proginet10qsb043008.htm

PROGINET CORPORATION

NOTES TO FINANCIAL STATEMENTS

April 30, 2008

(Unaudited)

1. Interim Financial Data

The accompanying unaudited financial statements have been prepared by Proginet Corporation (“Proginet” or “the Company”) in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods indicated. These financial statements should be read in conjunction with the financial statements and notes related thereto, included in the Annual Report on Form 10-KSB for year ended July 31, 2007.

These results for the period ended April 30, 2008 are not necessarily indicative of the results to be expected for the full fiscal year. The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Revenue Recognition

We recognize revenue in accordance with Statement of Position, or SOP, 97-2, “Software Revenue Recognition,” and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions”. We recognize software license revenues when all of the following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable, delivery of the product has occurred and the customer has accepted the product (including the expiration of an acceptance period) if the terms of the contract include an acceptance requirement. In instances when any of the criteria are not met, we will either defer recognition of the software license revenue until the criteria are met or we will recognize the software license revenue on a ratable basis, as required by SOPs 97-2 and 98-9. We generally utilize written contracts as the means to establish the terms and conditions by which our products, support and services are sold to our customers. Our revenues are derived from direct sales executives, distributors and original equipment manufacturer partners. Revenues from sales through distributors are recorded at the gross amount charged based on the economic risks and ongoing product support responsibilities we assume.

We consider a non-cancelable agreement signed by us and the customer to be evidence of an arrangement. Delivery is considered to occur when media containing the licensed programs is provided to a common carrier, or the customer is given electronic access to the licensed software. Our typical end user license agreements do not contain acceptance clauses. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment. If the fee is not fixed or determinable, we recognize revenue as the amounts become due and payable. Probability of collection is based upon our assessment of the customer’s financial condition through review of its current financial statements or credit reports. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as payments become due. For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. If we determine that collection is not probable, we defer the revenue and recognize the revenue upon cash collection.

When our software licenses contain multiple elements, we allocate revenue to each element based on the relative fair values of the elements. Multiple element arrangements generally include post-contract support (PCS or support), software products and, in some cases, service. Revenue from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as PCS, based on the relative fair values of the elements specific to us. Our determination of fair value of each element in multi-element arrangements is based on vendor-specific objective evidence, which is generally determined by sales of the same element or service to third parties or by reference to a renewal rate specified in the related arrangement.

Where vendor-specific objective evidence of fair value exists for all undelivered elements, but evidence does not exist for one or more delivered elements, we account for the delivered elements in accordance with the “Residual Method” prescribed by SOP 98-9. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. In most cases, the bundled multiple elements include PCS and the software product. In such cases, when vendor-specific objective evidence of fair value exists for all of the undelivered elements (most commonly PCS), the residual amount is recognized as revenue and the PCS is recognized ratably over the PCS term, which is typically 12 months.

A customer typically prepays maintenance revenues for the first 12 months and the related maintenance revenues are recognized ratable monthly over the term of the maintenance contract, which is generally 12 months. Maintenance contracts include the right to unspecified upgrades on a when-and-if available basis and ongoing support.

Deferred revenues include amounts received from customers for which revenue has not yet been recognized that generally results from deferred maintenance, consulting or training services not yet rendered and license revenue deferred until all requirements under SOP 97-2 are met. Revenue is recognized upon delivery of our products, as services are rendered, or as other requirements requiring deferral under SOP 97-2 are satisfied.

Commission Expense

Our revenues are derived from direct sales executives, distributors and OEM partners. Commission expense is recorded at the time of sale. Commission rates to direct sales people are based on a graduating scale, ranging from 5% to 15% of the sale, dependent upon the revenue volume generated by the sales executive. Distributors are typically compensated at a commission rate of 40% to 50% and VARs are compensated at a commission rate of 25% to 40% of the license revenue generated. The rates vary based upon their level of effort, resources assigned and products sold. OEM arrangements include a commission structure similar to distributors and also may include specific fixed pricing for the number of "users" the product is licensed for. Revenues from sales through distributors are recorded at the gross amount charged based on the economic risks and ongoing product support responsibilities we assume.

3. Accounts Receivable

The Company continually reviews accounts for collectability and establishes an allowance for doubtful accounts. As of April 30, 2008 and July 31, 2007, there was an allowance for doubtful accounts of $235,000 and $5,000, respectively.

