prgf8k013109.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2009

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File No.: 000-30151

Proginet Corporation

(Exact name of registrant as specified in its charter)

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

200 Garden City Plaza, Garden City, NY	11530
(Address of principal executive offices)	(Zip Code)

(516) 535-3600

(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 x No o

Indicate by check mark whether registrant is a large accelerated filer, accelerated filer, 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.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

There were 14,849,055 shares of Common Stock outstanding as of March 5, 2009.

PROGINET CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED January 31, 2009

	PART I. FINANCIAL STATEMENTS

Item 1.	Financial Statements

	Balance Sheets as of January 31, 2009 (Unaudited) and July 31, 2008	3

	Statements of Operations for the Three and Six Months ended January 31, 2009 and 2008 (Unaudited)	4

	Statement of Stockholders' Equity for the Six Months ended January 31, 2009 (Unaudited)	5

	Statements of Cash Flows for the Six Months Ended January 31, 2009 and 2008 (Unaudited)	6

	Notes to Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	22

Item 4T.	Controls and Procedures	23


	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 6.	Exhibits	24

SIGNATURES		25

PROGINET CORPORATION

Balance Sheets

	January 31, 2009 (Unaudited)			July 31, 2008
Assets
Current assets
Cash	$	1,282,575		$	2,338,335
Trade accounts receivable, net		1,124,468			1,816,388
Prepaid expenses		239,703			262,396
Total current assets		2,646,746			4,417,119

Property and equipment, net		375,671			181,226
Capitalized software development costs, net		4,030,601			3,660,387
Purchased software, net		283,378			433,558
Customer relationships, net		226,260			346,170
Goodwill		135,932			135,932
Other assets		35,870			35,870
	$	7,734,458		$	9,210,262

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable	$	483,013		$	170,557
Accrued expense		961,682			1,054,836
Deferred revenues		2,778,312			3,942,590
Deferred rent		18,906			14,054
Total current liabilities		4,241,913			5,182,037


Other long-term liabilities, excluding current portion		-			148,497
Deferred revenues		7,141			68,966
Deferred rent		137,980			147,838
		4,387,034			5,547,338
Stockholders’ equity
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued		-			-
Common stock, $.001 par value, 40,000,000 shares authorized,
16,174,281 shares issued at January 31, 2009 and 16,049,281 at July 31, 2008		16,175			16,050
Additional paid-in capital		13,061,662			12,877,948
Treasury stock 1,325,226, at cost, at January 31, 2009 and July 31, 2008		(606,023	)		(606,023	)
Accumulated deficit		(9,124,390	)		(8,625,051	)
Total stockholders’ equity		3,347,424			3,662,924

	$	7,734,458		$	9,210,262

The accompanying notes are an integral part of these financial statements.

PROGINET CORPORATION

Statements of Operations (Unaudited)

	Three months ended						Six months ended
	January 31,						January 31,
	2009			2008				2009			2008

Revenues

Software licenses	$	934,685		$	393,889			$	2,389,291		$	809,044
Software maintenance fees and other		1,021,054			1,513,399				2,353,676			3,054,130
Professional services		24,000			36,500				100,138			83,000
		1,979,739			1,943,788				4,843,105			3,946,174

Operating expense
Cost of software licenses		409,077			394,094				852,795			791,748
Cost of maintenance fees and other		245,627			265,763				529,444			532,396
Cost of professional services		4,827			10,265				25,671			21,955
Commissions		218,012			203,424				388,061			392,191
Research and development		69,722			134,160				132,190			161,369
Selling and marketing		613,340			638,266				1,432,150			1,263,794
General and administrative		917,360			839,096				1,991,197			1,737,947
		2,477,965			2,485,068				5,351,508			4,901,400

Loss from operations		(498,226	)		(541,280	)			(508,403	)		(955,226	)

Interest income		2,139			27,550				9,064			59,524

Loss before income taxes	$	(496,087	)	$	(513,730	)		$	(499,339	)	$	(895,702	)

Income Tax Expense		-			-				-			-

Net loss	$	(496,087	)	$	(513,730	)		$	(499,339	)	$	(895,702	)

Basic and diluted loss per common share	$	(.03	)	$	(.03	)		$	(.03	)	$	(.06	)

Weighted average common shares outstanding - basic		14,849,055			14,691,685				14,828,539			14,655,726

Weighted average common shares outstanding - diluted		14,849,055			14,691,685				14,828,539			14,655,726

The accompanying notes are an integral part of these financial statements.

