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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 March 31, 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
(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 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 May 1, 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 March 31, 2007 (unaudited) and December 31, 2006 (audited)
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006
    
    
    4Condensed Consolidated Statement of Stockholders Equity for the three months ended March 31, 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 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
    
    
    37Stock Option Agreement - Russell MorganStock Option Agreement - David RobertsonStock Option Agreement - Richard D. SpurrStock Option Agreement - Barry WilsonStock Option Agreement - Ronald A WoessnerSubleaseCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906
  2




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ZIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,786,000
    
    
    $
    12,783,000Receivables, net
    
    
    762,000
    
    
    
    746,000Prepaid and other current assets
    
    
    1,720,000
    
    
    
    2,178,000Total current assets
    
    
    13,268,000
    
    
    
    15,707,000Restricted cash
    
    
    1,700,000
    
    
    
    35,000Property and equipment, net
    
    
    2,168,000
    
    
    
    2,404,000Intangible assets, net
    
    
    
    
    
    
    23,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Deferred financing costs and other assets
    
    
    53,000
    
    
    
    36,000Total assets
    
    $
    19,350,000
    
    
    $
    20,366,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    278,000
    
    
    $
    221,000Accrued expenses
    
    
    2,853,000
    
    
    
    3,079,000Deferred revenue
    
    
    9,498,000
    
    
    
    8,388,000Customer deposit
    
    
    5,000
    
    
    
    2,000,000Promissory note payable
    
    
    
    
    
    
    2,661,000Short-term note payable
    
    
    180,000
    
    
    
    255,000Total current liabilities
    
    
    12,814,000
    
    
    
    16,604,000Long-term liabilities:Deferred revenue
    
    
    3,517,000
    
    
    
    2,496,000Promissory note payable
    
    
    1,477,000
    
    
    
    Deferred rent
    
    
    335,000
    
    
    
    339,000Total long-term liabilities
    
    
    5,329,000
    
    
    
    2,835,000Total liabilities
    
    
    18,143,000
    
    
    
    19,439,000Commitments and contingencies (see Note 14)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; 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
    
    
    324,244,000
    
    
    
    322,330,000Treasury stock, at cost; 2,327,181 common shares in 2007 and 2006
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (312,157,000
    )
    
    
    (310,516,000
    )Total stockholders equity
    
    
    1,207,000
    
    
    
    927,000Total liabilities and stockholders equity
    
    $
    19,350,000
    
    
    $
    20,366,000
  3




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ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended March 31,2007
    
    
    2006Revenues
    
    $
    5,387,000
    
    
    $
    3,895,000Cost of revenues
    
    
    2,853,000
    
    
    
    3,375,000Gross margin
    
    
    2,534,000
    
    
    
    520,000Operating expenses:Research and development expenses
    
    
    1,299,000
    
    
    
    1,595,000Selling, general and administrative expenses
    
    
    4,800,000
    
    
    
    6,592,000Customer deposit forfeiture
    
    
    (2,000,000
    )
    
    
    (1,000,000
    )Total operating expenses
    
    
    4,099,000
    
    
    
    7,187,000Operating loss
    
    
    (1,565,000
    )
    
    
    (6,667,000
    )Other (expense) income:Investment and other income
    
    
    155,000
    
    
    
    217,000Interest expense
    
    
    (50,000
    )
    
    
    (418,000
    )Loss on extinguishment of debt
    
    
    (178,000
    )
    
    
    Total other (expense) income
    
    
    (73,000
    )
    
    
    (201,000
    )Loss before income taxes
    
    
    (1,638,000
    )
    
    
    (6,868,000
    )Income taxes
    
    
    (3,000
    )
    
    
    (6,000
    )Net loss
    
    $
    (1,641,000
    )
    
    $
    (6,874,000
    )Basic and diluted loss per common share
    
    $
    (0.03
    )
    
    $
    (0.14
    )Basic and diluted weighted average common shares outstanding
    
    
    59,879,950
    
    
    
    49,654,338
  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, 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
    
    
    
    
    
    
    
    
    
    
    483,000
    
    
    
    
    
    
    
    
    
