##### 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, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number: 0-17995
 ZIX CORPORATION
 (Exact Name of Registrant as Specified in its Charter)
 Texas
    
    75-2216818(State of Incorporation)
    
    (I.R.S. Employer Identification Number)
 2711 North Haskell Avenue
Suite 2200, LB 36
Dallas, Texas 75204-2960
(Address of Principal Executive Offices)
 (214) 370-2000
(Registrants Telephone Number, Including Area Code)
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o 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 1, 2008Common Stock, par value $0.01 per share
    
    63,012,726




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##### 



INDEX
 PageNumberPART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007 (audited)
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007
    
    4Condensed Consolidated Statement of Stockholders Deficit for the six months ended June 30, 2008
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007
    
    6Notes to Condensed Consolidated Financial Statements
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    27Item 4. Controls and Procedures
    
    27PART II-OTHER INFORMATIONItem 1. Legal Proceedings
    
    28Item 1A. Risk Factors
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    28Item 3. Defaults Upon Senior Securities
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    28Item 5. Other Information
    
    28Item 6. Exhibits
    
    29Certification of Richard D. Spurr, President and Chief Executive Officer Pursuant to Section 302Certification of Barry W. Wilson, Chief Financial Officer and Treasurer Pursuant to Section 302Certification of Richard D. Spurr, President and Chief Executive Officer and Barry W. Wilson, Chief Financial Officer and Treasurer Pursuant to Section 906
  2




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ZIX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2008
    
    
    2007(unaudited)
    
    
    (audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,007,000
    
    
    $
    10,524,000Marketable securities
    
    
    
    
    
    
    1,734,000Receivables, net
    
    
    697,000
    
    
    
    1,119,000Prepaid and other current assets
    
    
    1,341,000
    
    
    
    1,545,000Total current assets
    
    
    15,045,000
    
    
    
    14,922,000Restricted cash
    
    
    25,000
    
    
    
    25,000Property and equipment, net
    
    
    2,131,000
    
    
    
    2,297,000Goodwill
    
    
    2,161,000
    
    
    
    2,161,000Other assets
    
    
    42,000
    
    
    
    69,000Total assets
    
    $
    19,404,000
    
    
    $
    19,474,000LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    276,000
    
    
    $
    231,000Accrued expenses
    
    
    2,791,000
    
    
    
    3,064,000Deferred revenue
    
    
    13,588,000
    
    
    
    12,606,000Total current liabilities
    
    
    16,655,000
    
    
    
    15,901,000Long-term liabilities:Deferred revenue
    
    
    3,334,000
    
    
    
    3,497,000Deferred rent
    
    
    345,000
    
    
    
    365,000Total long-term liabilities
    
    
    3,679,000
    
    
    
    3,862,000Total liabilities
    
    
    20,334,000
    
    
    
    19,763,000Commitments and contingencies (see Note 14)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; 65,314,420 issued and
62,987,239 outstanding in 2008 and 64,959,649 issued and 62,632,468 outstanding in 2007
    
    
    653,000
    
    
    
    650,000Additional paid-in capital
    
    
    331,596,000
    
    
    
    329,186,000Treasury stock, at cost; 2,327,181 common shares in 2008 and 2007
    
    
    (11,507,000
    )
    
    
    (11,507,000
    )Accumulated deficit
    
    
    (321,672,000
    )
    
    
    (318,618,000
    )Total stockholders deficit
    
    
    (930,000
    )
    
    
    (289,000
    )Total liabilities and stockholders deficit
    
    $
    19,404,000
    
    
    $
    19,474,000
  3




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ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    6,958,000
    
    
    $
    5,555,000
    
    
    $
    14,157,000
    
    
    $
    10,942,000Cost of revenues
    
    
    2,542,000
    
    
    
    2,647,000
    
    
    
    5,122,000
    
    
    
    5,500,000Gross margin
    
    
    4,416,000
    
    
    
    2,908,000
    
    
    
    9,035,000
    
    
    
    5,442,000Operating expenses:Research and development expenses
    
    
    1,381,000
    
    
    
    1,343,000
    
    
    
    2,926,000
    
    
    
    2,642,000Marketing expenses
    
    
    805,000
    
    
    
    938,000
    
    
    
