    )
 Six Months Ended June 30, 2007
    
    
    Six Months Ended June 30, 2006Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    8,054,000
    
    
    $
    2,888,000
    
    
    $
    
    
    
    $
    10,942,000
    
    
    $
    6,702,000
    
    
    $
    1,402,000
    
    
    $
    
    
    
    $
    8,104,000Cost of revenues
    
    
    2,226,000
    
    
    
    3,274,000
    
    
    
    
    
    
    
    5,500,000
    
    
    
    2,785,000
    
    
    
    3,680,000
    
    
    
    
    
    
    
    6,465,000Gross margin (loss)
    
    
    5,828,000
    
    
    
    (386,000
    )
    
    
    
    
    
    
    5,442,000
    
    
    
    3,917,000
    
    
    
    (2,278,000
    )
    
    
    
    
    
    
    1,639,000Direct expenses
    
    
    5,409,000
    
    
    
    3,619,000
    
    
    
    
    
    
    
    9,028,000
    
    
    
    5,723,000
    
    
    
    5,468,000
    
    
    
    
    
    
    
    11,191,000Segment contribution (loss)
    
    
    419,000
    
    
    
    (4,005,000
    )
    
    
    
    
    
    
    (3,586,000
    )
    
    
    (1,806,000
    )
    
    
    (7,746,000
    )
    
    
    
    
    
    
    (9,552,000
    )Unallocated (expense) / incomeMarketing, general and
administrative expense
    
    
    
    
    
    
    
    
    
    
    (3,063,000
    )
    
    
    (3,063,000
    )
    
    
    
    
    
    
    
    
    
    
    (5,171,000
    )
    
    
    (5,171,000
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (178,000
    )
    
    
    (178,000
    )
    
    
    
    
    
    
    
    
    
    
    (871,000
    )
    
    
    (871,000
    )Gain on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,930,000
    
    
    
    2,930,000Operating lease impairment charge
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (100,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    1,000,000Investment and other income
    
    
    
    
    
    
    
    
    
    
    294,000
    
    
    
    294,000
    
    
    
    
    
    
    
    
    
    
    
    511,000
    
    
    
    511,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (106,000
    )
    
    
    (106,000
    )
    
    
    
    
    
    
    
    
    
    
    (895,000
    )
    
    
    (895,000
    )Total
    
    
    
    
    
    
    
    
    
    
    (1,153,000
    )
    
    
    (1,153,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,496,000
    )
    
    
    (2,496,000
    )Income (loss) before income taxes
    
    $
    419,000
    
    
    $
    (4,005,000
    )
    
    $
    (1,153,000
    )
    
    $
    (4,739,000
    )
    
    $
    (1,806,000
    )
    
    $
    (7,746,000
    )
    
    $
    (2,496,000
    )
    
    $
    (12,048,000
    )
   June 30, 2007
    
    December 31, 2006Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    e-Prescribing
    
    Corporate
    
    Total
    
    Encryption
    
    e-Prescribing
    
    Corporate
    
    TotalTotal Assets
    
    $
    3,481,000
    
    
    $
    1,476,000
    
    
    $
    14,074,000
    
    
    $
    19,031,000
    
    
    $
    3,377,000
    
    
    $
    1,813,000
    
    
    $
    15,176,000
    
    
    $
    20,366,000
 11




---



##### Table of Contents



6. Stock Options and Stock-based Employee Compensation
   Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2007Cost of revenues
    
    $
    41,000
    
    
    $
    88,000Research and development expenses
    
    
    30,000
    
    
    
    63,000Selling, general and administrative expenses
    
    
    293,000
    
    
    
    741,000Stock-based compensation expense
    
    $
    364,000
    
    
    $
    892,000
   Stock Option Activity
  Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (Yrs)
    
    
    ValueOutstanding at March 31, 2007
    
    
    9,618,936
    
    
    $
    5.29Granted at market price
    
    
    104,240
    
    
    $
    1.80Granted above market price
    
    
    
