##### 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, 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 filero
    
    Accelerated filerþ
    
    Non-accelerated filero(Do not check if a smaller reporting company)
    
    Smaller reporting companyo
 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 2, 2010Common Stock, par value $0.01 per share
    
    64,071,326




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##### 



INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009
    
    
    4Condensed Consolidated Statement of Stockholders Equity (Deficit) for the six months ended June 30, 2010
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June 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-10.1EX-10.2EX-31.1EX-31.2EX-32.1
  2




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ZIX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,477,000
    
    
    $
    13,287,000Marketable securities
    
    
    
    
    
    
    25,000Receivables, net
    
    
    564,000
    
    
    
    760,000Prepaid and other current assets
    
    
    854,000
    
    
    
    1,142,000Total current assets
    
    
    18,895,000
    
    
    
    15,214,000Property and equipment, net
    
    
    2,240,000
    
    
    
    2,137,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Other assets
    
    
    164,000
    
    
    
    236,000Total assets
    
    $
    23,460,000
    
    
    $
    19,748,000LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    672,000
    
    
    $
    769,000Accrued expenses
    
    
    2,393,000
    
    
    
    3,124,000Deferred revenue
    
    
    16,454,000
    
    
    
    14,478,000License subscription note payable
    
    
    131,000
    
    
    
    126,000Total current liabilities
    
    
    19,650,000
    
    
    
    18,497,000Long-term liabilities:Deferred revenue
    
    
    1,803,000
    
    
    
    2,821,000License subscription note payable
    
    
    119,000
    
    
    
    186,000Deferred rent
    
    
    198,000
    
    
    
    233,000Total long-term liabilities
    
    
    2,120,000
    
    
    
    3,240,000Total liabilities
    
    
    21,770,000
    
    
    
    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; 66,362,868 issued and
64,035,687 outstanding in 2010 and 66,053,772 issued and 63,726,591 outstanding in 2009
    
    
    664,000
    
    
    
    661,000Additional paid-in capital
    
    
    338,815,000
    
    
    
    337,352,000Treasury stock, at cost; 2,327,181 common shares in 2010 and 2009
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (326,282,000
    )
    
    
    (328,495,000
    )Total stockholders equity (deficit)
    
    
    1,690,000
    
    
    
    (1,989,000
    )Total liabilities and stockholders equity (deficit)
    
    $
    23,460,000
    
    
    $
    19,748,000
  3




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ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues
    
    $
    8,915,000
    
    
    $
    7,371,000
    
    
    $
    17,331,000
    
    
    $
    14,627,000Cost of revenues
    
    
    1,970,000
    
    
    
    2,368,000
    
    
    
    3,826,000
    
    
    
    4,839,000Gross profit
    
    
    6,945,000
    
    
    
    5,003,000
    
    
    
    13,505,000
    
    
    
    9,788,000Operating expenses:Research and development
    
    
    1,307,000
    
    
    
    1,747,000
    
    
    
    2,755,000
    
    
    
    3,478,000Selling, general and administrative
    
    
    4,062,000
    
    
    
    5,228,000
    
    
    
    8,443,000
    
    
    
    9,872,000Total operating expenses
    
    
    5,369,000
    
    
    
    6,975,000
    
    
    
    11,198,000
    
    
    
    13,350,000Operating income (loss)
    
    
    1,576,000
    
    
    
    (1,972,000
    )
    
    
    2,307,000
    
    
    
    (3,562,000
    )Other income, net
    
    
    15,000
    
    
    
    73,000
    
    
    
    44,000
    
    
    
    141,000Income (loss) before income taxes
    
    
    1,591,000
    
    
    
    (1,899,000
    )
    
    
    2,351,000
    
    
    
    (3,421,000
    )Provision for income taxes
    
    
    (90,000
    )
    
    
    (26,000
    )
    
    
    (138,000
    )
    
    
    (46,000
    )Net income (loss)
    
    $
    1,501,000
    
    
    $
    (1,925,000
    )
    
    $
    2,213,000
    
    
    $
    (3,467,000
    )Basic income (loss) per common share
    
    $
    0.02
    
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.05
    )Diluted income (loss) per common share
    