    1,690,000
    
    
    
    1,857,000Sales expenses
    
    
    2,281,000
    
    
    
    2,225,000
    
    
    
    4,553,000
    
    
    
    4,535,000General and administrative expenses
    
    
    1,521,000
    
    
    
    1,486,000
    
    
    
    3,181,000
    
    
    
    3,057,000Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,000,000
    )Loss on impairment of operating lease
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    
    100,000Total operating expenses
    
    
    5,988,000
    
    
    
    6,092,000
    
    
    
    12,350,000
    
    
    
    10,191,000Operating loss
    
    
    (1,572,000
    )
    
    
    (3,184,000
    )
    
    
    (3,315,000
    )
    
    
    (4,749,000
    )Other (expense) income:Investment and other income
    
    
    222,000
    
    
    
    139,000
    
    
    
    338,000
    
    
    
    294,000Interest expense
    
    
    
    
    
    
    (56,000
    )
    
    
    
    
    
    
    (106,000
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (178,000
    )Total other income
    
    
    222,000
    
    
    
    83,000
    
    
    
    338,000
    
    
    
    10,000Loss before income taxes
    
    
    (1,350,000
    )
    
    
    (3,101,000
    )
    
    
    (2,977,000
    )
    
    
    (4,739,000
    )Income taxes expense
    
    
    
    
    
    
    (34,000
    )
    
    
    (77,000
    )
    
    
    (37,000
    )Net loss
    
    $
    (1,350,000
    )
    
    $
    (3,135,000
    )
    
    $
    (3,054,000
    )
    
    $
    (4,776,000
    )Basic and diluted loss per common share
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.05
    )
    
    $
    (0.08
    )Basic and diluted weighted average common shares outstanding
    
    
    62,903,431
    
    
    
    60,338,839
    
    
    
    62,803,638
    
    
    
    60,110,662
  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, January 1, 2008
    
    
    64,959,649
    
    
    $
    650,000
    
    
    $
    329,186,000
    
    
    $
    (11,507,000
    )
    
    $
    (318,618,000
    )
    
    $
    (289,000
    )Issuance of common
stock upon exercise
of stock options
    
    
    62,759
    
    
    
    1,000
    
    
    
    149,000
    
    
    
    
    
    
    
    
    
    
    
    150,000Common stock issued
to employees as
compensation in lieu
of cash
    
    
    292,012
    
    
    
    2,000
    
    
    
    996,000
    
    
    
    
    
    
    
    
    
    
    
    998,000Employee share-based
compensation costs
    
    
    
    
    
    
    
    
    
    
    1,265,000
    
    
    
    
    
    
    
    
    
    
    
    1,265,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,054,000
    )
    
    
    (3,054,000
    )Balance, June 30, 2008
    
    
    65,314,420
    
    
    $
    653,000
    
    
    $
    331,596,000
    
    
    $
    (11,507,000
    )
    
    $
    (321,672,000
    )
    
    $
    (930,000
    )
  5




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ZIX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30,2008
    
    
    2007Operating activities:Net loss
    
    $
    (3,054,000
    )
    
    $
    (4,776,000
    )Non-cash items in net loss:Depreciation and amortization
    
    
    649,000
    
    
    
    881,000Employee share-based compensation costs
    
    
    1,265,000
    
    
    
    826,000Common stock issued to employees as compensation in lieu of cash
    
    
    576,000
    
    
    
    Amortization of debt discount/premium, financing costs and other
    
    
    
    
    
    
    16,000Non-employee share-based compensation costs
    
    
    
    
    
    
    66,000Loss on extinguishment of debt
    
    
    
    
    
    
    178,000Loss on impairment of operating lease
    
    
    
    
    
    
    100,000Customer deposit forfeiture
    
    
    
    
    
    
    (2,000,000
    )Changes in deferred taxes
    
    
    27,000
    
    
    
    (89,000
    )Changes in operating assets and liabilities:Receivables
    
    
    422,000
    
    
    
    (65,000
    )Prepaid and other current assets
    
    
    220,000
    
    
    
    436,000Accounts payable
    
    
    90,000
    
    
    
    385,000Deferred revenue
    
    
    819,000
    
    
    
    4,118,000Accrued and other liabilities
    
    
    129,000
    
    
    
