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, 2010

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

For the transition period from ____________ to ____________

Commission File 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 the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether 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 17,085,448 shares of Common Stock outstanding as of February 26, 2009.

PROGINET CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED January 31, 2010

PART I. FINANCIAL STATEMENTS

Item 1.	Financial Statements

	Balance Sheets as of January 31, 2010 (Unaudited) and July 31, 2009	3

	Statements of Operations for the Three and Six Months ended January 31, 2010 and 2009 (Unaudited)	4

	Statement of Stockholders' Equity for the Six Months ended January 31, 2010 (Unaudited)	5

	Statements of Cash Flows for the Six Months Ended January 31, 2010 and 2009 (Unaudited)	6

	Notes to Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4T.	Controls and Procedures	20


PART II. OTHER INFORMATION

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	21

Item 6.	Exhibits	21

SIGNATURES		22

PROGINET CORPORATION

Balance Sheets

	January 31, 2010 (Unaudited)			July 31, 2009
Assets
Current assets
Cash	$	1,366,039		$	1,106,349
Trade accounts receivable, net		1,965,849			2,366,174
Prepaid expenses		135,438			207,050
Total current assets		3,467,326			3,679,573

Property and equipment, net		274,515			323,478
Capitalized software development costs, net		4,045,693			4,080,434
Purchased software, net		638,773			133,198
Customer relationships, net		-			106,350
Goodwill		135,932			135,932
Other assets		35,870			35,870
	$	8,598,109		$	8,494,835

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable	$	357,880		$	395,835
Accrued expense		683,126			865,819
Deferred revenues		2,586,675			2,804,438
Deferred rent		28,922			23,900
Total current liabilities		3,656,603			4,089,992

Deferred revenues		43,637			64,919
Deferred rent		109,058			123,938
		3,809,298			4,278,849
Stockholders’ equity
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		-			-
Common stock, $.001 par value, 40,000,000 shares authorized, 18,410,674 shares issued at January 31, 2010 and 17,847,508 at July 31, 2009		18,411			17,848
Additional paid-in capital		14,123,039			13,799,030
Treasury stock 1,325,226, at cost, at January 31, 2010 and July 31, 2009		(606,023	)		(606,023	)
Accumulated deficit		(8,746,616	)		(8,994,869	)
Total stockholders’ equity		4,788,811			4,215,986
	$	8,598,109		$	8,494,835

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,
	2010		2009				2010		2009

Revenues

Software licenses	$	968,374	$	934,685			$	1,599,629	$	2,389,291
Software maintenance fees and other		1,466,050		1,021,054				2,905,172		2,353,676
Professional services		45,776		24,000				141,776		100,138
		2,480,200		1,979,739				4,646,577		4,843,105

Operating expense
Cost of software licenses		401,903		409,077				803,904		852,795
Cost of maintenance fees and other		332,511		245,627				654,822		529,444
Cost of professional services		22,966		4,827				78,466		25,671
Commissions		143,096		218,012				292,268		388,061
Research and development		98,847		69,722				112,439		132,190
Selling and marketing		462,696		613,340				899,783		1,432,150
General and administrative		849,652		917,360				1,559,145		1,991,197
		2,311,671		2,477,965				4,400,827		5,351,508

Income (loss) from operations		168,529		(498,226	)			245,750		(508,403	)

Interest income		1,205		2,139				2,503		9,064

Income (loss) before income taxes		169,734		(496,087	)			248,253		(499,339	)

Income tax expense		-		-				-		-

Net income (loss)	$	169,734	$	(496,087	)		$	248,253	$	(499,339	)

Basic and diluted loss per common share	$	.01	$	(.03	)		$	.01	$	(.03	)

Weighted average common shares outstanding - basic		16,931,066		14,849,055				16,834,486		14,828,539

Weighted average common shares outstanding - diluted		17,396,466		14,849,055				17,300,853		14,828,539

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

PROGINET CORPORATION

Statement of Stockholders’ Equity

Six months ended January 31, 2010 (unaudited)

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

Balance – August 1, 2009		17,847,508	$	17,848	$	13,799,030	$	(606,023	)	$	(8,994,869	)	$	4,215,986

