##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 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 November 2, 2009Common Stock, par value $0.01 per share
    
    63,650,997




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##### 



INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30,
2009 and 2008
    
    
    4Condensed Consolidated Statement of Stockholders Deficit for the nine months ended September 30, 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    23EX-31.1EX-31.2EX-32.1
  2




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,392,000
    
    
    $
    13,245,000Marketable securities
    
    
    25,000
    
    
    
    Receivables, net
    
    
    681,000
    
    
    
    476,000Prepaid and other current assets
    
    
    1,065,000
    
    
    
    1,145,000Total current assets
    
    
    14,163,000
    
    
    
    14,866,000Restricted cash
    
    
    
    
    
    
    28,000Property and equipment, net
    
    
    2,333,000
    
    
    
    2,236,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Other assets
    
    
    276,000
    
    
    
    66,000Total assets
    
    $
    18,933,000
    
    
    $
    19,357,000LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    923,000
    
    
    $
    512,000Accrued expenses
    
    
    2,810,000
    
    
    
    2,404,000Deferred revenue
    
    
    14,505,000
    
    
    
    14,960,000License subscription note payable
    
    
    123,000
    
    
    
    Total current liabilities
    
    
    18,361,000
    
    
    
    17,876,000Long-term liabilities:Deferred revenue
    
    
    2,681,000
    
    
    
    2,484,000License subscription note payable
    
    
    218,000
    
    
    
    Deferred rent
    
    
    251,000
    
    
    
    300,000Total long-term liabilities
    
    
    3,150,000
    
    
    
    2,784,000Total liabilities
    
    
    21,511,000
    
    
    
    20,660,000Commitments and contingencies (see Note 9)Stockholders 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; 65,861,716 issued and
63,534,535 outstanding in 2009 and 65,646,663 issued and 63,319,482 outstanding in 2008
    
    
    659,000
    
    
    
    656,000Additional paid-in capital
    
    
    336,454,000
    
    
    
    333,608,000Treasury stock, at cost; 2,327,181 common shares in 2009 and 2008
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (328,184,000
    )
    
    
    (324,060,000
    )Total stockholders deficit
    
    
    (2,578,000
    )
    
    
    (1,303,000
    )Total liabilities and stockholders deficit
    
    $
    18,933,000
    
    
    $
    19,357,000
  3




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    7,835,000
    
    
    $
    6,709,000
    
    
    $
    22,462,000
    
    
    $
    20,866,000Cost of revenues
    
    
    2,249,000
    
    
    
    2,383,000
    
    
    
    7,088,000
    
    
    
    7,505,000Gross profit
    
    
    5,586,000
    
    
    
    4,326,000
    
    
    
    15,374,000
    
    
    
    13,361,000Operating expenses:Research and development
    
    
    1,760,000
    
    
    
    1,590,000
    
    
    
    5,238,000
    
    
    
    4,516,000Selling, general and administrative
    
    
    4,557,000
    
    
    
    4,232,000
    
    
    
    14,429,000
    
    
    
    13,656,000Total operating expenses
    
    
    6,317,000
    
    
    
    5,822,000
    
    
    
    19,667,000
    
    
    
    18,172,000Operating loss
    
    
    (731,000
    )
    
    
    (1,496,000
    )
    
    
    (4,293,000
    )
    
    
    (4,811,000
    )Other income, net
    
    
    35,000
    
    
    
    97,000
    
    
    
    176,000
    
    
    
    435,000Loss before income taxes
    
    
    (696,000
    )
    
    
    (1,399,000
    )
    
    
    (4,117,000
    )
    
    
    (4,376,000
    )Provision for income taxes
    
    
    39,000
    
    
    
    (110,000
    )
    
    
    (7,000
    )
    
    
    (187,000
    )Net loss
    
    $
    (657,000
    )
    
    $
    (1,509,000
    )
    
    $
    (4,124,000
    )
    
    $
    (4,563,000
    )Basic and diluted loss per common share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.07
    )Basic and diluted weighted average
common shares outstanding
    
    
    63,367,037
    
    
    
    63,072,191
    
    
    
    63,335,508
    
    
    
    62,893,809
  4




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
  Stockholders DeficitAdditional
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Deficit
    
    
    DeficitBalance, December 31, 2008
    
    
    65,646,663
    
    
    $
    656,000
    
    
    $
    333,608,000
    
    
    $
    (11,507,000
    )
    