PROGINET CORPORATION

Statement of Stockholders’ Equity

Six months ended January 31, 2009 (unaudited)

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


Balance – August 1, 2008		16,049,281	$	16,050	$	12,877,948	$	(606,023	)	$	(8,625,051	)	$	3,662,924

Exercise of commons stock options		125,000		125		63,575								63,700
Stock Option Expense						120,139								120,139
Net loss											(499,339	)		(499,339	)

Balance – January 31, 2009		16,174,281	$	16,175	$	13,061,662	$	(606,023	)	$	(9,124,390	)	$	3,347,424

The accompanying notes are an integral part of these financial statements.

PROGINET CORPORATION

Statements of Cash Flows (Unaudited)

	Six months ended
	January 31,
	2009			2008

Cash flows from operating activities
Net loss	$	(499,339	)	$	(895,702	)
Adjustments to reconcile net loss to cash
Depreciation and amortization		877,186			789,989
Provision for bad debt allowance, net	-				370,000
Stock based compensation		120,139			7,743
Deferred revenue		(1,226,103	)		(229,336	)
Deferred rent		(5,006	)		(317	)
Changes in operating assets and liabilities
Trade accounts receivable		691,920			46,888
Prepaid expenses and other assets		22,693			39,098
Accounts payable and accrued expenses		70,805			(129,515	)
Net cash provided by (used in) operating activities		52,295			(1,152	)

Cash flows from investing activities
Capitalized software development costs		(924,119	)		(596,518	)
Purchases of property and equipment		(247,636	)		(10,952	)

Net cash used in investing activities		(1,171,755	)		(607,470	)

Cash flows from financing activities
Exercise of common stock options		63,700			17,762

Net cash provided by financing activities		63,700			17,762

Net decrease in cash		(1,055,760	)		(590,860	)

Cash at beginning of period		2,338,335			3,439,988

Cash at end of period	$	1,282,575		$	2,849,128

The accompanying notes are an integral part of these financial statements.

PROGINET CORPORATION

NOTES TO FINANCIAL STATEMENTS

January 31, 2009

(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, 2008.

These results for the period ended January 31, 2009 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, collectability 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.

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 ratable 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.

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

Our revenues are derived from direct sales executives, distributors, Value Added Resellers (“VARs”) and Original Equipment Manufacturers (“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. 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. 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 January 31, 2009 and July 31, 2008, there was an allowance for doubtful accounts of $45,000.

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 $273,768 and $553,905 for the three and six months ended January 31, 2009. Amortization expense charged to operations was $234,851 and $490,049 for the three and six months ended January 31, 2008. Capitalized software development costs are net of accumulated amortization of $4,256,298 and $9,435,093 at January 31, 2009 and July 31, 2008, 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. As of January 31, 2009, $5,732,700 of capitalized costs was retired from the Balance Sheet.

5. Corporate Developments

On October 31, 2008, Proginet Corporation (“Proginet”) entered into an Asset Exchange Agreement (the “Asset Exchange Agreement”), with Beta Systems Software of North America, Inc., a Delaware corporation ("Beta America"), and Beta Systems Software of Canada Ltd., a Canadian body corporate ("Beta Canada"), effective as of October 1, 2008. Under the Asset Exchange Agreement, Proginet (i) has transferred to Beta Canada all of its intellectual property rights, and books and records, relating to Proginet’s Secur-Pass products, and (ii) has assigned to Beta America its customer, maintenance and service agreements relating to Proginet’s Secur-Pass products, in exchange for Beta Canada’s transfer to Proginet of all of its intellectual property rights, and Beta America’s transfer to Proginet of its customer, maintenance and service agreements, each relating to the Harbor NSM and Harbor HFT products. The Asset Exchange Agreement contains customary representations and warranties and indemnities of the parties. The Asset Exchange Agreement was accounted for as a nonmonetary exchange of assets in accordance with Financial Accounting Standard No. 153(as amended).