    
    
    $
    Cancelled or expired
    
    
    (163,534
    )
    
    $
    2.32Exercised
    
    
    
    
    
    $
    Outstanding at June 30, 2007
    
    
    9,559,642
    
    
    $
    5.30
    
    
    
    6.20
    
    
    $
    742,000Options exercisable at June 30, 2007
    
    
    6,588,017
    
    
    $
    6.67
    
    
    
    5.14
    
    
    $
    132,000
  Common Stock Issued in Lieu of Cash
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Common stock issued to employees for compensation in lieu of cash
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    157,000Stock granted to third parties
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    30,000Total
    
    $
    
    
    
    $
    10,000
    
    
    $
    
    
    
    $
    187,000
  7. Supplemental Cash Flow Information
  12




---



##### Table of Contents



Six Months Ended June 30,2007
    
    2006Cash paid for interest
    
    $
    45,000
    
    
    $
    259,000Cash paid for income tax
    
    $
    96,000
    
    
    $
    42,000Noncash investing and financing activities:Issuance of common stock and warrants related to the restructure of the
prior promissory note payable
    
    $
    1,393,000
    
    
    $
    Issuance of a replacement promissory note payable
    
    $
    1,477,000
    
    
    $
    Accrued expenses relating to private placement of common stock (Note 13)
    
    $
    
    
    
    $
    94,000Valuation of beneficial conversion, net of subsequent reversal (Note 12)
    
    $
    
    
    
    $
    94,000Accrued expenses related to fixed asset purchases
    
    $
    33,000
    
    
    $
    40,000Assets sold to customers as part of their subscription service
    
    $
    4,000
    
    
    $
    19,000Value of additional warrants issued (Note 12)
    
    $
    
    
    
    $
    130,000
 8. Restricted Cash
  9. Receivables, net
 June 30,
    
    
    December 31,2007
    
    
    2006Gross trade accounts receivable
    
    $
    5,138,000
    
    
    $
    4,523,000Allowance for returns and doubtful accounts
    
    
    (64,000
    )
    
    
    (71,000
    )Unpaid portion of deferred revenue
    
    
    (4,263,000
    )
    
    
    (3,706,000
    )Trade receivables, net
    
    
    811,000
    
    
    
    746,000Note receivable
    
    
    488,000
    
    
    
    488,000Allowance for note receivable
    
    
    (488,000
    )
    
    
    (488,000
    )Note receivables, net
    
    
    
    
    
    
    Total receivables, net
    
    $
    811,000
    
    
    $
    746,000
     13




---



##### Table of Contents



10. Prepaid and other current assets
 June 30,
    
    
    December 31,2007
    
    
    2006Inventory
    
    $
    402,000
    
    
    $
    767,000Deferred cost of sales charges
    
    
    389,000
    
    
    
    334,000Prepaid insurance, maintenance and other
    
    
    940,000
    
    
    
    1,025,000Tax related
    
    
    15,000
    
    
    
    52,000Prepaid and other current assets
    
    $
    1,746,000
    
    
    $
    2,178,000
 Inventory
 Deferred cost of sales charges
 Prepaid insurance, maintenance and other
 11. Customer Deposit
    12. Notes Payable
  14




---



##### Table of Contents



Promissory
    
    
    
    
    
    
    Promissorynote payable
    
    
    Short-Term
    
    
    note payable
    
    
    Totalsanofi-aventis
    
    
    note payable
    
    
    sanofi-aventis
    
    
    note payableStated interest rate
    
    
    4.50
    %
    
    
    6.99
    %
    
    
    5.00
    %Effective interest rate
    
    
    11.00
    %
    
    
    6.99
    %
    
    
    9.09
    %Term
    
    Mar-07
    
    Nov-07
    
    Jan-10December 31, 2006, net book value
    
    $
    2,661,000
    
    
    $
    255,000
    
    
    $
    
    
    
