ZIX CORP (Form: 10-Q, Received: 08/09/2010 12:23:53)

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 filer o	Accelerated filer þ	Non-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 2, 2010

Common Stock, par value $0.01 per share		64,071,326

INDEX


	Page
	Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009		4
Condensed Consolidated Statement of Stockholders’ Equity (Deficit) for the six months ended June 30, 2010		5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures About Market Risk		19
Item 4. Controls and Procedures		19
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		19
Item 1A. Risk Factors		19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3. Defaults Upon Senior Securities		19
Item 4. (Removed and Reserved)		19
Item 5. Other Information		19
Item 6. Exhibits		20
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1

ZIX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	17,477,000		$	13,287,000
Marketable securities		—			25,000
Receivables, net		564,000			760,000
Prepaid and other current assets		854,000			1,142,000

Total current assets		18,895,000			15,214,000
Property and equipment, net		2,240,000			2,137,000
Goodwill		2,161,000			2,161,000
Other assets		164,000			236,000

Total assets	$	23,460,000		$	19,748,000

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	672,000		$	769,000
Accrued expenses		2,393,000			3,124,000
Deferred revenue		16,454,000			14,478,000
License subscription note payable		131,000			126,000

Total current liabilities		19,650,000			18,497,000
Long-term liabilities:
Deferred revenue		1,803,000			2,821,000
License subscription note payable		119,000			186,000
Deferred rent		198,000			233,000

Total long-term liabilities		2,120,000			3,240,000

Total liabilities		21,770,000			21,737,000
Commitments 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			661,000
Additional paid-in capital		338,815,000			337,352,000
Treasury 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

See notes to condensed consolidated financial statements.

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenues	$	8,915,000		$	7,371,000		$	17,331,000		$	14,627,000
Cost of revenues		1,970,000			2,368,000			3,826,000			4,839,000

Gross profit		6,945,000			5,003,000			13,505,000			9,788,000

Operating expenses:
Research and development		1,307,000			1,747,000			2,755,000			3,478,000
Selling, general and administrative		4,062,000			5,228,000			8,443,000			9,872,000

Total operating expenses		5,369,000			6,975,000			11,198,000			13,350,000

Operating income (loss)		1,576,000			(1,972,000	)		2,307,000			(3,562,000	)
Other income, net		15,000			73,000			44,000			141,000

Income (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			63,319,482

Diluted weighted average common shares outstanding		66,368,548			63,319,482			65,977,451			63,319,482

See notes to condensed consolidated financial statements.

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)


	Stockholders’ Equity
					Additional								Total
	Common 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		—			—			469,000
Employee stock-based compensation costs		—		—		976,000		—			—			976,000
Non-employee stock-based compensation costs		—		—		21,000		—			—			21,000
Net income		—		—		—		—			2,213,000			2,213,000

Balance, June 30, 2010		66,362,868	$	664,000	$	338,815,000	$	(11,507,000	)	$	(326,282,000	)	$	1,690,000

See notes to condensed consolidated financial statements.

ZIX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Six Months Ended June 30,
	2010			2009
Operating activities:
Net income (loss)	$	2,213,000		$	(3,467,000	)
Non-cash items in net income (loss):
Depreciation and amortization		685,000			648,000
Employee stock-based compensation costs		976,000			1,353,000
Non-employee stock-based compensation costs		21,000			16,000
Changes in deferred taxes		7,000			7,000
Changes in operating assets and liabilities:
Receivables		196,000			(152,000	)
Prepaid and other assets		353,000			374,000
Accounts payable		(222,000	)		409,000
Deferred revenue		958,000			(19,000	)
Accrued and other liabilities		(766,000	)		592,000

Net 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		—			3,000

Net 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			13,245,000

Cash and cash equivalents, end of period	$	17,477,000		$	12,494,000

See notes to condensed consolidated financial statements.

ZIX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying condensed consolidated financial statements of Zix Corporation (“ZixCorp,” the “Company,” “we,” “our,” “us”) should be read in conjunction with the audited consolidated financial statements included in the Company’s 2009 Annual Report to Shareholders on Form 10-K. These financial statements are unaudited, but have been prepared in the ordinary course of business for the purpose of providing information with respect to the interim periods. Management of the Company believes that all adjustments necessary for a fair presentation for such periods have been included and are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2010, are not necessarily indicative of the results to be expected for the full year.

2. Recent Accounting Standards and Pronouncements

To be adopted in 2010 or beyond:

In October 2009, the FASB issued guidance that provides principles for allocation of consideration among a revenue arrangement’s multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The guidance introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. It is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The potential impact of this standard is being evaluated. We do not expect the adoption of this statement to have a material impact on our consolidated financial statements or footnote disclosures.

International Financial Reporting Standards (“IFRS”) — On August 27, 2008, the U.S. Securities and Exchange Commission (SEC) announced that it will issue for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with IFRS. IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, we could be required in fiscal 2014 to prepare financial statements in accordance with IFRS, and the SEC is expected to make a determination in 2011 regarding the mandatory adoption of IFRS. We will continue to monitor the development of the potential implementation of IFRS.

3. Segment Information

We have concluded that our business has two reportable segments: Email Encryption and e-Prescribing. Our senior management team measures the performance of each segment and determines the related allocation of resources. In 2009 we announced our plan to exit the e-Prescribing business by December 31, 2010. Throughout 2010 we expect to wind down the remaining obligations related to this business segment.

To determine the allocation of resources, the senior management team generally assesses the performance of each segment based on revenue, gross profit, and direct expenses which include research and development expenses and selling and marketing expenses that are directly attributable to the segments. Most assets and most corporate costs are not allocated to the segments and are not used to determine resource allocation. The accounting policies of the reportable segments are the same as those applied to the consolidated financial statements.

“Corporate” includes charges such as corporate management, compliance and other non-operational activities that cannot be directly attributed to a reporting segment. The following table shows Operating results broken out by segment, including Corporate, for the three month periods ended June 30, 2010 and 2009.


Three Months Ended June 30, 2010	Email Encryption		e-Prescribing		Corporate			Total
Revenues	$	8,194,000	$	721,000	$	—		$	8,915,000
Cost of revenues		1,570,000		400,000		—			1,970,000

Gross profit		6,624,000		321,000		—			6,945,000

Direct expenses		3,632,000		133,000		—			3,765,000

Segment contribution		2,992,000		188,000		—			3,180,000
Unallocated (expense) income
General and administrative expense		—		—		(1,604,000	)		(1,604,000	)
Other income, net		—		—		15,000			15,000

Total 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


Three Months Ended June 30, 2009	Email Encryption		e-Prescribing			Corporate			Total
Revenues	$	6,379,000	$	992,000		$	—		$	7,371,000
Cost of revenues		1,088,000		1,280,000			—			2,368,000

Gross profit		5,291,000		(288,000	)		—			5,003,000

Direct expenses		2,979,000		1,749,000			—			4,728,000

Segment contribution (loss)		2,312,000		(2,037,000	)		—			275,000
Unallocated (expense) income
General and administrative expense		—		—			(2,247,000	)		(2,247,000	)
Other income, net		—		—			73,000			73,000

Total 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			Total
Revenues	$	15,673,000	$	1,658,000		$	—		$	17,331,000
Cost of revenues		3,072,000		754,000			—			3,826,000

Gross profit		12,601,000		904,000			—			13,505,000

Direct expenses		7,409,000		426,000			—			7,835,000

Segment contribution		5,192,000		478,000			—			5,670,000
Unallocated (expense) income
General and administrative expense		—		—			(3,363,000	)		(3,363,000	)
Other income, net		—		—			44,000			44,000

Total unallocated (expense) income		—		—			(3,319,000	)		(3,319,000	)

Income (loss) before provision for income taxes	$	5,192,000	$	478,000		$	(3,319,000	)	$	2,351,000


Six Months Ended June 30, 2009	Email Encryption		e-Prescribing			Corporate			Total
Revenues	$	12,621,000	$	2,006,000		$	—		$	14,627,000
Cost of revenues		2,101,000		2,738,000			—			4,839,000

Gross profit		10,520,000		(732,000	)		—			9,788,000

Direct expenses		5,735,000		3,594,000			—			9,329,000

Segment contribution (loss)		4,785,000		(4,326,000	)		—			459,000
Unallocated (expense) income
General and administrative expense		—		—			(4,021,000	)		(4,021,000	)
Other income, net		—		—			141,000			141,000

Total 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:

The following table shows depreciation and amortization expense by segment.