Exercise of common stock options		167,500		168		48,082								48,250

Stock option expense						85,697								85,697

Private placement, net		161,291		161		49,839								50,000

Stock issuance related to asset purchase		234,375		234		140,391								140,625

Net income											248,253			248,253

Balance – January 31, 2010		18,410,674	$	18,411	$	14,123,039	$	(606,023	)	$	(8,746,616	)	$	4,788,811

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

PROGINET CORPORATION

Statements of Cash Flows (Unaudited)

	Six months ended
	January 31,
	2010			2009
Cash flows from operating activities
Net income (loss)	$	248,253		$	(499,339	)
Adjustments to reconcile net income (loss) to cash provided by operating activities
Depreciation and amortization		859,181			877,186
Stock based compensation		85,697			120,139
Deferred revenue		(239,045	)		(1,226,103	)
Deferred rent		(9,858	)		(5,006	)
Changes in operating assets and liabilities
Trade accounts receivable		400,325			691,920
Prepaid expenses and other assets		(11,093	)		22,693
Accounts payable and accrued expenses		(220,648	)		70,805
Net cash provided by operating activities		1,112,812			52,295

Cash flows from investing activities
Capitalized software development costs		(515,520	)		(924,119	)
Purchase of Rocketstream assets		(429,539	)		-
Purchases of property and equipment		(6,314	)		(247,636	)
Net cash used in investing activities		(951,373	)		(1,171,755	)

Cash flows from financing activities
Proceeds from private placement, net		50,000			-
Exercise of common stock options		48,250			63,700
Net cash provided by financing activities		98,250			63,700

Net increase (decrease) in cash		259,690			(1,055,760	)

Cash at beginning of period		1,106,349			2,338,335

Cash at end of period	$	1,366,039		$	1,282,575

Supplemental Disclosures of Cash Flow Information

Non-cash financing and investing activity:
Stock issuance related to Rocketstream asset purchase	$	140,625	$	-
Settlement of a preexisting Rocketstream relationship	$	82,704	$	-

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

PROGINET CORPORATION

NOTES TO FINANCIAL STATEMENTS

January 31, 2010

(Unaudited)

1. Interim Financial Data

The accompanying unaudited financial statements have been prepared by Proginet Corporation in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Unless the context otherwise requires, “we,” “our,” “us” and similar expressions refer to Proginet Corporation. 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 our 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-K for year ended July 31, 2009.

These results for the period ended January 31, 2010 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.

Subsequent events have been updated through March 10, 2010.

2. Revenue Recognition

We recognize revenue in accordance with FASB Accounting Standards Codification (ASC) 985-605. 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 ASC 985-605. 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 our direct sales force and channel partnerships (value-added resellers (VARs), Original Equipment Manufacturers (OEMs), and distributors). 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 software licenses contain multiple elements, revenue is allocated 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 specific elements. 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 ASC 985-605. 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 selling price 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 and such 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 agreements where all necessary revenue recognition requirements have not been met, deferred maintenance, consulting or training services not yet rendered and license revenue deferred until all requirements under ASC 985-605 are met. Deferred revenue is recognized upon delivery of our products, as services are rendered, or as other requirements requiring deferral under ASC 985-605 are satisfied.

Commission Expense

Commission expense is recorded at the time of sale. Commission rates to direct salespeople are based on a graduating scale, ranging from 2% 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.

3. Accounts Receivable

On a periodic basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, when deemed necessary, based on its history of past write-offs and collections and current credit conditions. As of January 31, 2010 and July 31, 2009, 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. Generally, an original estimated economic life of five years is assigned to capitalized software development costs. Amortization expense charged to operations was $283,880 and $550,252 for the three and six months ended January 31, 2010. Amortization expense charged to operations was $273,768 and $553,905 for the three and six months ended January 31, 2009. This expense is recorded under “Cost of software licenses” on the Statement of Operations. Capitalized software development costs are net of accumulated amortization of $2,230,178 and $4,748,271 at January 31, 2010 and July 31, 2009, respectively. Capitalized software development costs are retired from the balance sheet when fully amortized. As of January 31, 2010, $8,801,054 of capitalized software development cost was retired from the balance sheet.