4. Research and Development Costs and Capitalized Software Development Costs

Research and development costs consist of salaries and other costs related to the development and enhancement of computer software programs. Software development costs are capitalized upon the establishment of product technological feasibility until the product is available for general release to the public. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain factors including, but not limited to, the timing of technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technologies. Software development costs not capitalized are expensed as research and development.

Amortization of capitalized software development costs is provided on a product-by-product basis at the greater of the amount computed using the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues or the straight-line method over the remaining estimated economic life of the product.

Amortization commences once a product becomes available for sale to customers. All costs of a product enhancement, including any costs carried over from the original product are amortized over the enhancement’s estimated useful life, which is generally five years. Amortization expense charged to operations was $214,078 and $704,127 for the three and nine months ended April 30, 2008. Amortization expense charged to operations was $266,923 and $756,732 for the three and nine months ended April 30, 2007. Capitalized software development costs are net of accumulated amortization of $9,220,826 and $8,516,699 at April 30, 2008 and July 31, 2007, respectively. Capitalized software development costs are retired from the balance sheet when fully amortized or written off if the related product is no longer sold.

5. Acquisition

On January 10, 2005, the Company entered into and closed an Asset Purchase Agreement (the “Agreement”) between the Company and Blockade Systems Corp. ("Blockade"), a privately-held Canadian identity management software corporation. Pursuant to the Agreement, Proginet acquired certain assets and the business of Blockade and assumed certain Blockade liabilities, for a cash purchase price of $2,389,643. The assets acquired by Proginet include complimentary intellectual property, customer contracts, equipment and other tangible personal property. The Agreement also provides for contingent payments to Blockade, payable annually over three years following the acquisition, upon the acquired Blockade business meeting certain revenue thresholds, including up to a maximum contingent payment of $1,300,000 in aggregate for meeting either software or maintenance revenue thresholds and a 50% contingent payment for net revenues generated from annual sales of identity management tokens, as defined in the Agreement. As of April 30, 2008, the Company is no longer liable to Blockade for such contingent payments.

In accordance with SFAS No. 141, “Business Combinations,” the acquisition has been accounted for under the purchase method of accounting. The total purchase price was allocated to the net tangible assets and intangible assets acquired based on estimates of fair value at the date of acquisition. The allocation of the total purchase price to the acquired technology and other intangible assets, including maintenance contracts, was based on management’s best estimate. As of April 30, 2008, the Company has allocated $135,932 of the total purchase price to goodwill, which is amortizable over fifteen years for income tax purposes.

6. Purchased Software and Customer Relationships

Purchased software and customer relationships include software and customer relationships purchased in connection with the Blockade acquisition for an original cost of $1,501,774 and $1,199,078, respectively. Purchased software is net of accumulated amortization of $993,126 and $767,856 at April 30, 2008 and July 31, 2007, respectively. Customer relationships are net of accumulated amortization of $792,953 and $613,088 at April 30, 2008 and July 31, 2007, respectively. Purchased software and customer relationships are being amortized over a period of five years. Amortization expense charged to operations for purchased software is $75,090 and $225,270 for the three and nine months ended April 30, 2008 and 2007, respectively. Amortization expense charged to operations for customer relationships is $59,955 and $179,865 for the three and nine months ended April 30, 2008 and 2007, respectively. Estimated amortization expense for customer relationships and purchased software in the succeeding years is $239,820 and $300,360 for fiscal 2008 and 2009 per year, and $106,350 and $133,198 for fiscal 2010, respectively.

7.	Income (Loss) Per Share

Basic income (loss) per common share (“EPS”) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, warrants and restricted stock using the “treasury stock” method. During periods of net loss, diluted net loss per share does not differ from basic net loss per share since potential shares of common stock from stock options and warrants are anti-dilutive and therefore are excluded from the calculation.

The following table sets forth the computation of basic and diluted income (loss) per share:

	Three months ended					Nine months ended
	April 30,					April 30,
	2008			2007		2008			2007

Numerator:
Net income (loss)	$	(219,984	)	$	440,587	$	(1,115,686	)	$	766,866

Denominator:
Weighted average number of common shares (basic)		14,722,677			14,514,387		14,677,717			14,459,608

Effect of dilutive securities:
Stock Options		-			1,075,362		-			863,255
Warrants		-			-		-			26,073
		-			1,075,362		-			889,328

Weighted average number of common shares (diluted)		14,722,677			15,589,749		14,677,717			15,348,936

Basic and diluted income (loss) per share	$	(0.01	)	$	0.03	$	(0.08	)	$	0.05

Potential common shares of 2,526,000 and 2,548,667 for the three and nine months ended April 30, 2008, and 438,000 and 1,246,956 for the three and nine months ended April 30, 2007 are excluded in computing basic and diluted net income per share as their effects would be anti-dilutive.