    $
    2,916,000Additional discount / warrants
    
    
    (139,000
    )
    
    
    
    
    
    
    (126,000
    )
    
    
    (265,000
    )Extinguishment of debt
    
    
    (2,700,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,700,000
    )Loss on extinguishment
    
    
    178,000
    
    
    
    
    
    
    
    
    
    
    
    178,000Additional debt / discount / amortization
    
    
    
    
    
    
    
    
    
    
    1,619,000
    
    
    
    1,619,000Payments made
    
    
    
    
    
    
    (151,000
    )
    
    
    
    
    
    
    (151,000
    )June 30, 2007, net book value
    
    $
    
    
    
    $
    104,000
    
    
    $
    1,493,000
    
    
    $
    1,597,000
 Promissory Note Payable
        15




---



##### Table of Contents



Debt Extinguishment Determination:Present value of new note payable
    
    $
    1,474,000Issuance of common stock (700,000 shares @ $1.81/share)
    
    
    1,267,000Black Scholes value of warrants issued
    
    
    126,000Paid fees & expenses
    
    
    11,000Total consideration given
    
    $
    2,878,000Loss on extinguishment of debt
    
    
    (178,000
    )Original note value
    
    $
    2,700,000Recording of New Note:New note value
    
    $
    1,600,000Discount on note payable
    
    
    (126,000
    )Issuance of common stock (700,000 shares @ $0.01/share)
    
    
    7,000Additional paid in capital
    
    
    1,260,000Additional paid in warrants
    
    
    126,000Accrued expenses
    
    
    11,000Total consideration given
    
    $
    2,878,000
 Short-term Notes Payable
  Convertible Promissory Notes Payable
  13. April 2006 Private Placement of Common Stock
     16




---



##### Table of Contents



.
  Gross proceeds
    
    $
    11,817,000Less:Fair value of warrants and liquidated damages to
investors
    
    
    (6,024,000
    )Liquidated damages for common stock
    
    
    (77,000
    )Potential future payments to brokers
    
    
    (60,000
    )Warrants issued to underwriters
    
    
    (199,000
    )Cash issuance costs
    
    
    (908,000
    )Proceeds allocated to common stock
    
    $
    4,549,000
        17




---



##### Table of Contents



(Gain)/April 5, 2006
    
    
    Loss on
    
    
    June 30, 2006Derivative Liability
    
    Fair Value
    
    
    Revaluation
    
    
    Fair ValueLiquidated damages related to common stock
    
    $
    77,000
    
    
    $
    (7,000
    )
    
    $
    70,000Warrants issued to investors and related liquidated damages
    
    
    6,024,000
    
    
    
    (2,925,000
    )
    
    
    3,099,000Potential future payments to transaction underwriters
    
    
    60,000
    
    
    
    2,000
    
    
    
    62,000Total
    
    $
    6,161,000
    
    
    $
    (2,930,000
    )
    
    $
    3,231,000
 Accounting for
Registration Payment Arrangements
 14. Loss on Impairment of Operating Lease
  15. Earnings Per Share and Potential Dilution
  June 30,2007
    
    2006Stock options
    
    
    9,559,642
    
    
    
    8,482,042Warrants issued in relation to debt and equity arrangements
    
    
    13,365,742
    
    
    
    10,721,576Shares issuable for conversion of convertible promissory notes payable
    
    
    
    
    
    
    988,318Total antidilutive securities excluded from EPS Calculation
    
    
    22,925,384
    
    
    
    20,191,936
 16. Contingencies
  18




---



##### Table of Contents



ITEM 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
   19




---



##### Table of Contents




    
    Rate of new subscriptions (termed new first year orders) for the Email Encryption Service;
    
    Renewal rates for the Email Encryption Service;
    
    e-Prescribing service to physicians by new and/or existing payors;
    
    Successful adoption and usage of the e-Prescribing service by physicians;
    