    (64,000
    )Net cash provided by operating activities
    
    
    1,143,000
    
    
    
    12,000Investing activities:Purchases of property and equipment
    
    
    (544,000
    )
    
    
    (543,000
    )Restricted cash investments and marketable securities, net
    
    
    1,734,000
    
    
    
    (1,665,000
    )Net cash provided (used) by investing activities
    
    
    1,190,000
    
    
    
    (2,208,000
    )Financing activities:Proceeds from exercise of stock options
    
    
    150,000
    
    
    
    Payment of short-term notes payable
    
    
    
    
    
    
    (151,000
    )Net cash provided (used) by financing activities
    
    
    150,000
    
    
    
    (151,000
    )Increase (decrease) in cash and cash equivalents
    
    
    2,483,000
    
    
    
    (2,347,000
    )Cash and cash equivalents, beginning of period
    
    
    10,524,000
    
    
    
    12,783,000Cash and cash equivalents, end of period
    
    $
    13,007,000
    
    
    $
    10,436,000
  6




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ZIX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
  2. Recent Accounting Standards and Pronouncements
 Share-Based Payment.
 Business Combinations Non-controlling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
 3. Company Overview and Liquidity
     7




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##### Table of Contents




    
    The key metrics upon which the operational success of the Company is primarily dependent
are set forth under the caption Overview, which appears on page 14 of this Form 10-Q.
Failure of the Company to perform satisfactorily relative to these key metrics or to
decrease its spending will negatively affect the Companys overall cash resources.
    
    The Company hopes to begin recruiting prescribers as part of the announced HighMark
initiative in Pennsylvania and to obtain new payor sponsorship contracts to deploy its
e-Prescribing service to a significant number of new prescriber (users). There are
significant upfront variable costs associated with establishing the service. The Company
has historically asked its health care payor sponsors to pay all (or most) of these
variable costs either before or as they are incurred. In the case of the HighMark
initiative and, in the case of possible new sponsorships being proposed, the Company would
pay a substantial portion of these variable costs upfront in exchange for cash and revenue
streams that commence or payments that are made upon achievement of active prescribers. Of
course, our business plan in these instances would be designed such that future payments
exceed our variable costs and provide net contribution to our fixed costs and, with
sufficient volume of active prescribers, would become profitable. However, with
significant increases to the number of orders under these new business models, the
Companys use of its cash resources will increase significantly.
    
    The Company may increase its research and development spending to develop new
functionality and services for one or both of its lines of business.
    
    New business opportunities may require significant investments for new technology or
infrastructure.
 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,
  8




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5. Segment Information
   Three Months Ended June 30, 2008
    
    
    Three Months Ended June 30, 2007Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    5,667,000
    
    
    $
    1,291,000
    
    
    $
    
    
    
    $
    6,958,000
    
    
    $
    4,120,000
    
    
    $
    1,435,000
    
    
    $
    
    
    
    $
    5,555,000Cost of Revenues
    
    
    1,059,000
    
    
    
    1,483,000
    
    
    
    
    
    
    
    2,542,000
    
    
    
    1,031,000
    
    
    
    1,616,000
    
    
    
    
    
    
    
    2,647,000Gross margin (loss)
    
    
    4,608,000
    
    
    
    (192,000
    )
    
    
    
    
    
    
    4,416,000
    
    
    
    3,089,000
    
    
    
    (181,000
    )
    
    
    
    
    
    
    2,908,000Direct expenses
    
    
    2,756,000
    
    
    
    1,717,000
    
    
    
    
    
    
    
    4,473,000
    
    
    
    2,743,000
    
    
    
    1,762,000
    
    
    
    
    
    
    
    4,505,000Segment contribution (loss)
    
    
    1,852,000
    
    
    
    (1,909,000
    )
    
    
    
    
    
    
    (57,000
    )
    
    
    346,000
    
    
    
    (1,943,000
    )
    
    
    
    
    
    
    (1,597,000
    )Unallocated (expense) / incomeMarketing, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (1,515,000
    )
    
    
    (1,515,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,487,000
    )
    
    
    (1,487,000
    )Loss on impairment of operating lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (100,000
    )Investment and other income
    
    
    
    
    
    
    
    
    
