SharpSpring 10K 2013 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


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

	For the fiscal year ended December 31, 2013


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

	For the transition period from ______________ to ______________

Commission file number 001-36280

SMTP, Inc.

(Exact name of Registrant as specified in its charter)


Delaware		05-0502529
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification number)

100 Innovative Way, Nashua, NH		03062
(Address of principal executive offices)		(Zip Code)

877-705-9362

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, $0.001 par value per share		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ

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. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). Yesþ Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.o

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


Large accelerated filero		Accelerated filero		Non-accelerated filero		Smaller reporting companyþ

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant was $1,568,650 as of June 30, 2013.

As of March 24, 2014, there were 5,015,931 outstanding shares of the registrant’s common stock, $.001 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy or information statement to be filed in conjunction with the registrant’s annual meeting of stockholders to be held in 2014 are incorporated by reference in Part III of this Annual Report on Form 10-K. The proxy or information statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2013.

TABLE OF CONTENTS


		Page
	PART I
Item 1.	Business	2
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	27
Item 3.	Legal Proceedings	27
Item 4	Mine Safety Disclosures	27
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	28
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	34
Item 9A.	Controls and Procedures	34
Item 9B.	Other Information	34
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	35
Item 11.	Executive Compensation	35
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	35
Item 13.	Certain Relationships and Related Transactions, and Director Independence	35
Item 14.	Principal Accounting Fees and Services	35
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	36
Signatures		37

PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-K 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:


·	the adequacy of our cash flow and earnings and other conditions which may affect our ability to pay our quarterly dividend at the planned level;
·	strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses;
·	the occurrence of hostilities, political instability or catastrophic events;
·	changes in customer demand;
·	the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors' services;
·	developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards; and
·	disruptions to our technology network including computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment.

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.” 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.

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.

ITEM 1.

BUSINESS

Overview

SMTP, Inc. (“Company”) is a provider of cloud-based email delivery services for companies in over 130 countries. Our customers turn to us to ensure their emails are delivered to the inbox of their intended recipients, just as companies turn to couriers to ensure their packages are delivered to physical destinations. A recent Return Path study noted that 22% of marketing email sent with subscribers’ permission never reached their inbox during the first half of 2013. While most people can easily send individual messages that flow freely through SPAM filters, the risks of non-delivery are much higher for high volume senders. Internet Service Providers (ISPs) have been forced to tighten filters resulting in billions of legitimate emails never reaching their intended recipients. When we improve the delivery of email for our customers, it improves the effectiveness of their email marketing, driving revenue growth. We believe that our historic growth has been due to the compelling value proposition that we deliver to our customers, along with the strength of our SMTP.com brand.

Unless the context otherwise requires, all references to “SMTP,” “our Company,” “we,” “our” or “us” and other similar terms means SMTP, Inc., a Delaware corporation.

Business

Our Company has a history of profitable growth, while paying dividends. Our business model is a subscription-based recurring revenue model. Customers pay us a monthly fee for the delivery services that we provide, up to a set quota, and may also pay us overage charges or fees for additional services.

Customers rely on us for improved inbox delivery, to reduce the cost and complexity of managing commercial email, and for our 24x7 customer support. A critical factor in whether legitimate emails are able to successfully get through SPAM filters and reach their destination inbox is the reputation of the sender, and we work closely with our customers to build their sending reputations. Approximately 50% of SMTP’s revenues are derived in the United States, with the balance split between Europe, Asia and the rest of the world.

Our services provide customers with the ability to increase the deliverability of email with less time, cost and complexity than handling it themselves. Our trusted servers and our experienced team allow us to provide a cost-effective, high level of service to our customers, thus improving their email delivery. Improved delivery increases the effectiveness of our customers’ marketing efforts, which has led to both top and bottom-line growth for our Company.

Our Company’s name, SMTP, stands for Simple Mail Transfer Protocol, which is the standard by which email is sent worldwide. Our website address is www.smtp.com. While our Company does not own the protocol, we believe the name SMTP earns our Company credibility with customers worldwide and is recognized by those in the email business globally. Companies may search directly for SMTP-related services online, regardless of their native tongue, which we believe often leads to successful hits for online searches of our services. We believe this brand is one of the reasons our Company has grown organically and profitably over the last decade, and has been able to attract customers in over 130 countries.

We have benefitted from the growing global email market, which Forrester estimated at over a $1.8B market in 2013, and which Forrester projects to grow to nearly $2.5B by 2016. Email marketing is recognized as one of the highest ROI investments businesses can make in growing revenues. MarketingSherpa’s 2013 survey indicated that respondents on average realized an ROI of 119% on email marketing. The high returns of email marketing are driven by the fact that companies can use email campaigns to contact prospective and current customers to drive new sales cost-effectively.

Forrester projects that the email delivery segment, which is the segment we serve, will grow approximately 30% from $717M in 2013 to over $933M in 2016, which would make it the largest and fastest growing segment in the email market. The expanding need for our services and for email delivery services in general is being driven by the increasing complexity of successfully delivering commercial marketing emails.

Our delivery services are necessary due to the challenges legitimate commercial senders face in reaching consumer inboxes. A recent ReturnPath study found that during the first half of 2013, 22% of commercial marketing emails sent with subscribers’ permission never reached their targeted destination inbox. As the filters used by the Internet Service Providers (ISPs) have tightened to prevent SPAM from reaching consumer inboxes, it has become increasingly difficult for legitimate commercial senders to reach inboxes as well.

Legitimate Commercial Senders Face Challenges Reaching the Inbox

Source: ReturnPath Email Intelligence Report 1H 2013

As shown above, of the 22% of opt-in commercial email that never reaches the intended inbox, only 4% is delivered as spam to a junk-mail folder, and 18% is missing or blocked by the ISPs. Notably, the ReturnPath study found that the challenges for commercial senders are increasing, as the percentage of opt-in commercial email reaching inboxes fell versus the prior years’ reported data.

The sender’s reputation is one of the primary factors considered by an ISP in determining whether to permit an email to pass through its filters and to reach an inbox. Like a credit rating, a client’s sending reputation is derived from its sending history, including sending volume, the number of bounced emails, and the number of customer complaints. A ReturnPath study found the 77% of delivery problems were based on issues with sender reputation.

We actively manage sending reputation for our clients, and will build the sending reputation of clients on IP addresses that are owned by SMTP. If a client were to leave SMTP, it cannot take these IP addresses, so it would leave behind the positive reputation we have created and maintained for its brand. We believe this “retention of reputation” dynamic has allowed SMTP to maintain a steady base of subscription-derived revenues, while our brand has helped us to add new customers and to grow.

Notably, our profit margins for 2013 were 22%, which are significantly higher than is typical of other public companies in the email sector. We believe that our profit margins are a function of both the compelling value we provide to our customers, and the disciplined and frugal management of our operations.

We believe SMTP has the opportunity for both significant organic growth and synergistic acquisitions. During 2013 our Company made significant moves to strengthen its senior management team, including adding a new Chief Executive Officer and a Vice President of Marketing. These new additions bring a track record of growing businesses rapidly by acquiring customers cost-effectively, and have successfully launched new products and services in related industries. In addition, SMTP continues to leverage its established technical team, which brings over a decade of experience in cloud-based email delivery. During the first quarter of 2014, we began implementing a plan to restructure certain of our part-time executive management positions into full-time executive management positions whereby our part-time Chief Financial Officer and our part-time Vice President of Innovation resigned their positions and are expected to be replaced by a full time Chief Financial Officer/Chief Operating Officer, a full time Vice President of Engineering and a full time Product Manager. We believe that this full-time dedicated team will allow us to more efficiently pursue both internal product development efforts and the execution of an inorganic growth strategy that includes acquisitions.

Our Company’s strategy for driving organic growth includes adding operational rigor using quantitative sales and marketing efforts, international expansion, and new product introductions. We believe our Company’s globally recognized brand and its core delivery service can be enhanced to encompass a greater range of products and services, thus broadening its customer base. We believe its cost-effective operations can be further leveraged as it grows, and acquisitions may present additional opportunities to add complementary products, services and customers.

Background on Our Business

SMTP, Inc. has been providing cloud-based SMTP relay services for over a decade. SMTP currently operates in 130 countries worldwide, with approximately half of its revenues coming from the United States and half of its revenues being derived overseas. Our Company employs a subscription-based revenue model. Our customers pay us a monthly fee for a specific quota of emails, which we will relay on their behalf.

We also earn revenues from additional usage charges that may come into effect when a customer exceeds its quota, as well as fees earned for related products and services. Additional products and services that we offer include a hosted email campaign management product and PreviewMyEmail, which allows customers to see how their emails will be delivered on a variety of desktop and mobile client devices.

A primary factor that ISPs consider in evaluating whether to transmit or quarantine email is the reputation of the sender. Each sending IP address will typically have a reputation with the ISPs, which is associated with factors such as typical sending volumes and the percentage of bounces and complaints that are sent from that IP address. SMTP maintains large pools of IP addresses, and proactively monitors email traffic through our system to maintain our sending reputation.

A single commercial sender of marketing emails may periodically send a large number of emails at once, such as in the distribution of a newsletter or marketing promotion at the end of a month. To an ISP, the rapid increase in volume associated with such sending may appear to be SPAM, and cause the ISP to bounce messages or to throttle back on the rate at which it will accept messages from that sending IP address. But by pooling a large number of quality senders, we maintain a consistent flow of traffic with sending statistics that are within the ranges expected and typically accepted by ISPs.

The illustration below summarizes how we can improve delivery for our clients by relaying their email:

We also manage dedicated IP addresses for many of our clients, whereby we will dedicate a specific IP address exclusively for a single customer’s use and then manage the customer’s sending reputation on an outsourced basis. We offer our larger clients the opportunity to have one or more dedicated IP addresses, and we can proactively manage the reputation of their IP addresses for them. Specifically, we will initially “warm up” the IP addresses for clients by slowly scaling up their volumes at a rate that may differ for different ISPs, while monitoring bounces, complaints and potential throttling by the ISPs. We will work with customers to improve the content of their emails and the quality of their lists, and to ensure that proper authentication is in place on their accounts. On an ongoing basis, we will monitor the IP’s reputation, as well as the customer’s sending statistics, providing continuous feedback to customers on how to effectively manage their sending practices. We have significant expertise in key services, which our customers typically would not have internally. A summary of some of the key areas of expertise we apply for our customers benefit are included below:

The assignment of IP addresses is controlled globally by the Internet Assigned Number Authority (IANA) and five regional entities, including the American Registry of Internet Numbers (ARIN). IP addresses are not normally “portable”, and usually may not be re-assigned to another organization unless ARIN has expressly approved such a transfer. SMTP has 12,286 portable IPv4 addresses, which can be used on behalf of our clients for sending email. Of these, 8,190 portable IPv4 addresses were obtained from ARIN in 2012, nearly tripling our available IP resources.

In addition to providing enhanced deliverability of email, SMTP also reduces the complexity of managing email for our clients. Large volume senders who do not employ an outsourced email delivery provider would need to address the management of bounces, complaints, and whitelisting themselves. They are likely to be unfamiliar with how to navigate throttling issues, whereby an individual ISP may limit the volume of email it may accept from a particular sender during a period of time. A client may not know the appropriate authentication procedures that can improve email delivery. Failure to manage these various issues effectively with the ISPs could inadvertently result in blacklisting of a legitimate sender, further complicating its ability to effectively reach inboxes effectively.

We provide services to enable businesses of various scales to outsource the sending of outbound emails. Legitimate senders of email use our services to help maintain their online email reputation so that their email is not blocked and is delivered to the intended recipients.

The services are differentiated based on the volume of emails sent by our customers:


1.	Low-volume solution services are for small businesses. These customers use shared IP pools and typically send between 2,000 and 100,000 emails each month, and pay between $15 and $160 per month in fees.

High-volume solutions are for medium and large businesses requiring dedicated resources, which may include physical servers, dedicated IP addresses, and support staff. We offer these customers advanced features such as: proactive reputation management, advanced email management features, 24/7 event monitoring and the highest level of customer support. Corporate customers typically send from 100,000 to tens of millions of emails each month and pay between $160 and $10,000 per month. As of March 31, 2014, we had approximately 760 corporate customers with the average customer paying us approximately $410 per month.

Our team has over a decade of experience in managing the cloud-based delivery of email and we provide 24x7 support for customers globally. A typical high-volume customer may start with us by testing our services using a small fraction of its email volume. We may work with customers on initial configuration of our services, including setting up authentication services, and whitelisting them as a legitimate sender. During their initial trials and as they scale, we would work interactively with them on improving the content of their emails, the quality of their distribution lists, and the management of their sending IP addresses. We would manage increases in the traffic on their IPs to gradually ramp the volumes in a manner that is acceptable to the individual ISPs, and at ramp-rates that may differ between Gmail and MSN, for example.

As they gain confidence in our services, clients may ask us to provide more than one IP address, and to manage sending across a pool of IP addresses. Over the course of sending large volumes of email, our customers may experience issues with bounces or complaints. We work with our senders and all of the ISPs to manage these issues proactively, and to head off any potential issues before they impact the ability of our senders to continue to market effectively. Over the course of sending email with us, our customers may need information on the status of their campaigns, and they have access both to our online portal for statistics and to our customer support team, if necessary.

We operate with both U.S. and overseas operations, with our Sales and Marketing department headquartered in the United States, and our Technical Development and Support groups located in Ukraine. Our Ukrainian operations have been providing support in English and other languages for over a decade, with ongoing training in both technical and language skills. The U.S. Sales and Marketing presence is important in growing sales in our largest single market; the overseas Technical Development and Support groups provide the Company with a competitive advantage by offering a lower cost structure for these critical functions. The combination of our domestic and overseas operations has provided for profitable growth for over a decade.