    Retention of the users (physicians) of the e-Prescribing service;
    
    Future transaction fees (or related fees) associated with the
use of the e-Prescribing service; and
    
    Our ability to increase business volume with reasonable cost increases.
  20




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Property and Equipment, Long-Lived and Other Intangible Assets, Depreciation and Amortization
   Deferred Tax Assets
 Revenue Recognition Software Revenue Recognition, Modification of SOP 97-2, Software Revenue
Recognition, With respect to Certain Transactions, Revenue Arrangements
with Multiple Deliverables, Revenue Recognition in Financial Statements,
 21




---



##### Table of Contents



Deferred cost of sales charge
 Stock-based compensation Share-Based
Payment Accounting for Stock Issued to
Employees
 Results of Operations
 Second Quarter 2007 Summary of Operations
 Financial Statement
 
    
    Revenue for the quarter ended June 30, 2007, was $5,555,000 compared with $4,209,000 for the same period in 2006.
 22




---



##### Table of Contents




    
    Gross Margin for the quarter ended June 30, 2007, was $2,908,000 or 52% of revenues compared to $1,119,000 or 27% of
revenues for the comparable period in 2006.
    
    Email Encryption  gross margin for this segment for the quarter ended June 30, 2007, was $3,089,000 or 75% of revenues
totaling $4,120,000 compared to $2,050,000 or 61% of revenues totaling $3,369,000 for the comparable period in 2006.
    
    e-Prescribing  the gross margin loss incurred by this segment for the quarter ended June 30, 2007, was $181,000 or a
negative 13% of revenues totaling $1,435,000 compared to a loss of $931,000 or a negative 111% of revenues totaling
$840,000 for the comparable period in 2006.
    
    Loss on impairment of operating lease totaling $100,000 was realized in the quarter ended June 30, 2007, relating to
the sublease of the Companys Mason, Ohio office location in April 2007. The loss is comprised of the difference
between future cash payments less future cash receipts from the sub-leasing arrangement. External costs to find a
lessee were expensed in the period incurred. The accrued liability of $100,000 at June 30, 2007, will be amortized over
the remaining life of the lease (31 months).
    
    Loss before income taxes for the quarter ended June 30, 2007, was $3,101,000 compared with a loss before income taxes
of $5,180,000 for the same period in 2006.
    
    The Companys ending unrestricted cash balance at June 30, 2007, was $10,436,000.
    
    Cash provided by operations for the first six months of 2007 was $12,000. Total cash and cash equivalent balances
(including unrestricted and restricted cash) decreased by $350,000 in the second quarter of 2007 (calculated by
subtracting the net Restricted Cash Investments from Decrease in Cash and Cash Equivalents as reported in the Condensed
Consolidated Statements of Cash Flows).
 Operations
 
    
    The Company secured new first year orders in the quarter ended June 30, 2007, totaling $1,397,000 for its Email
Encryption services and achieved customer contract renewals of 100% on a contract value basis for Email Encryption
customers, as discussed below under Revenues  Email Encryption.
    
    The Company deployed approximately 557 new e-Prescribing devices to physicians under sponsorship arrangements with
several insurance payor/sponsors.
    
    The Company exceeded 1,830,000 electronic prescriptions transacted in the three months ended June 30, 2007, through use
of its e-Prescribing service.
 Revenues
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended, June 30,
    
    
    2007 vs. 2006
    
    
    Six Months Ended, June 30,
    
    
    2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Email Encryption
    
    $
    4,120,000
    
    
    $
    3,369,000
    
    
    $
    751,000
    
    
    
    22
    %
    
    $
    8,054,000
    
    
    $
    6,702,000
    
    
    $
    1,352,000
    
    
    
    20
    %e-Prescribing
    
    
    1,435,000
    
    
    
    840,000
    
    
    
    595,000
    
    
    
    71
    %
    
    
    2,888,000
    
    
    
    1,402,000
    
    
    
    1,486,000
    
    
    