Proginet also entered into a Support Services Agreement (the “Services Agreement”), with Beta Canada on October 31, 2008, under which Beta Canada provides to Proginet certain maintenance and support services for Proginet’s CFI Suite and the Harbor NSM and Harbor HFT products. The Services Agreement was effective October 1, 2008 and will continue in effect for two years with automatic one year renewal terms thereafter, subject to certain non-renewal and termination rights. Proginet has agreed to compensate Beta Canada a percentage of the gross maintenance revenue received by Proginet in respect of the support services provided by Beta Canada under the Services Agreement.

On October 31, 2008, Proginet entered into a Secur-Line Products License Agreement (the “Secur-Line License Agreement”), with Beta America under which Proginet has licensed to Beta America, on a non-exclusive basis, intellectual property rights relating to Proginet’s Secur-Line products, effective October 1, 2008. The consideration for the license is certain retained customer payments and receivables generated under various contracts being assigned to Beta America.

Proginet has assigned to Beta America, under the Asset Exchange Agreement, its customer, maintenance and service agreements relating to the Secur-Line intellectual property and technology rights licensed under the Secur-Line License Agreement. The Secur-Line associated agreements have been assigned in consideration of certain royalty fees, payable by Beta America to Proginet, based on gross revenue received by Beta America during the license term under such agreements. Proginet has agreed, in turn, to pay to Beta America commissions equal to a percentage of such gross revenue. The term of the Secur-Line License Agreement expires on October 1, 2028, at which point the underlying license grant will continue but be deemed to be fully-paid and royalty-free. All requirements to make royalty and commission payments will continue until October 1, 2028. The primary purpose of the license grant is to permit Beta America to provide support services under the Secur-Line associated agreements assigned under the Asset Exchange Agreement and to further license the relevant intellectual property.

Under a Master Distributor Agreement (the “Master Distributor Agreement”), entered into on October 31, 2008 between Beta Systems Software AG, a German corporation (“Beta Germany”), and Proginet, Beta Germany or any of its distributors, subsidiaries or associated companies, has become the exclusive distributor, subject to certain exceptions, for Proginet’s CFI Suite and the Harbor NSM and Harbor HFT products (Proginet’s file transfer product suite) in Europe and certain other countries specified therein. Beta has also agreed to provide certain maintenance and support services to certain eligible customers under the Master Distributor Agreement. The term of the Master Distributor Agreement is from October 1, 2008 through July 31, 2011, subject to earlier termination by either party for cause. Under the Master Distributor Agreement, Proginet has agreed to compensate Beta Germany a percentage of gross annual license and maintenance and support services revenue collected by Beta Germany under the Master Distributor Agreement. Beta Germany has guaranteed certain revenue minimums which it will be obligated to pay Proginet annually.

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 $1,218,396 and $1,068,216 at January 31, 2009 and July 31, 2008, respectively. Customer relationships are net of accumulated amortization of $972,818 and $852,908 at January 31, 2009 and July 31, 2008, 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 $150,180 for the three and six months ended January 31, 2009 and 2008 respectively. Amortization expense charged to operations for customer relationships is $59,955 and $119,910 for the three and six months ended January 31, 2009 and 2008. Estimated amortization expense for customer relationships and purchased software for the succeeding two years is $119,910 and $150,180 for fiscal 2009 and $106,350 and $133,198 for fiscal 2010, respectively. These assets are expected to be fully amortized by the end of Fiscal 2010.

7.	Accrued Expense

	January 31, 2009 (Unaudited)		July 31, 2008
Salaries, commissions and benefits	$	246,759	$	299,527
Severance		327,151		551,053
Private placement costs		150,000		150,000
Professional fees		67,529		111,100
Distributor Fees Other		126,813 43,431		41,771 49,882
Total Accrued Expense		961,682		1,203,333

Current portion		961,682		1,054,836

Long term portion	$	-	$	148,497

8.	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 and warrants 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 loss per share:

		Three months ended						Six months ended
		January 31,						January 31,
		2009			2008			2009			2008


Numerator:
Net loss	$	(496,087	)	$	(513,730	)	$	(499,339	)	$	(895,702	)

Denominator:
Weighted average number of common shares (basic)		14,849,055			14,691,685			14,828,539			14,655,726

Effect of dilutive securities:
Stock Options		-			-			-			-
Warrants		-			-			-			-
		-			-			-			-

Weighted average number of common shares (diluted)		14,849,055			14,691,685			14,828,539			14,655,726

Basic and diluted Loss per share	$	(.03)		$	(.03	)	$	(.03)		$	(.06	)

Potential common shares of 3,243,000 and 2,541,000 for the three and six months ended January 31, 2009 and 2,535,000 and 2,560,000 for the three months ended January 31, 2008 are excluded in computing basic and diluted net loss per share as their effects would be anti-dilutive.