    $
    0.02
    
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.05
    )Basic weighted average common shares outstanding
    
    
    63,976,551
    
    
    
    63,319,482
    
    
    
    63,883,974
    
    
    
    63,319,482Diluted weighted average common shares outstanding
    
    
    66,368,548
    
    
    
    63,319,482
    
    
    
    65,977,451
    
    
    
    63,319,482
  4




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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, 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
    
    
    309,096
    
    
    
    3,000
    
    
    
    466,000
    
    
    
    
    
    
    
    
    
    
    
    469,000Employee stock-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    976,000
    
    
    
    
    
    
    
    
    
    
    
    976,000Non-employee stock-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    
    
    
    
    21,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,213,000
    
    
    
    2,213,000Balance, June 30, 2010
    
    
    66,362,868
    
    
    $
    664,000
    
    
    $
    338,815,000
    
    
    $
    (11,507,000
    )
    
    $
    (326,282,000
    )
    
    $
    1,690,000
  5




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ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30,2010
    
    
    2009Operating activities:Net income (loss)
    
    $
    2,213,000
    
    
    $
    (3,467,000
    )Non-cash items in net income (loss):Depreciation and amortization
    
    
    685,000
    
    
    
    648,000Employee stock-based compensation costs
    
    
    976,000
    
    
    
    1,353,000Non-employee stock-based compensation costs
    
    
    21,000
    
    
    
    16,000Changes in deferred taxes
    
    
    7,000
    
    
    
    7,000Changes in operating assets and liabilities:Receivables
    
    
    196,000
    
    
    
    (152,000
    )Prepaid and other assets
    
    
    353,000
    
    
    
    374,000Accounts payable
    
    
    (222,000
    )
    
    
    409,000Deferred revenue
    
    
    958,000
    
    
    
    (19,000
    )Accrued and other liabilities
    
    
    (766,000
    )
    
    
    592,000Net cash provided by (used in) operating activities
    
    
    4,421,000
    
    
    
    (239,000
    )Investing activities:Purchases of property and equipment
    
    
    (663,000
    )
    
    
    (515,000
    )Sales of marketable securities
    
    
    25,000
    
    
    
    Restricted cash and marketable securities, net
    
    
    
    
    
    
    3,000Net cash (used in) investing activities
    
    
    (638,000
    )
    
    
    (512,000
    )Financing activities:Proceeds from exercise of stock options
    
    
    469,000
    
    
    
    Payment of license subscription note payable
    
    
    (62,000
    )
    
    
    Net cash provided by financing activities
    
    
    407,000
    
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    4,190,000
    
    
    
    (751,000
    )Cash and cash equivalents, beginning of period
    
    
    13,287,000
    
    
    
    13,245,000Cash and cash equivalents, end of period
    
    $
    17,477,000
    
    
    $
    12,494,000
  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 in 2010 or beyond:
  International Financial Reporting Standards
 3. Segment Information
    Three Months Ended June 30, 2010
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    8,194,000
    
    
    $
    721,000
    
    
    $
    
    
    
    $
    8,915,000Cost of revenues
    
    
    1,570,000
    
    
    
    400,000
    
    
    
    
    
    
    
    1,970,000Gross profit
    
    
    6,624,000
    
    
    
    321,000
    
    
    
    
    
    
    
    6,945,000Direct expenses
    
    
    3,632,000
    
    
    
    133,000
    
    
    
    
    
    
    
    3,765,000Segment contribution
    
    
    2,992,000
    
    
    
    188,000
    
    
    
    
    
    
    
    3,180,000Unallocated (expense) incomeGeneral and administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,604,000
    )
    
    
    (1,604,000
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    15,000Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (1,589,000
    )
    
    
    (1,589,000
    )Income (loss) before provision for income taxes
    
    $
    2,992,000
    
    
    $
    188,000
    
    
    $
    (1,589,000
    )
    
    $
    1,591,000
 7




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##### Table of Contents



Three Months Ended June 30, 2009
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    6,379,000
    