Equity

Effective August 1, 2006, Proginet adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to August 1, 2006, Proginet accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. Proginet also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. Because the Company previously adopted the pro forma disclosure provisions of SFAS 123, it recognized compensation cost relating to the unvested portion of awards granted prior to the date of adoption, using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosures under SFAS 123, except that forfeitures rates will be estimated for all options, as required by SFAS 123R. The cumulative effect of applying the forfeiture rates was not material.

On November 30, 2007, the Board of Directors granted options to non-employee directors to purchase 425,000 shares of common stock (the “425,000 Grant”), at an exercise price of $1.38, which represented the fair market value of the underlying common stock on the date of grant. On February 14, 2008, the Board of Directors approved a grant of options to purchase 300,000 shares of common stock (the “300,000 Grant”) to the Executive Vice President of Sales and Marketing at an exercise price of $.90 which represented the fair market value of the underlying common stock on April 8, 2008, in accordance with his employment letter. The 425,000 Grant and the 300,000 Grant are both conditioned upon obtaining stockholder approval of amendments to the 2000 Stock Option Plan of Proginet Corporation increasing the aggregate share limit authorized for issuance under, and the extension of the term of, such option plan. See Part II, Item 4 for a description of the Special Meeting of Stockholders originally scheduled, for the purpose of submitting these amendments to a stockholder vote, to be held on April 8, 2008, and ultimately cancelled.

The Company has not recorded any compensation expense in connection with the 425,000 Grant and the 300,000 Grant as accounting rules do not permit compensation cost to be recognized prior to receiving all necessary stockholder approvals.

There was $7,500 of compensation cost related to non-qualified stock options recognized in general and administrative expense for the nine months ended April 30, 2007 relating to stock options granted prior to August 1, 2006. There was no additional compensation cost related to non-qualified stock options as all outstanding options granted prior to August 1, 2006.

Stock Option activity during the nine months ended April 30, 2008, is as follows:

	Number of options		Weighted average exercise price		Weighted average remaining contracted term (years)		Aggregate intrinsic value
Outstanding at August 1, 2007		2,623,700	$	.75		-		-
Granted		-		-		-		-
Exercised		97,700		.20		-		-
Forfeited		-		-		-		-
Outstanding at April 30, 2008		2,526,000	$	.78		5.55	$	432,730
Exercisable at April 30, 2008		2,526,000	$	.78		5.55	$	432,730

Restricted Stock Awards

During the quarter ended January 31, 2007, the Company awarded 19,417 shares of restricted Proginet common stock to 4 out of 5 of its non-employee directors for their services as members of the Board of Directors. The restricted stock awards contain time based vesting provisions and vested on August 21, 2007. Additionally, all restrictions on the awards will lapse upon certain situations including death or disability of the director and a change in control of the Company. The awards may not be sold, assigned or transferred during the restriction period and are subject to a repurchase right by the Company should the director cease to remain a director of the Company before the restricted awards are vested.

The fair value of the restricted stock award at the time of grant was $1.03 per share and is being expensed on a straight line basis in general and administrative expenses over their vesting period, 283 days. Total compensation expense recognized related to the restricted stock awards amounts to $7,743 for the nine months ended April 30, 2008. As of April 30, 2008, there was no unrecognized compensation expense related to nonvested restricted stock awards.

A summary of the status of the Company’s restricted stock awards as of April 30, 2008 and changes during the first nine months of fiscal 2008 is presented below:

Nonvested Restricted Stock Awards	Shares		Weighted-Average Grant- Date Fair Value
Nonvested at August 1, 2007		77,668	$	1.03
Granted		-		-
Vested		77,668	$	1.03
Forfeited		-		-
Nonvested at April 30, 2008		-		-

Item 2. Management's Discussion and Analysis or Plan of Operation

General

You should read the following discussion in conjunction with our financial statements and the notes thereto included in Item I of Part I of this Form 10Q-SB. Certain statements under the captions “Description of Business”, “Management's Discussion and Analysis” and elsewhere in this Form 10-QSB contain “forward-looking statements” within the meaning of the Securities Exchange Act of 1934. Words such as “may”, “should”, “could”, “believe”, “expect”, “anticipate”, “estimate”, “intend”, “strategy”, “likely” and similar expressions are intended to identify forward-looking statements about the Company’s future plans, objectives, performance, intentions and expectations. Such forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors which may cause the Company's actual results of operations and future financial condition to differ materially from those expressed or implied in or by any such forward-looking statements. Such factors include factors that may be beyond the Company’s control and include, among others, the following: litigation risk with respect to the claims asserted by one of its shareholders, as described more fully under “Management's Discussion and Analysis”; general economic and business conditions, competition from existing and potential competitors and availability of qualified personnel.