    
    222,000
    
    
    
    222,000
    
    
    
    
    
    
    
    
    
    
    
    139,000
    
    
    
    139,000Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,000
    )
    
    
    (56,000
    )Total
    
    
    
    
    
    
    
    
    
    
    (1,293,000
    )
    
    
    (1,293,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,504,000
    )
    
    
    (1,504,000
    )Income (loss) before income taxes
    
    $
    1,852,000
    
    
    $
    (1,909,000
    )
    
    $
    (1,293,000
    )
    
    $
    (1,350,000
    )
    
    $
    346,000
    
    
    $
    (1,943,000
    )
    
    $
    (1,504,000
    )
    
    $
    (3,101,000
    )
 9




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Six Months Ended June 30, 2008
    
    
    Six Months Ended June 30, 2007Email
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EmailEncryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    Total
    
    
    Encryption
    
    
    e-Prescribing
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    10,956,000
    
    
    $
    3,201,000
    
    
    $
    
    
    
    $
    14,157,000
    
    
    $
    8,054,000
    
    
    $
    2,888,000
    
    
    $
    
    
    
    $
    10,942,000Cost of Revenues
    
    
    2,109,000
    
    
    
    3,013,000
    
    
    
    
    
    
    
    5,122,000
    
    
    
    2,226,000
    
    
    
    3,274,000
    
    
    
    
    
    
    
    5,500,000Gross margin (loss)
    
    
    8,847,000
    
    
    
    188,000
    
    
    
    
    
    
    
    9,035,000
    
    
    
    5,828,000
    
    
    
    (386,000
    )
    
    
    
    
    
    
    5,442,000Direct expenses
    
    
    5,623,000
    
    
    
    3,552,000
    
    
    
    
    
    
    
    9,175,000
    
    
    
    5,409,000
    
    
    
    3,619,000
    
    
    
    
    
    
    
    9,028,000Segment contribution (loss)
    
    
    3,224,000
    
    
    
    (3,364,000
    )
    
    
    
    
    
    
    (140,000
    )
    
    
    419,000
    
    
    
    (4,005,000
    )
    
    
    
    
    
    
    (3,586,000
    )Unallocated (expense) / incomeMarketing, general and administrative expense
    
    
    
    
    
    
    
    
    
    
    (3,175,000
    )
    
    
    (3,175,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,063,000
    )
    
    
    (3,063,000
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (178,000
    )
    
    
    (178,000
    )Loss on impairment of operating lease
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (100,000
    )Customer deposit forfeiture
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    2,000,000Investment and other income
    
    
    
    
    
    
    
    
    
    
    338,000
    
    
    
    338,000
    
    
    
    
    
    
    
    
    
    
    
    294,000
    
    
    
    294,000Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106,000
    )
    
    
    (106,000
    )Total
    
    
    
    
    
    
    
    
    
    
    (2,837,000
    )
    
    
    (2,837,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,153,000
    )
    
    
    (1,153,000
    )Income (loss) before income taxes
    
    $
    3,224,000
    
    
    $
    (3,364,000
    )
    
    $
    (2,837,000
    )
    
    $
    (2,977,000
    )
    
    $
    419,000
    
    
    $
    (4,005,000
    )
    
    $
    (1,153,000
    )
    
    $
    (4,739,000
    )
   June 30, 2008
    
    
    December 31, 2007Total assets:Email Encryption
    
    $
    3,656,000
    
    
    $
    3,730,000e-Prescribing
    
    
    745,000
    
    
    
    1,272,000Corporate
    
    
    15,003,000
    
    
    
    14,472,000Total assets
    
    $
    19,404,000
    
    
    $
    19,474,000
 6. Stock Options and Share-based Employee Compensation
  Three Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2008Cost of revenues
    
    $
    78,000
    
    
    $
    157,000Research and development expenses
    
    
    65,000
    
    
    
    130,000Selling, general and administrative expenses
    
    
    488,000
    
    
    
    978,000Share-based compensation expense
    
    $
    631,000
    
    
    $
    1,265,000
  Stock Option Activity
  10




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##### Table of Contents



Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (Yrs)
    