    
    $
    992,000
    
    
    $
    
    
    
    $
    7,371,000Cost of revenues
    
    
    1,088,000
    
    
    
    1,280,000
    
    
    
    
    
    
    
    2,368,000Gross profit
    
    
    5,291,000
    
    
    
    (288,000
    )
    
    
    
    
    
    
    5,003,000Direct expenses
    
    
    2,979,000
    
    
    
    1,749,000
    
    
    
    
    
    
    
    4,728,000Segment contribution (loss)
    
    
    2,312,000
    
    
    
    (2,037,000
    )
    
    
    
    
    
    
    275,000Unallocated (expense) incomeGeneral and administrative expense
    
    
    
    
    
    
    
    
    
    
    (2,247,000
    )
    
    
    (2,247,000
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    73,000
    
    
    
    73,000Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (2,174,000
    )
    
    
    (2,174,000
    )Income (loss) before provision for income taxes
    
    $
    2,312,000
    
    
    $
    (2,037,000
    )
    
    $
    (2,174,000
    )
    
    $
    (1,899,000
    )The following table shows Operating results broken out by segment, including Corporate, for the six
month periods ended June 30, 2010 and 2009.Six Months Ended June 30, 2010
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    15,673,000
    
    
    $
    1,658,000
    
    
    $
    
    
    
    $
    17,331,000Cost of revenues
    
    
    3,072,000
    
    
    
    754,000
    
    
    
    
    
    
    
    3,826,000Gross profit
    
    
    12,601,000
    
    
    
    904,000
    
    
    
    
    
    
    
    13,505,000Direct expenses
    
    
    7,409,000
    
    
    
    426,000
    
    
    
    
    
    
    
    7,835,000Segment contribution
    
    
    5,192,000
    
    
    
    478,000
    
    
    
    
    
    
    
    5,670,000Unallocated (expense) incomeGeneral and administrative expense
    
    
    
    
    
    
    
    
    
    
    (3,363,000
    )
    
    
    (3,363,000
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    44,000
    
    
    
    44,000Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (3,319,000
    )
    
    
    (3,319,000
    )Income (loss) before provision for income taxes
    
    $
    5,192,000
    
    
    $
    478,000
    
    
    $
    (3,319,000
    )
    
    $
    2,351,000Six Months Ended June 30, 2009
    
    Email Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    12,621,000
    
    
    $
    2,006,000
    
    
    $
    
    
    
    $
    14,627,000Cost of revenues
    
    
    2,101,000
    
    
    
    2,738,000
    
    
    
    
    
    
    
    4,839,000Gross profit
    
    
    10,520,000
    
    
    
    (732,000
    )
    
    
    
    
    
    
    9,788,000Direct expenses
    
    
    5,735,000
    
    
    
    3,594,000
    
    
    
    
    
    
    
    9,329,000Segment contribution (loss)
    
    
    4,785,000
    
    
    
    (4,326,000
    )
    
    
    
    
    
    
    459,000Unallocated (expense) incomeGeneral and administrative expense
    
    
    
    
    
    
    
    
    
    
    (4,021,000
    )
    
    
    (4,021,000
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    141,000
    
    
    
    141,000Total unallocated (expense) income
    
    
    
    
    
    
    
    
    
    
    (3,880,000
    )
    
    
    (3,880,000
    )Income (loss) before provision for income taxes
    
    $
    4,785,000
    
    
    $
    (4,326,000
    )
    
    $
    (3,880,000
    )
    
    $
    (3,421,000
    )
 Depreciation and amortization expense:
  Six Months Ended June 30,2010
    
    
    2009Email Encryption
    
    $
    535,000
    
    
    $
    386,000e-Prescribing
    
    
    73,000
    
    
    
    179,000Unallocated
    
    
    77,000
    
    
    
    83,000Total depreciation expense
    
    $
    685,000
    
    
    $
    648,000
 8




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##### Table of Contents



Allocated costs:
       Other segment information:
   June 30, 2010
    
    
    December 31, 2009Total assets:Email Encryption
    
    $
    3,672,000
    
    
    $
    3,781,000e-Prescribing
    
    
    250,000
    
    
    