The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements contained herein or that may be made from time to time by or on behalf of the Company.

Use of Estimates and Critical Accounting Policies

In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenues, income from operations, and net income, as well as on the value of certain assets on our balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance, as these policies affect the reported amounts of revenues, expenses, and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include revenue recognition and capitalized software development costs. These policies are described in detail below. In addition, please refer to Note 1 to the accompanying financial statements for further discussion of our accounting policies.

In addition to the estimates and assumptions that we use to prepare our historical financial statements, we monitor our sales pipeline in order to estimate the timing and amount of future revenues. If we are unable to properly estimate the timing and amount of revenues, our future operations could be significantly impacted. Our sales pipeline may not consistently relate to revenues in a particular period, as the data upon which the assumptions and estimates were made by management may change. For example, information technology spending trends may cause customers to delay and reduce purchasing decisions. Accordingly, it may be harder to close contracts with customers, the size of the transactions may decrease, and many of our license contracts are pushed to the very end of the quarter, making it difficult for us to forecast revenues for the quarter, and adjust spending to respond to variations in revenue growth during the quarter, all of which may adversely affect our business, financial condition and results of operations.

Revenue Recognition

Based on our interpretation of SOP 97-2 and SOP 98-9, we believe that our current sales contract terms and business arrangements have been properly reported. However, the American Institute of Certified Public Accountants and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant standards to a wide range of sales contract terms and business arrangements that are prevalent in the software industry. Also, the SEC has issued Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements,” which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. Future interpretations of existing accounting standards or changes in our business practices could result in future changes in our revenue accounting policies that could have a material adverse effect on our business, financial condition and results of operations.

Commission Expense

Commission expense is recorded at the time of sale. Commission rates to direct sales people are based on a graduating scale, ranging from 5% to 15% of the sale, dependent upon the revenue volume generated by the sales executive. Distributors are typically compensated at a commission rate of 40% to 50% and VARs are compensated at a commission rate of 25% to 40% of the license revenue generated. The rates vary based upon their level of effort, resources assigned and products sold. The OEM arrangements include a commission structure similar to distributors and also may include specific fixed pricing for the number of “users” the product is licensed for.

Capitalized Software Development Costs

We capitalize our software development costs when the projects under development reach technological feasibility as defined by Financial Accounting Standard (“FAS”) No. 86, and amortize these costs over the products’ estimated useful lives. Under FAS No. 86, we evaluate our capitalized software costs at each balance sheet date to determine if the unamortized balance related to any given product exceeds the estimated net realizable value of that product. Any such excess is written off through accelerated amortization in the quarter it is identified. Determining net realizable value as defined by FAS No. 86 requires that we estimate future cash flows to be generated by the products and use judgment in quantifying the appropriate amount to write off, if any. Actual cash flows and amounts realized from the software products could differ from our estimates. Also, any future changes to our product portfolio could result in significant research and development expenses related to software asset write-offs.

Goodwill, Other Intangible Assets and Other Long-Lived Assets

The Company performs an evaluation of whether goodwill is impaired annually or when events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. Fair value is determined using market comparables for similar businesses or forecasts of discounted future cash flows. The Company also reviews other intangible assets, which are all currently amortized over their respective estimated lives, and other long-lived assets when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets, significant changes in the manner or our use of the assets or the strategy for our overall business and significant negative industry or economic trends. In addition, in all cases of an impairment review, we will re-evaluate the remaining useful life of the asset and modify it, as appropriate. Should the fair value of the Company's long-lived assets decline because of reduced operating performance, market declines, or other indicators of impairment, a charge to operations for impairment may be necessary.