    
    
    483,000Non-employee stock-based compensation
    
    
    
    
    
    
    
    
    
    
    45,000
    
    
    
    
    
    
    
    
    
    
    
    45,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,641,000
    )
    
    
    (1,641,000
    )Balance, March 31, 2007
    
    
    62,666,020
    
    
    $
    627,000
    
    
    $
    324,244,000
    
    
    $
    (11,507,000
    )
    
    $
    (312,157,000
    )
    
    $
    1,207,000
  5




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ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months Ended March 31,2007
    
    
    2006Operating activities:Net loss
    
    $
    (1,641,000
    )
    
    $
    (6,874,000
    )Non-cash items in net loss:Depreciation and amortization
    
    
    473,000
    
    
    
    779,000Amortization of debt discount / premium, financing costs and other
    
    
    
    
    
    
    307,000Value of additional warrants issued
    
    
    
    
    
    
    10,000Loss on extinguishment of debt
    
    
    178,000
    
    
    
    Employee share-based compensation costs
    
    
    483,000
    
    
    
    767,000Non-employee share-based compensation
    
    
    45,000
    
    
    
    3,000Customer deposit forfeiture
    
    
    (2,000,000
    )
    
    
    (1,000,000
    )Changes in deferred taxes
    
    
    (17,000
    )
    
    
    Common stock issued to employees and non-employee in lieu of cash
    
    
    
    
    
    
    177,000Changes in operating assets and liabilities, excluding effects of acquisitions:Receivables
    
    
    (16,000
    )
    
    
    (264,000
    )Prepaid and other current assets
    
    
    458,000
    
    
    
    195,000Accounts payable
    
    
    90,000
    
    
    
    (197,000
    )Deferred revenue
    
    
    2,131,000
    
    
    
    801,000Accrued and other liabilities
    
    
    (194,000
    )
    
    
    (250,000
    )Net cash used by operating activities
    
    
    (10,000
    )
    
    
    (5,546,000
    )Investing activities:Purchases of property and equipment
    
    
    (247,000
    )
    
    
    (398,000
    )Restricted cash investments, net
    
    
    (1,665,000
    )
    
    
    Net cash used by investing activities
    
    
    (1,912,000
    )
    
    
    (398,000
    )Financing activities:Payment of short-term notes payable, capital leases and other
    
    
    (75,000
    )
    
    
    (138,000
    )Net cash used by financing activities
    
    
    (75,000
    )
    
    
    (138,000
    )Decrease in cash and cash equivalents
    
    
    (1,997,000
    )
    
    
    (6,082,000
    )Cash and cash equivalents, beginning of period
    
    
    12,783,000
    
    
    
    20,240,000Cash and cash equivalents, end of period
    
    $
    10,786,000
    
    
    $
    14,158,000
  6




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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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8




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
    
    As of March 31, 2007, total cash on hand was $12,486,000 (including $1,700,000 of
restricted cash);
    
    Cash receipts for the next twelve months are projected to be approximately
$28,900,000 based on current contracted billings and estimated contract renewals and new
business; and
    
    Operating spending plus capital asset purchases for the next twelve months is
projected to be approximately $33,400,000 based upon the Companys organization and order and deployment rates as of March 31,
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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5. Segment Information
     10




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##### Table of Contents



Three Months Ended March 31, 2007
    
    
    Three Months Ended March 31, 2006Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    3,934,000
    
    
    $
    1,453,000
    
    
    $
    
    
    
    $
    5,387,000
    
    
    $
    3,333,000
    
    
    $
    562,000
    
    
    $
    
    
    
    $
    3,895,000Cost of revenues
    
    
    1,195,000
    
    
    
    1,658,000
    
    
    
    
    
    
    
    2,853,000
    
    
    
    1,466,000
    
    
    
    1,909,000
    
    
    
    
    
    
    
    3,375,000Gross margin (loss)
    
    
    2,739,000
    
    
    
    (205,000
    )
    
    
    
    
    
    
    2,534,000
    
    
    
    1,867,000
    
    
    
    (1,347,000
    )
    
    
    
    
    
    
    520,000Direct expenses
    
    
    2,666,000
    
    
    