In summary, our services provide customers with the ability to increase the deliverability of email with less time, cost and complexity than handling it themselves. Our trusted servers and our experienced team allow us to provide a cost-effective, high level of service to our customers, thus improving their email delivery. Improved delivery increases the effectiveness of our customers’ marketing efforts, which, in turn, has led to both top- and bottom-line growth for SMTP.

In addition to providing email delivery services, SMTP provides a hosted solution for email campaign management. This cloud-based software allows a client to compose an email campaign, to manage a client list, and to send large volumes of emails quickly using our integrated email delivery platform. Following delivery, this software allows clients to track opens and clicks for their campaigns, in order to measure the efficacy of their email marketing efforts.

Additionally,our PreviewMyEmail.com website (“PME”) provides email design testing for customers that allows our clients to view screen shots of emails as they would be viewed when received by 48 common desktop, web and mobile email applications. Previewing email on many different applications before sending can help ensure that email can be viewed as intended. PME also provides inbox analytics for clients to track email opens, clicks, and geo-location. These additional metrics can help senders maximize performance of future email campaigns.

Sales and Marketing

Our website address is www.smtp.com. The SMTP.com website has been a cornerstone of our historic growth. We sell directly to prospective customers online, but also have a number of industry partners who refer clients to our Company.

Our direct sales are largely driven by leads generated via our SMTP.com website. As stated earlier, SMTP stands for Simple Mail Transfer Protocol, which is the protocol by which email is sent globally. Despite the fact that we do not own the protocol, our name provides us immediate name recognition and credibility worldwide. In addition, the services we provide may be searched for online as “SMTP”, “SMTP relay services”, “SMTP services”, “SMTP providers”, or using similar terms.

Our website may appear in search engine results for these and other queries in common search engines, such as Google, Yahoo, Bing, and others. In addition, SMTP purchases online search advertising and other forms of online advertising to drive additional traffic to our website. In the aggregate, over 370,000 unique visitors visited our website during 2013.

Aside from online lead generation, a variety of referring partners provide us with leads. Referring partners are typically other service providers operating in the email ecosystem, who may provide related products and services that are non-competitive with our own. We pay these third parties between 15% and 30% of the revenue generated from their referrals.

We are not dependent on one or a few major customers. Our largest single customer represents less than 3% of our aggregate revenues, so the loss of any one customer would not represent a material loss of sales.

We believe our Company’s history of profitable growth has been driven by the strength of the SMTP.com brand, and with very limited internal oversight of marketing efforts. Our Company has had two inside sales professionals based in the United States, and has had no other U.S.-based or overseas sales and marketing support until the fourth quarter of 2013. Until that point, SMTP had utilized external marketing resources for the management of marketing efforts, and the marketing strategy has been focused upon the online acquisition of customers via organic website traffic driven by the SMTP.com website, and via externally managed Pay-Per-Click (PPC) campaigns, such as Google Adwords.

We have historically had three primary types of marketing expenses: online advertising, fees paid to affiliates for referrals, and outside marketing consulting fees. Our Company has paid and continues to pay affiliates 15-30% commissions for the referral of business to SMTP. SMTP’s strategy for improving the efficiency of online advertising will be described below as part of the growth strategy.

In September 2013, we hired a Vice President of Marketing, Yvonne Gaudette, who has updated our website and marketing strategy. Ms. Gaudette brings extensive experience in both online and offline marketing, improving cost effective customer acquisition, optimizing websites, improving customer communications, and building affiliate and partner programs. She also has direct experience in driving international marketing efforts.

The Email Services Market

The email services market is estimated by Forrester Research at $2.066B in 2014, and is growing at over 10% annually. The email market has several functional segments, which include creative, integration, analytics, and delivery. SMTP’s current business is focused on delivery, which is the largest and fastest growing segment of the market.

The market is highly fragmented, with numerous players providing a variety of different services and functions. Our Company has historically been focused in the area of delivery, with a market share of approximately 1% of the email delivery market, so a 1-2% increase in delivery share would represent approximately a doubling or tripling of our current revenues.

The email market is a large market, which can be segmented in a variety of ways. While there is significant overlap in services, our competitors are typically focused in one of three areas: marketing email creation, marketing email delivery or transactional email delivery.

Companies like Constant Contact and MailChimp are well-known brands best known for their tools for marketing email creation. They have a large following in the small business markets, where customers are focused on quickly and easily creating email campaigns, such as newsletters and promotions. The integrated services offered by these firms allow for campaign creation, management, analysis and delivery all in one platform. But typically, the companies spend heavily on sales and marketing to effectively reach large numbers of small business customers.

Our customers are focused on marketing email delivery. Our customers may have in-house design teams, and internal analytics capabilities, and they typically send significantly higher volumes of email. Because the risks of being inadvertently labeled as a spammer increase as volume increases, many of our customers are much more concerned with marketing email delivery than with the creation of email. Our customers may turn to us because of our expertise and focus in the area of delivery, but also because for comparable sending volumes, SMTP is typically significantly lower in cost than sending via these integrated packages. We believe our customers often remain with us because of the improvements we are able to demonstrate in their inbox delivery, the fact that they cannot transfer the sending reputations we create and maintain for them, and because of the 24x7 deep technical support we provide for any issues with deliverability issues.

There is a third major category of providers in the email market, those that largely focus on transactional email delivery, and an example of one such provider is SendGrid. A transactional email is an email sent in immediate response to a user action on a website, such as an order confirmation or a password reset request. Transactional email providers typically face few issues with SPAM filters. This is because the emails are directed to an email address that was just provided and is therefore unlikely to bounce, because they are not typically sent in large batches, and because SPAM filters do not normally target order confirmations or other typical transactional emails. Transactional email companies typically focus on creating an easy to use interface, or API, for developers. These companies make it easy to easily manage transactional emails, they typically sell to a technical contact, rather than a marketing professional, and they face and manage far fewer issues with message deliverability.

SMTP does provide transactional email services as part of its service offering, but the majority of SMTP’s traffic is related to marketing email messages. SMTP does see opportunities for growth in transactional email markets, but does not believe the margins in transactional email to be as attractive as in the marketing email delivery market.

Our Growth Strategy

We believe that the following factors have provided and will continue to provide us a differentiated competitive advantage, allowing us to drive further growth:


·	Our SMTP.com brand is a unique asset that is globally recognized, which we intend to continue to use to attract customers seeking SMTP-based email delivery services.
·	Our team blends over a decade of cloud-based email delivery experience with new executives bringing a strong track-record of driving cost-effective growth.
·	The sending reputation of our trusted servers took over a decade to establish, and requires significant expertise to maintain.
·	Our cost-effective balance of U.S. and overseas operations has allowed us to maintain above-average margins in the industry, while growing profitably.
·	Our public-entity status positions us well to secure further capital, and to pursue acquisitions opportunistically.

Our strategy for utilizing these competitive advantages to drive further growth is multi-pronged. We will strengthen the sales of existing email delivery products using targeted strategies for online growth, both domestically and internationally. We plan to launch complementary products and services, and may consider opportunistic acquisitions. We believe that offering complementary services will both strengthen our ability to attract customers to our email delivery business, and will allow us to expand to capture new customers now purchasing integrated solutions from competitors, which are typically substantially higher in cost.

We also believe that our growth will be enhanced by the projected growth of the email delivery market overall, which is projected by Forrester to grow approximately 20% between 2014 and 2016.

Our Online Marketing Strategy

Our online marketing strategy is focused on building awareness of the SMTP brand, and improving the conversion of visitors to our website. Because SMTP is the protocol by which email is sent globally, we believe the brand gets us immediate name recognition, but there are opportunities to drive improved awareness of our brand. The SMTP website was updated in the fourth quarter of 2013 to clarify the value of the products and services we offer to customers. The website will continue to be optimized to raise its visibility with search engines, and also to iteratively improve its conversion rates.

SMTP continues to work to develop partnerships with other players in the email marketing industry. Companies that refer business to SMTP include providers of related services in the industry. SMTP typically offers these referring partners a commission on any sales they may refer, which may range from 15-30%, and we see opportunities to expand these programs.

While our Company has historically driven online marketing using outsourced marketing agencies and Pay-Per-Click (PPC) advertising, our new team has brought marketing in-house in an effort to acquire customers more cost-effectively. The marketing plan includes both more targeted PPC advertising and outreach via a variety of other channels, as described in both our domestic and international sales strategies below.

Our Domestic Sales & Marketing

In addition to the new executive level hires for the roles of Chief Executive Officer and Vice President of Marketing, our Company plans on driving domestic revenue growth by further strengthening its U.S.-based sales & marketing team. While technical support in Ukraine has been highly effective in meeting customer needs on a 24x7 basis, our belief is that a stronger U.S. presence will help us close sales faster and more effectively. Our Company recently hired a Customer Care Coordinator charged with improving user experiences and better qualifying leads. We also intend to hire additional U.S.-based sales and marketing personnel.

Our Company upgraded its practices for tracking and pursuing its sales pipeline during the fourth quarter of 2013 in order to continue to sharpen the focus of our sales and marketing efforts as we move forward. In addition to online lead generation, we expect to use other channels, such as industry partnerships, public relations efforts, social media, and targeted industry media buys. Our new Vice President of Marketing is working to clarify and streamline all communication processes with customers, from initial outreach through onboarding and ongoing support, first for domestic sales, and then to support growth internationally.

Our International Growth

We believe there are significant opportunities for SMTP to drive substantial international growth. We believe our name is globally recognized and remains a key asset in international expansion.

While the SMTP website has been redesigned and updated during the fourth quarter of 2013, it has not yet been localized for the non-English speaking countries we serve. We believe that by localizing content on our web pages, and tailoring messages to particular nationalities and languages, we can increase international online lead generation.

We also believe that with a focused and quantitative approach to evaluating international expansion opportunities, we can drive additional growth. These opportunities will include both targeted online and offline opportunities. Online, we believe that localized online advertising can be utilized to drive online visitors to landing pages that are customized to the targeted geography. We also believe we can identify partners who can be helpful in providing international referrals, and we have been successful in increasing the rate of international referrals from partners during the fourth quarter of 2013.

Our Complementary Products and Services

SMTP is investing in the development of additional functionality to complement our core strength in the delivery of email. During 2013 we hired a part-time Vice President of Innovation, but most recently, we decided to restructure that aspect of our executive management team and replace that part-time position with both a full time Vice President of Engineering and a full time Product Manager. Our goal is to have both of these new positions filled shortly. Additionally, we continue to leverage the talents and experience of our Chief Technology Officer, who brings over a decade of experience in related technology.

Competing email service providers currently provide fully integrated tools for email composition, campaign management, and analytics, and may offer a wide variety of templates to users of their services. Customers and prospective customers ask us about our abilities to provide these services, and yet our offerings in these related areas have historically provided somewhat limited functionality. So we are moving forward to offer a broader set of solutions. By broadening our product set, we expect to be able to sell additional products to current customers, as well as to be able to attract customers who require broader solutions than our current email delivery service.

As one example, our intent is to integrate the PreviewMyEmail technology into the proprietary SMTP service offering, providing clients the opportunity to preview their emails on a host of desktop and mobile applications. We envision that PME would also continue to be available at PreviewMyEmail.com, where paid plans are currently priced from $49 to $199 per month. Other examples of areas where we could cost-effectively provide customers with improved functionality include the areas of campaign creation, management, analytics and optimization. These are relatively straightforward technical developments, which are highly complementary to our existing offering, that we believe our customers would be willing to purchase.

Our Acquisition Strategy

Growth may also be accelerated via acquisitions. We believe that SMTP is well positioned for acquisitions of related players in the space because of its strength in email delivery, its profitability, and the fact that it is a public company. Criteria for acquisitions include (1) a strategic fit with regard to technology or channel acquisition, (2) revenue potential in both the newly acquired business and by making our existing services more attractive, and (3) a comprehensive understanding of the acquisition risks.

The new changes to our senior executive team and board of directors bring significant experience with acquisition and integration of technology companies. Should we choose to pursue acquisitions, we expect to fund acquisitions through the issuance of debt or equity securities, the payment of cash, the exchange of services, or any combination thereof. Presently, we have no agreements with any potential acquisition candidates, and we cannot assure you that we will be able to consummate any acquisition upon terms acceptable to us or at all.

Competition

Our competitors include providers of email management services for small to medium size businesses such as Sendgrid.com, AuthSmtp.com, SMTP2Go.com, JangoSMTP/JangoMail.com, SocketLabs.com, StrongMail.com, Dyn, MailChimp.com/Mandrill.com, ConstantContact.com, CheetahMail.com, iContact.com, Bronto.com, and Amazon.com, as well as the in-house information technology capabilities of prospective customers.

The market for our services is competitive and rapidly changing, and we do not have patents or unique regulatory barriers that could prevent competitors from entering our market. Privately-backed and public companies could choose to enter our space and compete directly with us, or indirectly by offering substitute solutions. The result could be decreased demand or pricing for our services, longer sales cycles, or a requirement to make significant incremental investments in research and development to match these entrants’ new technologies. With the introduction of new technologies and the influx of new entrants to the market, we believe competition could persist and intensify in the future, which could harm our ability to increase sales, limit customer attrition and maintain our prices. If any of these happens, it could cause us to suffer a decline in revenues and profitability.