Equity

Proginet follows 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).

Stock Option activity during the six months ended January 31, 2009, is as follows:

	Number of options			Weighted Average exercise price		Weighted average remaining contracted term (years)		Aggregate intrinsic value
Outstanding at August 1, 2008		2,526,000		$	.78		-		-
Granted		1,449,500			.79		-		-
Exercised		(125,000	)		.51		-		-
Forfeited		(588,265	)		.88		-		-
Options outstanding at January 31, 2009		3,262,235		$	.93		8.78	$	44,410
Options exercisable at January 31, 2009		2,387,735		$	.83		5.80	$	35,410

On November 30, 2007, the Board of Directors granted options to non-employee directors to purchase 425,000 shares of common stock at an exercise price of $1.38, which represented the fair market value of the underlying common stock on the date of grant. Such grant was subject to obtaining stockholder approval of amendments (described below) to the 2000 Stock Option Plan of Proginet Corporation (the “2000 Plan”).

On February 14, 2008, the Board of Directors pursuant to an Offer Letter with Mr. Sandison Weil, the Company’s President and Chief Executive Officer (formerly, the Executive Vice President Sales and Marketing) approved a grant of options to purchase 500,000 shares of common stock at an exercise price of $.90 which represented the fair market value of the underlying common stock on April 8, 2008.Certain options vest at different times during the vesting period and certain options vest upon the achievement of certain performance based measures. In addition, Mr. Weil’s offer letter also provided for a grant of options to purchase 100,000 shares of common stock at an exercise price as of October 31, 2008. Such options will vest two years from the grant date based upon meeting performance criteria established by the Board of Directors for an aggregate two year program. Such grants were subject to obtaining stockholder approval of amendments (described below) to the 2000 Plan.

On October 7, 2008, the Board of Directors pursuant to an Offer Letter with Mr. Stephen Flynn, the Company’s Chief Operating Officer approved a grant of options to purchase up to 400,000 shares of common stock at an exercise price of $.45 which represented the fair market value of the underlying commons stock on grant date. Certain options vest immediately and certain options vest upon the achievement of certain performance based measures over a four year period. In addition, Mr. Flynn’s offer letter also provided for a grant of fully vested options to purchase 100,000 shares of commons stock at an exercise price equal to the closing price of the Company’s common stock on the OTC BB on April 6, 2009. Such grants were subject to obtaining stockholder approval of amendments (described below) to the 2000 Plan.

At the Company’s Annual Meeting of Stockholders on November 18, 2008, the stockholders approved amendments to the 2000 Plan which authorized a 3,000,000 share increase in the number of shares of common stock authorized for award grants under the 2000 Plan, increased the maximum number of shares of common stock for which options may be granted under the 2000 Plan to an employee in any calendar year from 250,000 to 750,000, and extended the term of the 2000 Plan by five years to October 10, 2015.

Based on the approval of the amendments to the 2000 Plan, the Company incurred a compensation cost related to the grants described above, based on the calculated fair value of these awards over the requisite service period (generally the vesting period of the equity award). As of January 31, 2009, such cost amounted to approximately $104,000.

On November 18, 2008, the Board of Directors granted options to non-employee directors to purchase 200,000 shares of common stock at an exercise price of $0.32, which represented the fair market value of the underlying common stock on the date of grant. As of January 31, 2009, compensation cost related to this grant amounted to approximately $11,000.

On December 31, 2008, the Board of Directors granted options to employees to purchase 424,500 shares of common stock at an exercise price of $0.42, which represented the fair market value of the underlying common stock on the date of grant. As of January 31, 2009, compensation cost related to this grant amounted to approximately $5,300.

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

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 10-Q. Certain statements under the captions “Description of Business”, “Management's Discussion and Analysis” and elsewhere in this Form 10-Q 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 risk factors in our latest Annual Report on Form 10-KSB for the fiscal year ended July 31, 2008, as well as risks relating to 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

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.