    1,857,000
    
    
    
    
    
    
    
    4,523,000
    
    
    
    2,945,000
    
    
    
    2,604,000
    
    
    
    
    
    
    
    5,549,000Segment contribution (loss)
    
    
    73,000
    
    
    
    (2,062,000
    )
    
    
    
    
    
    
    (1,989,000
    )
    
    
    (1,078,000
    )
    
    
    (3,951,000
    )
    
    
    
    
    
    
    (5,029,000
    )Unallocated (expense) / income
Marketing, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,576,000
    )
    
    
    (1,576,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,638,000
    )
    
    
    (2,638,000
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (178,000
    )
    
    
    (178,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    
    
    
    
    
    
    
    
    1,000,000
    
    
    
    1,000,000Investment and other income
    
    
    
    
    
    
    
    
    
    
    155,000
    
    
    
    155,000
    
    
    
    
    
    
    
    
    
    
    
    217,000
    
    
    
    217,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    (50,000
    )
    
    
    
    
    
    
    
    
    
    
    (418,000
    )
    
    
    (418,000
    )Total
    
    
    
    
    
    
    
    
    
    
    351,000
    
    
    
    351,000
    
    
    
    
    
    
    
    
    
    
    
    (1,839,000
    )
    
    
    (1,839,000
    )Income (loss) before income taxes
    
    $
    73,000
    
    
    $
    (2,062,000
    )
    
    $
    351,000
    
    
    $
    (1,638,000
    )
    
    $
    (1,078,000
    )
    
    $
    (3,951,000
    )
    
    $
    (1,839,000
    )
    
    $
    (6,868,000
    )
   Three Months Ended March 31, 2007
    
    Year Ended December 31, 2006Email
    
    e-
    
    
    
    
    
    
    
    
    
    Email
    
    e-Encryption
    
    Prescribing
    
    Corporate
    
    Total
    
    Encryption
    
    Prescribing
    
    Corporate
    
    TotalTotal Assets
    
    $
    3,258,000
    
    
    $
    1,545,000
    
    
    $
    14,547,000
    
    
    $
    19,350,000
    
    
    $
    3,377,000
    
    
    $
    1,813,000
    
    
    $
    15,176,000
    
    
    $
    20,366,000
 6. Stock Options and Stock-based Employee Compensation
   Three Months EndedMarch 31,2007
    
    
    2006Cost of revenues
    
    $
    47,000
    
    
    $
    33,000Research and development expenses
    
    
    33,000
    
    
    
    32,000Selling, general and administrative expenses
    
    
    403,000
    
    
    
    702,000Stock-based compensation expense
    
    $
    483,000
    
    
    $
    767,000
   11




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Stock Option Activity
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Yrs)
    
    
    ValueOutstanding at December 31, 2006
    
    
    9,676,309
    
    
    $
    5.38Granted at market price
    
    
    246,400
    
    
    $
    1.22Granted above market price
    
    
    23,080
    
    
    $
    1.50Cancelled or expired
    
    
    (326,854
    )
    
    $
    4.77Exercised
    
    
    
    
    
    $
    Outstanding at March 31, 2007
    
    
    9,618,935
    
    
    $
    5.29
    
    
    
    7.05
    
    
    $
    691,000Options exercisable at March 31, 2007
    
    
    6,161,523
    
    
    $
    6.94
    
    
    
    6.01
    
    
    $
    58,000
  Common Stock Issued in Lieu of Cash
  Three Months Ended March 31,2007
    
    
    2006Common stock issued to employees for compensation in lieu of cash
    
    $
    
    
    
    $
    157,000Stock granted to third parties
    
    
    
    
    
    
    20,000Total
    
    $
    
    
    
    $
    177,000
  7. Supplemental Cash Flow Information
  Three Months Ended March 31,2007
    
    2006Cash paid for interest
    
    $
    6,000
    
    
    $
    102,000Cash paid for income tax
    
    $
    25,000
    
    
    $
    Non-cash investing and financing activities:Accrued expenses related to fixed asset purchases
    