	Six Months Ended June 30,
	2010		2009
Email Encryption	$	535,000	$	386,000
e-Prescribing		73,000		179,000
Unallocated		77,000		83,000

Total depreciation expense	$	685,000	$	648,000

Allocated costs:

For the periods presented we allocated certain fixed expenses as well as certain shared expenses to our segment businesses. Fixed expenses include expenses related to occupancy, information technology and commercial insurance and are generally allocated to the business segments based on direct headcount. Shared expenses include expenses incurred by our customer service, network operations, quality assurance, research and development and marketing departments and are generally allocated based on percent of effort. Shared expenses are largely fixed in nature and are expected to remain flat or only slightly increase in 2010.

Included in the increase in Email Encryption Cost of revenues and Direct expenses for the second quarter 2010 compared to the same quarter last year was an increase of approximately $500,000 for allocated fixed and shared expenses which were spread approximately evenly between Cost of revenues and Direct expenses. This increase resulted from lower headcount in e-Prescribing and the shift in effort directed toward the Email Encryption business. The remaining increase in Email Encryption resulted from normal planned increases in the budget in support of Email Encryption growth. The expense reductions in e-Prescribing were attributable primarily to lower headcount and other expense reductions resulting from diminished recruiting and deployment activity in this business segment and the impact of lower allocated costs.

The Email Encryption increase in allocated fixed and shared expenses was approximately $1,000,000 for the six month period ended June 30, 2010 compared to the same period last year. This increase was spread approximately evenly between Cost of revenues and Direct expenses. The remaining increase in Email Encryption resulted primarily from planned increases in support of Email Encryption growth.

In our first quarter 2010 Form 10-Q we disclosed $1,148,000 of expenses which included planned increases to the Email Encryption business when it should have only included the fixed and shared allocated expenses absorbed by this business segment. We therefore have adjusted this amount down to approximately $500,000. This revision is only to the supplement disclosure included with the segment data, which was accurately stated.

The expense reductions in e-Prescribing resulted primarily from lower headcount and other expense reductions attributable to diminished recruiting and deployment activity in this business segment combined with the impact of lower allocated costs. We expect the Email Encryption business will absorb approximately $800,000 to $1,000,000 of allocated fixed and shared expenses during the second half of 2010 depending on the pace of the of the e-Prescribing wind down.

The wind down of the e-Prescribing business is progressing well and there have been minimal technical support issues, which have allowed us to utilize some of the e-Prescribing team to support the Email Encryption business as time permits. This movement of resources is producing a shift in expenses between the two businesses and will not change total expense. At the conclusion of the wind down of the e-Prescribing business unit, certain allocated expenses previously absorbed by this business unit will remain. We now anticipate approximately $600,000 to $700,000 depending on the pace of the wind down, of fixed and shared expenses to be absorbed by the remaining business unit, Email Encryption, and those expenses will be reflected in its expenses beginning in 2011.

Other segment information:

Revenues from international customers and long-lived assets located outside of the U.S. are not material to the consolidated financial statements.

Total assets by segment are shown below. Assets reported under each segment include only those that provide a direct and exclusive benefit to that segment. Assets assigned to each segment include accounts receivable and related allowances, prepaid and other assets, certain property and equipment and related accumulated depreciation, goodwill, and intangible assets and related accumulated amortization. All other corporate and shared assets are recorded under “Corporate.”


	June 30, 2010		December 31, 2009
Total assets:
Email Encryption	$	3,672,000	$	3,781,000
e-Prescribing		250,000		416,000
Corporate		19,538,000		15,551,000

Total assets	$	23,460,000	$	19,748,000

4. Stock Options and Stock-based Employee Compensation

As of June 30, 2010, there were 9,648,929 options outstanding and 1,105,285 available for grant. Of this amount, 861,262 options were available for grant to employees and 244,023 were available for grant to the Company’s directors. For the three month and six month periods ended June 30, 2010, the total stock-based employee compensation expense was recorded to the following line items of the Company’s condensed consolidated statements of operations:


	Three Months		Six Months
	Ended June 30,		Ended June 30,
	2010		2010
Cost of revenues	$	54,000	$	101,000
Research and development		51,000		98,000
Selling, general and administrative		372,000		777,000

Stock-based compensation expense	$	477,000	$	976,000

There were 139,460 and 309,096 stock options exercised for the three and six month periods ended June 30, 2010. No options were exercised for the comparable periods in 2009. The excess tax deficiency recorded in the three and six month periods ended June 30, 2010, related to these option exercises was $17,000 and $30,000, respectively. A deferred tax asset totaling $263,000 and $422,000, resulting from stock-based compensation expense relating to the Company’s U.S. operations, was recorded for the six month periods ended June 30, 2010, and 2009, respectively. These deferred tax assets were fully reserved because of the Company’s historical net losses for its U.S. operations. As of June 30, 2010, there was $1,616,000 of total unrecognized stock-based compensation related to non-vested stock-based compensation awards granted under the stock option plans. This cost is expected to be recognized over a weighted average period of 0.92 years.

Stock Option Activity

The following is a summary of all stock option transactions for the three months ended June 30, 2010:


						Weighted Average
				Weighted		Remaining		Aggregate
				Average		Contractual Term		Intrinsic
	Shares			Exercise Price		(Yrs)		Value
Outstanding at March 31, 2010		9,965,678		$	4.17
Granted at market price		63,000		$	2.41
Cancelled or expired		(240,289	)	$	3.49
Exercised		(139,460	)	$	1.57

Outstanding at June 30, 2010		9,648,929		$	4.21		5.61	$	1,999,000

Options exercisable at June 30, 2010		8,546,137		$	4.45		5.20	$	1,589,000

At June 30, 2010, we had 2,974,330 stock options outstanding in which the exercise price was lower than the market value of the Company’s common stock.

For additional information regarding the Company’s Stock Options and Stock-based Employee Compensation, see Note 4 to the consolidated financial statements contained in our Form 10-K for the fiscal year ended December 31, 2009.

5. Supplemental Cash Flow Information

Supplemental cash flow information relating to taxes and non-cash activities:


	Six Months Ended June 30,
	2010		2009
Cash paid for interest	$	12,000	$	—
Cash income tax payments	$	149,000	$	142,000
Non-cash investing and financing activities:
Assets sold to customers as part of their subscription service	$	—	$	2,000
Payables related to purchases of fixed assets	$	125,000	$	153,000
Issuance of license subscription note payable	$	—	$	390,000
Amounts reclassified from Notes payable to Accounts payable	$	—	$	19,000

6. Receivables, net


	June 30,			December 31,
	2010			2009
Receivables	$	602,000		$	786,000
Allowance for returns and doubtful accounts		(38,000	)		(26,000	)
Note receivable		484,000			484,000
Allowance for note receivable		(484,000	)		(484,000	)

Receivables, net	$	564,000		$	760,000

The allowance for doubtful accounts includes all specific accounts receivable which we believe are likely not collectible based on known information. In addition, we record 2.5% of all accounts receivable greater than 90 days past due, net of those accounts specifically reserved, as a general allowance against accounts that could potentially become uncollectible.

The note receivable represents the remaining outstanding balance of an original note related to the sale of a product line in 2005 in the amount of $540,000.

7. Earnings Per Share and Potential Dilution

Basic earnings per share are computed using the weighted average number of common shares outstanding for the period. The dilutive effect of potential common shares outstanding is included in diluted earnings per share. The computations for basic and diluted earnings per share for the three and six month periods ended June 30, 2010 and 2009 are as follows:


	Three Months ended June 30,					Six Months ended June 30,
	2010		2009			2010		2009
Net 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		63,319,482
Effect 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		63,319,482

Net earnings (loss) per share
Basic	$	0.02	$	(0.03	)	$	0.03	$	(0.05	)

Diluted	$	0.02	$	(0.03	)	$	0.03	$	(0.05	)

During the three and six month periods ended June 30, 2010, weighted average shares related to certain stock options of 7,444,427 and 7,405,497 respectively, were excluded from the calculation of diluted earnings per share because the stock options were anti-dilutive. Anti-dilutive warrants of 3,664,902 in both the three and six month periods ended June 30, 2010, were also excluded from the calculation. For the three and six month periods ended June 30, 2009, the assumed exercise of common stock equivalents would be anti-dilutive, as a net loss was reported. Common shares excluded from the computation of diluted loss per common share for the three and six month periods ended June 30, 2009, was 9,661,326 for stock options and 10,260,246 for warrants.