    $
    (324,060,000
    )
    
    $
    (1,303,000
    )Issuance of common stock
upon exercise of stock
options
    
    
    7,492
    
    
    
    1,000
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    13,000Issuance of common stock
upon exercise of warrants
    
    
    207,561
    
    
    
    2,000
    
    
    
    337,000
    
    
    
    
    
    
    
    
    
    
    
    339,000Employee stock-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    2,473,000
    
    
    
    
    
    
    
    
    
    
    
    2,473,000Non-employee stock-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    24,000
    
    
    
    
    
    
    
    
    
    
    
    24,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,124,000
    )
    
    
    (4,124,000
    )Balance, September 30, 2009
    
    
    65,861,716
    
    
    $
    659,000
    
    
    $
    336,454,000
    
    
    $
    (11,507,000
    )
    
    $
    (328,184,000
    )
    
    $
    (2,578,000
    )
  5




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ZIX CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months Ended September 30,2009
    
    
    2008Operating activities:Net loss
    
    $
    (4,124,000
    )
    
    $
    (4,563,000
    )Non-cash items in net loss:Depreciation and amortization
    
    
    987,000
    
    
    
    961,000Employee stock-based compensation costs
    
    
    2,473,000
    
    
    
    1,905,000Non-employee stock-based compensation costs
    
    
    24,000
    
    
    
    43,000Common stock issued to employees as compensation in lieu of cash
    
    
    
    
    
    
    1,004,000Changes in deferred taxes
    
    
    5,000
    
    
    
    37,000Changes in operating assets and liabilities:Receivables
    
    
    (205,000
    )
    
    
    580,000Prepaid and other current assets
    
    
    256,000
    
    
    
    435,000Accounts payable
    
    
    168,000
    
    
    
    166,000Deferred revenue
    
    
    (258,000
    )
    
    
    756,000Accrued and other liabilities
    
    
    357,000
    
    
    
    89,000Net cash (used in) provided by operating activities
    
    
    (317,000
    )
    
    
    1,413,000Investing activities:Purchases of property and equipment
    
    
    (852,000
    )
    
    
    (695,000
    )Restricted cash and marketable securities, net
    
    
    3,000
    
    
    
    1,734,000Net cash (used in) provided by investing activities
    
    
    (849,000
    )
    
    
    1,039,000Financing activities:Proceeds from exercise of stock options
    
    
    13,000
    
    
    
    164,000Proceeds from exercise of warrants
    
    
    339,000
    
    
    
    Payment of promissory note payable
    
    
    (39,000
    )
    
    
    Net cash provided by financing activities
    
    
    313,000
    
    
    
    164,000(Decrease) increase in cash and cash equivalents
    
    
    (853,000
    )
    
    
    2,616,000Cash and cash equivalents, beginning of period
    
    
    13,245,000
    
    
    
    10,524,000Cash and cash equivalents, end of period
    
    $
    12,392,000
    
    
    $
    13,140,000
  6




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ZIX CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of Presentation
  2. Recent Accounting Standards and Pronouncements
 Interim Disclosures about Fair Value of Financial Instruments,
 Subsequent Events,
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles,
 Effective Date of FASB
Statement No. 157,
 Business Combinations,
 Non-controlling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51,
 7




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Determination of the
Useful Life of Intangible Assets, . .
 3. Segment Information
    Three Months Ended September 30, 2009
    
    
    Three Months Ended September 30, 2008Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    6,685,000
    
    
    $
    1,150,000
    
    
    $
    
    
    
    $
    7,835,000
    
    
    $
    5,578,000
    
    
    $
    1,131,000
    
    
    $
    
    
    
    $
    6,709,000Cost of revenues
    
    
    1,179,000
    
    
    
    1,070,000
    
    
    
    
    
    
    
    2,249,000
    
    
    
    985,000
    
    
    
    1,398,000
    
    
    
    
    
    
    
    2,383,000Gross profit
    
    
    5,506,000
    
    
    
    80,000
    
    
    
    
    
    
    
    5,586,000
    
    
    
    4,593,000
    
    
    
    (267,000
    )
    
    
    
    
    
    
    4,326,000Direct expenses
    
    
    2,882,000
    
    
    
    1,460,000
    
    
    
    
    
    
    
    4,342,000
    
    
    
    2,643,000
    
    
    