    416,000Corporate
    
    
    19,538,000
    
    
    
    15,551,000Total assets
    
    $
    23,460,000
    
    
    $
    19,748,000
 4. Stock Options and Stock-based Employee Compensation
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2010
    
    
    2010Cost of revenues
    
    $
    54,000
    
    
    $
    101,000Research and development
    
    
    51,000
    
    
    
    98,000Selling, general and administrative
    
    
    372,000
    
    
    
    777,000Stock-based compensation expense
    
    $
    477,000
    
    
    $
    976,000
 9




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##### Table of Contents



Stock Option Activity
  Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (Yrs)
    
    
    ValueOutstanding at March 31, 2010
    
    
    9,965,678
    
    
    $
    4.17Granted at market price
    
    
    63,000
    
    
    $
    2.41Cancelled or expired
    
    
    (240,289
    )
    
    $
    3.49Exercised
    
    
    (139,460
    )
    
    $
    1.57Outstanding at June 30, 2010
    
    
    9,648,929
    
    
    $
    4.21
    
    
    
    5.61
    
    
    $
    1,999,000Options exercisable at June 30, 2010
    
    
    8,546,137
    
    
    $
    4.45
    
    
    
    5.20
    
    
    $
    1,589,000
   5. Supplemental Cash Flow Information
  Six Months Ended June 30,2010
    
    2009Cash paid for interest
    
    $
    12,000
    
    
    $
    Cash income tax payments
    
    $
    149,000
    
    
    $
    142,000Non-cash investing and financing activities:Assets sold to customers as part of their subscription service
    
    $
    
    
    
    $
    2,000Payables related to purchases of fixed assets
    
    $
    125,000
    
    
    $
    153,000Issuance of license subscription note payable
    
    $
    
    
    
    $
    390,000Amounts reclassified from Notes payable to Accounts payable
    
    $
    
    
    
    $
    19,000
 6. Receivables, net
 June 30,
    
    
    December 31,2010
    
    
    2009Receivables
    
    $
    602,000
    
    
    $
    786,000Allowance for returns and doubtful accounts
    
    
    (38,000
    )
    
    
    (26,000
    )Note receivable
    
    
    484,000
    
    
    
    484,000Allowance for note receivable
    
    
    (484,000
    )
    
    
    (484,000
    )Receivables, net
    
    $
    564,000
    
    
    $
    760,000
   10




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##### Table of Contents



7. Earnings Per Share and Potential Dilution
  Three Months ended June 30,
    
    
    Six Months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    1,501,000
    
    
    $
    (1,925,000
    )
    
    $
    2,213,000
    
    
    $
    (3,467,000
    )Basic weighted average shares
    
    
    63,976,551
    
    
    
    63,319,482
    
    
    
    63,883,974
    
    
    
    63,319,482Effect of dilutive securities:Employee and director stock options
    
    
    845,705
    
    
    
    
    
    
    
    748,190
    
    
    
    Warrants
    
    
    1,546,292
    
    
    
    
    
    
    
    1,345,287
    
    
    
    Potential dilutive common shares
    
    
    66,368,548
    
    
    
    63,319,482
    
    
    
    65,977,451
    
    
    
    63,319,482Net earnings (loss) per shareBasic
    
    $
    0.02
    
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.05
    )Diluted
    
    $
    0.02
    
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.05
    )
  8. Commitments and contingencies
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    Years 2 & 3
    
    
    Beyond 3 YearsOperating leases
    
    $
    4,287,000
    
    
    $
    1,219,000
    
    
    $
    1,959,000
    
    
    $
    1,109,000License subscription note payable
    
    
    250,000
    
    
    
    131,000
    
    
    
    119,000
    
    
    
    Total cash obligations
    
    
    4,537,000
    
    
    
    1,350,000
    
    
    
    2,078,000
    
    
    
    1,109,000Interest on obligations
    
    
    21,000
    
    
    
    16,000
    
    
    
    5,000
    
    
    
    Total
    
    $
    4,558,000
    
    
    $
    1,366,000
    
    
    $
    2,083,000
    
    
    $
    1,109,000
  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
 12




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##### Table of Contents



Results of Operations
 Second Quarter 2010 Summary of Operations
 Financial
 
    
    Revenue for the quarter ended June 30, 2010, was $8,915,000 compared with $7,371,000 for
the same period in 2009 representing a 21% increase.
    