8. Commitments and contingencies

A summary of our fixed contractual obligations and commitments at June 30, 2010, is as follows:


	Payments Due by Period
	Total		1 Year		Years 2 & 3		Beyond 3 Years
Operating leases	$	4,287,000	$	1,219,000	$	1,959,000	$	1,109,000
License subscription note payable		250,000		131,000		119,000		—

Total cash obligations		4,537,000		1,350,000		2,078,000		1,109,000
Interest on obligations		21,000		16,000		5,000		—

Total	$	4,558,000	$	1,366,000	$	2,083,000	$	1,109,000

We have not entered into any material, non-cancelable purchase commitments at June 30, 2010.

Claims and Proceedings

We are, from time to time, involved in various legal proceedings that arise in the ordinary course of business. We do not believe the outcome of those legal proceedings either individually or taken as a whole, will have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, we cannot predict with certainty any eventual loss or range of possible loss related to such matters.

9. Fair Value Measurements

Financial Accounting Standards Board (“FASB”) guidance regarding fair value measurement establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices for similar assets and liabilities in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

For certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables, and accounts payable, the fair values approximate carrying values due to the short-term maturities of these instruments. The carrying values of other current assets and accrued expenses are also not recorded at fair value, but approximate fair values primarily due to their short-term nature.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS

Statements in this report, or in our news releases, websites, public filings, investor and analyst conferences or elsewhere, which are not purely historical facts or which necessarily depend upon future events, including statements about trends, uncertainties, hopes, beliefs, anticipations, expectations, plans, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including risks and uncertainties described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Any of these risk factors could have a material adverse effect on our business, financial condition or financial results and reduce the value of an investment in our securities. We may not succeed in addressing these and other risks associated with an investment in our securities, with our business and with our achieving any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. All forward-looking statements are based upon information available to us on the date the statements are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a leader in providing secure, Internet-based applications in a Software as a Service (“SaaS”) model. Our focus is the operation of an Email Encryption Service, which has been designed with the customers’ most important relationships in mind. More than 1,200 hospitals and over 1,300 financial institutions, including some of the most influential companies and government organizations use our Email Encryption Service. Wellpoint, Humana, and the SEC are among these notable customers. Our Email Encryption Service is enhanced by ZixDirectory ^SM , which contains more than 22 million email addresses. ZixDirectory ^SM allows for emails to be sent seamlessly whenever possible, across the largest email encryption community in the world. Email Encryption is one of two reporting segments we currently operate; the other segment we operate is e-Prescribing (see Note 3 to the condensed consolidated financial statements). In 2009 we announced our plan to exit this segment of our business by December 31, 2010. Throughout 2010 we expect to wind down the remaining obligations related to the e-Prescribing business.

The business operations and service offerings are supported by the ZixData Center™, a network operations center dedicated to secure electronic transaction processing. The operations of the ZixData Center are independently audited annually to maintain AICPA SysTrust ^SM certification in the areas of security, confidentiality, integrity and availability. Auditors also produce a SAS70 Type II report on the effectiveness of operational controls used over the audit period. The center is staffed 24 hours a day with a proven 99.99% reliability. Whether it is delivery of email, prescriptions or other sensitive information, we enable communications to be sent in a trusted, safe, and secure manner. This is our core competency and we believe it is a competitive advantage.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States requires the Company’s management to make estimates and assumptions that affect the amounts reported in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most subjective judgments.

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies , of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K, for the year ended December 31, 2009. We discuss our Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009.

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 — gross profit was $6,624,000 or 81% of revenues compared with $5,291,000 or 83% of revenues for the comparable period in 2009.

e-Prescribing — gross profit was $321,000 or 45% of revenues compared with gross loss of $288,000 or 29% of revenues for the comparable period in 2009.

	•		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

Email Encryption and e-Prescribing are primarily subscription-based services. The following table sets forth a period-over-period comparison of the Company’s revenues:


					3-month Variance										6-month Variance
	Three Months Ended June 30,				2010 vs. 2009						Six Months Ended June 30,				2010 vs. 2009
	2010		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	%

The increase in Email Encryption revenue was due to continued cumulative growth in our subscription model, where strong new orders combined with a sustained high level of customer retention. Our second quarter 2010 Email Encryption revenues include a catch-up entry of approximately $300,000 of deferred revenue we recognized due to our implementing an automated method of closing out our service offering deployments. This method shortens the time for reporting deployments and allows us to more effectively synchronize revenue recognition with service deployment. Because we expected to recognize that deferred revenue during the third and fourth quarters of 2010, the catch-up entry is not anticipated to have any material impact on our projected annual revenue for 2010.

The decrease in e-Prescribing revenue is largely due to a reduction in renewal revenue, which is expected to continue as we exit the business. Due to the ongoing wind down of the e-Prescribing business and the absence of new deployments, we expect e-prescribing revenue to decline throughout 2010, to approximately 60% of the 2009 annual total.

Revenue Indicators — Backlog and Orders

Email Encryption backlog — Our Email Encryption customer order backlog is a key measurement of our success in signing new customers and retaining existing customers. Our end-user order backlog is comprised of contractually bound agreements that we expect to amortize into revenue as the services are performed. The timing of revenue recognition is affected by both the length of time required to deploy a service and the length of the service contract.

As of June 30, 2010, Email Encryption backlog was $45,593,000 and we expect approximately 57% of the backlog to be recognized as revenue during the next twelve months. As of June 30, 2010, the Email Encryption backlog was comprised of the following elements: $17,657,000 of deferred revenue that has been billed and paid, $4,830,000 billed but unpaid, and approximately $23,107,000 of unbilled backlog relating primarily to the second and third years of multi-year contracts.

Email Encryption Orders — Total orders for Email Encryption were $9,598,000 and $9,966,000 for the three month periods ended June 30, 2010 and 2009, respectively. The decline in total Email Encryption orders in the second quarter 2010 compared to the same period in 2009 was attributable to a higher number of larger sized contacts scheduled for renewal in the second quarter 2009 and the length of those contracts. Total orders includes anticipated revenues from customer orders, which management groups into three categories: first twelve months of renewing contracts, NFYOs, and new and renewing orders beyond the first year of service in a multi-year service contract. NFYOs were $2,108,000 and $1,650,000 for the three month periods ended June 30, 2010 and 2009, respectively. We believe the increase in demand is the result of customers’ increased awareness of the need to protect sensitive information in transit and customers’ efforts to comply with new federal and state privacy regulations.

e-Prescribing — As of June 30, 2010, our e-Prescribing backlog was $663,000, which we expect to recognize as revenue in 2010. As of June 30, 2010, the e-Prescribing backlog was comprised of $600,000 of deferred revenue that has been billed and paid and $63,000 billed but unpaid. This backlog includes revenue from approximately 1,250 actively writing prescribers with subscriptions through our December 2010 exit of the e-Prescribing business. We have concluded appropriate resolutions with our major customers to fulfill our contractual obligations while also renewing contracts for service through the remainder of the wind down period as noted above.

Cost of Revenues

The following table sets forth a period-over-period comparison of the cost of revenues by product line.


					3-month Variance										6-month Variance
	Three Months Ended June 30,				2010 vs. 2009						Six Months Ended June 30,				2010 vs. 2009
	2010		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	%)

As we wind down the e-Prescribing business, we have reduced headcount and expenses for activities relating to recruiting new prescribers and deploying new service. Additionally, due to reduced e-Prescribing business activity, that business is absorbing a smaller portion of the allocated costs described in the Segment information and the Email Encryption business has absorbed more of the allocated costs. The increase in Cost of revenues for Email Encryption for both the three and six month periods ended June 30, 2010, compared to the same time periods last year resulted primarily from these higher allocations.

For the three month period ended June 30, 2010, the Cost of revenues improvement resulted primarily from (i) a $210,000 decrease in salary and benefits for individuals performing deployment activities due to a decrease in average headcount in the e-Prescribing product line, (ii) a $108,000 decrease in e-Prescribing device costs, (iii) a $40,000 decrease in travel costs, primarily related to e-Prescribing field services, and (iv) a $40,000 net decrease in other various non-people costs primarily associated with decreased deployments of our e-Prescribing product. Additionally, due to lower than anticipated e-Prescribing technical support requirements, we moved a few people who were previously assigned to e-Prescribing Research and development to Email Encryption Customer support to assist with higher order volumes in that business. That reassignment reduced e-Prescribing Research and development costs and increased Email Encryption Cost of revenues.