    $
    33,000
    
    
    $
    74,000Value of additional warrants issued
    
    $
    
    
    
    $
    50,000Issuance 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
    
    
    $
    
 12




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8. Restricted Cash
  9. Receivables, net
 March 31,
    
    
    December 31,2007
    
    
    2006Gross trade accounts receivable
    
    $
    4,084,000
    
    
    $
    4,370,000Allowance for returns and doubtful accounts
    
    
    (74,000
    )
    
    
    (71,000
    )Unpaid portion of deferred revenue
    
    
    (3,391,000
    )
    
    
    (3,706,000
    )Trade receivables, net
    
    
    619,000
    
    
    
    593,000Note receivable
    
    
    488,000
    
    
    
    488,000Allowance for note receivable
    
    
    (488,000
    )
    
    
    (488,000
    )Note receivables, net
    
    
    
    
    
    
    Other receivable
    
    
    143,000
    
    
    
    153,000Total receivables, net
    
    $
    762,000
    
    
    $
    746,000
      13




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10. Prepaid and other current assets
 March 31,
    
    
    December 31,2007
    
    
    2006Inventory
    
    $
    541,000
    
    
    $
    767,000Deferred cost of sales charges
    
    
    339,000
    
    
    
    334,000Prepaid insurance, maintenance and other
    
    
    830,000
    
    
    
    1,025,000Tax related
    
    
    10,000
    
    
    
    52,000Prepaid and other current assets
    
    $
    1,720,000
    
    
    $
    2,178,000
 Inventory
 Deferred Cost of Revenue
 Prepaid insurance, maintenance
 11. Customer Deposit
    14




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12. Notes Payable
  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
    
    
    
    
    
    
    
    
    
    
    1,603,000
    
    
    
    1,603,000Payments made
    
    
    
    
    
    
    (75,000
    )
    
    
    
    
    
    
    (75,000
    )March 31, 2007, net book value
    
    $
    
    
    
    $
    180,000
    
    
    $
    1,477,000
    
    
    $
    1,657,000
 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
  13. Earnings Per Share and Potential Dilution
  March 31,2007
    
    
    2006Stock options
    
    
    9,618,935
    
    
    
    8,871,059Warrants issued in relation to debt and equity arrangements
    
    
    13,547,193
    
    
    
    7,640,282Shares issuable for conversion of convertible promissory notes payable
    
    
    
    
    
    
    954,199Total antidilutive securities excluded from EPS Calculation
    
    
    23,166,128
    
    
    
    17,465,540
 16




---



##### Table of Contents



14. Contingencies
     15. Subsequent Events
  17




---



##### Table of Contents



ITEM 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
      18




---



##### Table of Contents




    
    Rate of new subscriptions (termed new first year orders) for the Email Encryption Service;
    
    Renewal rates for the Email Encryption Service;
    
    New insurance payor sponsorships of the e-Prescribing service to physicians;
    
    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 PocketScript service; and
    
    Our ability to increase the business volume with reasonable cost increases.
   Critical Accounting Policies and Estimates
  Property and Equipment, Long-Lived and Other Intangible Assets, Depreciation and Amortization
   19




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##### Table of Contents



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,
      20




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##### Table of Contents



Deferred cost of sales charge
 Stock-based compensation Share-Based
Payment Accounting for Stock Issued to
Employees
 Results of Operations
 First Quarter 2007 Summary of Operations
 Financial Statement
 
    
    Revenue for the quarter ended March 31, 2007, was $5,387,000 compared with $3,895,000 for the same period in 2006.
    
    Gross Margin for the quarter ended March 31, 2007, was $2,534,000 or 47% of revenues compared to $520,000 or 13% of
revenues for the comparable period in 2006.
    
    Email Encryption  gross margin for this segment for the quarter ended March 31, 2007, was $2,739,000 or 70% of
revenues totaling $3,934,000 compared to $1,867,000 or 56% of revenues totaling $3,333,000 for the comparable period in
2006.
    
    e-Prescribing  the margin loss incurred by this segment for the quarter ended March 31, 2007, was $205,000 or a
negative 14% of revenues totaling $1,453,000 compared to a loss of $1,347,000 or a negative 240% of revenues totaling
$562,000 for the comparable period in 2006.
    