5. Corporate Developments

On October 31, 2008, we 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, we (i) have transferred to Beta Canada all of our intellectual property rights, and books and records, relating to our Secur-Pass products, and (ii) have assigned to Beta America its customer, maintenance and service agreements relating to our Secur-Pass products, in exchange for Beta Canada’s transfer to us of all of its intellectual property rights, and Beta America’s transfer to us of its customer, maintenance and service agreements, each relating to the Harbor NSM and Harbor HFT products. Such agreements were transferred on the effective date. However, because Beta Canada retained the maintenance and service obligations associated with the Harbor NSM and HFT products pursuant to the Services Agreement and Master Distributor Agreement described below, no liability for these agreements was recorded by us. The revenue associated with the customer, maintenance and service agreements of the Secur-Pass products was applied by Beta America as consideration for the Secur-Line License Agreement, discussed below. The Asset Exchange Agreement contains customary representations and warranties and indemnities of the parties. The Asset Exchange Agreement was accounted for as a non-monetary exchange of assets in accordance with ASC 845, “Non-Monetary Transactions”.

We also entered into a Support Services Agreement (the “Services Agreement”), with Beta Canada on October 31, 2008, under which Beta Canada provides to us certain maintenance and support services for our 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. We have agreed to compensate Beta Canada a percentage of the gross maintenance revenue received by us in respect of the support services provided by Beta Canada under the Services Agreement.

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

We have 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 us, based on gross revenue received by Beta America during the license term under such agreements which is recorded at the gross amount received under the customer, maintenance and service agreements in “Maintenance fee and other” in the accompanying Statement of Operations. We have agreed, in turn, to pay to Beta America commissions equal to a percentage of such gross revenue which is recorded in “Costs of maintenance fees and other” in the accompanying Statement of Operations. 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 ourselves, Beta Germany or any of its distributors, subsidiaries or associated companies, has become the exclusive distributor, subject to certain exceptions, for our CFI Suite and the Harbor NSM and Harbor HFT products (our 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, We have 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 us annually.

6.	Purchased Software and Customer Relationships

Rocketstream

On December 21, 2009, we entered into a Subscription Agreement with various parties to purchase certain assets related to Rocketstream software. The agreement called for a cash payment, issuance of Proginet stock as well as a potential royalty earn out on Rocketstream software sales up to December 20, 2011, which will be recorded as a royalty expense as incurred. We recorded $652,868, which includes legal and other transaction fees, as purchased software and are amortizing over a five year period. As of January 31, 2010 accumulated amortization was $14,095.

Blockade

In a prior year the Company acquired Blockade which resulted in the recording of purchased software and customer relationships include software and customer relationships with an original cost of $1,501,774 and $1,199,078, respectively. Purchased software from this acquisition is net of accumulated amortization of $1,501,774 and $1,368,576 at January 31, 2010 and July 31, 2009, respectively. Customer relationships are net of accumulated amortization of $1,199,078 and $1,092,728 at January 31, 2010 and July 31, 2009, respectively.

Purchased software and customer relationships were being amortized over a period of five years and are fully amortized as of January 31, 2010. Amortization expense charged to operations for purchased software is $72,203 and $147,293 for the three and six months ended January 31, 2010. Amortization expense charged to operations for customer relationships is $46,395 and 106,350 for the three and six months ended January 31, 2010.

7.	Accrued Expense

	January 31, 2010		July 31, 2009
Salaries, commissions, and benefits	$	293,105	$	227,624
Severance		-		148,261
Distributor payable		258,707		304,914
Private placement costs		-		19,055
Professional fees		95,556		91,945
Other		35,758		74,020
Total Accrued Expense	$	683,126	$	865,819

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 income (loss) per share:

Three months ended		Six months ended
January 31,		January 31,
2010	2009	2010	2009

Numerator:
Net income (loss)		$	169,734			$	(496,087	)		$	248,253			$	(499,339	)

Denominator:
Weighted average number of common shares (basic)	16,931,066	14,849,055	16,834,486	14,828,539

Effect of dilutive securities:
Stock Options	465,400	-	466,367	-

Weighted average number of common shares (diluted)	17,396,466	14,849,055	17,300,853	14,828,539

Basic and diluted Income (loss) per share

.01

(.03

)

.01

(.03

)

Potential common shares of 1,586,676 and 1,671,706 for the three and six months ended January 31, 2010 and 3,243,000 and 2,541,000 for the three and six months ended January 31, 2009 are excluded in computing basic and diluted net loss per share as their effects would be anti-dilutive.