For the six month period ended June 30, 2010, the Cost of revenues improvement resulted primarily from (i) a $630,000 decrease in salary and benefits for individuals performing deployment activities due to a decrease in average headcount in the e-Prescribing product line, (ii) a $188,000 decrease in e-Prescribing device costs, (iii) a $90,000 decrease in travel costs, primarily related to e-Prescribing field services, (iv) an $84,000 decrease in stock-based compensation expense, and (v) a $21,000 net decrease in other various non-people costs primarily associated with decreased deployments of our e-Prescribing product. Although to a lesser extent, the year to date results include the aforementioned reassignment of e-Prescribing personnel.

Email Encryption — Email Encryption’s Cost of revenues is comprised of costs related to operating and maintaining the ZixData Center, a field deployment team, customer service and support and the amortization of Company-owned, customer-based computer appliances. For Email Encryption, a significant portion of the total cost of revenues relates to the ZixData Center, which currently has excess capacity.

e-Prescribing — e-Prescribing’s Cost of revenues is comprised of costs related to operating and maintaining the ZixData Center and customer service and support.

Research and Development Expenses

The following table sets forth a period-over-period comparison of our research and development expenses.


					3-month Variance										6-month Variance
	Three Months Ended June 30,				2010 vs. 2009						Six Months Ended June 30,				2010 vs. 2009
	2010		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	%)

Research and development expenses consist primarily of salary, benefits, and stock-based compensation for our development staff and other non-people costs associated with enhancing our existing products and services and developing new products and services. For the periods presented, we allocated total Research and development expenses to our segment businesses based on percent of effort applied by our engineering resources to each business segment. With the wind down of the e-Prescribing business, the percentage of shared research and development resources allocated to Email Encryption was increased resulting in a higher Research and development expense to the Email Encryption business.

The increase in Email Encryption Research and development expense for the three and six month periods ended June 30, 2010, compared to the same periods last year is primarily attributable to the increase in shared cost allocation and additional resources. The decrease in e-Prescribing resulted primarily from a reduction in the same allocated shared costs for both the three and six month periods ended June 30, 2010, compared to the same periods in 2009. Further decreases in e-Prescribing Research and development were attributable to decreases in salary and benefits resulting from lower average headcount totaling $379,000 and $607,000 for the three and six month periods ended June 30, 2010, respectively, compared to the same periods in 2009.

In the second quarter of 2010 the on-going investment in our Email Encryption products included delivery of new versions of both ZixGateway and ZixPort that provide advanced protocol handling, security functions and support for multiple languages. We also designed a set of tools to improve the automation level and efficiency of the customer provisioning process for our resellers and distributors. This will allow our third-party channels to deploy our service more quickly.

Selling, General and Administrative Expenses

The following table sets forth a period-over-period comparison of our selling, general and administrative expenses.


					3-month Variance										6-month Variance
	Three Months Ended June 30,				2010 vs. 2009						Six Months Ended June 30,				2010 vs. 2009
	2010		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	%)

Selling, general and administrative expenses (“SG&A”) consist primarily of salary, stock-based compensation and benefit costs for marketing, selling, executive and administrative personnel as well as costs associated with promotions, professional services, travel and general corporate activities.

Email Encryption selling and marketing expenses for the three month period ended June 30, 2010, increased due to (i) a $68,000 increase in salaries and variable compensation resulting from an increase in average headcount and sales commissions resulting from higher NFYOs, (ii) a $70,000 increase in allocated costs for occupancy and information technology and (iii) a $16,000 net increase in trade show expenses and various other selling and marketing costs.

The year to date increase in Email Encryption selling and marketing expenses resulted from (i) a $398,000 increase in salaries and variable compensation driven primarily by sales commissions resulting from higher NFYOs, and (ii) a $200,000 increase in allocated costs due to the wind down of the e-Prescribing business for occupancy and information technology.

The reductions for e-Prescribing for both the three and six month periods ended June 30, 2010, compared to the same periods last year, resulted from a reduction in salary and benefit expense, travel expense and other expenses consistent with the wind down of that business segment.

The decrease in Corporate General and administrative expenses for the three month period ended June 30, 2010, compared to the same period last year resulted from (i) a $292,000 decrease in salaries and benefits primarily attributable to a non-recurring severance expense in the second quarter of 2009 and (ii) a $298,000 decrease in professional fees, primarily outside legal fees.

Year to date, the cost decreases in the second quarter of 2010 were substantially offset by higher professional fees, primarily outside legal fees, in the first quarter 2010 compared to the same period last year.

Other Income, net

Other income, net consists primarily of investment income. Investment income was $20,000 and $79,000 for the quarters ended June 30, 2010 and 2009, respectively. The change was primarily due to sublease income of $20,000 related to an operating lease in Ohio that expired in 2009 and a decrease in interest rates between periods. Also included in the three month periods ended June 30, 2010 and 2009, is interest expense of $5,000 and $6,000, respectively, which resulted from a third party note for a 36 month Microsoft license subscription.

Other income, net, consists of $56,000 investment income and $12,000 interest expense for the six month period ended June 30, 2010. For the same period in 2009, Other income, net consists of $147,000 investment income and $6,000 interest expense. Included in 2009 investment income is sublease income of $40,000. In the second quarter of 2009 we also recognized $36,000 of investment income related to an e-Prescribing project which was not generally released and was discontinued by customer request. The remaining variance is due to a decrease in interest rates between periods.

Provision for Income Taxes

The Provision for income taxes was $90,000 and $26,000 for the three month period ended June 30, 2010 and 2009, respectively and $138,000 and $46,000 for the six month period ended June 30, 2010 and 2009, respectively. The operating losses incurred by the Company’s U.S. operations and the resulting net operating losses for U.S. Federal tax purposes are subject to a $112,348,000 reserve due to the historical uncertainty of future taxable income. Our 2010 provision for the six month period ended June 30, 2010, of $138,000 consists of taxes on our U.S. operations totaling $53,000, and Canadian operation totaling $69,000, and a small amount of state taxes based on gross revenues. The 2009 provision for income tax of $46,000 consisted of taxes on our Canadian operation totaling $96,000, a small amount of state taxes based on gross revenues and a $56,000 refund for historical U.S. tax credits.

There were no penalty-related charges to selling, general and administrative expenses accrued or recognized for the same comparative periods. Additionally, we have not taken a tax position that would have a material effect on the financial statements or the effective tax rate for the three and six month periods ended June 30, 2010.

The Company previously recorded a $327,000 tax contingency liability related to tax year 2004 for its Canadian operations. That contingency remains unchanged except for currency translation adjustments. As of June 30, 2010, the gross amount of our unrecognized tax benefits, inclusive of the $327,000 tax liability and $50,000 in other uncertain positions in 2008, was approximately $440,000. Included in this balance are tax positions which, if recognized, would impact our effective tax rate.

As indicated earlier, the operating losses incurred by our U.S. operations and the resulting net operating losses for U.S. Federal tax purposes are subject to a reserve. Significant judgment is required in determining any reserve recorded against the deferred tax asset. In assessing the need for a reserve, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.

If the facts and circumstances on which our estimates and assumptions are based were to change, thereby impacting the likelihood of realizing the deferred tax assets, we would have to apply judgment to determine the amount of reserve no longer required. Given our current income position and our expectation of continued income in future periods, we are currently in the process of evaluating our ability to utilize all or a portion of our tax reserve. Our ability to utilize all or a part of this reserve could have a significant positive impact on operating results in the period that it becomes more likely than not that certain of our deferred tax assets will be realized. Additionally, deferred tax assets may be limited in whole or in part by Internal Revenue Code Section 382. As a result, our ability to fully utilize the deferred tax assets, including net operating loss carry forwards, against future taxable income may be limited.

Net Income

The Net income for the second quarter of 2010 of $1,501,000 reflects the achievement of profitability for the second consecutive quarter, and is an improvement of $3,426,000 compared to the net loss of $1,925,000 for the same period last year. The improvement in Net income resulted from higher Gross profit, due to increased revenue and lower Cost of revenues, combined with lower R&D and SG&A expenses, as discussed above. Specifically, these expenses decreased due primarily to reductions in average headcount and other costs related to our wind down of the e-Prescribing business.

Liquidity and Capital Resources

Overview

Based on our performance over the last four quarters and current expectations, we believe our cash and cash equivalents, and cash generated from operations, will satisfy our working capital needs, capital expenditures, investment requirements, contractual obligations, commitments, future customer financings, and other liquidity requirements associated with our operations through at least the next twelve months. We plan for and measure our liquidity and capital resources through an annual budgeting process. At June 30, 2010, our cash and cash equivalents totaled $17,477,000 and our debt was $250,000. Our debt consists of a note related to a three year subscription for Microsoft software licenses that is paid on a monthly basis at approximately $12,000 per month.