    Customer deposit forfeiture of $2,000,000 was incurred in the quarter ended March 31, 2007, compared with a $1,000,000
forfeiture for the same period in 2006.
    
    Loss on extinguishment of debt totaling $178,000 was realized in the quarter ended March 31, 2007, resulting from the
restructuring of the original promissory note with sanofi-aventis, SA.
    
    Net loss for the quarter ended March 31, 2007, was $1,641,000 compared with a net loss of $6,874,000 for the same
period in 2006.
    
    The Companys ending unrestricted cash balance at March 31, 2007, was $10,786,000.
    
    Cash used in operations was $10,000, and total cash and cash equivalent balances (including unrestricted and restricted
cash) decreased by $332,000 in the quarter (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). Restricted cash
increased and unrestricted cash decreased by $1,665,000 during the quarter principally due to the issuance of a Letter
of Credit in the amount of $1,675,000 to secure a new promissory note issued in favor of sanofi-aventis, SA as part of
restructuring the original promissory note with sanofi-aventis, SA.
 Operations
 
    
    The Company secured new first year orders in the quarter ended March 31, 2007, totaling $1,352,000 for its Email
Encryption services and maintained a renewal rate of 99.6% for Email Encryption customers.
    
    The Company deployed approximately 500 new e-Prescribing devices to physicians under sponsorship arrangements with
several large insurance payors.
 21




---



##### Table of Contents




    
    The Company exceeded 1,760,000 electronic prescriptions transacted in the three months ended March 31, 2007, through
use of its PocketScript e-Prescribing service.
 Subsequent Event, Sublease agreement (see Note 15 to the condensed consolidated financial
statements)
 
    
    On April 11, 2007,the Company entered into a sublease agreement for the leased premises
located in Mason, Ohio to reduce excess capacity and operating expenses. The term of the
sublease agreement coincides with the Companys property lease. Based upon the sublease
agreement, the Company will reduce rent expense by $33,000, $79,000, and $65,000 in 2007,
2008, and 2009 respectively.
 Revenues
  Three Months Ended March 31,2007
    
    
    2006
    
    
    VarianceEmail Encryption
    
    $
    3,934,000
    
    
    $
    3,333,000
    
    
    $
    601,000
    
    
    
    18
    %e-Prescribing
    
    
    1,453,000
    
    
    
    562,000
    
    
    
    891,000
    
    
    
    159
    %Total revenues
    
    $
    5,387,000
    
    
    $
    3,895,000
    
    
    $
    1,492,000
    
    
    
    38
    %
 Email Encryption 
    22




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##### Table of Contents



e-Prescribing 
  Revenue
Outlook
 Revenue Indicators  Backlog, Orders, and Deployments
 Company-wide backlog 
   Email Encryption Orders 
  23




---



##### Table of Contents



2007
    
    
    2006Three month period ending:March 31
    
    $
    1,352,000
    
    
    $
    970,000June 30
    
    
    
    
    
    
    1,372,000September 30
    
    
    
    
    
    
    1,234,000December 31
    
    
    
    
    
    
    1,089,000Total new first year orders for the twelve months ending December 31
    
    $
    1,352,000
    
    
    $
    4,665,000
  e-Prescribing 
  24




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##### Table of Contents



Cost of Revenues
  Three Months Ended March 31,2007
    
    
    2006
    
    
    VarianceEmail Encryption
    
    $
    1,195,000
    
    
    $
    1,466,000
    
    
    $
    (271,000
    )
    
    
    (18
    %)e-Prescribing
    
    
    1,658,000
    
    
    
    1,909,000
    
    
    
    (251,000
    )
    
    
    (13
    %)Total cost of revenues
    
    $
    2,853,000
    
    
    $
    3,375,000
    
    
    $
    (522,000
    )
    
    
    (15
    %)
  Email Encryption 
 e-Prescribing 
 Research and Development Expenses
  Three Months Ended March 31,2007
    
    
    2006
    
    
    VarianceTotal research and development
    
    $
    1,299,000
    
    
    $
    1,595,000
    
    
    $
    (296,000
    )
    