A customer typically prepays maintenance revenues for the first 12 months and the related maintenance revenues are recognized ratably 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.

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).

Results of Operations

Corporate Developments

On October 31, 2008, Proginet entered into an Asset Exchange Agreement (the “Asset Exchange Agreement”), with Beta Systems Software of North America, Inc., a Delaware corporation ("Beta America"), and Beta Systems Software of Canada Ltd., a Canadian body corporate ("Beta Canada"), effective as of October 1, 2008. Under the Asset Exchange Agreement, Proginet (i) has transferred to Beta Canada all of its intellectual property rights, and books and records, relating to Proginet’s Secur-Pass products, and (ii) has assigned to Beta America its customer, maintenance and service agreements relating to Proginet’s Secur-Pass products, in exchange for Beta Canada’s transfer to Proginet of all of its intellectual property rights, and Beta America’s transfer to Proginet of its customer, maintenance and service agreements, each relating to the Harbor NSM and Harbor HFT products. The Asset Exchange Agreement contains customary representations and warranties and indemnities of the parties.

Revenues

Total revenues for the quarter ended January 31, 2009 amounted to $1,979,739 representing an increase of $35,951, or 1.8% compared to revenues of $1,943,788 for the quarter ended January 31, 2008. Total revenues for the six months ended January 31, 2009 amounted to $4,843,105 representing an increase of $896,931 or 22.7% compared to revenues of $3,946,174 for the six months ended January 31, 2008.

Software license revenues for the quarter ended January 31, 2009 amounted to $934,685 representing an increase of $540,796, or 137.3%, compared to software license revenues of $393,889 for the quarter ended January 31, 2008. Software license revenues for the six months ended January 31, 2009 amounted to $2,389,291 representing an increase of $1,580,247, or 195.3%, compared to software license revenues of $809,044 for the six months ended January 31, 2008. Software license revenue is sold directly through the Company’s sales executives and indirectly through international distributors, VAR’s and OEM partners (collectively, “Channels”). The increase in software license revenue is due to, in approximate order of significance, (i) the meeting of certain contractual requirements with respect to, and the resulting ratable recognition of revenue in connection with, a fiscal 2008 software license sale to a U.S. government agency, (ii) implementation of the Master Distribution Agreement with Beta Germany, (iii) continued add-on sales to existing customers and (iv) new product sales of CFI Slingshot. Secondarily, for the six months ended January 31, 2009, software license revenue increased primarily due to the Secur-Line License Agreement with Beta America.

Software maintenance fees and other decreased by $492,345, or 32.5% to $1,021,054 compared to such fees for the quarter ended January 31, 2008 of $1,513,399. Software maintenance fees and other decreased by $700,454 or 22.9% to $2,353,676 compared to such fees for the six months ended January 31, 2008 of $3,054,130. The decrease in software maintenance fees and other is primarily due to the recognition of deferred maintenance revenue relating to the Secur-Line License Agreement with Beta America during the quarter ended October 31, 2008.

Fees for professional services for the quarter ended January 31, 2009 amounted to $24,000 compared to fees for professional services of $36,500 for the quarter ended January 31, 2008, representing a decrease of $12,500 or 34.2%. Fees for professional services for the six months ended January 31, 2009 amounted to $100,138 compared to fees for professional services of $83,000 for the six months ended January 31, 2008, representing an increase of $17,138 or 20.6%. 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 decreased to $2,477,965 for the quarter ended January 31, 2009 from $2,485,068 for quarter ended January 31, 2008, a decrease of $7,103 or 0.3%. Operating expenses increased to $5,351,508 for the six months ended January 31, 2009 from $4,901,400 for the six months ended January 31, 2008, an increase of $450,108 or 9.2%. The changes in operating expenses for the three and six months ended January 31, 2009 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 January 31, 2009 amounted to $409,077 representing an increase of $14,983 or 3.8%, compared to cost of software licenses of $394,094 for the quarter ended January 31, 2008. Cost of licenses for the six months ended January 31, 2009 amounted to $852,795 representing an increase of $61,047 or 7.7% compared to cost of software licenses of $791,748 for the six months ended January 31, 2008. The increase is primarily due to the increase in amortization expense for internally developed software completed and announced available for sale during the six months ended January 31, 2009.