We operate two distinct business segments which are in different stages of their life cycle. We expect our Email Encryption segment to remain profitable with revenue growth at approximately 25% for the full year 2010 as compared to 2009. Our e-Prescribing segment was generating significant losses when we announced in 2009 a plan to wind down this business during 2010. We expect the e-Prescribing business to be slightly profitable in 2010 and we expect to exit this business by December 31, 2010.

For the three month period ended June 30, 2010, we achieved our second consecutive quarter of profitability. Cash and cash equivalents at June 30, 2010, were $17,477,000, an improvement of $4,190,000 from the December 31, 2009, balance. This improvement was primarily driven by cost savings generated by the wind down of our e-Prescribing business and continued growth in the Email Encryption business. In addition, cash collections in our Email Encryption business grew while our accounts payable and accrued expenses remained relatively flat. We expect this trend to continue in the foreseeable future, and believe a significant portion of our spending is discretionary and flexible and that we have the ability to adjust overall cash spending to react, as needed, to any shortfalls in projected cash.

Impact of Current Economic Environment

With the likely continuation of constraints in the capital markets, we expect access to capital to remain somewhat restricted over the next twelve months. Although we anticipate funding our operations internally, if we are unable to do so, our ability to raise capital at costs that are similar to offerings under historic market conditions could be limited.

Sources and Uses of Cash Summary


	Six Months Ended June 30,
	2010			2009
Net 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		$	—

As noted above, our improvement in cash provided by operations results primarily from the cost savings generated by the wind down of our e-Prescribing business, combined with growth in cash collections from our Email Encryption business and relatively flat expenses.

Related to our investing activities in the first six months of 2010, we utilized $663,000 to purchase computing equipment primarily to satisfy customer contracts. Approximately 48% of these capital purchases were for computer servers for our Email Encryption segment, which are required to deliver our ZixGateway ^SM services. These purchases were partially offset by a $25,000 cash inflow from proceeds from the sales of maturing marketable securities. In the first six months of 2009, we utilized $515,000 to purchase computing equipment, of which 60% was for computer servers for our Email Encryption segment.

Cash provided from financing activities in the first six months of 2010 resulted from the exercise of stock options, which was partially offset by $62,000 used to fund a small promissory note associated with computer software licenses. There were no such activities in the first six months of 2009. Prior to the fourth quarter of 2007 we used a significant amount of cash to fund debt obligations. We do not expect significant funding obligations in the immediate foreseeable future.

Liquidity Summary

The continued growth in our Email Encryption business and the wind down of our e-Prescribing business have driven a significant financial improvement for our Company and are reflected in our financial position for the six month period ended June 30, 2010. Based on our first six months operating results and current 2010 budget plans, we believe we have adequate resources and liquidity to sustain operations for the next twelve months. Management believes that raising capital by issuing new shares of common stock is not attractive at the current price of the Company’s common stock. If we were to experience an unanticipated need for cash, we would first utilize our existing cash resources and would also consider altering our business plan to augment our cash flow position through cost reduction measures or other actions. There can be no assurance, however, that we would be successful in carrying out any of these measures if they become necessary.

Options and Warrants of ZixCorp Common Stock

We have significant warrants and options outstanding that are currently vested. There is no assurance that any of these options and warrants will be exercised; therefore, the extent of future cash from additional warrant and option exercises is not certain. The following table summarizes the warrants and options that were outstanding as of June 30, 2010. The vested shares are a subset of the outstanding shares. The value of the shares is the number of shares multiplied by the exercise price for each share.


	Summary of Outstanding Options and Warrants
					Vested
			Total Value		(included in		Total Value of
Exercise 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		1,028,000

Total		17,655,491	$	58,653,000		16,558,849	$	56,062,000

Off-Balance Sheet Arrangements

None.

Contractual Obligations, Contingent Liabilities and Commitments

A summary of our fixed contractual obligations and commitments at June 30, 2010, is as follows:


	Payments Due by Period
	Total		1 Year		Years 2 & 3		Beyond 3 Years
Operating leases	$	4,287,000	$	1,219,000	$	1,959,000	$	1,109,000
Debt (long-term and short-term)		271,000		147,000		124,000		—

Total	$	4,558,000	$	1,366,000	$	2,083,000	$	1,109,000

We did not enter into any other material, non cancelable purchase commitments during the three month period ended June 30, 2010.

We have severance agreements with certain employees which would require the Company to pay approximately $1,770,000 if all such employees separated from employment with our Company in certain circumstances, including a “Change of Control” or termination without “Cause,” as defined in the severance agreements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 4. CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2010.

Changes in Internal Controls over Financial Reporting

During the three month period ended June 30, 2010, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

See Note 8 to the Condensed Consolidated Financial Statements set forth in this Form 10-Q.

ITEM 1A. Risk Factors

See Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes in our risk factors from those disclosed in such Annual Report on Form 10-K. The risk factors in our Form 10-K should be read in conjunction with the considerations set forth above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (Removed and Reserved)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

a. Exhibits

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q:


Exhibit No.		Description of Exhibits
3.1		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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	ZIX CORPORATION
Date: August 9, 2010	By:	/s/ Susan K. Conner
		Susan K. Conner
		Chief Financial Officer

Exhibit 10.1

FORM OF
ZIX CORPORATION
OUTSIDE DIRECTOR
STOCK OPTION AGREEMENT

This Outside Director Stock Option Agreement (“ Option ”) is effective as of the Grant Date set forth in the Grant Detail section of this Option (“ Grant Details ”) with respect to the stock options described in the Grant Details that are granted by Zix Corporation, a Texas corporation (“ Company ”), to the Non-Employee Director (“ Optionee ”) named in the Grant Details.

The Company wishes to recognize Optionee’s contributions to the Company and to encourage Optionee’s sense of proprietorship in the Company by providing Optionee with the opportunity to purchase shares of the Company’s common stock, par value $.01 per share (“ Common Stock ”).

The Company and Optionee therefore agree as follows:

1 Non-Qualified Stock Option Grant

The Company hereby grants to Optionee the options to purchase up to the number of shares of Common Stock shown as the Quantity in the Grant Details. The Option exercise price is the amount per share shown as the Exercise Price in the Grant Details. The Option is subject to the terms set forth in this Option and the terms of the Stock Option Plan described in the Grant Details (the “ Plan ”). The Option is intended to be a nonqualified stock option, and it is not to be characterized or treated as an incentive stock option, under applicable tax laws.

2 Grant Details

Optionee:

Grant Date:

Expiration Date:

Quantity:

Exercise Price:

Stock Option Plan: 2006 Directors’ Stock Option Plan

Vesting Schedule:

3 Term of Option

This Option automatically expires at 12:00 midnight on Expiration Date described in the Grant Details. This Option may be terminated earlier by other provisions of the Plan or this Option.

3.1 Departure of Director Other Than for “Cause”

This Option terminates one year after Optionee ceases to be member of the Board, except that if Optionee was a member of the Board for least five years then this Option will terminate on the last business day of December of the calendar year in which falls the one year anniversary of the date on which Optionee ceased to be a member of the Board. This clause does not apply to Optionee’s departure from the Board within 180 days after a Change in Control.

3.2 Removal of Director for “Cause”

This Option terminates immediately and automatically if Optionee is removed from the Board by a vote of the shareholders for Cause.

4 Vesting of Option Shares

This Option will vest and become exercisable with respect to a number of shares of Common Stock according to the Vesting Schedule described in the Grant Details, except that no shares of Common Stock will vest and become exercisable during the periods described in section 3.1. Once this Option has become exercisable with respect to a number of shares of Common Stock (“ Vested Shares ”), it will remain exercisable as that number of shares, or any lesser number of shares, until the expiration or termination of this Option.

4.1 Accelerated Vesting

This Option becomes fully exercisable upon (i) the Optionee being removed from the Board by a vote of the shareholders other than for Cause; or (ii) upon a Change in Control, if Optionee is a member of the Board on the date the Change of Control occurs.

5 Adjustment of Option

If the shares subject to this Option are adjustable pursuant to Section 9 of the Plan, the Committee may make any adjustment that it deems appropriate to the Quantity or the Exercise Price.

5.1 Adjustment of Option for Certain Transactions

exchange for Common Stock as a part of the transaction, then this Option will be amended to create a right to purchase or receive (at an aggregate exercise price equal to the Exercise Price) the amount of shares of stock, other securities, cash or property that would have been receivable for Common Stock in the transaction if the unexercised Quantity of shares of Common Stock had been purchased immediately before the consummation of the transaction.