    
    (19
    %)
  25




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##### Table of Contents



Selling, General and Administrative Expenses
   Three Months Ended March 31,2007
    
    
    2006
    
    
    VarianceTotal selling, general and administrative
    
    $
    4,800,000
    
    
    $
    6,592,000
    
    
    $
    (1,792,000
    )
    
    
    (27
    %)
  Customer Deposit Forfeiture
  Investment and Other Income
  26




---



##### Table of Contents



Interest Expense
  Stated Interest
    
    
    Financing Cost
    
    
    
    
    
    
    Discount
    
    
    Total Intereston Notes
    
    
    Amortization
    
    
    Warrants Issues
    
    
    Amortization
    
    
    ExpensePromissory
note payable (original note)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    38,000
    
    
    $
    38,000Promissory
note payable (new note)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    6,000Short-term promissory note
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Other
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000Total
    
    $
    6,000
    
    
    $
    
    
    
    $
    
    
    
    $
    44,000
    
    
    $
    50,000
  Stated Interest
    
    
    Financing Cost
    
    
    
    
    
    
    Discount
    
    
    Total Intereston Notes
    
    
    Amortization
    
    
    Warrants Issues
    
    
    Amortization
    
    
    ExpenseConvertible promissory note payable
    
    $
    93,000
    
    
    $
    140,000
    
    
    $
    63,000
    
    
    $
    10,000
    
    
    $
    306,000Promissory note payable (original note)
    
    
    
    
    
    
    104,000
    
    
    
    
    
    
    
    
    
    
    
    104,000Short-term promissory note
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000Capital Leases
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000Total notes payable
    
    $
    101,000
    
    
    $
    244,000
    
    
    $
    63,000
    
    
    $
    10,000
    
    
    $
    418,000
   Loss on extinguishment of debt
     27




---



##### Table of Contents



Income Taxes
    Net Loss
  Liquidity and Capital Resources
 Overview
   28




---



##### Table of Contents




    
    Rate of new subscriptions (termed new first-year orders) for the Email Encryption Service;
    
    Renewal rates for the Email Encryption Service;
    
    New insurance payor sponsorships of the e-Prescribing service to physicians;
    
    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 the business volume with reasonable cost increases.
 Email Encryption
 e-Prescribing
 29




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##### Table of Contents



30




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##### Table of Contents



Sources and Uses of Cash Summary
   Three Months Ended March 31,2007
    
    
    2006
    
    
    VarianceOperating Cash Receipts
    
    $
    7,980,000
    
    
    $
    4,896,000
    
    
    $
    3,084,000
    
    
    
    63
    %Net Operating Cash Spending
    
    
    (7,990,000
    )
    
    
    (10,442,000
    )
    
    
    2,452,000
    
    
    
    23
    %Net Cash Used by Operating Activities
    
    $
    (10,000
    )
    
    $
    (5,546,000
    )
    
    $
    5,536,000
    
    
    
    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
 e-Prescribing transaction and performance-based fees
   32




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##### Table of Contents



Cash Requirements
    Liquidity Summary
  
    
    As of March 31, 2007, total cash on hand is $12,486,000 (including $1,700,000 of
restricted cash);
    
    Cash receipts for the next twelve months are projected to be approximately
$28,900,000 based on current contracted billings and estimated contract renewals and new
business; and
    
    Operating spending plus capital asset purchases for the next twelve months is
projected to be approximately $33,400,000 based upon the Companys organization and order and deployment rates as of March 31,
2007.
   33




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##### Table of Contents



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$1.21 - $1.99
    
    
    8,981,165
    
    
    $
    13,763,829
    
    
    
    7,024,458
    
    
    $
    10,809,202$2.00 - $3.49
    
    
    5,291,642
    
    
    
    15,741,400
    
    
    
    4,379,475
    
    
    
    13,150,846$3.50 - $4.99
    
    
    3,799,968
    
    
    
    16,570,001
    
    
    
    3,328,094
    
    
    
    14,588,133$5.00 - $5.99
    
    
    1,653,948
    
    
    