Competition could result in reduced sales, reduced margins or the failure of our email marketing product to achieve or maintain more widespread market acceptance, any of which could harm our business. While we do not compete currently with vendors focused on enterprise-scale customers, we may face future competition from these providers if they determine that our target market presents an opportunity for them. Finally, in the future, we may experience competition from Internet Service Providers, or ISPs, advertising and direct marketing agencies and other large established businesses, such as Microsoft Corporation, Google Inc. or Yahoo! Inc., possessing large, existing customer bases, substantial financial resources and established distribution channels. If these companies decide to develop, market or resell competitive email marketing products, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. In addition, one or more of these ISPs or other businesses could decide to offer a competitive email marketing product at no cost or low cost in order to generate revenue as part of a larger product offering.

Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products. Our current and potential competitors may have more extensive customer bases and broader customer relationships than we have. In addition, these companies may have longer operating histories and greater name recognition than we have and may be able to bundle an email marketing product with other products that have gained widespread market acceptance. These competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. If we are unable to compete with such companies, the demand for our products could substantially decline.

We cannot assure you that we will be able to respond quickly, cost-effectively or sufficiently to these potential market conditions. Our business, financial condition and operating results may be adversely affected if we are unable to anticipate or respond quickly and economically to any developments.

Our ability to compete will also depend on the strength of our brand, our ability to attract and retain key talent and other personnel, the efficiency of development and marketing. All these activities require significant financial resources. We may not be able to sustain competition. Our inability to compete effectively would have an adverse impact on our business.

Intellectual Property

We do not own any patents, trademarks, licenses, franchises or concessions, although we believe our ownership of SMTP.com provides value to our Company due to website traffic and the strength of the brand.

Our trade secrets include our competencies in managing the transmission of high volumes of email messages to various Internet Service Providers, as is described more fully below in the Technology section. The technology of both hardware and SPAM filters is constantly changing, and our team is constantly uncovering new issues and implementing new methodologies to improve the quality of our service.

Technology

SMTP leverages Message Transfer Agent (MTA) technology provided by Message Systems for its small business customers. This software is utilized to handle large volumes of email and provides extensive features for managing email delivery issues, such as throttling by the ISP’s, using such technologies as adaptive delivery. Facebook, LinkedIn, and other very large email senders typically utilize this sophisticated software, but our typical customers are too small and individually spend too little on email to be able to afford this type of sophisticated system. Our solution to provide our customers with access to these systems has been to pool a large number of customers into our proprietary scalable system that can handle billions of emails annually for our customers in a cost-effective manner.

We customized various aspects of the software to optimize the speed at which email is delivered, and to manage the process of maximizing inbox delivery. Our proprietary systems manage how emails are sent, and which IP addresses or pools of IP addresses are utilized for sending. We control the throttling of how quickly emails are released to various ISPs, and may, for example, allow sending to Gmail addresses to ramp more quickly than to MSN addresses, depending upon our interactions with the various ISPs.

Our systems provide for the reporting of key statistics to our customers. These statistics are available to our customers via our proprietary customer portal, or via an external API, which we have developed. In addition, our proprietary systems also provide for enhanced internal reporting. These internal reporting capabilities allow us to proactively manage customers’ sending reputations, and to provide them alerts if we notice any issues.

A key part of our technological assets are our 12,286 portable IPv4 addresses. We can allow our customers to utilize our IP addresses to improve the inbox delivery of their email campaigns. We have over a decade of experience building the reputation of IP addresses, and the reputation of our IP addresses is a key technological asset of the Company.

We currently rent Internet servers from providers such as Rackspace, Softlayer, Hetzner and Sadecehosting. Each of these companies has servers in multiple cities in the United States, in Europe, or in Canada. These companies offer us servers located in multiple physical locations, providing redundancy in the event of a natural disaster.

We utilize Postfix software that is open source and can be used by anyone without cost. We customized various aspects of the software to optimize the speed at which email is delivered, and to manage the process of maximizing inbox delivery. Customizations to open source software code generally require developers to make their work available at no cost. Since we have created our software by developing extensions which plug into open source software without modifying the open source code, we do not believe there is a risk we could be required to offer our products or make our source code available. Generally, we spend less than 10% of our sales on research and development activities.

Regulation of our business

We must comply with U.S. federal legislation entitled Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, which imposes certain obligations on the senders of commercial emails and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content.

The CAN-SPAM Act’s main provisions include:


·	prohibiting false or misleading email header information
·	prohibiting the use of deceptive subject lines
·	ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender, with the opt-out effective within 10 days of the request
·	requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively assented to receiving the message
·	requiring that the sender include a valid postal address in the email message

In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult or other harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act. Additionally,some foreign jurisdictions, such as Australia, Canada and the European Union, have also enacted laws that regulate sending email, some of which are more restrictive than the CAN-SPAM Act. For example, some foreign laws prohibit sending unsolicited email unless the recipient has provided the sender advance consent to receipt of such email, or in other words has “opted-in” to receiving it.

The ability of our customers’ constituents to opt out of receiving commercial emails may minimize the effectiveness of our email marketing product. Moreover, non-compliance with the CAN-SPAM Act carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our customers or if we were deemed to be directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our business. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or increase our operating costs.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to email communications. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our customers in the form of increased subscription fees. In addition, federal, state and foreign governmental or regulatory agencies may decide to impose taxes on services provided over the Internet or via email. Such taxes could discourage the use of the Internet and email as a means of commercial marketing and communications, which would adversely affect the viability of our services.

Employees

As of March 24, 2014, we have 6 full-time employees consisting of our Chief Executive Officer, Vice President of Marketing, Controller, and three sales professionals. We also have 23 independent contractors in Ukraine, consisting of our Chief Technology Officer, , 9 technical support personnel, 7 systems engineers, 4 research development engineers, 1 administrative assistant, and 1 project manager, and 2 full-time employees in Ukraine consisting of our Vice President – Operations and Customer Service and a service manager.

We believe that our future success will depend in part on our continued ability to attract, hire or acquire and retain qualified employees and independent contractors. There can be no assurance that we will be able to attract and retain such individuals or companies. If we are unsuccessful in managing the timely delivery of these services our business could be adversely affected. We believe we have good relations with our employees and independent contractors.

Properties

Our corporate headquarters are located in Nashua, NH and we have support and technology offices in Cambridge, MA, Las Vegas, NV, Kiev, Ukraine and Odessa, Ukraine. Presently, we rent these five offices for approximately $5,600 per month total. We believe that additional space may be required as our business expands and believe that we can obtain suitable space as needed.

Corporate Information

We were incorporated in Massachusetts on October 14, 1998 as EMUmail, Inc. and changed our name on April 1, 2010 to SMTP.com, Inc. On November 23, 2010, we incorporated a new entity under the name SMTP, Inc. in the State of Delaware and entered into a Merger Agreement with SMTP.com, Inc. The sole purpose of the merger was to change the jurisdiction of our company from Massachusetts to Delaware and to increase the number of authorized shares outstanding.

Our executive offices are located at 100 Innovative Way, Suite 3330, Nashua, New Hampshire 03062. Our telephone number is 877-705-9362. Our website is located atwww.SMTP.com. The information on our website is not part of this Form 10-K Annual Report.

ITEM 1A.

RISK FACTORS

Risks Related To Our Business

The majority of our services are sold pursuant to short-term subscription agreements, and if our customers elect not to renew these agreements, our revenues may decrease.

Typically, our services are sold pursuant to short-term subscription agreements, which are generally one month to one year in length, with no obligation to renew these agreements. Our renewal rates may decline due to a variety of factors, including the services and prices offered by our competitors, new technologies offered by others, consolidation in our customer base or if some of our customers cease their operations. If our renewal rates are low or decline for any reason, or if customers renew on less favorable terms, our revenues may decrease, which could adversely affect our stock price.

If we fail to enhance our existing services or develop new services, our services may become obsolete or less competitive and we could lose customers.

If we are unable to enhance our existing services or develop new services that keep pace with rapid technological developments and meet our customers’ needs, our business will be harmed. Creating and designing such enhancements and new products entail significant technical and business risks and require substantial expenditures and lead-time, and there is no guarantee that such enhancements and new products will be completed in a timely fashion. Nor is there any guarantee that any new service offerings will gain acceptance among our email marketing customers or by the broader market. For example, our existing email marketing customers may not view any new service as complementary to our email service offerings and therefore decide not to purchase such service. If we cannot enhance our existing services or develop new products or if we are not successful in selling such enhancements and new products to our customers, we could lose customers or have difficulty attracting new customers, which would adversely impact our financial performance.

If we are unable to attract new customers and retain existing customers on a cost-effective basis, our business and results of operations will be adversely affected.

To succeed, we must continue to attract and retain a large number of customers on a cost-effective basis, many of whom have not previously used an email service like ours. We rely on a variety of methods to attract new customers, such as paying providers of online services, search engines, directories and other websites to provide content, advertising banners and other links that direct customers to our website, direct sales and partner sales. If we are unable to use any of our current marketing initiatives or the cost of such initiatives were to significantly increase or such initiatives or our efforts to satisfy our existing customers are not successful, we may not be able to attract new customers or retain existing customers on a cost-effective basis and, as a result, our revenue and results of operations would be adversely affected.

If we fail to develop our brands cost-effectively, our business may be adversely affected.

Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brands. If we fail to successfully promote and maintain our brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business and results of operations could suffer.

Our relationships with our channel partners may be terminated or may not continue to be beneficial in generating new email marketing customers, which could adversely affect our ability to increase our customer base.

We maintain a network of active channel partners, as well as business service providers such as web developers and marketing agencies, on whom we depend to refer customers to us through links on their websites and outbound promotion to their customers. If we are unable to maintain our contractual relationships with existing channel partners or establish new contractual relationships with potential channel partners, we may experience delays and increased costs in adding customers, which could have a material adverse effect on us. The number of customers we are able to add through these marketing relationships is dependent on the marketing efforts of our partners over which we exercise very little control, and a significant decrease in the number of gross customer additions generated through these relationships could adversely affect the size of our customer base and revenue.

If the delivery of our customers’ emails is limited or blocked, the fees we may be able to charge for our email marketing product may not be accepted by the market and customers may cancel their accounts.

Internet Service Providers (ISP) can block emails from reaching their users. Recent releases of ISP software and the implementation of stringent new policies by ISPs make it more difficult to deliver our customers’ emails. We continually improve our own technology and work closely with ISPs to maintain our deliverability rates. If ISPs materially limit or halt the delivery of our customers’ emails, or if we fail to deliver our customers’ emails in a manner compatible with ISPs’ email handling or authentication technologies, then the fees we charge for our email marketing product may not be accepted by the market, and customers may cancel their accounts.

Our inability to successfully acquire and integrate other businesses, assets, products or technologies could harm our operating results.

We are actively evaluating acquisitions and strategic investments in businesses, products or technologies that we believe could complement or expand our existing solutions, expand our client base and operations worldwide, enhance our technical capabilities or otherwise offer growth or cost-saving opportunities. From time to time, we may enter into letters of intent with companies with which we are negotiating potential acquisitions or investments or as to which we are conducting due diligence. Although we are currently not a party to any binding definitive agreement with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, we may enter into these types of arrangements in the future, which could materially decrease the amount of our available cash or require us to seek additional equity or debt financing. We have limited experience in successfully acquiring and integrating businesses, products and technologies. We may not be successful in negotiating the terms of any potential acquisition, conducting thorough due diligence, financing the acquisition or effectively integrating the acquired business, product or technology into our existing business and operations. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices, or employee or customer issues.

Additionally, in connection with any acquisitions we complete, we may not achieve the synergies or other benefits we expected to achieve, and we may incur write-downs, impairment charges or unforeseen liabilities that could negatively affect our operating results or financial position or could otherwise harm our business. If we finance acquisitions using existing cash, the reduction of our available cash could cause us to face liquidity issues or cause other unanticipated problems in the future. If we finance acquisitions by issuing convertible debt or equity securities, the ownership interest of our existing stockholders may be diluted, which could adversely affect the market price of our stock. Further, contemplating or completing an acquisition and integrating an acquired business, product or technology could divert management and employee time and resources from other matters.

Our international operations subject us to additional risks and uncertainties.

Our international operations present unique challenges and risks to our Company. Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business in international jurisdictions and could interfere with our ability to offer our products and services to one or more countries or expose us or our employees to fines and penalties. These laws and regulations include, but are not limited to, tax laws, data privacy and filtering requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Violations of these laws and regulations could result in monetary damages, criminal sanctions against us, our officers, or our employees, and prohibitions on the conduct of our business. Our international operations also subject us to additional foreign currency exchange rate risks and will require additional management attention and resources. Our international operations subject us to other inherent risks, including, but not limited to:


·	the impact of recessions in economies outside of the United States
·	changes in and differences between regulatory requirements between countries
·	U.S. and foreign export restrictions, including export controls relating to encryption technologies
·	reduced protection for and enforcement of intellectual property rights in some countries
·	potentially adverse tax consequences
·	difficulties and costs of staffing and managing foreign operations
·	political and economic instability
·	international conflicts, wars or terrorism
·	tariffs and other trade barriers
·	seasonal reductions in business activity

Additionally, our technical development and support groups are located in Ukraine. Recently, the Ukraine has been subject to economic and political changes, and it may become subject to unfavorable changes in laws, policies and taxation, and the current physical infrastructure of the country may change. Should we become unable to conduct our technical development and support operations in this country in the future, and our contingency and business continuity plans are unsuccessful in addressing the related risks to our operations, our business could be adversely affected.

