SharpSpring (SHSP) 10-Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2013
Or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:0-54309
SMTP, Inc.
(Exact name of registrant as specified in its charter)
Delaware	05-0502529
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1810 E. Sahara Ave. Suite 111 Las Vegas, NV	89104
(Address of principal executive offices)	(Zip Code)
877-705-9362 Ext. 205
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes þ  No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,854,498 shares of common stock as of May 6, 2013.

SMTP, INC.

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	1
Item 1. Financial Statements:.	2
Condensed Balance Sheets—December 31, 2012 and March 31, 2013 (unaudited)	2
Condensed Statements of Operations (unaudited)	3
Condensed Statements of Cash Flows (unaudited)	4
Notes to Financial Statements (unaudited)	5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations	10
Item 3. Quantitative and Qualitative Disclosure About Market Risk	13
Item 4. Controls and Procedures	13
PART II – OTHER INFORMATION	13
Item 1. Legal Proceedings.	14
Item 1A. Risk Factors.	14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3. Defaults Upon Senior Securities	14
Item 4. Mine Safety Disclosures	14
Item 5. Other Information.	14
Item 6. Exhibits	15
SIGNATURES	16

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PART I – FINANCIAL INFORMATION

Forward-Looking Information

This report on Form 10-Q contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

Examples of forward-looking statements include:

·

the timing of the development of future products;

·

projections of costs, revenue, earnings, capital structure and other financial items;

·

statements of our plans and objectives;

·

statements regarding the capabilities of our business operations;

·

statements of expected future economic performance;

·

statements regarding competition in our market; and

·

assumptions underlying statements regarding us or our business.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

·

general economic and business conditions

·

competition from third parties

·

regulatory constraints

·

changes in methods of marketing

·

changes in customer demand

·

changes in product mix

·

other risks to which our Company is subject

·

other factors beyond the Company's control

·

strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses.

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A “Risk Factors contained in the Company’s Annual Report” on Form 10-K for the year ended December 31, 2012. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

We caution you that actual outcomes and results may differ materially from what is expressed, implied, or forecast by our forward-looking statements.  The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

1

Item 1.

Financial Statements.

SMTP, INC.

CONDENSED BALANCE SHEETS

	March 31,			December 31,
	2013			2012
	(unaudited)
Assets
Cash and cash equivalents	$	702,423		$	784,001
Accounts receivable		51,280			38,152
Deferred income taxes		212,485			196,097
Income taxes receivable		24,624			-
Other current assets		42,526			66,093
Total current assets		1,033,338			1,084,343
Property and equipment, net of accumulated depreciation of $60,536 and $43,180		366,541			141,948
Intangibles, net of accumulated amortization of $9,000 and $8,768		-			232
Deferred income taxes		21,458			14,536
Deposits		29,995			29,995
Total assets	$	1,451,332		$	1,271,054
Liabilities and Shareholders' Equity
Deferred revenue	$	329,494		$	351,059
Income taxes payable		-			42,590
Allowance for refunds and chargebacks		9,036			9,036
Accrued expenses and other		159,932			128,989
Total current liabilities		498,462			531,674
Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at March 31, 2013 and December 31, 2012		-			-
Common stock, $0.001 par value, 50,000,000 shares authorized, 14,845,618 and 14,767,250 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		14,846			14,768
Additional paid in capital		1,365,019			1,111,175
Accumulated deficit		(426,995	)		(386,563	)
Total shareholders' equity		952,870			739,380
Total liabilities and shareholders' equity	$	1,451,332		$	1,271,054

See accompanying notes to the financial statements

2

SMTP, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended March 31,
	2013		2012
Net revenue	$	1,369,438	$	1,247,414
Cost of services		324,673		306,347
Gross profit		1,044,765		941,067
Operating expenses:
Sales and marketing		202,767		226,775
General and administrative		416,178		278,657
Research and development		52,532		113,598
Total operating expenses		671,477		619,030
Income before income taxes		373,288		322,037
Provision for income tax		147,718		117,212
Net income	$	225,570	$	204,825
Net income per share:
Basic	$	0.02	$	0.01
Diluted	$	0.01	$	0.01
Weighted average common shares outstanding:
Basic		14,790,565		13,841,500
Diluted		15,970,359		15,431,961

See accompanying notes to the financial statements

3

SMTP, INC.