    
    ValueOutstanding at March 31, 2008
    
    
    9,524,080
    
    
    $
    4.95Granted at market price
    
    
    91,991
    
    
    $
    3.34Cancelled or expired
    
    
    (43,205
    )
    
    $
    4.08Exercised
    
    
    (4,975
    )
    
    $
    1.82Outstanding at June 30, 2008
    
    
    9,567,891
    
    
    $
    4.94
    
    
    
    6.78
    
    
    $
    2,799,000Options exercisable at June 30, 2008
    
    
    6,780,224
    
    
    $
    5.61
    
    
    
    5.95
    
    
    $
    1,489,000
  Common Stock Issued in Lieu of Cash
   7. Supplemental Cash Flow Information
  Six Months Ended June 30,2008
    
    
    2007Cash paid for interest
    
    $
    
    
    
    $
    45,000Cash paid for income tax
    
    $
    84,000
    
    
    $
    96,000Noncash investing and financing activities:Issuance of common stock and warrants related to the
restructure of the prior promissory note payable
    
    $
    
    
    
    $
    1,393,000Issuance of a replacement promissory note payable
    
    $
    
    
    
    $
    1,477,000Accrued expenses related to fixed asset purchases
    
    $
    
    
    
    $
    33,000Assets sold to customers as part of their subscription service
    
    $
    16,000
    
    
    $
    4,000Stock issued for accrued expenses
    
    $
    422,000
    
    
    $
    
 8. Fair Value Measurements
    11




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##### Table of Contents



9. Receivables, net
 June 30,
    
    
    December 31,2008
    
    
    2007Gross trade accounts receivable
    
    $
    4,443,000
    
    
    $
    4,513,000Allowance for returns and doubtful accounts
    
    
    (79,000
    )
    
    
    (66,000
    )Unpaid portion of deferred revenue
    
    
    (3,667,000
    )
    
    
    (3,328,000
    )Trade receivables, net
    
    
    697,000
    
    
    
    1,119,000Note receivable
    
    
    488,000
    
    
    
    488,000Allowance for note receivable
    
    
    (488,000
    )
    
    
    (488,000
    )Note receivables, net
    
    
    
    
    
    
    Total receivables, net
    
    $
    697,000
    
    
    $
    1,119,000
    10. Prepaid and other current assets
 June 30,
    
    
    December 31,2008
    
    
    2007Inventory
    
    $
    119,000
    
    
    $
    218,000Deferred cost of sales charges
    
    
    287,000
    
    
    
    301,000Prepaid insurance, maintenance and other
    
    
    928,000
    
    
    
    1,013,000Tax related
    
    
    7,000
    
    
    
    13,000Prepaid and other current assets
    
    $
    1,341,000
    
    
    $
    1,545,000
 Inventory
 Deferred cost of revenues charges
  Prepaid insurance, maintenance and other
 12




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##### Table of Contents



11. Notes Payable
  12. Loss on Impairment of Operating Lease
  13. Earnings Per Share and Potential Dilution
  June 30,2008
    
    
    2007Stock options
    
    
    9,567,891
    
    
    
    9,559,642Warrants issued in relation to debt and equity arrangements
    
    
    10,434,804
    
    
    
    13,365,742Total antidilutive securities excluded from EPS calculation
    
    
    20,002,695
    
    
    
    22,925,384
  14. Commitments and contingencies
 Leases
  Payments Due by PeriodTotal
    
    1 Year
    
    2-3 Year
    
    > 3 YearsOperating leases
    
    $
    6,177,000
    
    
    $
    1,254,000
    
    
    $
    2,013,000
    
    
    $
    2,910,000
  Lawsuits
   13




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##### Table of Contents



ITEM 2.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
      
    
    Rate of new subscriptions (termed new first year orders) for the Email Encryption
Service;
    
    Renewal rates for the Email Encryption Service;
    
    Additional payor sponsorship of the e-Prescribing service to prescribers by new or
existing insurance payors;
    
    Successful adoption and usage of the e-Prescribing service by prescribers;
    
    Retention of the users (prescribers) of the e-Prescribing service as measured by
renewal rates;
    
    Future transaction fees or incremental service fees for new functionality, for
instance, disease management program enrollment associated with the use of the
e-Prescribing service; and
    