Equity

We follow the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) (currently within the scope of FASB ASC Subtopic 718-10) 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). The impact on our results of operations of recording share-based compensation expense for the three and six months ended January 31, 2010 were $47,241 and $85,697, respectively. The impact on our results of operations of recording share-based compensation expense for both the three and six months ended January 31, 2009 was $120,139. This expense was recorded to “General and administrative” on the Statement of Operations.

Stock Option activity during the six months ended January 31, 2010, is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contracted term (years)		Aggregate intrinsic value
Outstanding at August 1, 2009		3,481,235		$	.74		-		-
Granted		200,000			.65		-		-
Exercised		(167,500	)		.29		-		-
Forfeited		(715,059	)		.79		-		-
Options outstanding at January 31, 2010		2,798,676		$	.75		7.15	$	389,630
Options exercisable at January 31, 2010		2,133,174		$	.76		6.60	$	299,635

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

General

Unless the context otherwise requires, “we,” “our,” “us” and similar expressions refer to Proginet Corporation. You should read the following discussion in conjunction with our financial statements and the notes thereto included elsewhere herein. Certain statements under the captions “Business”, “Management's Discussion and Analysis of Financial Condition and Results of Operations” 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 our 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 our 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 our control and include, among others, the risks described in our latest Form 10-K for the year ended July 31, 2009. We caution that the foregoing list of important factors is not exclusive. We do not undertake to update any forward-looking statements contained herein or that may be made from time to time by us or on our behalf.

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

Our revenues are derived from our direct sales force and channel partnerships (VARs, OEMs, and distributors). Commission expense is recorded at the time of sale. Commission rates to direct sales people are based on a graduating scale, ranging from 2% to 15% of the sale, dependent upon the revenue volume generated by the sales person. 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.

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 selling price method prescribed by ASC 985-605. Under the selling price method, the estimated selling price 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 selling price 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 ASC 985-605 are met. Revenue is recognized upon delivery of our products, as services are rendered, or as other requirements requiring deferral under ASC 985-605 are satisfied.

Based on our interpretation of ASC 985-605, 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. 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.

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 (currently within the scope of FASB Accounting Standards Codification (ASC) Subtopic 985-20), and amortize these costs over the products’ estimated useful lives. Under ASC 985-20, 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 ASC 985-20 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

We assess the possible impairment of goodwill at least annually or when events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carry amount. Impairment is the condition that exists when the carrying amount of the goodwill exceeds its implied fair value. The first step in the impairment process is to determine the fair value of the reporting unit and then compare it to the carry value, including goodwill. We determined that the market capitalization approach is the most appropriate method of measuring fair value of the reporting unit, assuming a controlling interest. Under this approach, fair value is calculated based on the market price of common stock, multiplied by the number of outstanding shares. A control premium, which is representative of premiums paid to the marketplace to acquire a controlling interest in a company, is then added to the market capitalization to determine the fair value of the asset. If the fair value exceeds the carrying value, no further action is required and no impairment loss is recognized. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that, more likely than not, the carrying value of goodwill has been impaired. There was no impairment of goodwill in 2010 or 2009.

Stock Options and Stock Based Compensation

Effective August 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) (currently within the scope of FASB ASC Subtopic 718-10) 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

Revenues

Total revenues for the quarter ended January 31, 2010 amounted to $2,480,200, representing an increase of $500,461, or 25.3% compared to revenues of $1,979,739 for the quarter ended January 31, 2009. Total revenues for the six months ended January 31, 2010 amounted to $4,646,577, representing a decrease of $196,528, or 4.1% compared to revenues of $4,843,105 for the six months ended January 31, 2009. This three month increase and six month decrease is due to the factors described below.

Software license revenues for the quarter ended January 31, 2010 amounted to $968,374 representing an increase of $33,689 or 3.6%, compared to software license revenues of $934,685 for the quarter ended January 31, 2009. Software license revenues for the six months ended January 31, 2010 amounted to $1,599,629 representing a decrease of $789,662 or 33.1%, compared to software license revenues of $2,389,291 for the six months ended January 31, 2009. Software license revenue is sold directly through domestic salespeople and indirectly through international distributors and OEM partners. The increase in software license for the three month period was minimal and included $250,000 associated with a new license sale for the storage related capabilities of our RocketStream products. The decrease in software license revenue for the six month period is primarily attributable to last year’s Secur-Line License Agreement with Beta America, more fully described in Note 5 of the accompanying financial statements, under which certain deferred maintenance revenue was recognized as license revenue in October 2008, and is now being recognized as maintenance revenue.