Our failure to address these risks adequately could materially and adversely affect our business, revenue, results of operations, cash flows and financial condition.

We could be adversely affected by the devaluation of the U.S. Dollar against the Euro and could be adversely affected by the rate of inflation in the European Union.

All of our revenues are currently generated in U.S. Dollars, and inflation in the European Union and/or the devaluation of the U.S. dollar in relation to the Euro may have the effect of increasing the cost in U.S. dollars of financing expenses. As a result, our U.S. dollar-measured results of operations may be adversely affected. Because exchange rates between the Euro and the U.S. dollar fluctuate continuously, exchange rate fluctuations will have an impact on our profitability and period-to-period comparisons of our results of operations once we begin generating more significant revenues outside the U.S.

We face significant threats from new entrants to our business, which could cause us to suffer a decline in revenues and profitability.

Barriers to entry in Internet service markets are low. Privately-backed and public companies could choose to enter our space and compete directly with us, or indirectly by offering substitute solutions. The result could be decreased demand or pricing for our services, longer sales cycles, or a requirement to make significant incremental investments in research and development to match these entrants’ new technologies. If any of these happens, it could cause us to suffer a decline in revenues and profitability.

The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.

The market for our services is competitive and rapidly changing, and the barriers to entry are relatively low. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales, limit customer attrition and maintain our prices.

Our principal competitors include providers of email management services for small to medium size businesses such as AuthSmtp.com, SMTP2Go.com, SendGrid.com, JangoMail.com/JangoSMTP.com, SocketLabs.com, StrongMail.com, ExactTarget.com, CheetahMail.com, ConstantContact.com, iContact.com, MailChimp.com/Mandrill.com and Bronto.com, larger companies such as Amazon.com, as well as the in-house information technology capabilities of prospective customers. Competition could result in reduced sales, reduced margins or the failure of our email marketing product to achieve or maintain more widespread market acceptance, any of which could harm our business. While we do not compete currently with vendors serving larger customers, we may face future competition from these providers if they determine that our target market presents an opportunity for them. We may also experience competition from Internet Service Providers, or ISPs, advertising and direct marketing agencies and other large established businesses, such as Microsoft Corporation, Google Inc. or Yahoo! Inc., possessing large, existing customer bases, substantial financial resources and established distribution channels. If these companies decide to develop, market or resell competitive email marketing products, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. In addition, one or more of these ISPs or other businesses could decide to offer a competitive email marketing product at no cost or low cost in order to generate revenue as part of a larger product offering.

Our business is substantially dependent on continued demand for email marketing and any decrease in demand could cause us to suffer a decline in revenues and profitability.

We derive, and expect to continue to derive, substantially all of our revenue from organizations, including small and medium size businesses, associations and non-profits. As a result, widespread acceptance of communicating by email among small and medium size organizations is critical to our future growth and success. The overall market for email and related services is relatively new and still evolving, and small organizations have generally been slower than larger organizations to adopt email marketing as part of their marketing mix. There is no certainty regarding how or whether this market will develop, or whether it will experience any significant contractions. Our ability to attract and retain customers will depend in part on our ability to make email communications convenient, effective and affordable. If small and medium size organizations determine that email marketing and communication does not sufficiently benefit them, existing customers may cancel their accounts and potential customers may decide not to utilize our email services. In addition, many small and medium size organizations currently lack the technical expertise to effectively send large quantities of email. As technology advances, however, small and medium size organizations may establish the capability to manage their own email transmissions and therefore have no need for our email services. If the market for email services fails to grow or grows more slowly than we currently anticipate, demand for our services may decline and our revenue would suffer.

We depend on search engines to attract a significant percentage of our customers, and if those search engines change their listings or our relationship with them deteriorates or terminates, we may be unable to attract new customers, which would adversely affect our business and results of operations.

Many of our customers located our website by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas designed by the search engine. Purchased listings can be purchased by advertisers in order to attract users to their websites. We rely on both algorithmic and purchased listings to attract a significant percentage of the customers we serve to our website. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, this could result in fewer customers clicking through to our website, requiring us to resort to other costly resources to replace this traffic, which, in turn, could reduce our revenue and negatively impact our operating results, harming our business. If one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, or our revenue could decline and our business may suffer. The cost of purchased search listing advertising fluctuates and may increase as demand for these channels grows, and any such increases could have negative effects on our financial results.

Risks Related To Our Management

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued efforts and abilities of our executive officers, including our Chief Executive Officer, our Chairman and other key personnel, each of whom would be difficult to replace. In particular, Jonathan M. Strimling, our Chief Executive Officer, and Semyon Dukach, our Chairman, are critical to the development of our strategic direction. The loss of the services of Messrs. Strimling and Dukach, or other key personnel, and the process to replace any of our key personnel, would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives. We currently do not have a written employment agreement with Mr. Dukach, and we currently do not maintain key person life insurance on either Mr. Strimling or Mr. Dukach. Accordingly, the loss of the services of any of these persons would adversely affect our business.

Our anticipated growth in our operations could place a significant strain on our management team and our administrative, operational and financial reporting infrastructure.

Our success will depend in part on the ability of our management team to effectively manage our growth in our operations. To do so, we believe we will need to continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational and financial controls and update our reporting procedures and systems. The expected addition of new employees and the capital investments that we anticipate will be necessary to manage our anticipated growth will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our anticipated growth, our business operations could be adversely affected.

Our officers and directors own a controlling interest in our voting stock and investors will not have any voice in our management, which could result in decisions adverse to our general stockholders.

Our officers and directors, in the aggregate, beneficially own approximately or have the right to vote approximately 55% of our outstanding common shares on a fully diluted basis. As a result, these stockholders, acting together, have the ability to control substantially all matters submitted to our stockholders for approval including:


·	election of our board of directors
·	removal of any of our directors
·	amendment of our Articles of Incorporation or By-laws
·	adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us

As a result of their ownership and positions, our officers and directors collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The interests of our officers may differ from the interests of the other stockholders, and they may influence decisions with which the other stockholders may not agree. Such decisions may be detrimental to our business plan and/or operations and they may cause our business to fail in which case you may lose your entire investment.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or to prevent fraud.

The United States Securities and Exchange Commission, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company's internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal controls over financial reporting. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls, on an ongoing basis, over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for our Company to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our shares of common stock.

A material weakness in internal controls may remain undetected for a longer period because of our Company's exemption from the auditor attestation requirements under Section 404(b) of Sarbanes-Oxley.

Our annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s attestation in its annual report. As a result, a material weakness in our internal controls may remain undetected for a longer period.

Risks Related To Our Systems

Various private spam blacklists have in the past interfered with, and may in the future interfere with, the effectiveness of our products and our ability to conduct business.

We depend on email to market to and communicate with our customers, and our customers rely on email to communicate with their constituents. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, ISPs and Internet protocol addresses associated with those entities or individuals that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company’s Internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any Internet domain or Internet address that subscribes to the blacklisting entity’s service or purchases its blacklist.

Some of our Internet protocol addresses currently are listed with one or more blacklisting entities and, in the future, our other Internet protocol addresses may also be listed with these and other blacklisting entities. There can be no guarantee that we will not continue to be blacklisted or that we will be able to successfully remove ourselves from those lists. Blacklisting of this type could interfere with our ability to market our products and services and communicate with our customers and could undermine the effectiveness of our customers’ email marketing campaigns, all of which could have a material negative impact on our business and results of operations.

Our customers’ use of our products to transmit negative messages or website links to harmful applications could damage our reputation, and we may face liability for unauthorized, inaccurate or fraudulent information distributed via our services.

Our customers could use our email servers to transmit negative messages or website links to harmful applications, reproduce and distribute copyrighted material without permission, or report inaccurate or fraudulent data or information. Any such use of our products could damage our reputation and we could face claims for damages, copyright or trademark infringement, defamation, negligence or fraud. Moreover, our customers’ promotion of their products and services through our email marketing product may not comply with federal, state and foreign laws. We cannot predict whether our role in facilitating these activities would expose us to liability under these laws.

Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending such claims. If we are found liable for our customers’ activities, we could be required to pay fines or penalties, redesign business methods or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.

We do not currently have any general liability insurance to protect us in case of customer or other claims.

We do not have any general liability insurance to cover any potential claims to which we are exposed. Any imposition of liability would increase our operating losses and reduce our net worth and working capital.

Our facilities and systems are vulnerable to natural disasters and other unexpected events and any of these events could result in an interruption of our ability to execute clients’ email campaigns.

We depend on the efficient and uninterrupted operations of our third-party data centers and hardware systems. The data centers and hardware systems are vulnerable to damage from earthquakes, tornados, hurricanes, fire, floods, power loss, telecommunications failures and similar events. If any of these events results in damage to our third-party data centers or systems, we may be unable to execute clients’ hosted online direct marketing campaigns until the damage is repaired, and may accordingly lose clients and revenues. In addition, subject to applicable insurance coverage, we may incur substantial costs in repairing any damage.

System failures could reduce the attractiveness of our service offerings, which could cause us to suffer a decline in revenues and profitability.

We provide email delivery services to our clients and end-users through our proprietary technology and client management systems. The satisfactory performance, reliability and availability of the technology and the underlying network infrastructure are critical to our operations, level of client service, reputation and ability to attract and retain clients. We have experienced periodic interruptions, affecting all or a portion of our systems, which we believe will continue to occur from time to time. We are not aware of any loss of customers due to material service interruptions. However any systems damage or interruption that impairs our ability to accept and fill client orders could result in an immediate loss of revenue to us, and could cause some clients to purchase services offered by our competitors. In addition, frequent systems failures could harm our reputation. Some factors that could lead to interruptions in customer service include: operator negligence; improper operation by, or supervision of, employees; physical and electronic break-ins; misappropriation; computer viruses and similar events; power loss; computer systems failures; and Internet and telecommunications failures. We do not carry sufficient business interruption insurance to fully compensate us for losses that may occur.

A rapid expansion of our network and systems could cause our network or systems to fail or cause our network to lose data.

In the future, we may need to expand our network and systems at a more rapid pace than we have in the past. We may suddenly require additional bandwidth for which we have not adequately planned. We may secure an extremely large customer, group of customers, or experience demands for growth by an existing customer or set of customers that would require significant system resources. Our network or systems may not be capable of meeting the demand for increased capacity, or we may incur additional unanticipated expenses to accommodate such capacity constraints. In addition, we may lose valuable data or our network may temporarily shut down if we fail to expand our network to meet future requirements. Any disruption in our network processing or loss of data may damage our reputation and result in the loss of customers.

Any significant disruption in service on our website or in our computer systems, or in our customer support services, could reduce the attractiveness of our products and result in a loss of customers.

The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new customers and retain existing customers. Our production system hardware and the disaster recovery operations for our production system hardware are co-located in third-party hosting facilities. None of the companies who host our systems guarantee that our customers’ access to our products will be uninterrupted, error-free or secure. Our operations depend on their ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events. In the event that our arrangements with third-party data centers are terminated, or there is a lapse of service or damage to their facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities. Any interruptions or delays in access to our services, whether as a result of a third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors could damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause customers to cancel their accounts, any of which could adversely affect our business, financial condition and results of operations.

An unexpected disaster could lead to service interruptions and result in a loss of customers.

While we have established contingency plans for certain potential disasters, it is possible that an unexpected disaster may occur, which could interrupt our ability to provide services. In the event of a disaster in which our software or hardware are irreparably damaged or destroyed, we would experience interruptions in access to our services. Any or all of these events could cause our customers to lose access to our products.

We rely on third-party computer hardware and software that may be difficult to replace or that could cause errors or failures of our service, which could cause us to suffer a decline in revenues and profitability.

We rely on computer hardware purchased and software licensed from third parties in order to offer our products, including hardware from such large vendors as International Business Machines Corporation, Dell Computer Corporation, Sun Microsystems, Inc. and EMC Corporation. This hardware and software may not continue to be available on commercially reasonable terms, or at all. If we lose the right to use any of this hardware or software or such hardware or software malfunctions, our customers could experience delays or be unable to access our services until we can obtain and integrate equivalent technology or repair the cause of the malfunctioning hardware or software. Any delays or failures associated with our services could upset our customers and harm our business.

If we are unable to protect the confidentiality of our unpatented proprietary information, processes and know-how and our trade secrets, the value of our technology and services could be adversely affected.

We rely upon unpatented proprietary technology, processes and know-how and trade secrets. Although we try to protect this information in part by executing confidentiality agreements with our employees, consultants and third parties, such agreements may offer only limited protection and may be breached. Any unauthorized disclosure or dissemination of our proprietary technology, processes and know-how or our trade secrets, whether by breach of a confidentiality agreement or otherwise, may cause irreparable harm to our business, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise be independently developed by our competitors or other third parties. If we are unable to protect the confidentiality of our proprietary information, processes and know-how or our trade secrets are disclosed, the value of our technology and services could be adversely affected, which could negatively impact our business, financial condition and results of operations.

Our use of open source software could impose limitations on our ability to commercialize our products, which could cause us to suffer a decline in revenues and profitability.

Customizations to open source software code generally require developers to make their work available at no cost. Since we have created our software by developing extensions which plug into open source software without modifying the open source code, we do not believe there is a risk we could be required to offer our products or make our source code available. Although we monitor our use of open source software closely, the terms of many open source licenses to which we are subject have not been interpreted by United States or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue sales of our products, or to release our software code under the terms of an open source license, any of which could materially adversely affect our business.

Given the nature of open source software, there is also a risk that third parties may assert copyright and other intellectual property infringement claims against us based on our use of certain open source software programs. The risks associated with intellectual property infringement claims are discussed immediately below.