    1,762,000
    
    
    
    
    
    
    
    4,405,000Segment
contribution (loss)
    
    
    2,624,000
    
    
    
    (1,380,000
    )
    
    
    
    
    
    
    1,244,000
    
    
    
    1,950,000
    
    
    
    (2,029,000
    )
    
    
    
    
    
    
    (79,000
    )Unallocated
(expense) / Income:Selling, general
and administrative
    
    
    
    
    
    
    
    
    
    
    (1,975,000
    )
    
    
    (1,975,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,417,000
    )
    
    
    (1,417,000
    )Investment and
other income
    
    
    
    
    
    
    
    
    
    
    43,000
    
    
    
    43,000
    
    
    
    
    
    
    
    
    
    
    
    97,000
    
    
    
    97,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (8,000
    )
    
    
    (8,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    (1,940,000
    )
    
    
    (1,940,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,320,000
    )
    
    
    (1,320,000
    )Income (loss)
before provision
for income taxes
    
    $
    2,624,000
    
    
    $
    (1,380,000
    )
    
    $
    (1,940,000
    )
    
    $
    (696,000
    )
    
    $
    1,950,000
    
    
    $
    (2,029,000
    )
    
    $
    (1,320,000
    )
    
    $
    (1,399,000
    )Depreciation expense
    
    $
    211,000
    
    
    $
    81,000
    
    
    $
    47,000
    
    
    $
    339,000
    
    
    $
    176,000
    
    
    $
    95,000
    
    
    $
    41,000
    
    
    $
    312,000
 Nine Months Ended September 30, 2009
    
    
    Nine Months Ended September 30, 2008Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    19,306,000
    
    
    $
    3,156,000
    
    
    $
    
    
    
    $
    22,462,000
    
    
    $
    16,534,000
    
    
    $
    4,332,000
    
    
    $
    
    
    
    $
    20,866,000Cost of revenues
    
    
    3,280,000
    
    
    
    3,808,000
    
    
    
    
    
    
    
    7,088,000
    
    
    
    3,094,000
    
    
    
    4,411,000
    
    
    
    
    
    
    
    7,505,000Gross profit
    
    
    16,026,000
    
    
    
    (652,000
    )
    
    
    
    
    
    
    15,374,000
    
    
    
    13,440,000
    
    
    
    (79,000
    )
    
    
    
    
    
    
    13,361,000Direct expenses
    
    
    8,617,000
    
    
    
    5,054,000
    
    
    
    
    
    
    
    13,671,000
    
    
    
    8,266,000
    
    
    
    5,314,000
    
    
    
    
    
    
    
    13,580,000Segment
contribution (loss)
    
    
    7,409,000
    
    
    
    (5,706,000
    )
    
    
    
    
    
    
    1,703,000
    
    
    
    5,174,000
    
    
    
    (5,393,000
    )
    
    
    
    
    
    
    (219,000
    )Unallocated
(expense) / Income:Selling, general
and administrative
    
    
    
    
    
    
    
    
    
    
    (5,996,000
    )
    
    
    (5,996,000
    )
    
    
    
    
    
    
    
    
    
    
    (4,592,000
    )
    
    
    (4,592,000
    )Investment and
other income
    
    
    
    
    
    
    
    
    
    
    189,000
    
    
    
    189,000
    
    
    
    
    
    
    
    
    
    
    
    435,000
    
    
    
    435,000Interest expense
    
    
    
    
    
    
    
    
    
    
    (13,000
    )
    
    
    (13,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    (5,820,000
    )
    
    
    (5,820,000
    )
    
    
    
    
    
    
    
    
    
    
    (4,157,000
    )
    
    
    (4,157,000
    )Income (loss)
before provision
for income taxes
    
    $
    7,409,000
    
    
    $
    (5,706,000
    )
    
    $
    (5,820,000
    )
    
    $
    (4,117,000
    )
    
    $
    5,174,000
    
    
    $
    (5,393,000
    )
    
    $
    (4,157,000
    )
    
    $
    (4,376,000
    )Depreciation expense
    
    $
    596,000
    
    
    $
    259,000
    
    
    $
    132,000
    
    
    $
    987,000
    
    
    $
    546,000
    
    
    $
    288,000
    
    
    $
    127,000
    
    
    $
    961,000
 8




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##### Table of Contents



September 30, 2009
    
    
    December 31, 2008Total assets:Email Encryption
    
    $
    3,872,000
    
    
    $
    3,335,000e-Prescribing
    
    
    558,000
    
    
    