Stock-based Compensation

Effective August 1, 2006, Proginet adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to August 1, 2006, Proginet accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. Proginet also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. Because the Company previously adopted the pro forma disclosure provisions of SFAS 123, it will recognize compensation cost relating to the unvested portion of awards granted prior to the date of adoption, using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosures under SFAS 123, except that forfeitures rates will be estimated for all options, as required by SFAS 123R. The cumulative effect of applying the forfeiture rates was not material.

Results of Operations

Revenues

Total revenues for the quarter ended April 30, 2008 amounted to $1,868,175, representing a decrease of $602,224, or 24.4% compared to revenues of $2,470,399 for the quarter ended April 30, 2007. Total revenues for the nine months ended April 30, 2008 amounted to $5,814,349, representing a decrease of $1,228,670 or 17.4% compared to revenues of $7,043,019 for the nine months ended April 30, 2007.

Software license revenues for the quarter ended April 30, 2008 amounted to $316,378 representing a decrease of $666,219, or 67.8%, compared to software license revenues of $982,597 for the quarter ended April 30, 2007. Software license revenues for the nine months ended April 30, 2008 amounted to $1,125,422 representing a decrease of $1,537,402, or 57.7%, compared to software license revenues of $2,662,824 for the nine months ended April 30, 2007. Software license revenue is sold directly through domestic sales executives, indirectly through international distributors and domestically and internationally through OEM partners. Direct sales, international distributor sales and OEM sales amounted to $128,547, $186,080 and $1,751, respectively, for the quarter ended April 30, 2008 compared to $875,363, $104,746 and $2,488, respectively, for the quarter ended April 30, 2007. For the nine months ended April 30, 2008, direct sales, international distributor sales and OEM sales amounted to $667,895, $423,385 and $34,142 compared to the prior year nine months period of $1,769,536, $831,310 and $61,978. The decrease in software license revenue is primarily due to a decrease in sales of our advanced managed file transfer technology, which primarily resulted from continued delays in the customer procurement processes (including government entities) and a reduction in sales opportunities from the financial services sector reflective of current economic stresses in that marketplace. For the nine months ended April 30, 2008, software license revenue also decreased due to a decrease in sales of our identity and access management technology as the demand for the products as a standalone solution has continued to decline.

Software maintenance fees and other increased by $82,745, or 5.7% to $1,535,847 compared to such fees for the quarter ended April 30, 2007 of $1,453,102. Software maintenance fees and other increased by $306,482 or 7.2% to $4,589,977 compared to such fees for the nine months ended April 30, 2007 of $4,283,495. The increase in software maintenance fees and other is primarily due to fees earned as a result of an increase in the fiscal 2007 license revenue and due to the sale of an inactive domain name for $35,000 in October, 2008.

Fees for professional services for the quarter ended April 30, 2008 amounted to $15,950 compared to fees for professional services of $34,700 for the quarter ended April 30, 2007, representing a decrease of $18,750 or 54%. Fees for professional services for the nine months ended April 30, 2008 amounted to $98,950 compared to fees for professional services of $96,700 for the nine months ended April 30, 2007, representing an increase of $2,250 or 2.3%. The Company does not generate significant professional service revenue as resources are utilized for license revenue related activities. Typically, professional services are related to ad-hoc consulting engagements that are provided in response to requests for support from existing customers. Consequently, professional service revenue may vary considerably from period to period.

Operating Expenses

Operating expenses increased to $2,115,049 from $2,046,880 for the quarter ended April 30, 2008 and April 30, 2007 respectively, an increase of $68,169 or 3.3%. Operating expenses increased to $7,016,449 from $6,318,967 for the nine months ended April 30, 2008 and 2007 respectively, an increase of $697,482 or 11.0%. The increase in operating expenses for the quarter is primarily a combined result of the following factors:

Cost of software licenses (which primarily includes amortization of capitalized software costs) for the quarter ended April 30, 2008 amounted to $356,226, representing a decrease of $50,403 or 12.4%, compared to cost of software licenses of $406,629 for the quarter ended April 30, 2007. Cost of software licenses for the nine months ended April 30, 2008 amounted to $1,147,974, representing a decrease of $59,562 or 4.9%, compared to cost of software licenses of $1,207,536 for the nine months ended April 30, 2007. The decrease in cost of software licenses for the three and nine months ended April 30, 2008 is primarily related to the full amortization of certain advanced managed file transfer related products in the quarter ended January 31, 2008.