    106
    %Total revenues
    
    $
    5,555,000
    
    
    $
    4,209,000
    
    
    $
    1,346,000
    
    
    
    32
    %
    
    $
    10,942,000
    
    
    $
    8,104,000
    
    
    $
    2,838,000
    
    
    
    35
    %
 Email Encryption 
 23




---



##### Table of Contents



e-Prescribing 
  Revenue Outlook:
 Revenue Indicators  Backlog, Orders, and Deployments
 Company-wide backlog 
   Email Encryption Orders 
 24




---



##### Table of Contents



2007
    
    
    2006Three month period ending:March 31
    
    $
    1,352,000
    
    
    $
    1,011,000June 30
    
    
    1,397,000
    
    
    
    1,402,000September 30
    
    
    
    
    
    
    1,234,000December 31
    
    
    
    
    
    
    1,089,000Total new first year orders
    
    $
    2,749,000
    
    
    $
    4,736,000
  e-Prescribing 
  25




---



##### Table of Contents



Cost of Revenues
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree
Months Ended, June 30,
    
    
    2007 vs. 2006
    
    

Six
Months Ended, June 30,
    
    
    2007 vs. 20062007
    
    
    2006
    
    
    $
    
    
    %
    
    
    2007
    
    
    2006
    
    
    $
    
    
    %Email Encryption
    
    $
    1,031,000
    
    
    $
    1,319,000
    
    
    $
    (288,000
    )
    
    
    (22
    %)
    
    $
    2,226,000
    
    
    $
    2,785,000
    
    
    $
    (559,000
    )
    
    
    (20
    %)e-Prescribing
    
    
    1,616,000
    
    
    
    1,771,000
    
    
    
    (155,000
    )
    
    
    (9
    %)
    
    
    3,274,000
    
    
    
    3,680,000
    
    
    
    (406,000
    )
    
    
    (11
    %)Total cost of revenues
    
    $
    2,647,000
    
    
    $
    3,090,000
    
    
    $
    (443,000
    )
    
    
    (14
    %)
    
    $
    5,500,000
    
    
    $
    6,465,000
    
    
    $
    (965,000
    )
    
    
    (15
    %)
  Email Encryption 
 e-Prescribing 
 Research and Development Expenses
  3-month Variance
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended, June 30,
    
    2007 vs. 2006
    
    Six Months Ended, June 30,
    
    2007 vs. 20062007
    
    2006
    
    $
    
    %
    
    2007
    
    2006
    
    $
    
    %Total Research and Development
    
    
    1,343,000
    
    
    
    1,626,000
    
    
    
    (283,000
    )
    
    
    (17
    %)
    
    
    2,642,000
    
    
    
    3,221,000
    
    
    
    (579,000
    )
    
    
    (18
    %)
 26




---



##### Table of Contents



Selling, General and Administrative Expenses
   3-month Variance
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended, June 30,
    
    2007 vs. 2006
    
    Six Months Ended, June 30,
    
    2007 vs. 20062007
    
    2006
    
    $
    
    %
    
    2007
    
    2006
    
    $
    
    %Total selling, general and
administrative expenses
    
    
    4,649,000
    
    
    
    6,549,000
    
    
    
    (1,900,000
    )
    
    
    (29
    %)
    
    
    9,449,000
    
    
    
    13,141,000
    
    
    
    (3,692,000
    )
    
    
    (28
    %)
   Loss on impairment of operating lease
  Customer Deposit Forfeiture
  Investment and Other Income
  27




---



##### Table of Contents



Interest Expense
   Stated
    
    
    FinancingInterest on
    
    
    Cost
    
    
    Warrants
    
    
    Discount
    
    
    Total InterestNotes
    
    
    Amortization
    
    
    Issued
    
    
    Amortization
    
    
    ExpensePromissory note payable (original note)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    39,000
    
    
    $
    39,000Promissory note payable (new note)
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    19,000
    