6 Modification of Option

At any time and from time-to-time, the Committee may execute an instrument providing for modification, extension or renewal of this Option, provided that no such modification, extension or renewal may (i) impair this Option holder’s rights in any respect without the written consent of the holder or (ii) conflict with the provisions of Rule 16b-3 under the Exchange Act.

7 Who May Exercise Option

This Option is exercisable during Optionee’s lifetime only by Optionee. To the extent exercisable after Optionee’s death, this Option may be exercised only by a person who has obtained Optionee’s rights under this Option by will or under the laws of descent and distribution or pursuant to a “qualified domestic relations order” as defined in the Code. If the person exercising this Option is a transferee of Optionee by will or under the laws of descent and distribution or pursuant to a “qualified domestic relations order,” the Exercise Notice must be accompanied by appropriate proof of the right of such transferee to exercise this Option.

8 Method of Exercise

As a condition of exercising this Option with respect to any Vested Shares, Optionee must have an established brokerage account with the Company’s authorized stock option administrative brokerage, which is currently Merrill Lynch (“ Broker ”). At the time of exercise, the Broker will pay to the Company on behalf of Optionee this Option Price times the number of vested shares as to which this Option is being exercised. Such payment may consist of (a) cash, (b) a certified cashier’s check or (c) at the Committee’s election, any other consideration that the Committee determines is consistent with the Plan and applicable law. Optionee must bear any transaction costs imposed by the Broker.

As a condition of exercising this Option with respect to any Vested Shares, each designated Optionee must provide to the Company (or its designee) at its principal executive office a written notice satisfying the requirements of this section 0 (“ Exercise Notice ”). The Exercise Notice must contain sufficient information to identify this Option being exercised, including Optionee’s name, Exercise Price, Grant Date and Stock Option Plan. The Exercise Notice must state the number of Vested Shares for which this Option is being exercised. If the shares of Common Stock that are being purchased are to be evidenced by more than one stock certificate, the Exercise Notice must state the number of shares of Common Stock to be indicated on each stock certificate. The Exercise Notice is deemed to be provided when it is delivered to the Company’s Corporate Secretary. After receiving the Exercise Notice from Optionee, the

Company will determine whether this Option is subject to any restrictions and is otherwise eligible for exercise.

If the Company determines that the designated Option is eligible for exercise, the Company will, authorize the Broker to allow the Optionee to exercise the Option, and authorize the Optionee to exercise the Option by contacting the Broker. The Broker will not allow Optionee to exercise the Option unless Optionee has provided the Exercise Notice to the Company and the Company has authorized the exercise.

9 Restrictions on Exercise

Notwithstanding anything to the contrary in this Option:

	a)		Company is not obligated to issue fractional Shares.

	b)		Optionee cannot exercise this Option in order to purchase less than 100 Option Shares unless the number of then Vested Shares is less than 100.

	c)		Optionee cannot exercise this Option if exercise or the delivery of Shares would violate any applicable law or any rule of any securities exchange on which the Shares are then listed.

	d)		Optionee cannot exercise this Option if exercise or the delivery of shares would in the Company’s sole discretion constitute a violation of any Company rule or policy, including but not limited to block trades, windows and black-out periods.

10 Payment and Tax Withholding

As a condition of exercising this Option with respect to any Vested Shares, Optionee must make prior arrangements for the payment of the Exercise Price and arrangements for any withholding tax obligations. The Company may take such steps to withhold any taxes that it is required to withhold in connection with the exercise of this Option.

11 Shares Issued on Option Exercise

The shares of Common Stock purchased upon the exercise of this Option will be registered in the name of Optionee at the address specified in the Exercise Notice. Any stock certificates issued will contain an appropriate legend referencing any applicable transfer restrictions.

12 No Rights as Shareholder

evidenced by the appropriate entry on the books of the Company or its duly authorized stock registrar and transfer agent.

13 State and Federal Securities Regulation

No Option Shares will be issued by the Company upon the exercise of this Option unless and until all legal requirements have been complied with to the satisfaction of the Company and its counsel. The Company may restrict the periods during which this Option may be exercised if, in the opinion of the Company and its counsel, such a restriction is desirable to comply with legal requirements. The Option is subject to the requirement that, if the Company determines in its discretion that the listing, registration or qualification of this Option Shares upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting or exercise of this Option or the issuance or purchase of Option Shares, this Option may not be exercised in whole or in part until such listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Company. The Company has no obligation to effect or obtain any such listing, registration, qualification, consent or approval if the Company determines, in its discretion, that such action would not be in the best interest of the Company. The Company will not be liable to Optionee or anyone claiming under or through Optionee for damages due to a delay in the delivery or issuance of any Option Shares for any reason whatsoever, including, but not limited to, a delay caused by listing, registration or qualification of this Option Shares upon any securities exchange or under any federal or state law or the effecting or obtaining of any consent or approval of any governmental body with respect to the granting or exercise of this Option or the issue or purchase of Option Shares.

14 Continued Directorship Not Guaranteed

Nothing in this Option, the Plan, any document describing either of them, or the grant of an option gives Optionee the right to continue to serve as a director of the Company.

15 No Liability of Option

The Option is not liable for or subject to, in whole or in part, the debts, contracts, liabilities or torts of Optionee nor is it subject to garnishment, attachment, execution, levy or other legal or equitable process without the prior written consent of the Company (which consent the Company may withhold or condition for any reason or for no reason).

16 No Assignment

This Option is not Transferable without the prior written consent of the Company (which consent the Company may withhold or condition for any reason or for no reason) except that this Option is Transferrable by will or the laws of descent and distribution or pursuant to a “qualified domestic relations order” as defined in the Code. Any other attempted Transfer is void and ineffective for all purposes. Subject to the Transferability limitations in this Option, this Option

is binding upon and inure to the benefit of the representatives, executors, successors or beneficiaries of the parties hereto.

17 Notice

Other than any Exercise Notice, any notice required or permitted to be given under the Plan or this Option must be in writing and delivered in person or sent by registered or certified mail, return receipt requested, first-class postage prepaid (i) if to Optionee, at the address shown on the books and records of the Company or at Optionee’s place of employment, or (ii) if to the Company, at 2711 N. Haskell Avenue, Suite 2200, Dallas, Texas 75204-2960, Attention: Corporate Secretary, or any other address that is specified in a notice provided by one party to the other party. Any notice, if sent by registered or certified mail, is deemed to effective upon actual receipt.

18 Defined Terms

All capitalized terms not defined in this Option have the meanings ascribed to them in the Plan. Section references are to the sections of this Option unless otherwise specified. All section titles and captions in this Option are for convenience only, are not be deemed part of this Option, and in no way define, limit, extend or describe the scope or intent of any provisions of this Option.

“ Acquiring Person ” means any person (including any “person” as such term is used in Sections 13(d)(3) or 14(d)(2) of the Exchange Act that, together with all Affiliates and Associates of such person, is the beneficial owner (as the term “beneficial owner” is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of 10% or more of the outstanding Common Stock. The term “Acquiring Person” does not include the Company, any majority-owned subsidiary of the Company, any employee benefit plan of the Company or a majority-owned subsidiary of the Company, or any person to the extent such person is holding Common Stock for or pursuant to the terms of any such plan. For the purposes of this Option, a person who becomes an Acquiring Person by acquiring beneficial ownership of 10% or more of the Common Stock at any time after the date of this Option will continue to be an Acquiring Person whether or not such person continues to be the beneficial owner of 10% or more of the outstanding Common Stock.

“ Affiliate ” and “ Associate ” have the meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.

“ Cause ” means any circumstances described in the Company’s bylaws which permit the termination of the term of office of a Director of the Company upon the affirmative vote of a majority of the Company’s Board of Directors.

“ Change in Control ” means:

(i)

The Company is merged, consolidated or reorganized into or with another corporation or other legal person and as a result of such merger, consolidation or reorganization, the Company or its shareholders or Affiliates immediately before

such transaction beneficially own, immediately after or as a result of such transaction, equity securities of the surviving or acquiring corporation or such corporation’s parent corporation possessing less than fifty-one percent (51%) of the voting power of the surviving or acquiring person or such person’s parent corporation; or

	(ii)		The Company sells all or substantially all of its assets to any other corporation or other legal person and as a result of such sale, the Company or its shareholders or Affiliates immediately before such transaction beneficially own, immediately after or as a result of such transaction, equity securities of the surviving or acquiring corporation or such corporation’s parent corporation possessing less than fifty-one percent (51%) of the voting power of the surviving or acquiring person or such person’s parent corporation (provided that this provision does not apply to a registered public offering of securities of a subsidiary of the Company, which offering is not part of a transaction otherwise a part of or related to a Change in Control); or

	(iii)		Any Acquiring Person has become the beneficial owner (as the term “beneficial owner” is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities which, when added to any securities already owned by such person, would represent in the aggregate 35% or more of the then outstanding securities of the Company which are entitled to vote to elect any class of directors; or

	(iv)		If, at any time, the Continuing Directors then serving on the Board of Directors of the Company cease for any reason to constitute at least a majority thereof; or

	(v)		Any occurrence that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A or any successor rule or regulation promulgated under the Exchange Act.

