SharpSpring (SHSP) 10-Q 2014 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2014
Or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:001-36280
SMTP, Inc.
(Exact name of registrant as specified in its charter)
Delaware	05-0502529
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 Innovative Way, Suite 3330 Nashua, NH	03062
(Address of principal executive offices)	(Zip Code)
877-705-9362
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,015,931 shares of common stock as of May 5, 2014.

SMTP, INC.

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	1
Item 1. Financial Statements:.	2
Balance Sheets—December 31, 2013 and March 31, 2014 (unaudited)	2
Statements of Operations (unaudited)	3
Statements of Cash Flows (unaudited)	4
Notes to Financial Statements (unaudited)	5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations	13
Item 3. Quantitative and Qualitative Disclosure About Market Risk	16
Item 4. Controls and Procedures	16
PART II – OTHER INFORMATION	17
Item 1. Legal Proceedings.	17
Item 1A. Risk Factors.	17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3. Defaults Upon Senior Securities	17
Item 4. Mine Safety Disclosures	17
Item 5. Other Information.	17
Item 6. Exhibits	18
SIGNATURES	19

i

PART I – FINANCIAL INFORMATION

Forward-Looking Information

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

Examples of forward-looking statements include:

·

the timing of the development of future products;

·

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

·

statements of our plans and objectives;

·

statements regarding the capabilities of our business operations;

·

statements of expected future economic performance;

·

statements regarding competition in our market; and

·

assumptions underlying statements regarding us or our business.

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

·

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” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. 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.

1

Item 1.

Financial Statements.

SMTP, INC.

BALANCE SHEETS

	March 31,		December 31,
	2014		2013
	(unaudited)
Assets
Cash and cash equivalents	$	11,810,650	$	1,731,243
Accounts receivable		38,683		25,024
Deferred income taxes		204,269		183,435
Income taxes receivable		184,333		—
Other current assets		88,720		116,522
Total current assets		12,326,655		2,056,224
Property and equipment, net of accumulated depreciation of $175,371 and $145,261		297,232		327,342
Deferred income taxes		60,280		50,099
Deposits		29,995		29,995
Total assets	$	12,714,162	$	2,463,660
Liabilities and Shareholders' Equity
Deferred revenue	$	367,962	$	334,328
Income taxes payable		—		144,280
Allowance for refunds and chargebacks		2,442		2,965
Accrued expenses and other current liabilities		110,441		106,748
Total current liabilities		480,845		588,321
Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at March 31, 2014 and December 31, 2013		—		—
Common stock, $0.001 par value, 50,000,000 shares authorized, 5,015,916 and 3,127,598 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		5,015		3,126
Additional paid in capital		12,228,302		2,241,749
Accumulated deficit		—		(369,536	)
Total shareholders' equity		12,233,317		1,875,339
Total liabilities and shareholders' equity	$	12,714,162	$	2,463,660

See accompanying notes to the financial statements

2

SMTP, INC.

STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended
	March 31,
	2014		2013
Net revenue	$	1,490,054	$	1,369,438
Cost of services		288,370		274,558
Gross profit		1,201,684		1,094,880
Operating expenses:
Sales and marketing		148,672		202,767
General and administrative		583,764		466,293
Research and development		77,111		52,532
Total operating expenses		809,547		721,592
Income before income taxes		392,137		373,288
Provision for income tax		168,765		147,718
Net income	$	223,372	$	225,570
Net income per share:
Basic	$	0.05	$	0.08
Diluted	$	0.05	$	0.07
Weighted average common shares outstanding:
Basic		4,239,363		2,958,113
Diluted		4,302,443		3,194,072

See accompanying notes to the financial statements

3

SMTP, INC.

STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended
	March 31,
	2014			2013
Cash flows from operating activities:
Net income	$	223,372		$	225,570
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		30,110			17,587
Excess tax benefits from share-based payment arrangements		(83,775	)		3,171
Non-cash stock compensation		156,052			247,127
Allowance for refunds and chargebacks		(523	)		—
Deferred income taxes		(31,015	)		(23,310	)
Changes in assets and liabilities:
Accounts receivable		(13,659	)		(13,128	)
Other assets		27,802			23,567
Net change income taxes payable		(244,838	)		(67,214	)
Accrued expenses and other current liabilities		3,693			30,943
Deferred revenue		33,634			(21,565	)
Net cash provided by operating activities		100,853			422,748
Cash flows from investing activities
Purchases of property and equipment		—			(241,948	)
Net cash used in investing activities		—			(241,948	)
Cash flows provided by (used in) financing activities:
Dividends to shareholders		(601,766	)		(266,002	)
Proceeds from issuance of common stock		10,507,427			3,624
Excess tax benefits from share-based payment arrangements		72,893			—
Net cash provided by (used in) financing activities		9,978,554			(262,378	)
Change in cash and cash equivalents		10,079,407			(81,578	)
Cash and cash equivalents, beginning of period		1,731,243			784,001
Cash and cash equivalents, end of period	$	11,810,650		$	702,423
Supplemental cash flow disclosures:
Cash paid for income taxes	$	455,500		$	235,000

See accompanying notes to the financial statements

4

SMTP, INC.

Notes to the Financial Statements

(Unaudited)

Note 1:  Organization

Background

The Company was incorporated in Massachusetts on October 14, 1998 as EMUmail, Inc. and changed its name on April 1, 2010 to SMTP.com, Inc.  On November 23, 2010, the Company changed the domicile of the Company from a Massachusetts corporation to a Delaware corporation 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 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 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

In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 31, 2014. The accounting policies are described in the “Notes to Financial Statements” in the 2013 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

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

Credit card fees of $50,115 were reclassified from cost of services to general and administrative expenses for the three months ended March 31, 2013.

Fair Value of Financial Instruments

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

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

5

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

The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. There are no uncertain tax positions taken by the Company on its tax returns. Tax years subsequent to 2010 remain open to examination by U.S. federal and state tax jurisdictions.

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

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 is depreciated over its expected useful life on the straight-line method over five (5) years. The license was placed into service in August 2012.

Property and equipment is as follows:

	March 31,			December 31,
	2014			2013
Property and equipment, net:
Leasehold improvements	$	16,245		$	16,245
Furniture and fixtures		13,619			13,619
Computer equipment and software		427,286			427,286
Construction in progress		15,453			15,453
Total		472,603			472,603
Less: Accumulated depreciation		(175,371	)		(145,261	)
	$	297,232		$	327,342

Estimated useful lives are as follows:

Computing equipment	3 years
Software	3 - 5 years

6

Revenue Recognition

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

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

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

Deferred Revenue

The Company’s customers pay for services in advance on a 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 March 31, 2014 and December 31, 2013, 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 periods ended March 31, 2014, and 2013, 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.

Credit Card Processing Fees

Credit card processing fees are included as a component of general and administrative expenses and are expensed as incurred.

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.

7

Net Income Per Share

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

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:  Commitments and Contingencies

Litigation

The Company may from time to time be involved in legal proceedings arising from the normal course of business.

We are not a party to any litigation of a material nature. In October 2013, we 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.

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 in, 2013.  Future minimum payments under non-cancelable service contracts are as follows as of March 31:

2014		4,248
2015		—
2016		—
2017		—
2018		—
Thereafter		—
	$	4,248

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.

8

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.

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 years as follows: 1,000 options shall 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.

Note 4:  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 registrant acquired from Octeth certain tangible assets, including servers and devices, intangible assets related to PreviewMyEmail.com, along with customer and co-location contracts, in exchange for $160,000 cash. This asset purchase agreement did not constitute a business combination for which purchase accounting would apply and therefore the purchase price was allocated to the assets required based on their estimated fair value.  

Note 5:  Shareholders’ Equity

During 2012, the Company paid $386,563 of dividends in excess of retained earnings which created an accumulated deficit of $386,563 as of December 31, 2012 in the statement of Stockholders’ equity. According to SAB Topic 3.C. Question 1, for SEC registrants, if an accumulated deficit exists, the charge for dividends paid should be to additional paid in capital. In order to correct the error, the Company reclassified $386,563 of dividends from accumulated deficit to additional paid in capital for the three month period ended March 31, 2014. Management has concluded that the error pertaining to the presentation of dividends would not require an adjustment retrospectively to the financial statements of the form 10 – K for the years ended December 31, 2013 and 2012. The correction of the error has no impact on the historical net income, total equity, total assets and total liabilities.  The misstatement was not intentional by management and did not conceal any unlawful transactions. It was only a reclassification within the statement of stockholders’ equity.