    
    
    43,000Short-term promissory note
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000Other
    
    
    17,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,000Total
    
    $
    48,000
    
    
    $
    
    
    
    $
    
    
    
    $
    58,000
    
    
    $
    106,000
  Stated
    
    
    FinancingInterest on
    
    
    Cost
    
    
    Warrants
    
    
    Discount
    
    
    Total InterestNotes
    
    
    Amortization
    
    
    Issued
    
    
    Amortization
    
    
    ExpenseConvertible promissory note payable
    
    $
    185,000
    
    
    $
    122,000
    
    
    $
    10,000
    
    
    $
    354,000
    
    
    $
    671,000Promissory note payable (original note)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211,000
    
    
    
    211,000Short-term promissory note
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000Capital leases
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000Total notes payable
    
    $
    198,000
    
    
    $
    122,000
    
    
    $
    10,000
    
    
    $
    565,000
    
    
    $
    895,000
   Gain on Derivative Liability
  Loss on extinguishment of debt
  28




---



##### Table of Contents



Income Taxes
    Net Loss
  29




---



##### Table of Contents



Liquidity and Capital Resources
 Overview
     Email Encryption
 e-Prescribing
   30




---



##### Table of Contents



Sources and Uses of Cash Summary
   Six Months Ended June 30,2007
    
    
    2006
    
    
    VarianceOperating Cash Receipts
    
    $
    15,935,000
    
    
    $
    9,388,000
    
    
    $
    6,547,000
    
    
    
    70
    %Net Operating Cash Spending
    
    
    (15,923,000
    )
    
    
    (19,992,000
    )
    
    
    4,069,000
    
    
    
    20
    %Net Cash (Used) Provided by Operating Activities
    
    $
    12,000
    
    
    $
    (10,604,000
    )
    
    $
    10,616,000
    
    
    
    100
    %
  31




---



##### Table of Contents



Cash Sources
  
    
    contractual backlog;
    
    Email Encryption growth and retention;
    
    e-Prescribing growth and retention; and
    
    e-Prescribing transaction and performance-based fees.
 Backlog
 Email Encryption growth and retention
 e-Prescribing growth and retention
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e-Prescribing transaction and performance-based fees
      Liquidity Summary
  
    
    As of June 30, 2007, total cash on hand was $12,136,000 (including $1,700,000 of
restricted cash);
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##### Table of Contents




    
    Cash receipts for the next twelve months are projected to be approximately
$30,600,000 based on current contracted billings, estimated contract renewals, prepay
amounts and estimated new business; and
    
    Operating spending including debt payments and capital asset purchases for the next
twelve months is projected to be approximately $34,700,000 based on the Companys
organization and order and deployment rates as of June 30, 2007.
  Options
and Warrants of Zix Corporation Common Stock
  Summary of Outstanding Options and WarrantsVested SharesTotal Value of
    
    
    (included inOutstanding
    
    
    Outstanding
    
    
    Outstanding
    
    
    Total Value ofExercise Price Range
    
    Shares
    
    
    Shares
    
    
    shares)
    
    
    Vested Shares$1.21 - $1.99
    
    
    8,990,310
    
    
    $
    13,845,078
    
    
    
    7,214,815
    
    
    $
    11,110,815$2.00 - $3.49
    
    
    5,241,856
    
    
    
    15,620,731
    
    
    
    4,474,137
    
    
    
    13,419,685$3.50 - $4.99
    
    
    3,604,864
    
    
    
    15,609,063
    
    
    
    3,251,454
    
    
    
    14,123,879$5.00 - $5.99
    
    
    1,651,448
    
    
    
    8,537,986
    
    
    
    1,651,448
    
    
    
    8,537,986$6.00 - $8.99
    
    
    1,032,715
    
    
    
    6,599,049
    
    
    
    957,715
    
    
    
    6,118,083$9.00 - $19.99
    
    
    1,266,495
    
    
    