    664,000Corporate
    
    
    14,503,000
    
    
    
    15,358,000Total assets
    
    $
    18,933,000
    
    
    $
    19,357,000
 4. Stock Options and Stock-based Employee Compensation
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2009
    
    
    September 30, 2009Cost of revenues
    
    $
    148,000
    
    
    $
    333,000Research and development
    
    
    130,000
    
    
    
    280,000Selling, general and administrative
    
    
    842,000
    
    
    
    1,860,000Stock-based compensation expense
    
    $
    1,120,000
    
    
    $
    2,473,000
   9




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##### Table of Contents



Stock Option Activity
  Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (Yrs)
    
    
    ValueOutstanding at June 30, 2009
    
    
    9,661,326
    
    
    $
    4.48Granted at market price
    
    
    80,200
    
    
    $
    1.73Cancelled or expired
    
    
    (79,487
    )
    
    $
    11.16Exercised
    
    
    (7,492
    )
    
    $
    1.57Outstanding at September 30, 2009
    
    
    9,654,547
    
    
    $
    4.40
    
    
    
    6.05
    
    
    $
    1,937,103Options exercisable at September 30, 2009
    
    
    8,320,595
    
    
    $
    4.63
    
    
    
    5.68
    
    
    $
    1,398,212
   5. Supplemental Cash Flow Information
  Nine Months Ended September 30,2009
    
    2008Cash income tax payments
    
    $
    203,000
    
    
    $
    97,000Cash paid for interest
    
    $
    13,000
    
    
    $
    Non-cash investing and financing activities:Assets sold to customers as part of their subscription service
    
    $
    2,000
    
    
    $
    16,000Stock issued in lieu of accrued expenses
    
    $
    
    
    
    $
    422,000Payables related to purchases of fixed assets
    
    $
    233,000
    
    
    $
    5,000Issuance of license subscription note payable
    
    $
    390,000
    
    
    $
    Amounts reclassified from Notes payable to Accounts payable
    
    $
    19,000
    
    
    $
    
 6. Fair Value Measurements
  7. Receivables, net
 September 30,
    
    
    December 31,2009
    
    
    2008Gross accounts receivable
    
    $
    4,934,000
    
    
    $
    3,682,000Allowance for returns and doubtful accounts
    
    
    (45,000
    )
    
    
    (37,000
    )Unpaid portion of deferred revenue
    
    
    (4,208,000
    )
    
    
    (3,169,000
    )Receivables, net
    
    $
    681,000
    
    
    $
    476,000
  10




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##### Table of Contents



8. Earnings Per Share and Potential Dilution
  September 30,2009
    
    
    2008Stock options
    
    
    9,654,547
    
    
    
    9,571,966Warrants issued in relation to debt and equity arrangements
    
    
    10,052,640
    
    
    
    10,434,804Total anti-dilutive securities excluded from EPS calculation
    
    
    19,707,187
    
    
    
    20,006,770
  9. Commitments and contingencies
 Leases
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    Years 2 & 3
    
    
    Beyond 3 YearsOperating leases
    
    $
    5,149,000
    
    
    $
    1,299,000
    
    
    $
    2,076,000
    
    
    $
    1,774,000Debt (long-term and short-term)
    
    
    382,000
    
    
    
    148,000
    
    
    
    234,000
    
    
    
    Total
    
    $
    5,531,000
    
    
    $
    1,447,000
    
    
    $
    2,310,000
    
    
    $
    1,774,000
   Claims and Proceedings
  
 ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
  11




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##### Table of Contents



Management Discussion and Analysis
  Overview
 Strategic Alternatives
Review
  Critical Accounting Policies and Estimates
  Summary of Significant Accounting
Policies Critical Accounting Policies and
Estimates
 Results of Operations
 Third Quarter 2009 Summary of Operations
 Financial
 
    
    Revenue for the quarter ended September 30, 2009, was $7,835,000 compared with $6,709,000
for the same period in 2008 representing a 17% increase.
    