“ Continuing Director ” means a director of the Company who (i) is not an Acquiring Person or an Affiliate or Associate thereof, or a representative of an Acquiring Person or nominated for election by an Acquiring Person, and (ii) was either a member of the Board of Directors of the Company on the date of this Option or subsequently became a director of the Company and whose initial election or initial nomination for election by the Company’s shareholders was approved by a majority of the Continuing Directors then on the Board of Directors of the Company.

“ Option Shares ” means shares of Common Stock received upon exercise of this Option.

“ Transfer ” (or any derivative thereof) means a direct or indirect assignment, sale, transfer, license, lease, pledge, encumbrance, hypothecation or execution, attachment or similar process.

19 Miscellaneous

19.1 Governing Law

This Option has been executed by the Company in, and is deemed to be performable in, the City of Dallas, Dallas County, Texas. This Option is governed by and will be construed, interpreted and enforced in accordance with the laws of the State of Texas (excluding its conflict of laws rules).

19.2 Injunctive Relief

In addition to all other rights or remedies available at law or in equity, the Company is entitled to injunctive and other equitable relief to prevent or enjoin any violation of the provisions of this Option.

19.3 Consent to Jurisdiction and Venue

With respect to all matters relating to this Option or Option Shares, the parties consent to the personal jurisdiction of the courts of the State of Texas, and any courts whose jurisdiction is derivative of the jurisdiction of the courts of the State of Texas, and to venue in the courts in Dallas County, Texas.

19.4 Entire Agreement

This Option and the Plan together constitute the entire agreement between the parties pertaining to the subject matter hereof and supersede all prior and contemporaneous agreements, representations and understandings of the parties. If any provision of this Option conflicts with the Plan, the terms of the Plan will control.

19.5 Modifications in Writing

Except as provided in sections 5 and 6, no supplement, modification or amendment of this Option or waiver of any provision of this Option is binding unless it is in a writing signed by all parties to this Option.

19.6 No Deemed Waivers

No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Option or to exercise any right or remedy consequent upon a breach thereof will constitute a waiver of any such breach or any other covenant, duty, agreement or condition. No waiver of any of provision of this Option will be deemed to occur, or to constitute a waiver of any other provision of this Option, or to constitute a continuing waiver, unless that waiver is in a writing signed by the party against whom the waiver is asserted.

19.7 Blue-penciling

If any provision of this Option is declared or found to be illegal, unenforceable or void, in whole or in part, then the parties will be relieved of all obligations arising under such provision, but only to the extent that it is illegal, unenforceable or void, it being the intent and agreement of the parties that this Option will be deemed amended by modifying such provision to the extent necessary to make it legal and enforceable while preserving its intent or, if that is not possible, by substituting therefor another provision that is legal and enforceable and achieves the same objectives.

19.8 Further Acts

The parties will execute all documents, provide all information and take or refrain from taking all actions as may be necessary or appropriate to achieve the purposes of this Option.

20 Option Issued Pursuant to Plan

The Optionee accepts this Option subject to the provisions of this Option and the Plan, which are incorporated herein, including the provisions that authorize the Committee to administer and interpret the Plan and provide that the Committee’s determinations and interpretations with respect to the Plan are final and conclusive and binding on all persons affected thereby.

21 Electronic Signatures

This Option may be digitally signed by Optionee. By accepting this Option on the Broker’s online system, Optionee agrees to the terms of this Stock Option Agreement together with the pertinent Plan documents found in the Communications Center on the Broker’s website. By failing to accept this Option on the Broker’s online system, Optionee forfeits all rights to this Option and under this Option. Evidence of Optionee’s acceptance of this Option will be captured and stored in electronic format in the Broker’s database, and that electronic acceptance will create and evidence a binding contract between Optionee and the Company.


	ZIX CORPORATION
Date: __________________	By:
		Susan K. Conner
		Chief Financial Officer

Exhibit 10.2

FORM OF
ZIX CORPORATION
EMPLOYEE STOCK OPTION AGREEMENT

This Employee Stock Option Agreement (“ Option ”) is effective as of the Grant Date set forth in the Grant Detail section of this Option (“ Grant Details ”) with respect to the stock option described in the Grant Details that are granted by Zix Corporation, a Texas corporation (“ Company ”), to the person (“ Optionee ”) named in the Grant Details.

The Company and Optionee agree as follows:

1 Non-Qualified Stock Option Grant

The Company hereby grants to Optionee the option to purchase up to the number of shares of Common Stock shown as the Quantity in the Grant Details. The Option exercise price is the amount per share shown as the Exercise Price in the Grant Details. This Option is subject to the terms set forth in this Option and the terms of the Stock Option Plan described in the Grant Details (the “ Plan ”). This Option is intended to be a nonqualified stock option, and it is not to be characterized or treated as an incentive stock option, under applicable tax laws.

2 Grant Details

Optionee:

Grant Date:

Expiration Date:

Quantity:

Exercise Price:

Stock Option Plan:

Vesting Schedule:

3 Term of Option

This Option automatically expires at 12:00 midnight on Expiration Date described in the Grant Details. This Option may be terminated earlier by other provisions of the Plan or this Option.

3.1 Termination of Employment Other Than For “Cause”

a) This Option terminates 60 days after Optionee’s “Resignation.”

b) This Option terminates one year after Optionee ceases to be employed by the Company or any Subsidiary due to death, “Disability,” “Retirement” or termination of employment by the Company other than for “Cause.”

3.2 Termination of Employment For “Cause”

This Option terminates immediately and automatically upon the Company or any Subsidiary terminating the employment of Optionee for “Cause.”

4 Vesting of Option Shares

5 Adjustment of Option

If the shares subject to this Option are adjustable pursuant to the Plan, the Board of Directors or Committee may make any adjustment that it deems appropriate to the Quantity or the Exercise Price.

5.1 Adjustment of Option for Certain Transactions

Subject to the terms of the Plan, if a merger, consolidation, sale of shares or similar transaction occurs involving the Company and one or more other persons, and shares of stock, other securities, cash or property become issuable or deliverable in exchange for Common Stock as a part of the transaction, then this Option will be amended to create a right to purchase or receive (at an aggregate exercise price for the adjusted Option equal to the aggregate Exercise Price) the amount of shares of stock, other securities, cash or property that would have been receivable for Common Stock in the transaction if the unexercised Quantity of shares of Common Stock had been purchased immediately before the consummation of the transaction.

6 Modification of Option

7 Who May Exercise Option

8 Method of Exercise

8.1 All Optionees

8.2 Non-Designated Optionees

An Optionee who has not been advised by the Company that Optionee is subject to the exercise procedures described in section 8.3 may exercise an Option either by contacting the Broker or by an electronic transaction initiated by the Optionee using the Optionee’s account with the Broker described in section 8.1 via the Broker’s online system on the website, and for either method under the procedures designated by the Broker.

8.3 Certain Designated Optionees

An Optionee who has been advised by the Company that Optionee is subject to the exercise procedures described in this section 8.3, including Optionees who are subject to Section 16 of the Exchange Act, may exercise an Option only through the procedures specified by the Company, which depend on the Optionee’s particular designated status.

As a condition of exercising this Option with respect to any Vested Shares, each designated Optionee must provide to the Company (or its designee) at its principal executive office a written notice satisfying the requirements of this section 8 (“ Exercise Notice ”). The Exercise Notice must contain sufficient information to identify this Option being exercised, including Optionee’s name, Exercise Price, Grant Date and Stock Option Plan. The Exercise Notice must state the number of Vested Shares for which this Option is being exercised. If the shares of Common Stock that are being purchased are to be evidenced by more than one stock certificate, the Exercise Notice must state the number of shares of Common Stock to be indicated on each stock certificate. The Exercise Notice is deemed to be provided when it is delivered to the Company’s Corporate Secretary. After receiving the Exercise Notice from Optionee, the Company will determine whether this Option is subject to any restrictions and is otherwise eligible for exercise.