    13,462,842
    
    
    
    1,266,495
    
    
    
    13,462,842$20.00 - $57.60
    
    
    1,137,695
    
    
    
    60,548,128
    
    
    
    1,137,695
    
    
    
    60,547,051Total
    
    
    22,925,383
    
    
    $
    134,222,877
    
    
    
    19,953,759
    
    
    $
    127,320,341
 Off-Balance Sheet Arrangements
  Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    2-3 Year
    
    
    > 3 YearsDebt (long-term and short-term)
    
    $
    1,835,000
    
    
    $
    338,000
    
    
    $
    1,497,000
    
    
    $
    Operating leases and other
    
    
    7,423,000
    
    
    
    1,361,000
    
    
    
    2,158,000
    
    
    
    3,904,000Total
    
    $
    9,258,000
    
    
    $
    1,699,000
    
    
    $
    3,655,000
    
    
    $
    3,904,000
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 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
    
    Restated Bylaws of Zix Corporation, dated October 30, 2002. Filed as Exhibit 3.2 to Zix
Corporations Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2002, and incorporated herein by reference.10.1
    
    Zix Corporation 2006 Directors Stock Option Plan (amended and restated as of June 7, 2007).
Filed as Exhibit 10.1 to the Companys Current Report on Form 8-K, dated June 11, 2007, and
incorporated herein by reference.10.2
    
    Form of non-employee director stock option agreements and individual vesting schedules with
respect to June 7, 2007, option grants to non-employee directors. Filed as Exhibit 10.2 to
the Companys Current Report on Form 8-K, dated June 11, 2007, and incorporated herein by
reference.10.3
    
    Zix Corporation 2004 Stock Option Plan (amended and restated as of June 7, 2007). Filed as
Exhibit 10.3 to the Companys Current Report on Form 8-K, dated June 11, 2007, and
incorporated herein by reference.10.4
    
    Zix Corporation 2003 New Employee Stock Option Plan (amended and restated as of June 7,
2007). Filed as Exhibit 10.4 to the Companys Current Report on Form 8-K, dated June 11,
2007, and incorporated herein by reference.
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##### Table of Contents



Exhibit No.
    
    Description of Exhibits10.5
    
    Zix Corporation 2001 Stock Option Plan (amended and restated as of June 7, 2007). Filed as
Exhibit 10.5 to the Companys Current Report on Form 8-K, dated June 11, 2007, and
incorporated herein by reference.10.6
    
    Zix Corporation 2001 Employee Stock Option Plan (amended and restated as of June 7, 2007).
Filed as Exhibit 10.6 to the Companys Current Report on Form 8-K, dated June 11, 2007, and
incorporated herein by reference.10.7
    
    Description of Zix Corporation 2007 Management Variable Compensation Plan. Filed as Exhibit
10.7 to the Companys Current Report on Form 8-K, dated June 11, 2007, 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 Barry W. Wilson, Chief Financial Officer and Treasurer 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
Barry W. Wilson, Chief Financial Officer and Treasurer of the Company, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 37




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SIGNATURES
  ZIX CORPORATIONBy:
    /s/ Barry W. WilsonBarry W. WilsonChief Financial Officer and Treasurer  Signature
    
    Title/s/ Richard D. Spurr

(Richard D. Spurr)
    
    Chairman, Chief Executive Officer, President and Director (Principal
Executive Officer)/s/ Barry W. Wilson

(Barry W. Wilson)
    
    Chief Financial Officer and Treasurer (Principal
Financial and Accounting Officer)/s/ Robert C. Hausmann

(Robert C. Hausmann)
    
    Director/s/ Charles N. Kahn III

(Charles N. Kahn III)
    
    Director/s/ James S. Marston

(James S. Marston)
    
    Director/s/ Antonio R. Sanchez III

(Antonio R. Sanchez III)
    
    Director/s/ Paul E. Schlosberg

(Paul E. Schlosberg)
    
    Director
 38