9

For the three months ending March 31, 2014 and 2013, the Company paid quarterly dividends of $601,766 and $266,002, respectively.

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.

In connection with the S-1, the Company issued 80,000 warrants to purchase common stock at an exercise price of $7.81 per share with a term of 5 years in exchange for professional services. The warrants are exercisable after January 30, 2015.  As these warrants were issued in connection with an equity transaction, there was no expense recognized.

In February 2014, 47,567 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.

Note 6:Net Income Per Share

Computation of net income per share is as follows:

		Three Months Ended March 31,
		2014		2013
Net income attributable to SMTP.com		$	223,372	$	225,570
Basic weighted average common shares outstanding			4,239,363		2,958,113
Add incremental shares for:
Warrants			32,778		17,292
Stock options			30,302		218,667
Diluted weighted average common shares outstanding			4,302,443		3,194,072
	��
Net income per share:
Basic		$	0.05	$	0.08
Diluted		$	0.05	$	0.07

Note 7:  Stock-Based Compensation

From time to time, the Company grants stock option awards to officers and employees under the 2010 Stock Incentive Plan ("the Plan") which, as amended, provides us with the ability to issue options on up to 1,000,000 common shares. At March 31, 2014, the Company had 566,590 outstanding options issued under the plan.

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:

	Three Months Ended March 31,
	2014			2013
Volatility		73	%		—
Risk-free interest rate		1.93	%		—
Expected term		6.25			—

10

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.  The Company recognized expense of $151,052 and $36,029, for the three months ended March 31, 2014 and March 31, 2013, respectively. At March 31, 2014, future stock compensation expense (net of estimated forfeitures) not yet recognized was $900,645 and will be recognized over a weighted average remaining vesting period of 3.16 years.  The following summarizes stock option activity for the three months ended March 31, 2014:

								Weighted
				Weighted		Weighted		Average
				Average		Average		Remaining
	Number of			Exercise		Fair		Contractual
	Shares			Price		Value		Life
Outstanding at December 31, 2013		627,307		$	4.83	$	2.92
Granted at market price		76,000			7.50
Exercised		(45,567	)		0.47
Forfeited		(89,150	)		6.79
Outstanding at March 31, 2014		556,590			5.17		3.13		8.9
Exercisable		135,215		$	5.37	$	3.06		8.2

The outstanding shares at December 31, 2013 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 table summarizes information about the Company’s stock options at March 31, 2014:

	Exercisable				Unexercisable				Total
			Weighted				Weighted				Weighted
	Number		Average		Number		Average		Number		Average
Range of Exercise Prices	Outstanding		Exercise Price		Outstanding		Exercise Price		Outstanding		Exercise Price
$1.25 per share		20,450	$	1.25		11,150		1.25		31,600	$	1.25
$4.95 per share		46,375		4.95		88,625		4.95		135,000	$	4.95
$5.00 per share		24,490		5.00		274,200		5.00		298,690	$	5.00
$5.15 per share		—	$	5.15		25,000		5.15		25,000	$	5.15
$7.50 per share		2,500	$	7.50		16,000		7.50		18,500	$	7.50
$7.95 per share		41,400	$	7.95		16,400		7.95		57,800	$	7.95

The intrinsic value of the Company’s stock options outstanding was $1,792,520 at March 31, 2014.

Note 8:Income Taxes

During the quarter ended March 31, 2014, the Company recorded an income tax provision of $168,765, which was comprised of a current provision of $245,024 and a deferred benefit of $76,259.

Note 9:Warrants

On January 30, 2014, in connection with a consulting agreement, the Company issued 80,000 warrants to purchase common stock at an exercise price of $7.81 per share with a term of 5 years. For the three months ended March 31, 2014, the Company recognized an expense of $0, associated with these awards. The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on January 30, 2020 and have a remaining contractual life of 5.83 years as of March 31, 2014. These warrants are not exercisable prior to January 30, 2015.