Because we have not filed for patent protection of our technologies, we face the risk of our technologies not being adequately protected.

We have not applied for patent protection of our licensed technologies or processes with the US Patent and Trademark Office; if we fail to do so, we may be unable to adequately protect our intellectual property, especially if the designs and materials used in our products are replicated by our competitors. Further, even if we file for patent protection, there is no assurance that it will be approved by the US Patent and Trademark Office.

If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters or other forms of communication. These claims, whether or not successful, could:


·	divert management’s attention;
·	result in costly and time-consuming litigation;
·	require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all;
·	in the case of open source software-related claims, require us to release our software code under the terms of an open source license; or
·	require us to redesign our software and services to avoid infringement.

As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, many of our agreements with our channel partners require us to indemnify them for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling on any such claim. Even if we have not infringed any third parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management time. Finally, if a third party successfully asserts a claim that our products infringe its proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable or at all and we may be required to pay significant monetary damages to such third party.

If the security of our customers’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, our reputation may be severely harmed, we may be exposed to liability and we may lose the ability to offer our customers a credit card payment option.

Our system stores our customers’ proprietary email distribution lists, credit card information and other critical data. Any accidental or willful security breaches or other unauthorized access could expose us to liability for the loss of such information, adverse regulatory action by federal and state governments, time-consuming and expensive litigation and other possible liabilities as well as negative publicity, which could severely damage our reputation. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our customers’ data, our relationships with our customers will be severely damaged, and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states, including Massachusetts, have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, and we could lose customers and fail to acquire new customers.

If we fail to maintain our compliance with the data protection policy documentation standards adopted by the major credit card issuers, we could lose our ability to offer our customers a credit card payment option. Any loss of our ability to offer our customers a credit card payment option would make our products less attractive to many small organizations by negatively impacting our customer experience and significantly increasing our administrative costs related to customer payment processing.

Risks Related To Our Industry

The growth of the email marketing market depends on the continued growth and effectiveness of anti-spam products, which may be insufficient to enable us to offer our services at a profit.

Adoption of email as a communications medium depends on the ability to prevent junk mail, or “spam,” from overwhelming a subscriber’s electronic mailbox. In recent years, many companies have evolved to address this issue and filter unwanted messages before they reach customers’ mailboxes. In response, spammers have become more sophisticated and have also begun using junk messages as a means for fraud. Email protection companies in turn have evolved to address this new threat. However, if their products fail to be effective against spam, adoption of email as a communications tool will decline, which would adversely affect the market for our services.

Current economic conditions may negatively affect the business sector, which may cause our customers to terminate existing accounts with us or cause potential customers to fail to purchase our products, resulting in a decrease in our revenue and impairing our ability to operate profitably.

Our email services are designed specifically for small and medium size organizations, including small and medium size businesses, associations and non-profits that frequently have limited budgets and may be more likely to be significantly affected by economic downturns than their larger, more established counterparts. Small organizations may choose to spend the limited funds that they have on items other than our products and may experience higher failure rates. Moreover, if small organizations experience economic hardship, they may be unwilling or unable to expend resources on marketing, including email marketing, which would negatively affect the overall demand for our products, increase customer attrition and could cause our revenue to decline. In addition, we have limited experience operating our business during an economic downturn. Accordingly, we do not know if our current business model will continue to operate effectively during the current economic downturn. Furthermore, we are unable to predict the likely duration and severity of the current adverse economic conditions in the U.S. and other countries, but the longer the duration the greater risks we face in operating our business. There can be no assurance, therefore, that current economic conditions or worsening economic conditions, or a prolonged or recurring recession, will not have a significant adverse impact on our operating and financial results.

U.S. federal legislation entitled Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 imposes certain obligations on the senders of commercial emails, which could minimize the effectiveness of our email marketing product, and establishes financial penalties for non-compliance, which could increase the costs of our business.

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult or other harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The ability of our customers’ constituents to opt out of receiving commercial emails may minimize the effectiveness of our email marketing product. Moreover, non-compliance with the CAN-SPAM Act carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our customers or if we were deemed to be directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our business. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or increase our operating costs.

Evolving regulations concerning data privacy may restrict our customers’ ability to solicit, collect, process and use data necessary to conduct email campaigns or to analyze the results or may increase their costs, which could harm our business.

Federal, state and foreign governments have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing or use of consumers’ personal information. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. Other proposed legislation could, if enacted, prohibit the use of certain technologies that track individuals’ activities on web pages or that record when individuals click through to an Internet address contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use email addresses, page viewing data, and personal information, which may reduce demand for our products. They may also negatively impact our ability to effectively market our products.

As Internet commerce develops, federal, state and foreign governments may adopt new laws to regulate Internet commerce, which may negatively affect our business.

Risks Related To Owning Our Securities

We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute your ownership of our common stock.

We have historically relied on outside financing and cash from operations to fund our operations, capital expenditures and expansion. We may require additional capital from equity or debt financing in the future to:


·	fund our operations;
·	respond to competitive pressures;
·	take advantage of strategic opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses; and
·	develop new products or enhancements to existing products.

We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds through issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

We may expand through acquisitions of, or investments in, other companies or through business relationships, all of which may result in additional dilution to our stockholders and consumption of resources that are necessary to sustain our business.

One of our business strategies is to acquire competing or complementary services, technologies or businesses. We also may enter into relationships with other businesses in order to expand our service offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies.

In connection with one or more of those transactions, we may:


·	issue additional equity securities that would dilute our stockholders;
·	use cash that we may need in the future to operate our business;
·	incur debt on terms unfavorable to us or that we are unable to repay;
·	incur large charges or substantial liabilities;


·	encounter difficulties retaining key employees of the acquired company or integrating diverse business cultures;
·	become subject to adverse tax consequences, substantial depreciation or deferred compensation charges; and
·	encounter unfavorable reactions from investment banking market analysts who disapprove of our completed acquisitions.

Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to existing common stockholders and with the ability to affect adversely stockholder voting power and perpetuate their control over us.

Our certificate of incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval, including large blocks of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders thereof the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock or other preferred stockholders and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock or existing preferred stock, if any.

Preferred stock could be used to dilute a potential hostile acquirer. Accordingly, any future issuance of preferred stock or any rights to purchase preferred stock may have the effect of making it more difficult for a third party to acquire control of us. This may delay, defer or prevent a change of control or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings attributable to, and assets available for distribution to, the holders of our common stock and could adversely affect the rights and powers, including voting rights, of the holders of our common stock and preferred stock.

A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline and may impair our ability to raise capital in the future.

Our common stock is traded on The NASDAQ Capital Market and, despite certain increases of trading volume from time to time, there have been periods when it could be considered “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. Finance transactions resulting in a large amount of newly issued shares that become readily tradable, or other events that cause current stockholders to sell shares, could place downward pressure on the trading price of our stock. We currently have outstanding a total of 2,778,770 shares of restricted common stock that are held by certain stockholders. In addition, the lack of a robust resale market may require astockholder who desires to sell a large number of shares of common stock to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of our stock.

If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, including the ending of restriction on resale, substantial amounts of our common stock in the public market, including shares issued upon the exercise of outstanding options or warrants, the market price of our common stock could fall. Sales of a substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. We may become involved in securities class action litigation that could divert management’s attention and harm our business.

Our amended certificate of incorporation and bylaws, and certain provisions of Delaware corporate law, as well as certain of our contracts, contain provisions that could delay or prevent a change in control even if the change in control would be beneficial to our stockholders.

Delaware law, as well as our amended certificate of incorporation and bylaws, contains anti-takeover provisions that could delay or prevent a change in control of our Company, even if the change in control would be beneficial to our stockholders. These provisions could lower the price that future investors might be willing to pay for shares of our common stock. These anti-takeover provisions:


·	authorize our board of directors to create and issue, without stockholder approval, preferred stock, thereby increasing the number of outstanding shares, which can deter or prevent a takeover attempt;
·	prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;


·	empower our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
·	provide that our board of directors is expressly authorized to adopt, amend or repeal our bylaws; and
·	provide that our directors will be elected by a plurality of the votes cast in the election of directors.

Section 203 of the Delaware General Corporation Law, the terms of our employee stock option agreements and other contractual provisions may also discourage, delay or prevent a change in control of our Company. Section 203 generally prohibits a Delaware corporation from engaging in a business combination with an interested stockholder for three years after the date the stockholder became an interested stockholder. Our employee stock option agreements include change-in-control provisions that allow us to grant options or stock purchase rights that may become vested immediately upon a change in control. The terms of change of control provisions contained in certain of our senior executive employee agreements may also discourage a change in control of our Company. Our board of directors also has the power to adopt a stockholder rights plan that could delay or prevent a change in control of our Company even if the change in control is generally beneficial to our stockholders. These plans, sometimes called “poison pills,” are oftentimes criticized by institutional investors or their advisors and could affect our rating by such investors or advisors. If our board of directors adopts such a plan, it might have the effect of reducing the price that new investors are willing to pay for shares of our common stock.

Together, these charter, statutory and contractual provisions could make the removal of our management and directors more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by our founder, executive officers, and members of our board of directors, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

Our quarterly results may fluctuate and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially.

Our quarterly operating results may fluctuate, and if we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Some of the important factors that could cause our revenue and operating results to fluctuate from quarter to quarter include:


·	our ability to retain existing customers, attract new customers and satisfy our customers’ requirements;
·	general economic conditions;
·	changes in our pricing policies;
·	our ability to expand our business;
·	the effectiveness of our personnel;
·	new product and service introductions;
·	technical difficulties or interruptions in our services;
·	the timing of additional investments in our hardware and software systems;
·	regulatory compliance costs;
·	costs associated with future acquisitions of technologies and businesses; and
·	extraordinary expenses such as litigation or other dispute-related settlement payments.

Some of these factors are not within our control, and the occurrence of one or more of them may cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful and should not be relied upon as an indication of future performance.

Our common stock is subject to volatility.

We cannot assure you that the market price for our common stock will remain at its current level and a decrease in the market price could result in substantial losses for investors. The market price of our common stock may be significantly affected by one or more of the following factors:


·	announcements or press releases relating to our industry or to our own business or prospects;
·	regulatory, legislative, or other developments affecting us or our industry generally;


·	sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and
·	market conditions specific to email delivery companies, our industry and the stock market generally.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock would be negatively affected. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and its trading volume to decline.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM 2.

PROPERTIES

ITEM 3.

LEGAL PROCEEDINGS

We are not a party to any litigation of a material nature. We recently received a notification from RPost Holdings, Inc. whereby RPost Holdings, Inc. claims that we are infringing on their patent rights with certain of our products and services. Although we remain in the investigative stages of the merit to this claim, we believe that our Company and other companies were practicing the technology that RPost claims its patents cover before the first priority date of RPost’s patents. On that basis, we believe that the patents cannot cover our technology and remain valid. To our knowledge, we have not been named in any proceeding with respect to this matter.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock trades on The NASDAQ Capital Market under the symbol “SMTP”. Prior to January 31, 2014 our common stock traded on the OTCQB under the symbol “SMTP”. The following table set forth below lists the range of high and low bids for our common stock for our two most recent fiscal years. The prices in the table reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions or a liquid trading market. These prices also give pro forma effect to the 1-for-5 reverse stock split of our outstanding shares of common stock that occurred on December 26, 2013.


		High		Low

2012	1st Quarter	$	8.55	$	5.50
	2nd Quarter	$	7.25	$	2.60
	3rd Quarter	$	5.05	$	3.05
	4th Quarter	$	7.00	$	3.17
					.
2013	1st Quarter	$	7.25	$	5.05
	2nd Quarter	$	5.50	$	4.25
	3rd Quarter	$	5.95	$	4.35
	4th Quarter	$	9.25	$	1.43

Stockholders

As of March 24, 2014 we have a total of 5,015,931 shares of common stock outstanding, held of record by approximately 650 stockholders. We do not have any shares of preferred stock outstanding.

Dividends

Our Company began paying cash dividends during the year ended December 31, 2012. During fiscal year 2013 and 2012, our Company distributed dividends of $1,255,936 and $2,589,011, respectively, in cash to its stockholders. For 2013 this includes regular quarterly cash dividends. No special dividends were paid in 2013. For 2012 this includes quarterly cash dividends of $191,194 paid in May 2012, $220,550 in August 2012 and $265,324 paid in December 2012 along with a special cash dividend of $1,911,943 paid to our stockholders of record as of May 21, 2012.

During the first quarter of 2014, our company distributed a cash dividend equal to $.12 per share, and our board of directors considers it to be in the best interest of its shareholders to maintain a $0.12 per share dividend on our common stock for the foreseeable future.No restrictions limit our ability to pay cash dividends on our common stock. The payment of cash dividends in the future is contingent upon our Company's revenues and earnings, capital requirements and general financial condition. The payment of any dividends is within the discretion of our board of directors.

Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plans as of December 31, 2013.

Equity Compensation Plan Information


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders (1)	625,156	$4.83	290,794
Equity compensation plans not approved by security holders (2)	120,973	$4.92	-0-
Total	746,129	$4.85	290,794


(1)	Reflects our 2010 Stock Incentive Plan for the benefit of our directors, officers, employees and consultants. We have reserved 1,000,000 shares of common stock for such persons pursuant to that plan.
(2)	Comprised of common stock purchase warrants we issued for services.