CONDENSED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	225,570		$	204,825
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		17,587			2,116
Excess tax benefits from share-based payment arrangements		3,171			-
Non-cash stock compensation		247,127			30,028
Allowance for refunds and chargebacks		-			1,089
Deferred income taxes		(23,310	)		52,436
Changes in assets and liabilities:
Accounts receivable		(13,128	)		(46,655	)
Other assets		23,567			(9,087	)
Income taxes payable		(67,214	)		(283,346	)
Accrued expenses and other		30,943			(89,977	)
Deferred revenue		(21,565	)		22,713
Net cash provided by (used in) operating activities		422,748			(115,858	)
Cash flows from investing activities
Purchases of property and equipment		(241,948	)		-
Net cash used in investing activities		(241,948	)		-
Cash flows (used in) provided by financing activities:
Dividends to shareholders		(266,002	)		-
Proceeds from issuance of common stock		3,624			-
Net cash used in financing activities		(262,378	)		-
Change in cash and cash equivalents		(81,578	)		(115,858	)
Cash and cash equivalents, beginning of period		784,001			1,978,809
Cash and cash equivalents, end of period	$	702,423		$	1,862,951
Supplemental cash flow disclosures:
Cash paid for income taxes	$	235,000		$	348,122

See accompanying notes to the financial statements

4

SMTP, INC.

Notes to the Financial Statements

(unaudited)

Note 1:  Organizationand Basis of Presentation

Background

The Company was incorporated in Massachusetts on October 14, 1998 as EMUmail, Inc. and changed its name on April 1, 2010 to SMTP.com, Inc.  The Company focuses on the execution of email delivery for marketing and enterprise application customers.  The Company has customers for both corporate and personal email delivery. The Company’s services are marketed directly by the Company and through reseller partners.

On November 23, 2010, the Company formed a Delaware corporation, SMTP, Inc. for the purpose of changing the domicile of the Company from a Massachusetts corporation to a Delaware corporation and to increase the number of authorized shares outstanding.  Also on November 23, 2010, the Company entered into a Merger agreement between SMTP, Inc. and SMTP.com, Inc. whereby the surviving corporation would be SMTP, Inc. (the “Surviving Corporation”), the newly formed Delaware corporation.  The Surviving Corporation has an authorized capital structure of 50,000,000 shares of common stock, par value $0.001 per share and 5,000,000 shares of preferred stock, par value $0.001 per share.  Under the terms of the Merger agreement, the Company’s existing 100 shares of ownership (which were held by a sole shareholder) were exchanged for 13,440,000 shares of common stock in the Surviving Corporation.  

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 29, 2013. The accounting policies are described in the “Notes to Financial Statements” in the 2012 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Certain reclassifications have been made to prior period reported amounts to conform to current year presentation.

Fair Value of Financial Instruments

U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company’s financial instruments consist of cash, accounts receivable, deposits and accounts payable. The carrying amount of cash, accounts receivable and accounts payable approximates fair value because of the short-term nature of these items.

Income Taxes

Provision for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740,Accounting

5

for IncomeTaxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. There are no uncertain tax positions taken by the Company on its tax returns. Tax years subsequent to 2006 remain open to examination by U.S. federal and state tax jurisdictions.

In determining the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, statutory tax rates and tax planning opportunities available to the Company in the jurisdictions in which it operates.  This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are separately recognized in the quarter in which they occur.

Revenue Recognition

The Company recognizes revenue from its services when it is probable that the economic benefits associated with the transactions will flow to the Company and the amount of revenue can be measured reliably. This is normally demonstrated when: (i) persuasive evidence of an arrangement exists; (ii) the fee is fixed or determinable; (iii) performance of service has been delivered; and (iv) collection is reasonably assured.

The Company provides Internet-based services to facilitate email delivery. The Company’s services are offered over various contractual periods for a fixed fee that varies based on a maximum volume of transactions.  Revenues are typically paid by clients via credit card, check or wire payments at the inception of the contractual period.  Revenue is recognized on a straight-line basis over the contractual period.

The Company offers refunds on a pro-rata basis at any time during the contractual period.  The Company also experiences credit card chargebacks relating to cardholder disputes that are commonly experienced by businesses that accept credit cards.  The Company makes estimates for refunds and credit card chargebacks based on historical experience.