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The following table summarizes information about the Company’s warrants at March 31, 2014:

					Weighted
					Average
			Weighted		Remaining
	Number		Average		Contractual		Intrinsic
	of Units		Exercise Price		Term		Value
Outstanding at December 31, 2013		120,973	$	4.92
Granted		80,000		7.81
Outstanding at March 31, 2014		200,973	$	6.07		4.3		43,356
Exercisable at March 31, 2014		120,973	$	6.07		2.0		165,156

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

	Three Months Ended March 31,
	2014			2013
Volatility		72	%		66%-67	%
Risk-free interest rate		0.54	%		.31% -.37	%
Expected term	2.5 years			2.5 years

Note 10:  Subsequent Events

On April 28, 2014, the Company’s Board of Directors approved an increase of the shares of common stock under the Company’s 2010 Employee Stock Plan to 1,350,000 shares.

On May 5, 2014, the Company’s Board of Directors approved a quarterly dividend of $0.12 per share to be paid out on May 30, 2014 to its shareholders of record as of May 20, 2014.

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Item 2.

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

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. This information should also be read in conjunction with our audited historical financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission on March 31, 2014.

Overview

SMTP, Inc. (the “Company”) provides 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. 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.

Results of Operations

Net Revenues	2014		2013		Change from Prior Year		Percent Change from Prior Year
Three Months Ended March 31,	$	1,490,054	$	1,369,438	$	120,616		8.8	%

Revenues increased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013, due to increased sales of our email service products to consumers.  Revenue growth is attributable primarily to an increase in the number of higher volume accounts, providing for a higher price per customer.

Cost of Service	2014		2013		Change from Prior Year		Percent Change from Prior Year
Three Months Ended March 31,	$	288,370	$	274,558	$	13,812		5.0	%

Cost of services increased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily due to increased revenues.  As a percentage of revenues, cost of services decreased to 19% from 20% of net revenues for the three months ended March 31, 2014 and 2013, respectively, due to operational leverage gained from our increase in revenues.

Sales and Marketing	2014		2013		Change from Prior Year			Percent Change from Prior Year
Three Months Ended March 31,	$	148,672	$	202,767	$	(54,095	)		(26.7	)%

Sales and marketing expenses decreased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.  The decrease primarily relates to a decrease in marketing subcontractor expenses due to bringing marketing in-house.

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General and Administrative	2014		2013		Change from Prior Year		Percent Change from Prior Year
Three Months Ended March 31,	$	583,764	$	466,293	$	117,471		25.2	%

General and administrative expenses increased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 based on the following:

·

An increase in stock compensation expense of approximately $115,000 related to additional stock options issued;

·

An increase in depreciation and amortization of approximately $13,000;

·

An increase in other general and administrative expense of approximately $32,000;

·

An increase in payroll and benefits of approximately $92,000 related to recent executive hires;

·

A decrease in professional fees of approximately $132,000; primarily related to a reduction in consulting expenses.

·

A decrease in board of director fees of $2,500.

Research and Development	2014		2013		Change from Prior Year		Percent Change from Prior Year
Three Months Ended March 31,	$	77,111	$	52,532	$	24,579		46.8	%

Research and development expenses increased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to hiring a VP of Innovation in order to focus on expanding our service offerings and improving the functionality of our products.

Income Tax Benefit (Expense)	2014			2013			Change from Prior Year			Percent Change from Prior Year
Three Months Ended March 31,	$	(168,765	)	$	(147,718	)	$	(21,047	)		14.2	%

Changes in our income tax expense related primarily to a increase in pretax income during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Net Income	2014		2013		Change from Prior Year			Percent Change from Prior Year
Three Months Ended March 31,	$	223,372	$	225,570	$	(2,198	)		(1.0	)%

Net income decreased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013, due to revenue growth partially offset by increases in cost of services and operating expenses related to the growth in our business, each of which is described above.

Liquidity and Capital Resources

Sources and Uses of Cash

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

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

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Analysis of Cash Flows

Net cash provided by operating activities decreased by $321,895 or 76%, to $100,853 for the three months ended March 31, 2014, compared to $422,748 for the three months ended March 31, 2013.  The decrease in cash provided by operating activities was attributable primarily to a reduction in net income, partially offset by changes in net working capital and other adjustments. The change in working capital was offset by a decrease in net income of approximately $2,198.