Software maintenance fees and other increased by $444,996, or 43.6% to $1,466,050 compared to such fees for the quarter ended January 31, 2009 of $1,021,054. Software maintenance fees and other increased by $551,496, or 23.4% to $2,905,172 compared to such fees for the six months ended January 31, 2009 of $2,353,676. The increase in software maintenance fees and other is primarily due to last year’s recognition of deferred maintenance revenue as a result of the Secur-Line License Agreement with Beta America more fully described in Note 5 of the accompanying financial statements. As described in this Note, per this agreement certain deferred maintenance revenue was recognized as license revenue in October 2008, and is now being recognized as maintenance revenue.

Fees for professional services for the quarter ended January 31, 2010 amounted to $45,776 an increase of $21,776, or 90.7%, compared to fees for professional services of $24,000 for the quarter ended January 31, 2009. Fees for professional services for the six months ended January 31, 2010 amounted to $141,776 an increase of $41,638, or 41.6%, compared to fees for professional services of $100,138 for the six months ended January 31, 2009. Such revenue is related to ad-hoc consulting services that are typically provided in response to requests for support from existing customers. Consequently, consulting revenue can vary considerably from period to period.

Operating Expenses

Operating expenses decreased to $2,311,671 for the quarter ended January 31, 2010 from $2,477,965 for the quarter ended January 31, 2009, a decrease of $166,294 or 6.7%. Operating expenses decreased to $4,400,827 for the six months ended January 31, 2010 from $5,351,508 for the six months ended January 31, 2009, a decrease of $950,681 or 17.8%. The decrease in operating expenses for the three and six months ended January 31, 2010 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, 2010 amounted to $401,903, representing a decrease of $7,174 or 1.8%, compared to cost of software licenses of $409,077, for the quarter ended January 31, 2009. Cost of software licenses for the six months ended January 31, 2010 amounted to $803,904, representing a decrease of $48,891 or 5.7%, compared to cost of software licenses of $852,795, for the six months ended January 31, 2009. The decrease in cost of software sales and licenses is due to the decrease in amortization expense for internally developed software completed and announced available for sale during the quarter.

Cost of maintenance fees and other (which principally consists of technical support payroll) for the quarter ended January 31, 2010 amounted to $332,511, representing an increase of $86,884 or 35.4%, compared to cost of maintenance fees and other of $245,627 for the quarter ended January 31, 2009. Cost of maintenance fees and other for the six months ended January 31, 2010 amounted to $654,822, representing an increase of $125,378 or 23.7%, compared to cost of maintenance fees and other of $529,444 for the six months ended January 31, 2009. The increase in cost of maintenance fees and other is primarily due to the implementation of the Services Agreement with Beta Canada more fully described in Note 5 of the accompanying financial statements, offset by a decrease in the employee headcount and payroll allocated costs associated with the technical services rendered directly by us.

Commissions amounted to $143,096 for the quarter ended January 31, 2010 representing a decrease of $74,916 or 34.4% compared to $218,012 for the quarter ended January 31, 2009. Commissions amounted to $292,268 for the six months ended January 31, 2010 representing a decrease of $95,793 or 24.7% compared to $388,061 for the six months ended January 31, 2009. The decrease in commission expense for the three months ended January 31, 2010 is primarily due to certain sales that were non commissionable. The decrease in commission expense for the six months ended January 31, 2010 is primarily due to a decrease in license sales.

Selling and marketing expense for the quarter ended January 31, 2010 amounted to $462,696 representing a decrease of $150,644 or 24.6%, compared to selling and marketing expense of $613,340 for the quarter ended January 31, 2009. Selling and marketing expense for the six months ended January 31, 2010 amounted to $899,783 representing a decrease of $532,367 or 37.2%, compared to selling and marketing expense of $1,432,150 for the six months ended January 31, 2009. The decrease in selling and marketing for the three and six months ended January 31, 2010 is primarily due to a decrease in employee payroll and employee related expenses, the termination of the our public relations firm and decreases in sales related travel.