Deferred Revenue

The Company’s customers pay for services in advance on a monthly, quarterly, annual, bi-annually and quinquennially basis. Deferred revenue consists of payments received in advance of the Company’s providing the services. Deferred revenues are amortized on a straight-line basis in connection with the contractual period.

Net Income Per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period.

Note 2:  Commitments and Contingencies

Litigation

The Company may from time to time be involved in legal proceedings arising from the normal course of business.  There are no pending or threatened legal proceedings as of March 31, 2013.

6

Consulting Services

On October 18, 2012, the Company entered into a professional services agreement.  The agreement requires the Company to pay a monthly cash retainer of $12,500 to cover professional services provided by the service provider.  Additionally, any service that exceeds the $12,500 retainer are to be paid through issuances of the Company’s common stock with a vesting schedule of six months from delivery date.  On March 4, 2013, the Company added an addendum to this agreement.  This addendum amended the agreement so that each month is a fixed fee of $25,000 payable in $12,500 cash and $12,500 in restricted common stock.  The addendum also waived all fees and other amounts exceeding $25,000 owed for November and December 2012 for services rendered. On March 8, 2013, the Company issued 18,868 shares of restricted common stock representing $25,000 worth of stock for services rendered during November and December of 2012.   On March 8, 2013, the Company also issued 45,000 shares of restricted common stock representing payment for website construction in fiscal year 2013 valued at $55,800 based on the closing share price of $1.24 on March 8, 2013.

On October 29, 2012, the Company entered into a professional services agreement. In connection with the agreement, the Company issued 454,863 warrants to purchase common stock at an exercise price of $0.98 per share with a term of 5 years in exchange for professional services. As of March 31, 2013, all warrants were exercisable. The agreement also calls for certain incentives that if achieved call for the disbursement of $500,000 or more depending on the size of transaction as well as fees to arrange funding. See Note 8 for discussion of warrants.

Operating Leases and Service Contracts

The Company rents its facilities on a month-to-month or quarter-to-quarter basis. Most of its service contracts are also on a month-to-month basis. However, the Company entered into several non-cancelable service contracts during the year ended December 31, 2012.  Future minimum payments under non-cancelable service contracts are as follows as of March 31:

	Payments Due by Fiscal Year
			Remainder of
	Total		2013		2014		2015		2016		2017		Thereafter
Operating lease commitments	$	20,720	$	13,815	$	6,905	$	-	$	-	$	-	$	-
Noncancelable service agreements	$	175,000	$	175,000	$	-	$	-	$	-	$	-	$	-
	$	195,720	$	188,815	$	6,905	$	-	$	-	$	-	$	-

Change in Officers and Employment Agreements

On March 5, 2013 Maksym Ilin was appointed as President, Principal Executive Officer and Vice President-Operations and Customer Service. Pursuant to a non-written agreement, Mr. Ilin will receive a base salary of $38,400 per year along with performance based bonuses. Previously, Mr. Ilin served as the Company’s Director of Customer Service.

On March 5, 2013, Ruslan Bondariev was appointed as Chief Technology Officer and Vice President – Research. Pursuant to a non-written agreement, Mr. Bondariev will receive a base salary of $36,000 per year along with performance based bonuses. Previously, Mr. Bondarev served as the Company’s Director of Research and Development.

On March 5, 2013, Alena Chuprakova was appointed as Comptroller, Treasurer and Principal Financial Officer. Pursuant to a non-written agreement, Ms. Chuprakova will receive a base salary of $50,000 per year, along with performance based bonuses.

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Note 3:  Property and Equipment

On January 9, 2013 the Company entered into an asset purchase agreement (“Asset Purchase Agreement”) with Oktet Bilişim Danışmanlık Organizayon Reklamcılık Limited Şirketi, a Turkish corporation (“Octeth”). Pursuant to the Asset Purchase Agreement, the registrant acquired from Octeth certain tangible assets, including servers and devices, intangible assets related to PreviewMyEmail.com, along with customer and co-location contracts, in exchange for $160,000 cash. This asset purchase agreement did not constitute a business combination for which purchase accounting would apply and therefore the purchase price was allocated to the assets required based on their estimated fair value.