    Gross profit for the quarter ended September 30, 2009, was $5,586,000 or 71% of revenues
compared with $4,326,000 or 64% of revenues for the comparable period in 2008.
 Email
Encryption
 e-Prescribing
 12




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##### Table of Contents




    
    Net loss for the quarter ended September 30, 2009, was $657,000 compared with a net loss
of $1,509,000 in 2008. Included in the loss for the quarter ended September 30, 2009, was
approximately $300,000 of non-recurring severance costs and non-recurring expenses related
to the Strategic Alternatives Review as well as a non-recurring stock based compensation
expense of approximately $482,000 associated with the Companys stock option system
conversion.
    
    Ending cash and cash equivalents were $12,392,000 on September 30, 2009, compared with
$13,245,000 on December 31, 2008.
 Operations
 
    
    For the Email Encryption service, new first year orders (NFYO or NFYOs) for the
quarter ended September 30, 2009, were $1,314,000 and customer contract renewals were 91% on
a contract value basis. The renewal rate of 91%, although lower than our historical rate of
93% to 95%, reflected an improvement from the 86% achieved in the preceding quarter. The
factors driving the non-renewal generally fell into two categories: impact of the economy or
competition. Consistent with the first half of the year, the economy has in many cases
resulted in reduced IT budgets forcing customers either to cut back on the number of users
or services they purchased or decide to do without an email encryption solution altogether.
In other cases, competition was the primary driver which manifested itself either through
lower prices or a desire to purchase bundled solutions that included anti-spam and
anti-virus services.
    
    We deployed approximately 210 new e-Prescribing devices to prescribers and reached
approximately 2.3 million electronic prescriptions transacted in the three-month period
ended September 30, 2009 (the $2.3 million was 16% higher than the same period in 2008).
    
    During the third quarter of 2009, the Company received cash proceeds totaling
approximately $339,000 from the exercise of 207,561 warrants.
 Revenues
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    9-month VarianceThree Months Ended September 30,
    
    
    2009 vs. 2008
    
    
    Nine Months Ended September 30,
    
    
    2009 vs. 20082009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Email Encryption
    
    $
    6,685,000
    
    
    $
    5,578,000
    
    
    $
    1,107,000
    
    
    
    20
    %
    
    $
    19,306,000
    
    
    $
    16,534,000
    
    
    $
    2,772,000
    
    
    
    17
    %e-Prescribing
    
    
    1,150,000
    
    
    
    1,131,000
    
    
    
    19,000
    
    
    
    2
    %
    
    
    3,156,000
    
    
    
    4,332,000
    
    
    
    (1,176,000
    )
    
    
    (27
    %)Total revenues
    
    $
    7,835,000
    
    
    $
    6,709,000
    
    
    $
    1,126,000
    
    
    
    17
    %
    
    $
    22,462,000
    
    
    $
    20,866,000
    
    
    $
    1,596,000
    
    
    
    8
    %
  Revenue Indicators  Backlog, Orders and Deployments
 Company-wide backlog
  13




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Email Encryption Orders
 e-Prescribing
      14




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##### Table of Contents



Cost of Revenues
  Three Months Ended
    
    
    3-month Variance
    
    
    
    
    
    
    
    
    
    
    9-month VarianceSeptember 30,
    
    
    2009 vs. 2008
    
    
    Nine Months Ended September 30,
    
    
    2009 vs. 20082009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Email Encryption
    
    $
    1,179,000
    
    
    $
    985,000
    
    
    $
    194,000
    
    
    
    20
    %
    
    $
    3,280,000
    
    
    $
    3,094,000
    
    
    $
    186,000
    
    
    
    6
    %e-Prescribing
    
    
    1,070,000
    
    
    
    1,398,000
    
    
    
    (328,000
    )
    
    
    (23
    %)
    
    
    3,808,000
    
    
    
    4,411,000
    
    
    
    (603,000
    )
    
    
    (14
    %)Total cost of revenues
    
    $
    2,249,000
    
    
    $
    2,383,000
    
    
    $
    (134,000
    )
    
    
    (6
    %)
    
    $
    7,088,000
    
    
    $
    7,505,000
    
    
    $
    (417,000
    )
    
    
    (6
    %)
  Email Encryption
 e-Prescribing
  Research and Development Expenses
  Three Months Ended
    
    3-month Variance
    
    
    
    
    
    
    
    
    
    9-month VarianceSeptember 30,
    
    2009 vs. 2008
    
    Nine Months Ended September 30,
    
    2009 vs. 20082009
    
    2008
    
    $
    
    %
    
    2009
    
    2008
    
    $
    
    %Research and development
    
    $
    1,760,000
    
    
    $
    1,590,000
    
    
    $
    170,000
    
    
    