    8,550,911
    
    
    
    1,653,948
    
    
    
    8,550,911$6.00 - $8.99
    
    
    1,035,215
    
    
    
    6,619,508
    
    
    
    918,548
    
    
    
    5,864,674$9.00 - $19.99
    
    
    1,266,495
    
    
    
    13,462,842
    
    
    
    1,266,495
    
    
    
    13,462,842$20.00 - $57.60
    
    
    1,137,695
    
    
    
    60,547,051
    
    
    
    1,137,695
    
    
    
    60,547,051Total
    
    
    23,166,128
    
    
    $
    135,255,542
    
    
    
    19,708,713
    
    
    $
    126,973,659
 Off-Balance Sheet Arrangements
  Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    
    < 1 Year
    
    
    1-3 Year
    
    
    > 3 YearsDebt (long-term and short-term)
    
    $
    1,939,000
    
    
    $
    229,000
    
    
    $
    1,710,000
    
    
    $
    Operating leases
    
    
    8,298,000
    
    
    
    1,324,000
    
    
    
    3,543,000
    
    
    
    3,431,000Total
    
    $
    10,237,000
    
    
    $
    1,553,000
    
    
    $
    5,253,000
    
    
    $
    3,431,000
    34




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    35




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
   
 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
  36




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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
    
    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.4.1
    
    Agreement, dated February 22, 2007, between Zix Corporation and sanofi-aventis U.S. Inc.
Filed as Exhibit 4.1 to Zix Corporations Current Report on Form 8-K, dated February 28,
2007, and incorporated herein by reference.4.2
    
    Secured Promissory Note, dated February 22, 2007, of Zix Corporation issued to sanofi-aventis
U.S. Inc. Filed as Exhibit 4.2 to Zix Corporations Current Report on Form 8-K, dated
February 28, 2007, and incorporated herein by reference.4.3
    
    Warrant, dated February 22, 2007, to purchase 145,853 shares of Common Stock issued by Zix
Corporation to sanofi-aventis U.S. Inc. Filed as Exhibit 4.3 to Zix Corporations Current
Report on Form 8-K, dated February 28, 2007, and incorporated herein by reference.10.1*
    
    Stock Option Agreement, effective as of December 18, 2006, between Russell Morgan and Zix
Corporation covering 85,000 shares.10.2*
    
    Stock Option Agreement, effective as of December 18, 2006, between David Robertson and Zix
Corporation covering 100,000 shares.10.3*
    
    Stock Option Agreement, effective as of December 18, 2006, between Richard D. Spurr and Zix
Corporation covering 400,000 shares.10.4*
    
    Stock Option Agreement, effective as of December 18, 2006, between Barry Wilson and Zix
Corporation covering 30,000 shares.10.5*
    
    Stock Option Agreement, effective as of December 18, 2006, between Ronald A. Woessner and Zix
Corporation covering 80,000 shares.10.6*
    
    Sublease, dated as of April 11, 2007, between PocketScript, Inc., as Sublessor, and
Haverstick Consulting, Inc., as Sublessee.17.1
    
    Letter of Dr. Ben G. Streetman, Resignation from Board of Directors, effective April 4, 2007.
Filed as Exhibit 17.1 to Zix Corporations Current Report on Form 8-K, dated April, 4. 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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##### Table of Contents



SIGNATURES
  ZIX CORPORATIONBy:
    /s/ Barry W. WilsonBarry W. WilsonChief Financial Officer and Treasurer  Signature
    
    Title/s/ Richard D. Spurr
    
    Chairman, Chief Executive Officer, President and Director(Principal Executive Officer)(Richard D. Spurr)/s/ Barry W. Wilson
    
    Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)(Barry W. Wilson)/s/ Robert C. Hausmann
    
    Director(Robert C. Hausmann)/s/ Charles N. Kahn III
    
    Director(Charles N. Kahn III)/s/ James S. Marston
    
    Director(James S. Marston)/s/ Antonio R. Sanchez III
    
    Director(Antonio R. Sanchez III)/s/ Paul E. Schlosberg
    
    Director(Paul E. Schlosberg)
 38