If the Company determines that the designated Option is eligible for exercise, the Company will, depending on the Optionee’s particular designated status, either:

a) Authorize the Broker to allow the Optionee to exercise the Option, and authorize the Optionee to exercise the Option by contacting the Broker. The Broker will not allow Optionee to exercise the Option unless Optionee has provided the Exercise Notice to the Company and the Company has authorized the exercise.

b) Authorize the Optionee to exercise the Option either by contacting the Broker or by an electronic transaction initiated by the Optionee using the Optionee’s account with the Broker described in section 8.1 via the Broker’s online system on the website, and for either method under the procedures designated by the Broker.

9 Restrictions on Exercise

Notwithstanding anything to the contrary in this Option:

c) Company is not obligated to issue fractional Shares.

d) Optionee cannot exercise this Option in order to purchase less than 100 Option Shares unless the number of then Vested Shares is less than 100.

e) Optionee cannot exercise this Option if exercise or the delivery of Shares would violate any applicable law or any rule of any securities exchange on which the Shares are then listed.

f) Optionee cannot exercise this Option if exercise or the delivery of shares would in the Company’s sole discretion constitute a violation of any Company rule or policy, including but not limited to block trades, windows and black-out periods.

10 Noncompetition Agreement

The grant of this Option and the exercise of Optionee’s rights under this Option are subject to and conditioned upon Optionee’s full compliance with Optionee’s Confidentiality and Invention Agreement with the Company or its Subsidiary. If in any dispute between Optionee and the Company or its Subsidiary a court or arbitrator determines that Optionee did not comply in any respect with the that agreement, the Company will be entitled to receive from Optionee all Option Shares, or if Optionee has sold, transferred or otherwise disposed of this Option Shares the excess of the fair market value of this Option Shares on the date of sale, transfer or other disposition and the Exercise Price. This provision will survive any termination or expiration of this Option.

11 Payment and Tax Withholding

12 Shares Issued on Option Exercise

13 No Rights as Shareholder

Neither Optionee nor any person claiming under or through Optionee has any rights or privileges of a shareholder of the Company in respect of any of the shares issuable upon the exercise of this Option, unless and until Option Shares are registered in such person’s name, as evidenced by the appropriate entry on the books of the Company or its duly authorized stock registrar and transfer agent.

14 State and Federal Securities Regulation

approval has been effected or obtained free of any conditions not acceptable to the Company. The Company has no obligation to effect or obtain any such listing, registration, qualification, consent or approval if the Company determines, in its discretion, that such action would not be in the best interest of the Company. The Company will not be liable to Optionee or anyone claiming under or through Optionee for damages due to a delay in the delivery or issuance of any Option Shares for any reason whatsoever, including, but not limited to, a delay caused by listing, registration or qualification of this Option Shares upon any securities exchange or under any federal or state law or the effecting or obtaining of any consent or approval of any governmental body with respect to the granting or exercise of this Option or the issue or purchase of Option Shares.

15 Continued Employment Not Guaranteed

Nothing in this Option, the Plan or any document describing it nor the grant of any option gives Optionee the right to continue employment with the Company or any Subsidiary or affect the right of the Company or a Subsidiary to terminate the employment of Optionee with or without Cause.

16 No Liability of Option

This Option is not liable for or subject to, in whole or in part, the debts, contracts, liabilities or torts of Optionee nor is it subject to garnishment, attachment, execution, levy or other legal or equitable process without the prior written consent of the Company (which consent the Company may withhold or condition for any reason or for no reason).

17 No Assignment

18 Notice

19 Defined Terms

All capitalized terms not defined in this Option have the meanings ascribed to them in the Plan. Section references are to the sections of this Option unless otherwise specified. All section titles and captions in this Option are for convenience only, will not be deemed part of this Option, and in no way define, limit, extend or describe the scope or intent of any provisions of this Option.

“ Cause ” means (i) the failure, in the sole opinion of the Company or a Subsidiary that employs Optionee, of Optionee to adequately perform the duties assigned to Optionee (other than any such failure resulting from Optionee’s Disability); (ii) the engagement by Optionee in misconduct that, in the sole opinion of the Company or a Subsidiary that employs Optionee, is or may have the effect of being materially injurious to the Company or its Subsidiaries; (iii) the conviction of Optionee or plea of nolo contendere , or the substantial equivalent to either of the foregoing, of or with respect to, any felony or crime of moral turpitude; or (iv) breach by Optionee of the Confidentiality and Invention Agreement or any similar agreement between Optionee and the Company or a Subsidiary that employs Optionee; except that, as to each of the foregoing, “Cause” instead has the meaning given to that term in any employment agreement, severance agreement or similar agreement between Optionee and the Company or a Subsidiary that employs Optionee (regardless of whether such agreement exists on the date of this Option or is entered into hereafter).

“ Disability ” means any medically determinable physical or mental impairment that, in the opinion of the Committee, based upon medical reports and other evidence satisfactory to the Committee, can reasonably be expected to prevent Optionee from performing substantially all of his or her customary duties of employment (with or without reasonable accommodation) for a continuous period of not less than 12 months.

“ Option Shares ” means shares of Common Stock received upon exercise of this Option.

“ Resignation ” means the voluntary termination by Optionee of employment by the employing Subsidiary and, if applicable, Company under circumstances other than voluntary Retirement.

“ Retirement ” means the termination of Optionee’s employment in accordance with the requirements of a written retirement plan, policy or rule of the Company or employing Subsidiary, as applicable.

“ Subsidiary ” means any legal entity that is directly or indirectly controlled by the Company.

“ Transfer ” (or any variation thereof) means a direct or indirect assignment, sale, transfer, license, lease, pledge, encumbrance, hypothecation or execution, attachment or similar process.

20 Miscellaneous

20.1 Governing Law

20.2 Injunctive Relief

20.3 Consent to Jurisdiction and Venue

20.4 Entire Agreement

This Option and the Plan together constitute the entire agreement between the parties pertaining to the subject matter hereof and supersede all prior and contemporaneous agreements, representations and understandings of the parties Notwithstanding anything to the contrary in the previous sentence, if Optionee is a party to any agreement with the Company or a Subsidiary which contains any provision that conflicts with this Option, such as a provision with respect to vesting or exercise rights in connection with an involuntary separation or a change in control of the Company, then the terms of that agreement will control and govern this Option. If any provision of this Option or any such agreement conflicts with the Plan, the terms of the Plan will control and govern this Option and that agreement.

20.5 Modifications in Writing

20.6 No Deemed Waivers

duty, agreement or condition. No waiver of any of provision of this Option will be deemed to occur, or to constitute a waiver of any other provision of this Option, or to constitute a continuing waiver, unless that waiver is in a writing signed by the party against whom the waiver is asserted.

20.7 Blue-penciling

20.8 Further Acts

The parties will execute all documents, provide all information and take or refrain from taking all actions as may be necessary or appropriate to achieve the purposes of this Option.

21 Option Issued Pursuant to Plan

Optionee accepts this Option subject to the provisions of this Option and the Plan, which are incorporated herein, including the provisions that authorize the Committee to administer and interpret the Plan and provide that the Committee’s determinations and interpretations with respect to the Plan are final and conclusive and binding on all persons affected thereby.

22 Electronic Signatures


	ZIX CORPORATION
Date:	By:
		Susan K. Conner
		Chief Financial Officer

EXHIBIT 31.1

CERTIFICATION

I, Richard D. Spurr, certify that:

1.		I have reviewed this Quarterly Report on Form 10-Q of Zix Corporation;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: August 9, 2010	/s/ RICHARD D. SPURR
	Richard D. Spurr
	President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

I, Susan K. Conner, certify that:

1.		I have reviewed this Quarterly Report on Form 10-Q of Zix Corporation;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: August 9, 2010	/s/ SUSAN K. CONNER
	Susan K. Conner
	Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

August 9, 2010

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Ladies and Gentlemen:

The certifications set forth below are being submitted in connection with the Quarterly Report on Form 10-Q (the “Report”) of Zix Corporation for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Richard D. Spurr, the chief executive officer, and Susan K. Conner, the chief financial officer of Zix Corporation, each certifies that to the best of his and her knowledge and in their respective capacities as officers of Zix Corporation:

1.		the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2.		the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Zix Corporation.



	/s/ RICHARD D. SPURR
	Name:	Richard D. Spurr
	Title:	President and Chief Executive Officer


	/s/ SUSAN K. CONNER
	Name:	Susan K. Conner
	Title:	Chief Financial Officer

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