    11
    %
    
    $
    5,238,000
    
    
    $
    4,516,000
    
    
    $
    722,000
    
    
    
    16
    %
 15




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##### Table of Contents



Selling, General and Administrative Expenses
  Three Months Ended
    
    3-month Variance
    
    
    
    
    
    
    
    
    
    9-month VarianceSeptember 30,
    
    2009 vs. 2008
    
    Nine Months Ended September 30,
    
    2009 vs. 20082009
    
    2008
    
    $
    
    %
    
    2009
    
    2008
    
    $
    
    %Selling, general and administrative
    
    $
    4,557,000
    
    
    $
    4,232,000
    
    
    $
    325,000
    
    
    
    8
    %
    
    $
    14,429,000
    
    
    $
    13,656,000
    
    
    $
    773,000
    
    
    
    6
    %
    Other Income, net
 16




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##### Table of Contents



Provision for Income Taxes
  Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109
    Net Loss
  Liquidity and Capital Resources
 17




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##### Table of Contents



Overview
      Impact of Current Economic Environment
  Sources and Uses of Cash Summary
 Nine Months Ended September 30,2009
    
    2008Net cash (used in) provided by operations
    
    $
    (317,000
    )
    
    $
    1,413,000Net cash (used in) provided by investing activities
    
    $
    (849,000
    )
    
    $
    1,039,000Net cash provided by financing activities
    
    $
    313,000
    
    
    $
    164,000
 18




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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
    
    
    7,349,805
    
    
    $
    11,226,000
    
    
    
    6,676,569
    
    
    $
    10,267,000$2.00 - $3.49
    
    
    4,960,019
    
    
    
    14,835,000
    
    
    
    4,925,776
    
    
    
    14,735,000$3.50 - $4.99
    
    
    4,052,896
    
    
    
    18,050,000
    
    
    
    3,428,923
    
    
    
    15,094,000$5.00 - $5.99
    
    
    549,260
    
    
    
    2,791,000
    
    
    
    549,260
    
    
    
    2,791,000$6.00 - $8.99
    
    
    903,483
    
    
    
    5,757,000
    
    
    
    903,483
    
    
    
    5,757,000$9.00 - $19.99
    
    
    890,381
    
    
    
    9,728,000
    
    
    
    890,381
    
    
    
    9,728,000$20.00 - $57.60
    
    
    1,001,343
    
    
    
    55,482,000
    
    
    
    1,001,343
    
    
    
    55,482,000Total
    
    
    19,707,187
    
    
    $
    117,869,000
    
    
    
    18,375,735
    
    
    $
    113,854,000
 Off-Balance Sheet Arrangements
  19




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Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    
    1 Year
    
    
    Years 2 & 3
    
    
    Beyond 3 YearsOperating leases
    
    $
    5,149,000
    
    
    $
    1,299,000
    
    
    $
    2,076,000
    
    
    $
    1,774,000Debt (long-term and short-term)
    
    
    382,000
    
    
    
    148,000
    
    
    
    234,000
    
    
    
    Total
    
    $
    5,531,000
    
    
    $
    1,447,000
    
    
    $
    2,310,000
    
    
    $
    1,774,000
   
 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
 We could be affected by government regulation
 We could be affected by government regulation
 20




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  21




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  22




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##### Table of Contents



ITEM 6. EXHIBITS
 a. Exhibits
  ExhibitNo.
    
    Description of Exhibits3.1
    
    Restated Articles of Incorporation of Zix Corporation, as
filed with the Texas Secretary of State on November 10,
2005. Filed as Exhibit 3.1 to Zix Corporations Annual
Report on Form 10-K for the year ended December 31, 2005,
and incorporated herein by reference.3.2
    
    Amended and Restated Bylaws of Zix Corporation, dated
February 4, 2009. Filed as Exhibit 3.1 to Zix
Corporations Current Report on Form 8-K, dated February
10, 2009, and incorporated herein by reference.31.1*
    
    Certification of Richard D. Spurr, President and Chief
Executive Officer of the Company, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of 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. 23




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##### Table of Contents



SIGNATURE
  ZIX CORPORATIONDate: November 4, 2009
    By:
    /s/ Susan K. ConnerSusan K. ConnerChief Financial Officer 24