Net cash used in investing activities was $0 and $241,948 during the three months ended March 31, 2014, and 2013, respectively, consisting of investments in computers, servers, other equipment and licensed software related to an asset purchase agreement.

Net cash provided by (used in) financing activities was $9,978,554 and $(262,378) during the three months ended March 31, 2014 and 2013, respectively.  During the three months ended March 31, 2014, we distributed $601,766 in cash to our shareholders in the form of a regular quarterly dividend which was offset by proceeds of $10,507,427 received from the issuance of common stock and excess tax benefits from share-based payment arrangements of $72,893. During the three months ended March 31, 2013 we distributed $266,002, in cash to our shareholders in the form of a regular quarterly dividend which was offset by proceeds of $3,624 received from the issuance of our common stock.

We had net working capital of $11,845,810 and $1,467,903 as of March 31, 2014 and December 31, 2013, respectively.  Our increase in net working capital as of March 31, 2014 was primarily attributable to proceeds of $10,507,427 received from the issuance of our common stock in the first quarter of 2014 offset by a distribution of $601,766 in cash to our shareholders in the form of regular quarterly dividends.

Contractual Obligations

We rent our facilities on a month-to-month or quarter-to-quarter basis. Most of our service contracts are also on a month-to-month basis. However, we entered into several non-cancelable service contracts during 2013.  Future minimum payments under non-cancelable service contracts are as follows as of March 31:

2014		4,248
2015		—
2016		—
2017		—
2018		—
Thereafter		—
	$	4,248

Significant Accounting Policies

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

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We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree. Our Annual Report on Form 10-K for the year ended December 31, 2013 contains a discussion of these significant accounting policies. There have been no significant changes in our significant accounting policies since December 31, 2013.  See our Note 1 in our unaudited financial statements for the three months ended March 31, 2014 as set forth herein.

Off-balance sheet arrangements

We did not have any off-balance sheet arrangements at March 31, 2014.

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4. 

Controls and Procedures

Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2014. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of March 31, 2014 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting. We disclosed in our Annual Report on Form 10-K that management had 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. During the quarter ended March 31, 2014, management implemented and improved certain secondary reviews to address the issues related to gaps in segregation of duties. However, as of the quarter ended March 31, 2014, our documentation of management’s assessment of internal controls is not yet effective. We are working to improve such documentation in order to render our internal controls effective.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

Not applicable.

Item 1A.

Risk Factors.

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Securities issued for services

Date	Security/Value
February 2014	Common stock – 750 shares of common stock.  The common stock was valued at $5,000.
February 2014	Warrant - right to buy 80,000 shares of common stock at $7.8125 per share for professional services.

Securities issued for cash

Date	Security/Value
February 2014	Common stock – 47,567 shares of common stock at $1.25 per share for aggregate proceeds of $59,460 pursuant to option exercises.

Securities issued pursuant to our Employee Stock Plan

Date	Security/Value
January 2014	Stock options – right to buy 76,000 shares of common stock at $7.50 per share.

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

Item 3.

Defaults Upon Senior Securities.

Not Applicable.

Item 4.

Mine Safety Disclosures.

Not Applicable.

Item 5.

Other Information.

.

Not Applicable.

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Item 6.

Exhibits.

INDEX TO EXHIBITS

SEC Reference Number	Title of Document	Location
1.1	Form of Underwriting Agreement	*
14.1	Code of Ethics and Business Standards	**
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	XBRL	Furnished herewith

———————

*

Incorporated by reference to our Registration Statement on Form S-1 filed on January 23, 2014.

**

Incorporated by reference to our Form 8-K filed on January 14, 2014

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SMTP, INC.
By:	/s/Jonathan M. Strimling
	Jonathan M. Strimling
	Chief Executive Officer (Principal Executive Officer) Date: May 14, 2014

SMTP, INC.
By:	/s/ Alena Chuprakova
	Alena Chuprakova Controller
	(Principal Financial Officer) Date: May 14, 2014

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