Recent Sales of Unregistered Securities

During the period covered by this report, our Company issued the following securities without registering the securities under the Securities Act, giving pro forma effect to the 1-for-5 reverse stock split of our outstanding common stock that occurred on December 26, 2013:

Securities issued for cash



Date		Security
February 2013		Common Stock – 2,900 shares of common stock at $1.25 per share for aggregate proceeds of $3,626 pursuant to an option exercise.

June 2013		Common Stock – 16,000 shares of common stock at $1.25 per share for aggregate proceeds of $20,000 pursuant to an option exercise.

November 2013		Common Stock – 40,000 shares of common stock at $1.25 per share for aggregate proceeds of $50,000 pursuant to an option exercise.

Securities issued for services



Date		Security
March 2013		Common stock – 3,774 shares of common stock for $25,000 in consulting services.

March 2013		Common stock – 9,000 shares of common stock for $55,800 in consulting services.

April 2013		Common stock – 1,776 shares of common stock for $10,000 in board member services.

July 2013		Common stock – 14,083 shares of common stock for $75,000 in consulting services.

August 2013		Warrant - right to buy 30,000 shares of common stock at $5.00 per share for professional services.

August 2013		Common stock – 992 shares of common stock for $5,000 in board member services.

November 2013		Common stock – 956 shares of common stock for $5,000 in board member services.

Securities issued pursuant to our Employee Stock Plan



Date		Security
August 2013		Stock options – right to buy 298,690 shares of common stock at $5.00 per share.

September 2013		Stock options – right to buy 25,000 shares of common stock at $5.15 per share.

September 2013		Stock options – right to buy 30,000 shares of common stock at $5.55 per share.

No underwriters were utilized and no commissions or fees were paid with respect to any of the above transactions. These persons were the only offerees in connection with these transactions. We relied on Section 4(2) and 701 of the Securities Act since the transactions did not involve any public offering.

ITEM 6.

SELECTED FINANCIAL DATA

Not Applicable.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

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. We currently operate in 130 countries worldwide, with approximately half of our revenues coming from the United States and half of our revenues being derived overseas. Our Company employs a subscription-based revenue model. Our customers pay us a monthly fee for a specific quota of emails, which we will relay on their behalf. We also earn revenues from additional usage charges that may come into effect when a customer exceeds its quota, as well as fees earned for related products and services. Additional products and services that we offer include a hosted email campaign management product and PreviewMyEmail, which allows customers to see how their emails will be delivered on a variety of desktop and mobile client devices.

Results of Operations


Net Revenues	2013		2012		Change from Prior Year		Percent Change from Prior Year

Year Ended December 31,	$	5,753,929	$	5,353,550	$	400,379		7.5	%

Revenues increased for the year ended December 31, 2013 as compared to the year ended December 31, 2012, due to increased sales of our email service products to consumers. Revenue growth is attributable primarily to a shift in sales to larger accounts that are providing more substantial revenues per account.


Cost of Service	2013		2012		Change from Prior Year			Percent Change from Prior Year

Year Ended December 31,	$	1,049,325	$	1,081,330	$	(32,005	)		(3.0	)%

Cost of services decreased for the year ended December 31, 2013 as compared to the year ended December 31, 2012 primarily due to a $22,000 decrease in partner commissions that have been paid out in 2013, a $10,000 decrease in network operations and support. As a percentage of revenues, cost of services were 18% and 20% of net revenues for the years ended December 31, 2013 and 2012, respectively. Credit card fees were reclassified from cost of services to general and administrative expenses for the years ended December 31, 2013 and 2012.


Sales and Marketing	2013		2012		Change from Prior Year		Percent Change from Prior Year

Year Ended December 31,	$	817,971	$	775,073	$	42,898		5.5	%

Sales and marketing expenses increased for the year ended December 31, 2013 as compared to the year ended December 31, 2012 primarily attributable to a general growth in our business. We spent more on advertising and marketing to fuel additional growth, but there is no direct correlation between revenues and marketing expenses. We regrouped expenses in 2013 by reducing online advertising by approximately $180,000 and increasing our public relations , investor relations and marketing subcontractors by approximately $160,000. We also hired a VP of Marketing in October of 2013 which increased wages by $62,000 compared to 2012.


General and Administrative	2013		2012		Change from Prior Year		Percent Change from Prior Year

Year Ended December 31,	$	1,710,934	$	1,380,242	$	330,692		24.0	%

General and administrative expenses increased for the year ended December 31, 2013 as compared to the year ended December 31, 2012 based on the following:


·	An increase of approximately $144,000 of professional services primarily related to increased legal expenses connected with the S-1 filing;
·	An increase in stock compensation expense of approximately $60,000 related to options issued during 2013;
·	An increase in other general and administrative expenses of approximately $2,000;
·	An increase in payroll and related costs of approximately $70,000 related to new hires;
·	A decrease of $15,000 in board of director fees, which started in 2012; and
·	An increase of approximately $69,000 in depreciation and amortization expense.


Research and Development	2013		2012		Change from Prior Year			Percent Change from Prior Year

Year Ended December 31,	$	234,582	$	403,303	$	(168,721	)		(41.8	)%

Research and development expenses decreased for the year ended December 31, 2013 as compared to the year ended December 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

Year Ended December 31,	$	(668,155	)	$	(643,995	)	$	(24,160	)		3.8	%

Changes in our income tax expense related primarily to differences in pretax income during the years ended December 31, 2013 and 2012, respectively, and the effects of certain balancing to our tax returns that vary from year to year.


Net Income	2013		2012		Change from Prior Year		Percent Change from Prior Year

Year Ended December 31,	$	1,272,963	$	1,069,607	$	203,356		19.0	%

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

Liquidity and Capital Resources

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, 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.

Years Ended December 31, 2013 and 2012

Net cash provided by operating activities increased approximately $1,096,773, or 129%, to $1,948,543 for the year ended December 31, 2013, compared to $851,770 for the year ended December 31, 2012. The increase of cash provided by operating activities was primarily attributable to an increase in non-cash stock compensation of $308,284, in increase in income taxes payable of $553,339 and an increase in net income of approximately $203,356.

Net cash used in investing activities was $287,475 and $24,206 during the year ended December 31, 2013, and 2012, respectively, consisting of the purchase of software licenses and investments in servers and computers for employees.

Net cash used in financing activities was $713,826 and $2,022,372 and during the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, financing activities consisted primarily of dividends paid of $1,255,936, offset partly from proceeds from the issuance of common stock of $471,301. During the year ended December 31, 2012, financing activities consisted primarily of dividends paid of $2,589,011, offset partly from proceeds from the issuance of common stock of $531,438.

We had net working capital of $1,467,903 as of December 31, 2013 and $552,669 as of December 31, 2012. The increase in net working capital as of December 31, 2013 was primarily attributable to our increased cash, which increased to $1,731,243 at December 31, 2013 compared to $784,001 at December 31, 2012.

Public Offering of Common Stock.During February 2014 we closed on an $11,500,000 underwritten public offering of our common stock, includingthe exercise of the entire over-allotment option granted to the underwriters. The net proceeds to our Companyafter underwriting discounts and commissions and other expenses approximated $10,562,725. We intend to use the net proceeds received from this offering for working capital, other general corporate purposes, and possibly acquisitions of other companies, services or technologies. Presently, the Company has no agreements with any potential acquisition candidates.

Critical Accounting Policies

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Financial Statements. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

New Accounting Pronouncements

Our new accounting pronouncements are disclosed in the Notes to the Financial Statements. We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements included in this annual report under this item are set forth beginning on Page F-1 of this Annual Report, immediately following the signature pages.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

Not Applicable.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our Company evaluated the effectiveness and design and operation of its disclosure controls and procedures. Our Company’s disclosure controls and procedures are the controls and other procedures that we designed to ensure that our Company records, processes, summarizes, and reports in a timely manner the information that it must disclose in reports that our Company files with or submits to the Securities and Exchange Commission. Our principal executive officer and principal financial officer reviewed and participated in this evaluation. Based on this evaluation, our Company made the determination that its disclosure controls and procedures were effective.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Control -Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2013 due to gaps in segregation of duties and documentation of management’s assessment of internal controls. Management intends to hire additional personnel and implement and improve review procedures.

The Company's internal control over financial reporting includes policies and procedures that (1) pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and controls may become inadequate if conditions change. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s attestation in this annual report.

Changes in Company Internal Controls

No change in our Company’s internal control over financial reporting occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

Not Applicable.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference from the information contained within our Company’s definitive proxy statement or information for the Annual Meeting of Stockholders to be held later this year.

ITEM 11.

EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the information contained within our Company’s definitive proxy or information statement for the Annual Meeting of Stockholders to be held later this year.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report:

1.Financial Statements and Reports

The financial statements included in Part II, Item 8 of this Annual Report on Form 10-K are filed as part of this Report.

2. Financial Statements Schedule

Other financial statement schedules have been omitted because either the required information (i) is not present, (ii) is not present in amounts sufficient to require submission of the schedule or (iii) is included in the Financial Statements and Notes thereto under Part II, Item 8 of this Annual Report on Form 10-K.

3.Exhibits

The exhibit list in the Index to Exhibits is incorporated herein by reference as the list of exhibits required as part of this Report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on March 31, 2014.


	SMTP, Inc.

	By:	/s/ Jonathan M. Strimling
		Jonathan M. Strimling
		Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.


Signature	Title	Date

/s/ Jonathan M. Strimling	Chief Executive Officer (Principal Executive Officer), Director	March 31, 2014
Jonathan M. Strimling		March 31, 2014

/s/ Alena Chuprakova	Controller and Treasurer (Principal Financial Officer)	March 31, 2014
Alena Chuprakova	Controller and Treasurer (Principal Financial Officer)

/s/ Semyon Dukach	Chair of the Board of Directors	March 31, 2014
Semyon Dukach

/s/ Vadim Yasinovsky	Director	March 31, 2014
Vadim Yasinovsky

/s/ John L. Troost	Director	March 31, 2014
John L. Troost

/s/ David A. Buckel	Director	March 31, 2014
David A. Buckel

INDEX TO FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets	F-3
Statements of Operations	F-4
Statements of Shareholders’ Equity	F-5
Statements of Cash Flows	F-6
Notes to Financial Statements	F-7

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors

SMTP, Inc.

We have audited the accompanying balance sheets of SMTP, Inc. (the Company) as of December 31, 2013 and 2012, and the related statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal controls over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SMTP, Inc as of December 31, 2013 and 2012 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ McConnell & Jones, LLP

Houston, Texas

March 31, 2014

3040 Post Oak Blvd., Suite 1600

Houston, TX 77056

Phone: 713.968.1600

WWW.MCCONNELLJONES.COM

F-2

SMTP, INC.

BALANCE SHEETS


	December 31,
	2013			2012

Assets

Cash and cash equivalents	$	1,731,243		$	784,001
Accounts receivable		25,024			38,152
Deferred income taxes		183,435			196,097
Other current assets		116,522			66,093
Total current assets		2,056,224			1,084,343
Property and equipment, net of accumulated depreciation of $145,261 and $43,181		327,342			141,948
Intangibles, net of accumulated amortization of $9,000 and $8,768		—			232
Deferred income taxes		50,099			14,536
Deposits		29,995			29,995
Total assets	$	2,463,660		$	1,271,054

Liabilities and Shareholders' Equity

Deferred revenue	$	334,328		$	351,059
Income taxes payable		144,280			42,590
Allowance for refunds and chargebacks		2,965			9,036
Accrued expenses and other current liabilities		106,748			128,989
Total current liabilities		588,321			531,674

Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at December 31, 2013 and December 31, 2012		—			—
Common stock, $0.001 par value, 50,000,000 shares authorized, 3,127,598 and 2,953,450 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively		3,126			2,953
Additional paid in capital		2,241,749			1,122,990
Accumulated deficit		(369,536	)		(386,563	)
Total shareholders' equity		1,875,339			739,380

Total liabilities and shareholders' equity	$	2,463,660		$	1,271,054

See accompanying notes to the financial statements

F-3

SMTP, INC.

STATEMENTS OF OPERATIONS


	Years Ended December 31,
	2013		2012

Net revenue	$	5,753,929	$	5,353,550
Cost of services		1,049,325		1,081,330
Gross profit		4,704,604		4,272,220
Operating expenses:
Sales and marketing		817,971		775,073
General and administrative		1,710,934		1,380,242
Research and development		234,581		403,303

Total operating expenses		2,763,486		2,558,618

Income before income taxes		1,941,118		1,713,602
Provision for income tax		668,155		643,995

Net income	$	1,272,963	$	1,069,607

Net income per share:
Basic	$	0.42	$	0.37
Diluted	$	0.41	$	0.37

Weighted average common
shares outstanding:
Basic		3,004,541		2,882,437
Diluted		3,069,274		2,922,310

See accompanying notes to the financial statements

F-4

SMTP, INC.

STATEMENTS OF SHAREHOLDERS’ EQUITY


							Retained
							Earnings
	Common Stock				Additional		(Accumulated
	Shares		Amount		Paid in Capital		Deficit)			Total
Balance, December 31, 2011		2,768,300	$	2,768	$	287,998	$	1,132,841		$	1,423,607
Stock based compensation - stock options						153,376					153,376
Warrant for services rendered						115,162					115,162
Dividends paid to shareholders						—		(2,589,011	)		(2,589,011	)
Issuance of common stock, net		185,150		185		531,253		—			531,438
Tax benefit from stock-based award activity, net						35,201		—			35,201
Net Income						—		1,069,607			1,069,607
Balance, December 31, 2012		2,953,450	$	2,953	$	1,122,990	$	(386,563	)	$	739,380
Stock based compensation - stock options						212,946					212,946
Warrant for services rendered						188,077					188,077
Dividends paid to shareholders								(1,255,936	)		(1,255,936	)
Issuance of common stock for cash		143,569		143		471,158					471,301
Issuance of common stock for services		30,579		30		175,769					175,799
Tax benefit from stock-based award activity, net						70,809					70,809
Net Income								1,272,963			1,272,963
Balance, December 31, 2013		3,127,598	$	3,126	$	2,241,749	$	(369,536	)	$	1,875,339

See accompanying notes to the financial statements

F-5

SMTP, INC.