Cost of maintenance fees and other (which principally consists of technical support payroll) for the quarter ended April 30, 2008 amounted to $250,264, representing a decrease of $17,814 or 6.6%, compared to cost of maintenance fees and other of $268,078 for the quarter ended April 30, 2007. Cost of maintenance fees and other for the nine months ended April 30, 2008 amounted to $782,660, representing a decrease of $104,911 or 11.8%, compared to cost of maintenance fees and other of $887,571 for the nine months ended April 30, 2007. The decrease in cost of maintenance fees and other is due to a decrease in the allocation of employee related costs for technical services as such costs are being allocated to the development of the Company’s future products.

Commissions amounted to $247,870 for the quarter ended April 30, 2008 compared to commissions of $233,993 for the quarter ended April 30, 2007, representing an increase of $13,877 or 5.9%. Commissions amounted to $640,061 for the nine months ended April 30, 2008 compared to commissions of $983,598 for the nine months ended April 30, 2007, representing a decrease of $343,537 or 34.9%. The increase in commission expense for the three months ended April 30, 2008 is due to an increase in international distributor software sales and an increase in international maintenance fees arising from fiscal 2007 software license sales. Such increases were offset by a lower direct sale commissions due to the decrease in direct sales. The decrease in commission expense for the nine months ended April 30, 2008 is due to the collective decreases in direct and international distributor software sales.

Research and development costs amounted to $78,096 for the quarter ended April 30, 2008, compared to research and development costs of $51,905 for the quarter ended April 30, 2007, representing an increase of $26,191 or 50.5%. Research and development costs amounted to $239,465 for the nine months ended April 30, 2008 compared to research and development costs of $129,732 for the nine months ended April 30, 2007, representing an increase of $109,733 or 84.6%. The increase in research and development costs for the three and nine months ended April 30, 2008 is due to an increase in employee and employee related costs allocated to the research of the Company’s future technology principally related to our advanced managed file transfer product to meet additional requirements of a broader international market.

Selling and marketing expense for the quarter ended April 30, 2008 amounted to $697,460 representing an increase of $256,840 or 58.3%, compared to selling and marketing expense of $440,620 for the quarter ended April 30, 2007. Selling and marketing expense for the nine months ended April 30, 2008 amounted to $1,961,254 representing an increase of $680,514 or 53.1%, compared to selling and marketing expense of $1,280,740 for the nine months ended April 30, 2007. The increase in selling and marketing for the three and nine months ended April 30, 2008 is primarily due to an increase in employee headcount and employee related costs, trade show participation, retention of a public relations firm, research services provided by an industry analyst, lead generation services and an increase in customer visitations by the sales organization for the nine months ended April 30, 2008. These increases are consistent with the Fiscal 2008 Business Plan which includes major expansion in sales, marketing and communication activities.

General and administrative expense for the quarter ended April 30, 2008 amounted to $481,365, representing a decrease of $155,395 or 24.4% compared to $636,760 in general and administrative expense for the quarter ended April 30, 2007. General and administrative expense for the nine months ended April 30, 2008 amounted to $2,219,312, representing an increase of $416,157 or 23.1% compared to $1,803,155 in general and administrative expense for the nine months ended April 30, 2007. The decrease in general and administrative expense for the three months ended April 30, 2008 is primarily due to a decrease in bad debt expense of $140,000 relating to a fiscal 2007 sale that was reserved for in January 2008 after multiple unsuccessful customer support resolution and collection attempts. All outstanding matters were resolved and payment was made in full in May 2008. This decrease was offset by an increase in professional fees due to additional costs incurred for the Special Meeting of Stockholders scheduled for April 2008 and other shareholder inquiries. The increase in general and administrative expense for the nine months ended April 30, 2008 is primarily due to an increase in bad debt expense of $230,000 related to one other international software sale recorded in fiscal 2007. The Company has complied with all contractual requirements of this software license agreement, however, even after several attempts to discuss open matters, such customer is not implementing the technology and not complying with the terms of the license agreement. We do not currently anticipate payment on this sale nor do we intend to litigate as such legal costs may be extensive. In addition, general and administrative expenses for the nine months ended April 30, 2008 increased due to an increase in additional non-recurring professional fees relating to costs associated with a partial tender offer and the election of new Board Members, an increase in fees and expenses paid to such Board Members and an increase in general office expenses. These expenses were offset by a reduction in employee profit sharing and management discretionary compensation expense as defined financial targets were not met in fiscal 2008.

The Company reported a net loss of $219,984 and $1,115,686 for the three and nine months ended April 30, 2008, and a net income of $440,587 and $766,866 for the three and nine months ended April 30, 2007.