    Our ability to increase business volume with reasonable cost increases.
 14




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Property and Equipment, Long-Lived and Other Intangible Assets, Depreciation and Amortization
   Deferred Tax Assets
 Revenue Recognition Software Revenue Recognition, Modification of SOP 97-2, Software Revenue
Recognition, With respect to Certain Transactions, Revenue Arrangements
with Multiple Deliverables, Revenue Recognition in Financial Statements,
 15




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##### Table of Contents



Deferred cost of revenues charges
  Share-based compensation Share-Based Payment Accounting for Stock Issued to Employees
 Share-Based Payment.
 Results of Operations
 Second Quarter 2008 Summary of Operations
 Financial Statement
 
    
    Company-wide revenue for the quarter ended June 30, 2008, was $6,958,000 compared with
$5,555,000 for the same period in 2007, representing a 25% increase.
    
    Company-wide gross margin for the quarter ended June 30, 2008, was $4,416,000 or 63% of
revenues compared to $2,908,000 or 52% of revenues for the comparable period in 2007.
    
    Email Encryption  gross margin for this segment for the quarter ended June 30, 2008,
was $4,608,000 or 81% of revenues totaling $5,667,000 compared to $3,089,000 or 75% of
revenues totaling $4,120,000 for the comparable period in 2007.
    
    e-Prescribing  the gross margin incurred by this segment for the quarter ended June
30, 2008, was a negative $192,000 or 15% of revenues totaling $1,291,000
compared to a negative gross margin of $181,000 or 13% of revenues totaling
$1,435,000 for the comparable period in 2007.
    
    Loss before income taxes for the quarter ended June 30, 2008, was $1,350,000 compared
with a loss before income taxes of $3,101,000 for the same period in 2007.
    
    The Companys ending unrestricted cash balance at June 30, 2008, was $13,007,000
compared to $10,436,000 at June 30, 2007.
    
    Net cash provided by operating activities for the first six months of 2008 was
$1,143,000. Total cash and cash equivalent balances (including unrestricted and restricted
cash) increased by $749,000 in the first half of 2008.
 16




---



##### Table of Contents



Operations
 
    
    The Company secured new first year orders in the quarter ended June 30, 2008, totaling
$1,375,000 for its Email Encryption services and achieved customer contract renewals of 93%
on a contract value basis for Email Encryption customers. The customer contract renewal
rate on an annualized basis has consistently remained at or above 95%. See Revenues 
Email Encryption below for more information.
    
    The Company deployed approximately 150 new e-Prescribing devices to prescribers under
sponsorship arrangements with several insurance payor/sponsors.
    
    The Company achieved approximately 2,100,000 electronic prescriptions transacted in the
three months ended June 30, 2008, through use of its e-Prescribing service compared to
approximately 1,830,000 for the comparable period in 2007.
 Revenues
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended, June 30,
    
    
    2008 vs. 2007
    
    
    Six Months Ended, June 30,
    
    
    2008 vs. 20072008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %Email Encryption
    
    $
    5,667,000
    
    
    $
    4,120,000
    
    
    $
    1,547,000
    
    
    
    38
    %
    
    $
    10,956,000
    
    
    $
    8,054,000
    
    
    $
    2,902,000
    
    
    
    36
    %e-Prescribing
    
    
    1,291,000
    
    
    
    1,435,000
    
    
    
    (144,000
    )
    
    
    (10
    %)
    
    
    3,201,000
    
    
    
    2,888,000
    
    
    
    313,000
    
    
    
    11
    %Total revenues
    
    $
    6,958,000
    
    
    $
    5,555,000
    
    
    $
    1,403,000
    
    
    
    25
    %
    
    $
    14,157,000
    
    
    $
    10,942,000
    
    
    $
    3,215,000
    
    
    
    29
    %
 Email Encryption 
 nd nd
  e-Prescribing 
 Revenue Outlook:
 17




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##### Table of Contents



Revenue Indicators  Backlog, Orders, and Deployments
 Company-wide backlog 
   Email Encryption Orders 
  2008
    
    
    2007Three month period ending:March 31
    
    $
    1,432,000
    
    
    $
    1,352,000June 30
    
    
    1,375,000
    
    
    
    1,397,000September 30
    
    
    
    
    
    
    1,359,000December 31
    
    
    
    
    