Note 4:  Shareholders’ Equity

The Company began paying dividends during the year ended December 31, 2012.  The Company distributed dividends of $2,589,011 in cash to its shareholders during the year ended December 31, 2012.  On March 8, 2013, the Company paid quarterly dividends of $266, 002 to its stockholders.

On March 8, 2013, in connection with a consulting agreement, the Company issued 63,868 shares of common stock in exchange for services.  See Note 2 for more discussion.

Note 5:Net Income Per Share

Computation of net income per share is as follows:

	Three Months Ended March 31,
	2013		2012
Net income attributable to SMTP.com	$	225,570	$	204,825
Basic weighted average common shares outstanding		14,790,565		13,841,500
Add incremental shares for:
Warrants		86,461		516,688
Stock options		1,093,333		1,073,773
Diluted weighted average common shares outstanding		15,970,359		15,431,961
Net income per share:
Basic	$	0.02	$	0.01
Diluted	$	0.01	$	0.01

Note 6:  Stock-Based Compensation

The Company has historically granted stock options to certain vendors and employees.  

On April 29, 2011, the Company increased the number of shares of the Company’s common stock available for issuance under the plan from 1,360,000 to 2,500,000.

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Stock option awards are expensed on a straight-line basis over the requisite service period.  The Company recognized expense of $36,029 and $30,028, for the three months ended March 31, 2013 and March 31, 2012, respectively. At March 31, 2013, future stock compensation expense (net of estimated forfeitures) not yet recognized was $489,112 and will be recognized over a weighted average remaining vesting period of 3.34 years.  The following summarizes stock option activity for the three months ended March 31, 2013:

								Weighted
				Weighted		Weighted		Average
				Average		Average		Remaining
	Number of			Exercise		Fair		Contractual
	Shares			Price		Value		Life
Outstanding at December 31, 2012		1,695,250		$	1.08	$	0.58
Granted at market price		-
Exercised		(14,500	)
Forfeited		(425,500	)
Outstanding at March 31, 2013		1,255,250			1.02		0.59		9.1
Exercisable		189,250		$	1.09	$	0.58		8.5

The following table summarizes information about the Company’s stock options at March 31, 2013:

	Exercisable				Unexercisable				Total
			Weighted				Weighted				Weighted
			Average				Average				Average
	Number		Exercise		Number		Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		Price		Outstanding		Price		Outstanding		Price
$.25 per share		70,000	$	0.25		107,000		0.25		177,000	$	0.25
$1.59 per share		119,250		1.59		169,000		1.59		288,250	$	1.59
$0.99 per share		-		-		790,000		0.99		790,000	$	0.99

Note 7:Income Taxes

During the quarter ended March 31, 2013, the Company recorded an income tax provision of $147,718, which was comprised of a current provision of $173,826 and a deferred benefit of $26,108.

Note 8:Warrants

On October 29, 2012, in connection with a consulting agreement, the Company issued 454,863 warrants to purchase common stock at an exercise price of $0.98 per share with a term of 5 years.  The warrants vest according to the following schedule:  75,813 shares vest immediately and 75,810 shares vest at the end of every thirty day period thereafter until the warrant is 100% vested.  For the three months ending March 31, 2013, the Company recognized an expense of $130,928 associated with these awards. The warrants expire on October 29, 2017 and have a remaining contractual life of 4.6 years as of March 31, 2013.  

The following table summarizes information about the Company’s warrants at March 31, 2013:

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual
	Number		Exercise		Term		Intrinsic
	of Units		Price		(in years)		Value
Outstanding at December 31, 2012		454,863	$	0.98		4.8		27,292
Granted		-
Outstanding at March 31, 2013		454,863	$	0.98		4.6		54,584
Exercisable at March 31, 2013		454,863	$	0.98		4.6		54,584

Note 9:  Subsequent Events

On April 1, 2013, Brad Harkavy and Mark S. Dailey resigned as members of the board of directors.

On April 8, 2013, the Company issued a total of 8,880 of the Company’s common stock to the directors.

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Item 2.