    Gross profit for the quarter ended June 30, 2010, was $6,945,000 or 78% of revenues
compared with $5,003,000 or 68% of revenues for the comparable period in 2009.
 Email Encryption
 e-Prescribing
 
    
    Net income for the quarter ended June 30, 2010, was $1,501,000 compared with a net loss
of $1,925,000 in 2009. Included in net income for the quarter ended June 30, 2010, was
approximately $169,000 of non recurring severance costs related to the wind down of our
e-Prescribing business.
    
    Ending cash and cash equivalents were $17,477,000 on June 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
June 30, 2010, were $2,108,000. June 30, 2010, Email Encryption backlog was $45,593,000.
    
    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 disclosed in our July 27, 2010,
press release, we expect this business to generate a small amount of profit for 2010.
 Revenues
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended June 30,
    
    
    2010 vs. 2009
    
    
    Six Months Ended June 30,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Email Encryption
    
    $
    8,194,000
    
    
    $
    6,379,000
    
    
    $
    1,815,000
    
    
    
    28
    %
    
    $
    15,673,000
    
    
    $
    12,621,000
    
    
    $
    3,052,000
    
    
    
    24
    %e-Prescribing
    
    
    721,000
    
    
    
    992,000
    
    
    
    (271,000
    )
    
    
    (27
    %)
    
    
    1,658,000
    
    
    
    2,006,000
    
    
    
    (348,000
    )
    
    
    (17
    %)Total revenues
    
    $
    8,915,000
    
    
    $
    7,371,000
    
    
    $
    1,544,000
    
    
    
    21
    %
    
    $
    17,331,000
    
    
    $
    14,627,000
    
    
    $
    2,704,000
    
    
    
    18
    %
   Revenue Indicators  Backlog and Orders
 Email Encryption backlog 
 13




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##### Table of Contents



Email Encryption Orders 
 e-Prescribing 
 Cost of Revenues
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended June 30,
    
    
    2010 vs. 2009
    
    
    Six Months Ended June 30,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Email Encryption
    
    $
    1,570,000
    
    
    $
    1,088,000
    
    
    $
    482,000
    
    
    
    44
    %
    
    $
    3,072,000
    
    
    $
    2,101,000
    
    
    $
    971,000
    
    
    
    46
    %e-Prescribing
    
    
    400,000
    
    
    
    1,280,000
    
    
    
    (880,000
    )
    
    
    (69
    %)
    
    
    754,000
    
    
    
    2,738,000
    
    
    
    (1,984,000
    )
    
    
    (72
    %)Total cost of revenues
    
    $
    1,970,000
    
    
    $
    2,368,000
    
    
    $
    (398,000
    )
    
    
    (17
    %)
    
    $
    3,826,000
    
    
    $
    4,839,000
    
    
    $
    (1,013,000
    )
    
    
    (21
    %)
    Email Encryption 
 e-Prescribing 
 14




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##### Table of Contents



Research and Development Expenses
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended June 30,
    
    
    2010 vs. 2009
    
    
    Six Months Ended June 30,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Email Encryption
    
    $
    1,248,000
    
    
    $
    821,000
    
    
    $
    427,000
    
    
    
    52
    %
    
    $
    2,557,000
    
    
    $
    1,624,000
    
    
    $
    933,000
    
    
    
    57
    %e-Prescribing
    
    
    59,000
    
    
    
    926,000
    
    
    
    (867,000
    )
    
    
    (94
    %)
    
    
    198,000
    
    
    
    1,854,000
    
    
    
    (1,656,000
    )
    
    
    (89
    %)Total Research and development
    
    $
    1,307,000
    
    
    $
    1,747,000
    
    
    $
    (440,000
    )
    
    
    (25
    %)
    