Liquidity and Capital Resources

At April 30, 2008, the Company had a cash and cash equivalent balance of $3,467,482.

Operating activities provided cash of $967,573 for the nine months ended April 30, 2008. This resulted primarily from the net loss of $1,115,686, an increase in deferred revenues of $276,084 due to higher sequential quarterly maintenance billings and associated cash collections, and a decrease in accounts payable and accrued expenses of $187,145 due to a reduction in accrued expenses as defined financial targets were not met in fiscal 2008. This decrease was offset by non-cash charges for depreciation and amortization of $1,152,926 and a provision for bad debt of $234,095 relating to a fiscal 2007 software sale.

Investing activities used cash of $959,421 for the nine months ended April 30, 2008 primarily for costs associated with the development of the Company's software products.

The Company has available a line of credit of $1,000,000. The interest rate is variable based on the bank’s prime rate. The line of credit is collateralized by accounts receivable of the Company and expires December 2008. As of April 30, 2008, the Company has not borrowed against this line of credit.

Off Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Recent Accounting Pronouncements

Effective August 1, 2007, we adopted Financial Accounting Standards Board Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of such date, we did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.

FIN 48 allows the Company to prospectively change its accounting policy as to where interest expense and penalties on income tax liabilities are classified. The Company will include interest and penalties in tax expense if incurred. As of the date of adoption of FIN 48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the respective quarters.

Contingency Relating to Shareholder Claim

In early April 2008, we received a letter from Red Oak Partners, LLC (“Red Oak”), which acquired shares of our common stock in a tender offer completed in August 2007, alleging that it had been damaged as a result of misleading statements and representations made by our management regarding our future financial performance and the existence of contractually committed orders from customers. While Red Oak has not alleged a specific dollar amount with respect to its damages, it has asked to be “made whole”.

We have responded to Red Oak’s assertions and have asserted that these claims are without merit. Although we believe that Red Oak’s claims are without merit and that we have substantial defenses in this matter, if Red Oak brings a litigation, we could in the future incur substantial litigation related expenses, and additional monetary expense if Red Oak prevails in its claims.

Following receipt of the shareholder’s initial letter in early April 2008, our Board of Directors determined to recommend that it was advisable to adjourn the Special Meeting of Stockholders originally scheduled on April 8, 2008 to approve certain amendments to our option plan, as described below under Item 4, Submission of Matters to a Vote of Security Holders. On April 8, 2008, the Company’s stockholders voted, by way of proxy, to adjourn the Special Meeting until May 6, 2008. On May 5, 2008, the Special Meeting was cancelled by our Board of Directors. The determination to adjourn and, ultimately, to cancel the Special Meeting, was made primarily because our Board of Directors was concerned that additional disclosure relating to Red Oak’s claim described above would be required in our proxy statement for the Special Meeting, which would require additional analysis, time and expense, and that communications with respect to the disputed matters were ongoing.

Item 3A(T). Controls and Procedures

(a)	Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly Report on Form 10-QSB. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the times periods specified in the Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QSB that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

The Company originally scheduled a Special Meeting of Stockholders (“Special Meeting”) to be held on April 8, 2008, for the purpose of obtaining stockholder approval of amendments to the 2000 Stock Option Plan of Proginet Corporation (the “2000 Plan”) increasing the aggregate share limit authorized for issuance under, and the extension of the term of, the 2000 Plan. A Definitive Proxy Statement was filed by the Company with the SEC on March 3, 2008. On April 8, 2008, the Company’s stockholders voted, by way of proxy, to adjourn the Special Meeting until May 6, 2008, by a vote of 8,711,800 shares. On May 5, 2008, the Special Meeting was cancelled by the Board of Directors. The reasons for the adjournment and ultimate cancellation are more fully described in Part I, Item 2, “Management’s Discussion and Analysis or Plan of Operation under the caption “Contingency Relating to Shareholder Claim”.