Cost of maintenance fees and other (which principally consists of technical support payroll) for the quarter ended January 31, 2009 amounted to $245,627, representing a decrease of $20,136 or 7.6%, compared to cost of maintenance fees and other of $265,763 for the quarter ended January 31, 2008. Cost of maintenance fees and other for the six months ended January 31, 2009 amounted to $529,444, representing a decrease of $2,952 or 0.6%, compared to cost of maintenance fees and other of $532,396 for the six months ended January 31, 2008. The decrease in cost of maintenance fees and other is primarily due to a decrease in the employee headcount and payroll allocated costs associated with the technical services.

Commissions amounted to $218,012 for the quarter ended January 31, 2009 compared to commissions of $203,424 for the quarter ended January 31, 2008, representing an increase of $14,588 or 7.2%. Commissions amounted to $388,061 for the six months ended January 31, 2009 compared to commission of $392,191 for the six months ended January 31, 2008, representing a decrease of $4,130 or 1.1%. The increase in commission expense is directly related to the increase in software license revenue for the three and six months ended January 31, 2009.

Research and development amounted to $69,722 for the three months ended January 31, 2009 compared to $134,160 for the three months ended January 31, 2008, representing a decrease of $64,438 or 48%. Research and development amounted to $132,190 for the six months ended January 31, 2009 compared to $161,369 for the six months ended January 31, 2008, representing a decrease of $29,179 or 18.1%.The decrease in research and development expense is attributable to a decrease in development employee headcount resulting in a decrease in allocated payroll and payroll related costs associated with the Company’s research and development activities.

Selling and marketing expense for the quarter ended January 31, 2009 amounted to $613,340 representing a decrease of $24,926 or 3.9%, compared to selling and marketing expense of $638,266 for the quarter ended January 31, 2008. Selling and marketing expense for the six months ended January 31, 2009 amounted to $1,432,150 representing an increase of $168,356 or 13.3%, compared to selling and marketing expense of $1,263,794 for the quarter ended January 31, 2008. The decrease in selling and marketing for the three months ended January 31, 2009 is primarily due to a decrease in employee payroll and employee related expenses and the termination of the Company’s public relations firm as the Company underwent a cost reduction initiative In November 2008. The increase in selling and marketing expense for the six months ended January 31, 2009 compared to the six months ended January 31, 2008 was primarily due to increases in employee headcount, consultants, customer visitations, and other marketing initiatives such as lead generation programs and website enhancements offset by a decrease in research services provided by industry analyst.

General and administrative expense for the quarter ended January 31, 2009 amounted to $917,360, representing an increase of $78,264 or 9.3% compared to $839,096 in general and administrative expense for the quarter ended January 31, 2008. General and administrative expense for the six months ended January 31, 2009 amounted to $1,991,197, representing an increase of $253,250 or 14.6% compared to $1,737,947 in general and administrative expense for the six months ended January 31, 2008. The increase in general and administrative expense for the three and six months ended January 31, 2009 is primarily due to an increase in consulting services related to strategic assistance provided in the areas of product management, development and other strategic initiatives, an increase in professional fees relating to costs associated with the Red Oak matter and other general corporate compliance and governance matters, an increase in discretionary compensation as certain senior management objectives were met, an increase in stock based compensation related to the fair value of vested stock options, offset by a decrease in bad debt expense for sales written off in the prior year.

The Company reported a net loss of $496,087 and a net loss of $513,730 for the three months ended January 31, 2009 and 2008, respectively and a net loss of $499,399 and a net loss of $895,702 for the six months ended January 31, 2009 and 2008, respectively.

Liquidity and Capital Resources

At January 31, 2009, the Company had a cash and cash equivalent balance of $1,282,575.

Operating activities provided cash of $52,295 for the six months ended January 31, 2009. This resulted primarily from non-cash charges for depreciation and amortization of $877,186 and stock based compensation of $120,139 and trade accounts receivable collections offset by the net loss of $499,339 and a decrease in deferred revenues of $1,153,442 primarily related to the recognition of deferred maintenance revenue as a result of the Secur-Line Agreement with Beta America.

Investing activities used cash of $1,171,755 for the six months ended January 31, 2009 primarily for costs associated with the development of the Company's software products and the purchases of property and equipment.