    
    1,406,000Total new first year orders
    
    $
    2,807,000
    
    
    $
    5,514,000
 18




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##### Table of Contents



e-Prescribing 
     19




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##### Table of Contents



Cost of Revenues
  3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended, June 30,
    
    
    2008 vs. 2007
    
    
    Six Months Ended, June 30,
    
    
    2008 vs. 20072008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %Email Encryption
    
    $
    1,059,000
    
    
    $
    1,031,000
    
    
    $
    28,000
    
    
    
    3
    %
    
    $
    2,109,000
    
    
    $
    2,226,000
    
    
    $
    (117,000
    )
    
    
    (5
    %)e-Prescribing
    
    
    1,483,000
    
    
    
    1,616,000
    
    
    
    (133,000
    )
    
    
    (8
    %)
    
    
    3,013,000
    
    
    
    3,274,000
    
    
    
    (261,000
    )
    
    
    (8
    %)Total cost of
revenues
    
    $
    2,542,000
    
    
    $
    2,647,000
    
    
    $
    (105,000
    )
    
    
    (4
    %)
    
    $
    5,122,000
    
    
    $
    5,500,000
    
    
    $
    (378,000
    )
    
    
    (7
    %)
  Email Encryption 
 20




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##### Table of Contents



e-Prescribing 
 Research and Development Expenses
  3-month Variance
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended, June 30,
    
    2008 vs. 2007
    
    Six Months Ended, June 30,
    
    2008 vs. 20072008
    
    2007
    
    $
    
    %
    
    2008
    
    2007
    
    $
    
    %Research and
Development
expenses
    
    $
    1,381,000
    
    
    $
    1,343,000
    
    
    $
    38,000
    
    
    
    3
    %
    
    $
    2,926,000
    
    
    $
    2,642,000
    
    
    $
    284,000
    
    
    
    11
    %
  Selling, General and Administrative Expenses
   3-month Variance
    
    
    
    
    
    
    
    
    
    
    6-month VarianceThree Months Ended, June 30,
    
    
    2008 vs. 2007
    
    
    Six Months Ended, June 30,
    
    
    2008 vs. 20072008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2008
    
    
    2007
    
    
    $
    
    
    %Marketing expenses
    
    $
    805,000
    
    
    $
    938,000
    
    
    $
    (133,000
    )
    
    
    (14
    %)
    
    $
    1,690,000
    
    
    $
    1,857,000
    
    
    $
    (167,000
    )
    
    
    (9
    %)Sales expenses
    
    
    2,281,000
    
    
    
    2,225,000
    
    
    
    56,000
    
    
    
    3
    %
    
    
    4,553,000
    
    
    
    4,535,000
    
    
    
    18,000
    
    
    
    General and administrative expenses
    
    
    1,521,000
    
    
    
    1,486,000
    
    
    
    35,000
    
    
    
    2
    %
    
    
    3,181,000
    
    
    
    3,057,000
    
    
    
    124,000
    
    
    
    4
    %Total selling, general and
administrative expenses
    
    $
    4,607,000
    
    
    $
    4,649,000
    
    
    $
    (42,000
    )
    
    
    
    
    
    $
    9,424,000
    
    
    $
    9,449,000
    
    
    $
    (25,000
    )
    
    
    
 Customer Deposit Forfeiture
  Loss on impairment of operating lease
  21




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##### Table of Contents



Investment and Other Income
  Interest Expense
  Loss on extinguishment of debt
  Income Taxes
    Net Loss
  Liquidity and Capital Resources
 Overview
  22




---



##### Table of Contents



Email Encryption
 e-Prescribing
    23




---



##### Table of Contents



Sources and Uses of Cash Summary
   Six Months Ended June 30,2008
    
    
    2007
    
    
    VarianceOperating cash receipts
    
    $
    16,743,000
    
    
    $
    15,935,000
    
    
    $
    808,000
    
    
    
    5
    %Net operating cash spending
    
    
    (15,600,000
    )
    
    
    (15,923,000
    )
    
    
    323,000
    
    
    
    2
    %Net cash provided by operating activities
    
    $
    1,143,000
    
    
    $
    12,000
    
    
    $
    1,131,000
    
    
    