Item 6. Exhibits

(a) Exhibits

Exhibit 31.1 – Rule 13a-14(a) Certification (Chief Executive Officer)

Exhibit 31.2 – Rule 13a-14(a) Certification (Chief Financial Officer)

Exhibit 32.1 – Section 1350 Certification of Chief Executive Officer

Exhibit 32.2 – Section 1350 Certification of Chief Financial Officer

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PROGINET CORPORATION

(Registrant)

Date June 6, 2008	/s/ Kevin M. Kelly
		Kevin M. Kelly, President and
		Chief Executive Officer



Date June 6, 2008	/s/ Debra A. DiMaria
		Debra A. DiMaria
		Corporate Secretary and Chief Financial
		and Accounting Officer

Delaware		11-3264929
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

	April 30,			July 31,
	2008			2007
	(Unaudited)
Assets
Current assets
Cash	$	3,467,482		$	3,439,988
Trade accounts receivable, net		516,167			1,328,326
Prepaid expenses		54,414			77,945
Total current assets		4,038,063			4,846,259

Property and equipment, net		147,165			167,933
Capitalized software development costs, net		3,338,380			3,105,982
Purchased software, net		508,648			733,918
Customer relationships, net		406,125			585,990
Goodwill		135,932			135,932
Other assets		35,870			35,870
	$	8,610,183		$	9,611,884

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable and accrued expenses	$	736,472		$	923,617
Deferred revenues		2,619,969			2,361,867
Deferred rent		11,628			4,541
Total current liabilities		3,368,069			3,290,025


Deferred revenues		62,372			44,390
Deferred rent		152,766			161,892
		3,583,207			3,496,307
Stockholders’ equity
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		-			-

Common stock, $.001 par value, 40,000,000 shares authorized, 16,049,281shares issued at April 30, 2008 and 15,873,913 at July 31, 2007		16,050			15,874
Additional paid-in capital		12,877,948			12,851,039
Treasury stock 1,325,226, at cost, at April 30, 2008 and July 31, 2007		(606,023	)		(606,023	)
Accumulated deficit		(7,260,999	)		(6,145,313	)
Total stockholders’ equity		5,026,976			6,115,577

	$	8,610,183		$	9,611,884

	Common Stock				Additional paid-in capital		Treasury Stock			Accumulated deficit			Total
	Shares		Amount


Balance – August 1, 2007		15,873,913	$	15,874	$	12,851,039	$	(606,023	)	$	(6,145,313	)	$	6,115,577

Common stock options exercised		97,700		98		19,244								19,342

Stock based compensation		77,668		78		7,665								7,743

Net loss (unaudited)											(1,115,686	)		(1,115,686	)

Balance – April 30, 2008		16,049,281	$	16,050	$	12,877,948	$	(606,023	)	$	(7,260,999	)	$	5,026,976

	Nine months ended
	April 30,
	2008			2007

Cash flows from operating activities
Net income (loss)	$	(1,115,686	)	$	766,866
Adjustments to reconcile net income (loss) to cash provided by operating activities
Depreciation and amortization		1,152,926			1,208,172
Provision for bad debt allowance, net		234,095			11,000
Stock based compensation		7,743			45,840
Deferred revenue		276,084			382,513
Deferred rent		(2,039	)		4,808
Changes in operating assets and liabilities
Trade accounts receivable		578,064			(719,641	)
Prepaid expenses and other assets		23,531			(27,797	)
Accounts payable and accrued expenses		(187,145	)		24,792
Net cash provided by operating activities		967,573			1,696,553

Cash flows from investing activities
Purchase of net assets of Blockade Systems Corp.		-			(12,271	)
Capitalized software development costs		(936,525	)		(663,335	)
Purchases of property and equipment		(22,896	)		(5,502	)
Net cash used in investing activities		(959,421	)		(681,108	)

Cash flows from financing activities
Exercise of common stock options		19,342			22,000
Net cash provided by financing activities		19,342			22,000

Net increase in cash and cash equivalents		27,494			1,037,445

Cash at beginning of period		3,439,988			2,501,520

Cash at end of period	$	3,467,482		$	3,538,965

Supplemental Disclosures of Cash Flow Information

Non-cash financing activity:
Accrued private placement costs	$	-		$	46,000

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Balance Sheets as of April 30, 2008 (Unaudited) and July 31, 2007	3

	Statements of Operations for the Three and Nine Months ended April 30, 2008 and 2007 (Unaudited)	4

	Statement of Stockholders' Equity for the Nine Months ended April 30, 2008 (Unaudited)	5

	Statements of Cash Flows for the Nine Months Ended April 30, 2008 and 2007 (Unaudited)	6

	Notes to Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis or Plan of Operation	13

Item 3A(T).	Controls and Procedures	21

PART II.	OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders	22

Item 6.	Exhibits	22

SIGNATURES

Dated: June 6, 2008
	/s/ Kevin M. Kelly
	Kevin M. Kelly
	President and Chief Executive Officer