    $
    2,755,000
    
    
    $
    3,478,000
    
    
    $
    (723,000
    )
    
    
    (21
    %)
    Selling, General and Administrative Expenses
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended June 30,
    
    
    2010 vs. 2009
    
    
    Six Months Ended June 30,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Email Encryption Selling and marketing expenses
    
    $
    2,140,000
    
    
    $
    1,986,000
    
    
    $
    154,000
    
    
    
    8
    %
    
    $
    4,381,000
    
    
    $
    3,791,000
    
    
    $
    590,000
    
    
    
    16
    %e-Prescribing Selling and marketing expenses
    
    
    52,000
    
    
    
    796,000
    
    
    
    (744,000
    )
    
    
    (93
    %)
    
    
    176,000
    
    
    
    1,689,000
    
    
    
    (1,513,000
    )
    
    
    (90
    %)Corporate Selling, general and administrative expenses
    
    
    1,870,000
    
    
    
    2,446,000
    
    
    
    (576,000
    )
    
    
    (24
    %)
    
    
    3,886,000
    
    
    
    4,392,000
    
    
    
    (506,000
    )
    
    
    (12
    %)Total Selling, general and administrative
    
    $
    4,062,000
    
    
    $
    5,228,000
    
    
    $
    (1,166,000
    )
    
    
    (22
    )%
    
    $
    8,443,000
    
    
    $
    9,872,000
    
    
    $
    (1,429,000
    )
    
    
    (14
    %)
    15




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##### Table of Contents



Other Income, net
   Provision for Income Taxes
      16




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##### Table of Contents



Net Income
  Liquidity and Capital Resources
 Overview
    Impact of Current Economic Environment
  Sources and Uses of Cash Summary
 Six Months Ended June 30,2010
    
    2009Net cash provided by (used in) operations
    
    $
    4,421,000
    
    
    $
    (239,000
    )Net cash used in investing activities
    
    $
    (638,000
    )
    
    $
    (512,000
    )Net cash provided by financing activities
    
    $
    407,000
    
    
    $
    
  ZixGateway SM
  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
    
    
    6,931,619
    
    
    $
    10,616,000
    
    
    
    6,449,559
    
    
    $
    9,867,000$2.00 - $3.49
    
    
    5,287,527
    
    
    
    15,430,000
    
    
    
    4,878,652
    
    
    
    14,565,000$3.50 - $4.99
    
    
    3,218,888
    
    
    
    14,319,000
    
    
    
    3,013,181
    
    
    
    13,342,000$5.00 - $5.99
    
    
    549,260
    
    
    
    2,792,000
    
    
    
    549,260
    
    
    
    2,792,000$6.00 - $8.99
    
    
    734,316
    
    
    
    4,741,000
    
    
    
    734,316
    
    
    
    4,741,000$9.00 - $19.99
    
    
    890,381
    
    
    
    9,727,000
    
    
    
    890,381
    
    
    
    9,727,000$20.00 - $37.63
    
    
    43,500
    
    
    
    1,028,000
    
    
    
    43,500
    
    
    
    1,028,000Total
    
    
    17,655,491
    
    
    $
    58,653,000
    
    
    
    16,558,849
    
    
    $
    56,062,000
 Off-Balance Sheet Arrangements
  Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    Years 2 & 3
    
    
    Beyond 3 YearsOperating leases
    
    $
    4,287,000
    
    
    $
    1,219,000
    
    
    $
    1,959,000
    
    
    $
    1,109,000Debt (long-term and short-term)
    
    
    271,000
    
    
    
    147,000
    
    
    
    124,000
    
    
    
    Total
    
    $
    4,558,000
    
    
    $
    1,366,000
    
    
    $
    2,083,000
    
    
    $
    1,109,000
   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.10.1*
    
    Form of Zix Corporation Outside Director Stock Option Agreement.10.2*
    
    Form of Zix Corporation Employee Stock Option Agreement.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 Susan K. Conner, Chief Financial 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 Susan K. Conner, Chief
Financial 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: August 9, 2010
    By:
    /s/ Susan K. ConnerSusan K. ConnerChief Financial Officer 21