    
    24




---



##### Table of Contents



Cash Sources
  
    
    contractual backlog;
    
    Email Encryption growth and retention;
    
    e-Prescribing growth and retention; and
    
    Future transaction fees or incremental service fees for new functionality, for instance
disease management program enrollment.
 Backlog
 Email Encryption growth and retention
 e-Prescribing growth and retention
 e-Prescribing performance-based, transaction and other incremental service fees
   25




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##### Table of Contents



Cash Requirements
     Liquidity Summary
  
    
    The key metrics upon which the operational success of the Company is primarily dependent
are set forth under the caption Overview, which appears on page 14 of this Form 10-Q.
Failure of the Company to perform satisfactorily relative to these key metrics or to
decrease its discretionary spending will negatively affect the Companys overall cash
resources.
    
    The Company hopes to begin recruiting prescribers as part of the announced HighMark
initiative in Pennsylvania and to obtain new payor sponsorship contracts to deploy its
e-Prescribing service to a significant number of new prescriber (users). There are
significant upfront variable costs associated with establishing the service. The Company
has historically asked its health care payor sponsors to pay all (or most) of these
variable costs either before or as they are incurred. In the case of the HighMark
initiative and, in the case of possible new sponsorships being proposed, the Company would
pay a substantial portion of these variable costs upfront in exchange for cash and revenue
streams that commence or payments that are made upon achievement of active prescribers. Of
course, our business plan in these instances would be designed such that future payments
exceed our variable costs and provide net contribution to our fixed costs and, with
sufficient volume of active
 26




---



##### Table of Contents



prescribers, would become profitable. However, with significant increases to the number of
orders under these new business models, the Companys use of its cash resources will increase
significantly.
    
    The Company may increase its research and development spending to develop new
functionality and services for one or both of its lines of business.
    
    New business opportunities may require significant investments for new technology or
infrastructure.
 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
    
    
    6,971,510
    
    
    $
    10,788,183
    
    
    
    5,980,328
    
    
    $
    9,281,026$2.00  $3.49
    
    
    4,950,559
    
    
    
    14,800,737
    
    
    
    4,579,764
    
    
    
    13,706,971$3.50  $4.99
    
    
    4,329,584
    
    
    
    19,311,008
    
    
    
    2,903,893
    
    
    
    12,619,372$5.00  $5.99
    
    
    600,354
    
    
    
    3,047,997
    
    
    
    600,354
    
    
    
    3,043,795$6.00  $8.99
    
    
    977,099
    
    
    
    6,241,066
    
    
    
    977,099
    
    
    
    6,235,393$9.00  $19.99
    
    
    1,116,570
    
    
    
    11,965,164
    
    
    
    1,116,570
    
    
    
    11,958,465$20.00  $57.60
    
    
    1,057,019
    
    
    
    57,590,935
    
    
    
    1,057,019
    
    
    
    57,590,233Total
    
    
    20,002,695
    
    
    $
    123,745,090
    
    
    
    17,215,027
    
    
    $
    114,435,255
 Off-Balance Sheet Arrangements
  Contractual Obligations, Contingent Liabilities and Commitments
  Payments Due by PeriodTotal
    
    1 Year
    
    2-3 Year
    
    > 3 YearsOperating leases
    
    $
    6,177,000
    
    
    $
    1,254,000
    
    
    $
    2,013,000
    
    
    $
    2,910,000
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  27




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##### 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
  28




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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.99.1
    
    Order and Final Judgment, United States District Court, Cause
No. 3-04-CV-1931-K, Northern District of Texas, Dallas
Division (dated June 16, 2008). Filed as Exhibit 99.1 to the
Companys Current Report on Form 8-K, filed June 17, 2008, 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. 29




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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
(Richard D. Spurr)
    
    Chairman, Chief Executive Officer, President and Director (Principal Executive
Officer)/s/ Barry W. Wilson
(Barry W. Wilson)
    
    Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)(Robert C. Hausmann)
    
    Director(Charles N. Kahn III)
    
    Director/s/ James S. Marston
(James S. Marston)
    
    Director/s/ Antonio R. Sanchez III
(Antonio R. Sanchez III)
    
    Director/s/ Paul E. Schlosberg
(Paul E. Schlosberg)
    
    Director
 30