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

Except for the historical information contained in this report onForm 10-Q, the matters discussed herein are forward-looking statements.Words such as “anticipates,” “believes,” “expects,” “future,” and “intends,” andsimilar expressions are used to identify forward-looking statements. These and otherstatements regarding matters that are not historical are forward-looking statements.These matters involve risks and uncertainties that could cause actual results todiffer materially from those in the forward-looking statements. Factors that couldcause or contribute to such differences in results and outcomes include withoutlimitation those discussed below as well as those discussed elsewhere in this report.Readers are cautioned not to place undue reliance on these forward-lookingstatements, which reflect management’s analysis only as of the date hereof. We assumeno obligation to update these forward-looking statements to reflect actual resultsor changes in factors or assumptions affecting such forward-looking statements.  This information should also be read in conjunction with our audited historical financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 29, 2013.

Background Overview

We provide Internet-based services to facilitate email delivery. Our services provide customers with the ability to increase the deliverability of email with less time, cost and complexity than handling it themselves. We believe our growth since inception has been driven by the compelling value proposition for our services.

Results of Operations

Net Revenues	2013		2012		Change from Prior Year		Percent Change from Prior Year
Three Months Ended March 31,	$	1,369,438	$	1,247,414	$	122,024		9.8	%

Revenues increased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, due to increased sales of our email service products to consumers.  Revenue growth is attributable primarily to an increase in our number of subscribers of these products.  Most of this growth is by organic growth in our customer base.

Cost of Service	2013		2012		Change from Prior Year		Percent Change from Prior Year
Three Months Ended March 31,	$	324,673	$	306,347	$	18,326		6.0	%

Cost of services increased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to increased revenues.  As a percentage of revenues, cost of services were 24% and 25% of net revenues for the three months ended March 31, 2013 and 2012, respectively. Cost of services increased due to growth of the technical support personnel connected with increased number of customers and our focus on quality.

Sales and Marketing	2013		2012		Change from Prior Year			Percent Change from Prior Year
Three Months Ended March 31,	$	202,767	$	226,775	$	(24,008	)		(10.6	)%

Sales and marketing expenses decreased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The decrease relates to less public relations fees paid in 2013 compared to 2012.

General and Administrative	2013		2012		Change from Prior Year		Percent Change from Prior Year
Three Months Ended March 31,	$	416,178	$	278,657	$	137,521		49.4	%

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General and administrative expenses increased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 based on the following:

·

An increase in consulting fees of approximately $142,000; primarily related to warrants issued for services and an increase in accounting fees.

·

An increase in stock compensation expense of approximately $6,000 related to additional stock options issued in October 2012;

·

An increase in depreciation and amortization of approximately $15,000;

·

An increase in other general and administrative expense of approximately $7,000;

·

A decrease in payroll and benefits of approximately $33,000 related to the previous CEO’s resignation.

Research and Development	2013		2012		Change from Prior Year			Percent Change from Prior Year
Three Months Ended March 31,	$	52,532	$	113,598	$	(61,066	)		(53.8	)%

Research and development expenses decreased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 as we have decided to outsource our development rather than having it in-house.  However, our research and development efforts are still focused around expanding our service offerings and improving the functionality of our products.

Income Tax Benefit (Expense)	2013			2012			Change from Prior Year			Percent Change from Prior Year
Three Months Ended March 31,	$	(147,718	)	$	(117,212	)	$	(30,506	)		26.0	%

Changes in our income tax expense related primarily to an increase in pretax income during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, and we accrued a provision at a slightly higher rate in the first quarter of fiscal 2013 than the first quarter of fiscal 2012.

Net Income	2013		2012		Change from Prior Year		Percent Change from Prior Year
Three Months Ended March 31,	$	225,570	$	204,825	$	20,745		10.1	%

Net income increased for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 primarily due to revenue growth partially offset by increases in cost of services and operating expenses related to the growth in our business, each of which is described above.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary source of cash inflows are net remittances from customers for email services.  Such payments are typically received in advance of providing the services, yielding a deferred revenue liability on our balance sheet.  

Our primary sources of cash outflows include payroll, dividends, income tax payments and payments to vendors and third party service providers.  With the exception of income taxes, which occur on a periodic basis, cash outflows typically occur in close proximity of expense recognition.  