STATEMENTS OF CASH FLOWS


	Year Ended December 31,
	2013			2012
Cash flows from operating activities:
Net income	$	1,272,963		$	1,069,607
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		102,313			32,909
Excess tax benefits from share-based payment arrangements		(70,809	)		(35,201	)
Non-cash stock compensation		576,822			268,538
Allowance for refunds and chargebacks		(6,071	)		1,834
Deferred income taxes		(22,901	)		(2,136	)
Changes in assets and liabilities:
Accounts receivable		13,128			(33,926	)
Other assets		(50,429	)		(40,051	)
Income taxes payable		172,499			(380,840	)
Accrued expenses and other current liabilities		(22,241	)		(44,598	)
Deferred revenue		(16,731	)		15,634
Net cash provided by operating activities		1,948,543			851,770

Cash flows from investing activities
Purchases of property and equipment		(287,475	)		(24,206	)
Net cash used in investing activities		(287,475	)		(24,206	)

Cash flows used in financing activities:
Dividends to shareholders		(1,255,936	)		(2,589,011	)
Proceeds from issuance of common stock		471,301			531,438
Excess tax benefits from share-based payment arrangements		70,809			35,201
Net cash used in financing activities		(713,826	)		(2,022,372	)

Change in cash and cash equivalents		947,242			(1,194,808	)

Cash and cash equivalents, beginning of year		784,001			1,978,809

Cash and cash equivalents, end of year	$	1,731,243		$	784,001

Supplemental cash flow disclosures:
Cash paid for income taxes	$	708,000		$	618,000

See accompanying notes to the financial statements

F-6

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1: Organization

The Company was incorporated in Massachusetts on October 14, 1998 as EMUmail, Inc. and changed our 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 structure 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 are held by a sole shareholder) were exchanged for 13,440,000 shares of common stock in the Surviving Corporation. All financial statements have been retroactively restated to show the effects of this recapitalization.

On December 26, 2013, the Company filed a Certificate of Amendment to its Certificate of Incorporation (the "Certificate of Amendment"), with the Secretary of State of the State of Delaware, to effect a 1-for-5 reverse stock split of the its common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, every five shares of the Company's pre-Reverse Stock Split common stock was combined and reclassified into one share of its common stock. All data for common stock, options and warrants have been adjusted to reflect the 1-for-5 reverse stock split for all periods presented. In addition, all common stock prices, and per share data for all periods presented have been adjusted to reflect the 1-for-5 reverse stock split.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP).

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. Credit card fees were classified from cost of services to general and administrative expenses for the years ended December 31, 2013 and 2012. Credit card processing fees were $208,833, and $195,796 for the years ended December 31, 2013 and 2012, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Cash and Cash Equivalents

Cash equivalents are short-term, liquid investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial institutions and at times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.

F-7

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 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.

Intangibles

Our intangible assets consist of a domain name. All such assets are capitalized at their original cost and amortized over their estimated useful lives. The Company evaluates its intangibles for impairment whenever events or circumstances indicate that impairment may have occurred in accordance with the provisions of FASB ASC 350 “Goodwill and Other Intangible Assets”.

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 for Income Taxes. 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 2010 remain open to examination by U.S. federal and state tax jurisdictions.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of the assets. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.

In 2011 the Company paid $100,000 to a third party for a software license which has been categorized as software within property and equipment. The license will be depreciated over its expected useful life on the straight-line method over five (5) years. The license was placed into service in August 2012.

F-8

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Property and equipment as of December 31 is as follows:


	2013			2012
Property and equipment, net:
Leasehold improvements	$	16,245		$	—
Furniture and fixtures		13,619			—
Computer equipment and software		427,286			185,129
Construction in progress		15,453			—
Total		472,603			185,129
Less: Accumulated depreciation		(145,261	)		(43,181	)
	$	327,342		$	141,948

Estimated useful lives are as follows:


Computing equipment	3 years
Software	3 - 5 years

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.

We provide 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 periodic basis (such as monthly, quarterly, annually or bi-annually). 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. Deferred revenues are computed on an estimated basis.

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents. At December 31, 2013 and 2012, the Company had cash balances at financial institutions that exceed federally insured limits. The Company maintains its cash balances with accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

For the years ended December 31, 2013, and 2012, there were no customers that accounted for more than 10% of total revenue.

Cost of Services

Cost of services consists primarily of the direct labor costs, software costs, and fees paid to resellers of the Company’s product.

F-9

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Credit Card Processing Fees

Credit card processing fees are included as a component of general and administrative expenses and are expensed as incurred. Credit card processing fees were $208,833 and $195,796 for the years ended December 31, 2013 and 2012, respectively.

Advertising Costs

The Company expenses advertising costs as incurred.

Research and Development costs

Research and development cost are charged to expenses when incurred and include salaries and related cost of personnel engaged in research and development activities.

Net Income (Loss) 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.

Recently Issued Accounting Standards

The Company has reviewed all recently issued, but not effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will cause a material impact on its financial condition or the result of its operation.

Note 3:Shareholders’ Equity

On April 11, 2012, 2,000 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $2,500 cash.

On May 1, 2012, 5,000 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $6,250 cash.

On May 8, 2012, the Company filed with the Securities Exchange Commission form S-1 for the registration of its Common Stock, $.001 par value. The amount of shares to be registered was 160,000. On May 9, 2012, the warrant to purchase 160,000 shares of common stock at an exercise price of $3.13 per share was exercised with total proceeds to the Company of $500,000 (see Note 9: Commitments and Contingencies).

On May 10, 2012, 750 stock options were exercised at a price of $1.25 per share with total proceeds to the Company $938 cash.

On May 16, 2012, 5,400 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $6,752 cash.

On October 22, 2012, 12,000 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $15,000 cash.

On February 20, 2013, 2,150 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $2,688 cash.

On February 21, 2013, 750 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $938 cash.

On April 8, 2013, the Company issued a total of 1,776 shares of the Company’s common stock to the directors.

F-10

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

On May 22, 2013, the Company entered into an investment agreement. Pursuant to the investment agreement, the Company could issue and sell to the investor, up to that number of shares of the Company’s common stock having an aggregate purchase price of $2.5 million, over a period of 36 months from the first trading day following the effectiveness of the registration statement registering the resale of shares. The purchase price was set at 92% of the lowest daily volume weighted average price of the Common Stock during the five consecutive trading day period beginning on the date of delivery of the applicable draw down notice.

On June 13, 2013, 16,000 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $20,000 cash.

On June 20, 2013, as part of the investment agreement, the Company filed with the Securities Exchange Commission a Form S-1 for the registration of its Common Stock, $0.001 par value. The amount of shares to be registered was 500,000 shares. The S-1 became effective on June 27, 2013. Since June 27, 2013, the date the Registration Statement was declared effective, through December 5, 2013, the date the Company terminated the Investment Agreement, the Company sold 84,669 shares of its common stock to Dutchess for total net proceeds of $397,678.

On July 1, 2013, the Company terminated a consulting services agreement and issued 14,083 shares of common stock to pay the outstanding balance of approximately $75,000 due to the consultants. See Note 9.

On August 15, 2013, the Company issued a total of 992 shares of the Company’s common stock to the directors.

On November 15, 2013, the Company issued a total of 956 shares of the Company’s common stock to the directors.

On November 15, 2013, 40,000 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $50,000 cash.

On December 26, 2013, the Company filed with the Securities Exchange Commission a Form S-1 registration statement. Pursuant to the Form S-1, the Company registered and sold 1,840,000 shares of common stock, $0.001 par value, in exchange for $11,500,000 in gross proceeds. The S-1 became effective on January 30, 2014.

The Company began paying cash dividends during the year ended December 31, 2012. During fiscal year 2013 and 2012, our Company distributed dividends of $1,255,936 and $2,589,011, respectively, in cash to its stockholders. For 2013 this includes regular quarterly cash dividends. For 2012 this includes quarterly cash dividends of $191,194 paid in May 2012, $220,550 in August 2012 and $265,324 paid in December 2012 along with a special cash dividend of $1,911,943 paid to our stockholders of record as of May 21, 2012.

Note 4:Net Income Per Share

Computation of net income per share is as follows:


	Year Ended December 31,
	2013		2012

Net income attributable to SMTP.com	$	1,272,963	$	1,069,607

Basic weighted average common shares outstanding		3,004,541		2,882,437
Add incremental shares for:
Warrants		11,255		12,768
Stock options		53,477		27,105
Diluted weighted average common shares outstanding		3,069,273		2,922,310

Net income per share:
Basic	$	0.42	$	0.37
Diluted	$	0.41	$	0.37

F-11

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 5: Income Taxes

The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Income taxes for years ended December 31, is summarized as follows:


	2013			2012

Current provision	$	745,852		$	646,131
Deferred provision (benefit)		(77,697	)		(2,136	)
Net income tax provision	$	668,155		$	643,995

A reconciliation of income tax computed at the U.S. statutory rate to the effective income tax rate is as follows:


	2013						2012
	Amount			Percent			Amount			Percent

Federal statutory rates	$	659,980			34	%	$	582,722			34	%
State income taxes, net of federal benefit		27,064			1	%		107,461			6	%
Stock options		27,503			1	%		(7,180	)		(0	)%
Permanent differences		4,313			0	%		6,271			0	%
Other		(50,705	)		(3	)%		(45,279	)		(3	)%
Effective rate	$	668,155			33	%	$	643,995			37	%

The following is a summary of the components of the Company’s deferred tax assets:


	2013			2012
Deferred tax assets (liabilities) - current:
Accounts receivable	$	(15,054	)	$	(18,694	)
Prepaid Expenses		(41,481	)		(23,435	)
Stock-based compensation		86,347			73,000
Provisions and accruals		20,194			24,756
Deferred revenue		133,429			140,470
Total current deferred tax assets (liabilities)		183,435			196,097
Deferred tax assets (liabilities) - long-term:
Plant and equipment		50,099			14,536
Total net deferred tax assets	$	233,534		$	210,633

As of December 31, 2013, the Company did not have a significant tax operating loss carry forward. No valuation allowances have been established for deferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carry forward periods provided in the tax law, which management estimate they will.

We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:


·	Future reversal of existing taxable temporary differences;
·	Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carry forwards; and
·	Tax-planning strategies.

Note 6: Related Party Transactions

There were no related party transactions for the years ended December 31, 2013 or 2012.

F-12

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 7:Warrants

On October 29, 2012, in connection with a consulting agreement, the Company issued 90,973 warrants to purchase common stock at an exercise price of $4.90 per share with a term of 5 years. The warrants vest according to the following schedule: 15,163 shares vest immediately and 15,163 shares vest at the end of every thirty day period thereafter until the warrant is 100% vested. For the years ended December 31, 2013 and 2012, the Company recognized an expense of $130,298 and $115,162, respectively. The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on October 29, 2017 and have a remaining contractual life of 3.83 years as of December 31, 2013. As of December 31, 2013, all warrants were exercisable.

On August 1, 2013, in connection with a consulting agreement, the Company issued 30,000 warrants to purchase common stock at an exercise price of $5.00 per share with a term of 3 years. For the year ended December 31, 2013, the Company recognized an expense of $57,779 associated with these awards. The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on August 1, 2016 and have a remaining contractual life of 2.59 years as of December 31, 2013. As of December 31, 2013, all warrants were exercisable.

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


					Weighted
					Average
			Weighted		Remaining
			Average		Contractual
	Number		Exercise		Term		Intrinsic
	of Units		Price		(in years)		Value

Outstanding at December 31, 2012		90,973	$	4.90

Granted		30,000		5.00

Outstanding at December 31, 2013		120,973	$	4.92		3.5		—

Exercisable at December 31, 2013		120,973	$	4.92		3.5		—

The warrants were valued using the Black-Scholes pricing model with the following assumptions:


	Year Ended December 31,
	2013			2012
Volatility		56	%		57% - 68	%
Risk-free interest rate		0.35	%		0.31% - 2.07	%
Expected term	1.5 years			2.5 - 5 years

Note 8: Stock-Based Compensation

From time to time, the Company grants stock option awards to officers and employees.

In November 2010, the board of directors authorized the 2010 Stock Incentive Plan ("the Plan") which provides us with the ability to issue options on up to 272,000 common shares.

On April 29, 2011, the Company increased the number of shares of the Company’s common stock available for issuance under the plan from 272,000 to 500,000.

In August 2013, the Company increased the number of shares of the Company’s common stock available for issuance under the Plan from 500,000 to 1,000,000. The Company’s stockholders approved this increase on October 22, 2013 pursuant to a written consent of stockholders owning a majority of the shares of outstanding common stock.

F-13

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Such awards are valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:


	Year Ended December 31,
	2013			2012
Volatility		66% - 68	%		54% - 68	%
Risk-free interest rate		1.74% - 2.01	%		0.90% - 1.22	%
Expected term	6.25-7.25 years			6.3 years
Forfeiture rate		15	%		15	%
Dividend yield rate		0	%		0

The volatility used was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. The risk free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.