Financing activities provided cash of $63,700 from the exercise of stock options.

The Company maintained its line of credit for $1,000,000 with a bank. The interest rate was variable based on the bank’s prime rate. The line of credit was collateralized by accounts receivable of the Company and originally expired November 24, 2008; however, the Company had extended this line of credit until February 24, 2009. Currently, the Company is negotiating the renewal of the line of credit with the bank. To date, the Company has not borrowed against this line of credit.

The Company believes that its present cash and the cash generated from operations will be sufficient to meet its cash needs for at least the next twelve months.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

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 was damaged because the directors and management of Proginet made misrepresentations and/or breached their fiduciary duties to Red Oak, Proginet’s stockholders and the investing public with respect to (i) representations concerning the existence of contractually committed orders and future financial performance; (ii) severance arrangements made with Proginet’s former CEO and (iii) a claim with respect to Proginet’s having procured directors and officers insurance from a relative of Proginet’s former CEO. While Red Oak has not alleged a specific dollar amount with respect to its damages, it has asked to be “made whole”. In connection with its claims, Red Oak has served a demand to inspect books and records of the Company pursuant to Section 220 of the Delaware General Corporation Law (the “220 Demand”). We have responded to the correspondence as well as the 220 Demand, and certain documentation has been provided to Red Oak in response to the 220 Demand. Management has informed Red Oak that it believes Red Oak’s claims are meritless.

In September 2008, the Company’s Directors & Officers Liability Insurance Company consented to use of the Company’s legal counsel to represent Proginet’s interests in this matter. With respect to defense costs, the first $100,000 worth of defense billing for legal fees and expenses were subject to the Company’s $100,000 policy retention (the Company believes the policy retention amount was met as of October 31, 2008). Subsequent legal costs and expenses will be reimbursable under the Company’s Directors & Officers Liability insurance policy (subject to routine review by the insurance company of costs incurred).

On March 4th,, 2009, Red Oak notified Proginet that it had determined to discontinue pursuing the previously asserted allegations against Proginet. No payment was made to either Proginet or Red Oak in connection with this matter.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4T. Controls and Procedures

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-Q. 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.

Changes in Internal Controls

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information included under the caption “Contingency Relating to Shareholder Claim” in Item 2. Management's Discussion and Analysis above is incorporated herein by this reference.

Item 1A. Risk Factors

Other than the risk factors set forth below, and as described above under “Contingency Related to Shareholder Claim, management believes that there have been no material changes in the Company’s risk factors as reported in the Annual Report on Form 10-KSB for the year ended July 31, 2008, which was filed on October 6, 2008 with the Securities and Exchange Commission.

Changes in the general economic environment may impact our future business and results of operations.

Current economic conditions, including the credit crisis affecting global financial markets and the possibility of a global recession, could adversely impact the Company’s future business and financial results. These conditions could result in reduced demand for some of the Company’s products, increased order cancellations and returns, increased pressure on the prices of the Company’s products, increased number of days to collect outstanding receivables and/or increased bad debts on outstanding receivables, and greater difficulty in obtaining necessary financing on favorable terms.

Risk Relating to the Successful Implementation of the Beta Systems Transactions

Proginet and Beta Systems Software AG and its subsidiaries have entered into agreements, namely the Asset Exchange Agreement, the Services Agreement, the Secur-Line License Agreement and the Master Distribution Agreement (collectively, the “Beta Agreements”) on October 31, 2008. The transactions contemplated by the Beta Agreements were designed to strengthen our competitive position in the managed file transfer market space and help focus the Company on its core competencies. There can be no assurance that we will be able to manage the implementation of the Beta Agreements effectively or achieve our stated goals. The implementation of the transactions contemplated by Beta Agreements and the integration of the new products acquired by the Company may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses and adversely impact our business, operating results , financial condition and may reduce our cash available for operations. They may also be viewed negatively by customers, financial markets or investors.

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

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.

	PROGINET CORPORATION
	(Registrant)

Date March 6, 2009	/s/ Sandison Weil
	Sandison Weil, President and
	Chief Executive Officer



Date March 6, 2009	/s/ Debra A. DiMaria
	Debra A. DiMaria
	Chief Financial and Accounting Officer