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Analysis of Cash Flows

Three Months Ended March 31, 2013 and 2012

Net cash generated by operating activities increased by $538,606 or 465%, to $422,748 for the three months ended March 31, 2013, compared to ($115,858) for the three months ended March 31, 2012.  The increase in cash generated by operating activities was primarily attributable to changes in working capital and other adjustments, the most significant of which was the decrease in 2012 in income taxes payable of approximately $216,132 meaning that cash spent was more than the expense recognition by those amounts.  The change in working capital was offset by a decrease in net income of approximately $20,745.

Net cash used in investing activities was $(241,948) and $0 during the three months ended March 31, 2013, and 2012, respectively, consisting of investments in computers, servers, other equipment and licensed software related to an asset purchase agreement

Net cash used in financing activities was ($262,378) and $0 during the three months ended March 31, 2013 and 2012, respectively.  During the three months ended March 31, 2013 we distributed $266,002, in cash to our shareholders in the form of a regular quarterly dividend which was offset by proceeds of $3,624 received from the issuance of our common stock.

We had net working capital of $534,876 and $552,669 as of March 31, 2013 and December 31, 2012, respectively.  Our decrease in net working capital as of March 31, 2013 was primarily attributable to a distribution of $266,002 in cash to our shareholders in the form of regular quarterly dividends offset by proceeds of $3,624 received from the issuance of our common stock in the first quarter of 2013.

Contractual Obligations

On October 18, 2012, the Company entered into a professional services agreement with a consulting firm to aid in increasing SMTP’s online presence, brand awareness and sales.  The agreement requires the Company to pay a monthly cash retainer of $25,000 of which $12,500 is to be paid in cash and $12,500 to be paid through issuances of the Company’s common stock with a vesting schedule of six months from delivery date.  This agreement expires in October 2013.

Future minimum payments under non-cancelable service contracts are as follows as of March 31:

	Payments Due by Fiscal Year
			Remainder of
	Total		2013		2014		2015		2016		2017		Thereafter
Operating lease commitments	$	20,720	$	13,815	$	6,905	$	-	$	-	$	-	$	-
Noncancelable service agreements	$	175,000	$	175,000	$	-	$	-	$	-	$	-	$	-
	$	195,720	$	188,815	$	6,905	$	-	$	-	$	-	$	-

Significant Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates.

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We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree.  Our Annual Report on Form 10-K for the year ended December 31, 2012 contains a discussion of these significant accounting policies. There have been no significant changes in our significant accounting policies since December 31, 2012.  See our Note 1 in our unaudited financial statements for the three months ended March 31, 2013, as set forth herein.

Off-balance sheet arrangements

We did not have any off-balance sheet arrangements at March 31, 2013.

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4.

Controls and Procedures.  

Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2013. Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of March 31, 2013 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

Not applicable.

Item 1A. Risk Factors.

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Securities issued for services

Date	Security/Value
March 2013	Common stock - 18,868 shares of common stock.  The common stock was valued at $25,000.
March 2013	Common stock – 45,000 shares of common stock.  The common stock was valued at $55,800

No underwriters were utilized and no commissions or fees were paid with respect to any of the above transactions. We relied on Section 4(2) of the Securities Act of 1933, as amended, since the transactions did not involve any public offering.

Item 3.

Defaults Upon Senior Securities.

Not Applicable.

Item 4.

Mine Safety Disclosures.

Not Applicable.

Item 5.

Other Information.

.

Not Applicable.

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Item 6.

Exhibits.

INDEX TO EXHIBITS

SEC Reference Number	Title of Document	Location
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
10.1	Professional Services Agreement	*
10.2	Addendum toProfessional Services Agreement	Filed herewith
10.3	Asset Purchase Agreement - Octeth	**
101	XBRL

*

Incorporated by reference to our Form 8-K filed on October 23, 2012.

**

Incorporated by reference to our Form 8-K filed on January 10, 2013.

All other Exhibits called for by Rule 601 of Regulation S-K are not applicable to this filing. Information pertaining to our common stock is contained in our Certificate of Incorporation and By-Laws.

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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.

SMTP, INC.
By:	/s/ Maksym Ilin
	Maksym Ilin
	President (Principal Executive Officer) Date: May 14, 2013

SMTP, INC.
By:	/s/ Alena Chuprakova
	Alena Chuprakova Comptroller
	(Principal Financial Officer) Date: May 14, 2013

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