Stock option awards are expensed on a straight-line basis over the requisite service period. During the years ended December 31, 2013 and 2012, the Company recognized expense of $212,946 and $153,376, respectively, associated with stock option awards. At December 31, 2013, future stock compensation expense (net of estimated forfeitures) not yet recognized was $1,208,238 and will be recognized over a weighted average remaining vesting period of 3.68 years. The following summarizes stock option activity for the year ended December 31, 2013:


								Weighted
				Weighted		Weighted		Average
				Average		Average		Remaining
	Number			Exercise		Fair		Contractual
	of Shares			Price		Value		Life
Outstanding at December 31, 2012		437,667		$	4.45	$	2.40
Granted at market price		353,690			5.06
Exercised		(58,900	)	$	1.09
Forfeited		(107,300	)	$	6.04
Outstanding at December 31, 2013		625,157			4.83		2.92		8.9
Exercisable at December 31, 2013		148,532		$	3.97	$	2.33		8.0

The outstanding shares at December 31, 2012 were adjusted to reflect options that were issued but not included in the prior periods tables. This does not impact stock compensation expense.

The following summarizes information about the Company’s stock options at December 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

$1.25 per share		56,717	$	1.25		20,450	$	1.25		77,167	$	1.25
$4.95 per share		46,375	$	4.95		90,125	$	4.95		136,500	$	4.95
$5.00 per share		24,490	$	5.00		274,199	$	5.00		298,690	$	5.00
$5.15 per share		—	$	5.15		25,000	$	5.15		25,000	$	5.15
$5.55 per share		—	$	5.55		30,000	$	5.55		30,000	$	5.55
$7.95 per share		20,950	$	7.95		36,850	$	7.95		57,800	$	7.95

The intrinsic value of the Company’s stock options outstanding was $0 at December 31, 2013.

F-14

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Note 9: Commitments and Contingencies

Litigation

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, 2013. Future minimum payments under non-cancelable service contracts are as follows for the years ended December 31:


2014	$	14,405
2015		—
2016		—
2017		—
2018		—
Thereafter		—
	$	14,405

Changes in Officers and Employment Agreements

On April 30, 2012, Mr. William Morrison resigned as the Vice President of Engineering of the Company. As a result of his departure, Mr. Morrison also resigned as an officer of the Company. Mr. Morrison did not receive any severance as part of his resignation. Of the 20,000 options granted on January 26, 2011, 5,000 vested and 15,000 remained unvested and were forfeited.

On June 13, 2012, Mr. Semyon Dukach, the Company’s Chief Executive Officer resigned, and on that same date the Company’s board of directors appointed Richard T. Harrison to the position of Chief Executive Officer. Mr. Harrison received as compensation, among other things, a base salary of $100,000 per year, along with quarterly performance based bonuses. Mr. Harrison’s employment agreement was effective June 1, 2012.

On June 13, 2012 the Company’s board of directors re-appointed Mr. Semyon Dukach to the position of Chair of the Board of Directors, which was an executive position with the Company, effective June 13, 2012. Mr. Dukach receives no compensation for serving as the registrant’s Chair of the Board of Directors and his existing oral employment agreement and annual salary of $100,000 per year was terminated, except that Mr. Dukach is entitled to reimbursement of reasonable business expenses in accordance with the registrant’s corporate policy and any health benefits the registrant offers its other employees.

On August 15, 2012, Richard T. Harrison resigned as the chief executive officer and all other positions he held with the registrant. On that same date, the registrant’s board of directors appointed a committee to oversee the registrant’s operations, led by Semyon Dukach, the registrant’s Chair of the Board of Directors. Mr. Harrison received a severance in the amount of $33,333, the equivalent of four months base salary paid ratably over a four month period according to the Company’s standard payroll schedule and health insurance benefits over a four month period. Of the 192,000 options granted on July 1, 2010, 112,667 vested and 79,333 remain unvested and were forfeited.

F-15

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 August 15, 2013, upon the appointment of Jonathan M. Strimling, as the Company’s Chief Executive Officer, the Company’s Board of Directors removed Mr. Ilin as the Company’s President and Principal Executive Officer. Mr. Illin continues to serve as the Company’s Vice President-Operations and 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.

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

On August 15, 2013, Jonathan M. Strimling was appointed as Chief Executive Officer. Pursuant to a written agreement, Mr. Strimling will receive a base salary of $180,000 per year along with quarterly performance based bonus compensation, other event based bonus compensation, and an option to purchase up 298,690 shares of the Company’s common stock at the strike price of $5.00 per share. The options vest monthly over a four year period in equal installments of 6,223 shares per month beginning August 15, 2013, except that during the final month of vesting 6,228 shares shall vest. All of the options expire on August 14, 2023. The option grant was made pursuant to the Company’s 2010 Employee Stock Plan.

On September 18, 2013, Yvonne Gaudette was appointed as Vice President of Marketing. As the Company’s Vice President of Marketing, pursuant to a written agreement, Ms. Gaudette will receive a base salary of $110,000 per year, along with quarterly performance based bonus compensation and an option to purchase up to 25,000 shares of the Company’s common stock at the strike price of $5.15 per share. The options vest over a period of four years with 25% of the option shares vesting on September 18, 2014 and the remaining 75% of the option shares vest on an equal monthly basis thereafter. All of the options expire on September 17, 2023. The option grant was made pursuant to the Company’s 2010 Employee Stock Plan.

On September 25, 2013, Paul Parisi was appointed as Vice President of Innovation. As the Company’s Vice President of Innovation, pursuant to a written agreement, Mr. Parisi will receive a base salary of $70,000 per year, along with quarterly performance based bonus compensation and an option to purchase up to 30,000 shares of the Company’s common stock at the strike price of $5.55 per share. The options vest in two tranches as follows: (i) 15,000 shares vest over a period of four years following the commencement of part-time employment (the Initial Option shares”) whereby 25% of the Initial Option Shares will vest on September 25, 2014 and the remaining 75% of the Initial Option Shares vest on a monthly basis thereafter; (ii) and 15,000 shares vest over the four years following the commencement of full time employment, if that event occurs (the "Second Option Shares"), whereby 25% of the Second Option Shares vest on the first anniversary of the date of the start of full time employment and the remaining 75% of the Second Option Shares vest on a monthly basis thereafter. All of the options expire on September 24, 2023. The option grant was made pursuant to the Company’s 2010 Employee Stock Plan.

Consulting Services

On May 9, 2012, the warrant to purchase 160,000 shares of common stock at an exercise price of $3.13 per share was exercised with total proceeds to the Company of $500,000.

F-16

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 3,774 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 9,000 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 $6.20 on March 8, 2013. On July 1, 2013, the Company terminated the consulting services agreement and issued 14,083 shares of common stock to pay the outstanding balance of approximately $75,000 due to the consultants.

On October 29, 2012, the Company entered into a professional services agreement. In connection with the agreement, the Company issued 90,973 warrants to purchase common stock at an exercise price of $4.90 per share with a term of 5 years in exchange for professional services. As of December 31, 2012, 45,487 of such warrants were exercisable. The agreement also call 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 7 for discussion of warrants.

On May 29, 2013, the Company entered into a professional services agreement. The agreement requires the Company to pay $25,000 per month in exchange for marketing and advertising services. The agreement terminates on December 31, 2014 but is cancellable at any time.

On August 1, 2013, the Company entered into a professional services agreement. In connection with the agreement, the Company issued 30,000 warrants to purchase common stock at an exercise price of $5.00 per share with a term of 3 years in exchange for professional services. As of September 30, 2013, all warrants were exercisable. This agreement also requires the Company to pay $7,500 in cash per month for 12 months in exchange for sales and marketing services. The agreement terminates on July 31, 2014 but is cancellable after the first six months.

Note 10: Asset Purchase Agreement

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 Company 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 acquired based on their estimated fair value.

Note 11: Subsequent Events

Restructuring of Executive Team

On January 13, 2014 the Company’s Board of Directors appointed Lewis Moorehead to serve as the Company’s Chief Financial Officer and principal financial officer commencing on January 14, 2014. Mr. Moorehead was engaged as a part time employee. As the Company’s Chief Financial Officer, Mr. Moorehead took responsibility for ensuring the long-term financial health of the Company, overseeing the Company’s accounting and audits, and such other duties that are customarily the responsibilities of a chief financial officer.

In exchange for serving as the Company’s Chief Financial Officer, Mr. Moorehead was offered as compensation a base salary of $4,333 per month and an option to purchase up to 60,000 shares of the Company’s common stock at an exercise price of $7.50 per share. The options were scheduled to vest over a period of four years with 1,250 options vesting each month over the four year period. All of the options expire on January 12, 2024, subject to earlier expiration in certain circumstances. The option grant was made pursuant to the Company’s 2010 Employee Stock Plan and subject to the terms of the Plan’s standard incentive stock option agreement.

F-17

SMTP, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

On January 13, 2014, upon the appointment of Mr. Moorehead as the Company’s Chief Financial Officer, the Company’s Board of Directors removed Alena Chuprakova as the Company’s principal financial officer. Ms. Chuprakova continues to serve as the Company’s Treasurer, and her title was changed from Comptroller to Controller.

On March 17, 2014, the Company initiated a restructuring of certain senior positions. The part-time CFO role and part-time Vice President of Innovation Roles were eliminated, with an intent to retain a full time CFO/COO, a full time Vice President of Engineering and a full time Product Manager. On March 17, 2014, Lewis Moorehead resigned his position as the Company’s Chief Financial Officer and is no longer an employee of our Company. Upon the resignation of Mr. Moorehead as the Company’s Chief Financial Officer, the Company’s Board of Directors appointed Alena Chuprakova, the Company’s Treasurer and Controller, to serve as the Company’s interim principal financial officer.On March 18, 2014 Paul Parisi resigned his position as Vice President of Innovation and is no longer an employee of our Company. Mr. Parisi and Mr. Moorehead are expected to continue to assist our Company on a consulting basis.

Appointment of New Directors

On January 13, 2014 the Board of Directors appointed Jonathan M. Strimling, the Company’s current Chief Executive Officer, and David A. Buckel, to the Board of Directors to fill two newly created directorships on the Board of Directors. Each of Mr. Strimling and Mr. Buckel accepted their appointment to the Board of Directors on that same date and each of them shall serve as a member of the Board of Directors until the Company’s next annual stockholder’s meeting or until their earlier resignation or removal.

Mr. Buckel was named to the following Board of Directors committees: Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee. Also, Mr. Buckel has been named chairman of the Audit Committee.

In exchange for serving on the Board of Directors as an independent director, Mr. Buckel shall receive an annual stipend equal to $10,000, payable in quarterly increments of $2,500 per quarter, payable in cash or in shares of Company stock, as shall be determined by the Board of Directors, payable at the end of each full quarter served. Additionally, Mr. Buckel shall be issued an option to purchase up to 16,000 shares of the Company’s common stock at an exercise price of $7.50 per share, to be issued from the Company’s 2010 Employee Stock Plan. The options shall vest over a period of four year as follows: 1,000 options hall vest quarterly over the four year period. All of the options expire on January 12, 2024, subject to earlier expiration in certain circumstances. Mr. Strimling shall receive no additional compensation for serving on the Board of Directors.

Effectiveness of Form S-1

Dividends

On March 3, 2014, the Company paid quarterly dividends of $601,912 to its shareholders.

Share Issuances

In February 2014, 47,568 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $59,460 cash.

In February 2014, the Company issued a total of 750 shares of the Company’s common stock to the directors.

F-18

INDEX TO EXHIBITS


Exhibit Number	Title of Document	Location

3.1	Certificate of Incorporation	Incorporated by reference to our Registration Statement on Form S-1 filed on December 2, 2010
3.2	Amendment to Certificate of Incorporation	Incorporated by reference to our Form 8-K filed on December 17, 2013
3.3	Bylaws	Incorporated by reference to our Registration Statement on Form S-1 filed on December 2, 2010
10.1	2010 Employee Stock Plan	Incorporated by reference to our Registration Statement on Form S-1 filed on December 2, 2010
10.4	Employment Agreement –Jonathan M. Strimling	Incorporated by reference to our Form 8-K filed on August 20, 2013
10.5	Employment Agreement –Yvonne Gaudette	Incorporated by reference to our Form 8-K filed on September 24, 2013
10.6	Employment Agreement – Paul D. Parisi	Incorporated by reference to our Form 8-K filed on September 30, 2013
10.7	Professional Services Agreement - inSegment	Incorporated by reference to our Form 8-K filed on October 23, 2012
10.8	Addendum to Professional Services Agreement - inSegment	Incorporated by reference to our Form 10-Q filed on May 14, 2013
10.9	Second Addendum to Professional Services Agreement - inSegment	Incorporated by reference to our Form S-1 filed on December 26, 2013

10.11	Asset Purchase Agreement - Octeth	Incorporated by reference to our Form 8-K filed on January 10, 2013
10.12	Investment Agreement - Dutchess Opportunity Fund, II, LP	Incorporated by reference to our Form 8-K filed on May 24, 2013
10.13	Registration Rights Agreement - Dutchess Opportunity Fund, II, LP	Incorporated by reference to our Form 8-K filed on May 24, 2013
10.14	Marketing Agreement - Greenway	Incorporated by reference to our Form 8-K filed on May 31, 2013
14.1	Code of Ethics and Business Standards	Incorporated by reference to our Form 8-K filed on January 14, 2014
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
101.1	XBRL	Furnished herewith

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

SharpSpring (SHSP) 10-K2013 FY Annual report

Content analysis