General and administrative expense for the quarter ended January 31, 2010 amounted to $849,652, representing a decrease of $67,708 or 7.4% compared to $917,360 in general and administrative expense for the quarter ended January 31, 2009. General and administrative expense for the six months ended January 31, 2010 amounted to $1,559,145, representing a decrease of $432,052 or 21.7% compared to $1,991,197 in general and administrative expense for the quarter ended January 31, 2009. The decrease in general and administrative expenses for the three and six months is primarily due to a decrease in consulting fees, a reduction in payroll and a decrease in professional fees offset by increases to executive discretionary compensation.

We reported net income of $169,734 and net loss of $496,087 for the three months ended January 31, 2010 and 2009, respectively and a net income of $248,253 and net loss of $499,339 for the six months ended January 31, 2010 and 2009, respectively.

Liquidity, Capital Resources and Financial Condition

At January 31, 2010, we had a cash balance of $1,366,039.

Operating activities provided cash of $1,112,812 for the six months ended January 31, 2010. This resulted primarily from a decrease to trade accounts receivable of $400,325, non-cash charges for depreciation and amortization of $859,181, offset by a decrease in deferred revenue of $239,045 and a decrease in accounts payable and accrued expenses of $220,648 based on the timing of cash disbursements.

Investing activities used cash of $951,373 for the six months ended January 31, 2010 primarily for the acquisition of Rocketstream assets of $429,539 and costs associated with the development of our software products.

Financing activities provided cash of $98,250 from proceeds of our common stock in a private placement and the exercise of stock options.

On September 25, 2009, we entered into an asset based credit facility (the “Credit Agreement”) with Bridge Bank, N.A (the “Lender”). The Credit Agreement provides for advances of up to $800,000 against 80% of eligible accounts receivable. The finance charge, which is assessed against the amount of receivables financed from time to time, is equal to the greater of 4.00% per annum or Lender’s Prime Rate, as announced, plus 0.64%. We are also required to pay the Lender a monthly maintenance fee equal to between 0.2% and 0.3% of the receivables financed. The credit facility is secured by a general pledge of our assets. Under the terms of the Credit Agreement, the obligors on the accounts receivable are to pay Lender directly through a lock box arrangement. If the amount advanced is not paid by the obligors within 90 days of the earlier of the advance or invoice date, we are required to pay the amount.

The Credit Agreement includes usual and customary events of default for facilities of this nature and provides that, upon the occurrence of an event of default, all amounts payable under the Credit Agreement may be accelerated. The Credit Agreement also restricts our ability to incur other indebtedness, other than payables in the ordinary course of business. Either party can terminate the Credit Agreement at any time, with a required payment of $10,000 if terminated by us in the first year after the date of execution. We are also required to pay a variety of fees aggregating approximately $35,000 in connection with entering into the facility. We have not yet used the Credit Agreement as of the date of this filing.

We believe that our present cash, the cash generated from operations and amounts available under its present line of credit agreements will be sufficient to meet our cash needs for at least the next twelve months.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4T. 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-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.

b.	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 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in our Report on Form 10-K for the year ended July 31, 2009. For a full description of these risk factors, please refer to Item 1A (Risk Factors) in our Report on Form 10-K for the year ended July 31, 2009.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

On December 21, 2009, several accredited investors were issued 234,375 shares of Common Stock, $0.001 par value per share, valued at $.64 per share, as partial consideration for the purchase of certain assets from these investors.

Exemption from the registration provisions of the Securities Act of 1933, as amended (the "Act") for the transaction described above is claimed under Section 4(2) of the Act, and Rule 506 promulgated thereunder. The exemption was established by the representation of such investor as to its status as an accredited investor, that it was purchasing the securities for its own account and not with a view to the resale or distribution of any part thereof in violation of the Act and the acknowledgment by such investor that resale of the securities may not be made unless registered under the Act, or another exemption is available. In addition, the securities bear a legend indicating such restrictions on transferability.

The securities issued in the transactions described above have not been registered under the Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

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 10, 2010	/s/ Sandison Weil
	Sandison Weil, President and
	Chief Executive Officer



Date March 10, 2010	/s/ Joseph Christel
	Joseph Christel
	Chief Financial Officer

PROGINET CORP 10-Q