UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

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FORM 10-Q

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(Mark One)

COMMISSION FILE NUMBER: 0-54309

SMTP, Inc.

(Exact name of registrant as specified in its charter)

One Broadway, 14th Floor Cambridge, MA 02142

(Address of principal executive offices) (Zip Code)

(617) 500-8635

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

SMTP, INC.

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

Forward-Looking Information

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

Examples of forward-looking statements include:

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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.

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, 2010. 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.

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ITEM 1.

FINANCIAL STATEMENTS.

SMTP, INC.

CONDENSED BALANCE SHEETS

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

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SMTP, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

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

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SMTP, INC.

UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS

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

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SMTP, INC.

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS

Note 1:

Organization and Basis of Presentation

Background

The Company was incorporated in Massachusetts on October 14, 1998 as EMUmail, Inc. and changed its name on April 1, 2010 to SMTP.com, Inc. The Company focuses on the execution of email delivery for marketing and transactional applications. The Company has customers for both corporate and small business 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.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The accounting policies are described in the “Notes to the Financial Statements” in the 2010 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 nine months ended September 30, 2011 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 reported period amounts to conform to current year presentations.

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 and a software license. 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”.

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SMTP, INC.

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

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 2006 remain open to examination by U.S. federal and state tax jurisdictions.

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

Revenue Recognition

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

The Company provides Internet email delivery and related services, including email marketing and transactional email sending, sender reputation management, email complaint processing, and email delivery diagnostics. 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, PayPal, 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.

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. For periods prior to March 31, 2011, the Company’s options and warrants to purchase shares of common stock were excluded from the calculation of net income per share because the average market price of the underlying shares during the period was not greater than the exercise price of the options.

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SMTP, INC.

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

Note 2:

Intangible Assets

Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Impairment is determined to exist if the anticipated future cash flow attributable to the asset is less than its carrying value. The asset is then reduced to the net present value of the anticipated future cash flow.

Domain Name

Domain name represents the cost of an internet domain. The cost is amortized on the straight-line method over its estimated useful life of fifteen (15) years.

Amortization expense for the three and nine months ended September 30, 2011 was $334 and $834 respectively, and for the three and nine months ended September 30, 2010 was $334 and $834, respectively. Estimated amortization expense for each of the ensuing years through December 31, 2013 is $1,336 per year.

Software License

Software license represents an amount paid to a third party for use of their software. The license will be amortized over its expected useful life on the straight-line method over five (5) years.

The Company has not amortized any of the licenses costs as of September 30, 2011.

Note 3:

Shareholders’ Equity

During February and March of 2011, the Company issued and sold 400,000 shares of the Company’s common stock at $0.25 per share. The sale of the common stock resulted in gross proceeds of $100,000 and net proceeds of $96,816 to the Company after deducting offering costs of $3,184. The Company has used a portion of, and intends to continue to use, the proceeds of their initial public offering for product development expenses.

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SMTP, INC.

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

Note 4:

Net Income Per Share

Computation of net income per share is as follows:

Note 5:

Stock-Based Compensation

The Company has historically granted stock options to certain vendors and employees. On January 26, 2011, the Company granted 384,000 stock options at a strike price of $0.25 that vest equally over a four year period. The grant date fair value of the awards was $54,736 (net of estimated forfeitures of 10%) which was determined using a Black-Scholes option pricing model using the following assumptions: volatility of 68%, risk-free rate of return of 2.4%, stock price of $0.25 and expected term of 6.25 years. The options expire in 2021.

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 three and nine months ended September 30, 2011, the Company recognized expense of $11,790 and $34,947, respectively, associated with stock option awards. There was no stock option expense recognized during the three and nine months ended September 30, 2010. At September 30, 2011, future stock compensation expense (net of estimated forfeitures) not yet recognized was $139,432 and will be recognized over a weighted average remaining vesting period of 1.7 years. The following summarizes stock option activity for the nine months ended September 30, 2011:

The intrinsic value of the Company’s stock options outstanding was $1,048,320 at September 30, 2011.

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SMTP, INC.

NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)

Note 6:

Warrants

On March 23, 2011, in connection with a consulting agreement, the Company issued 800,000 warrants to purchase common stock at an exercise price of $0.625 per share with a term of 5 years. The warrants were fully vested at the date of grant and the Company recognized an expense of $73,768 equal to the grant date fair value of the warrants using the following assumptions: volatility of 68%; risk-free interest rate of 2.07%; and expected term of 5 years. The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on March 23, 2016 and have a remaining contractual life of 4.5 years as of September 30, 2011.  The intrinsic value of the Company’s warrants outstanding was $324,000 at September 30, 2011.

Note 7:

Commitments and Contingencies

Litigation

The Company may from time to time be involved in legal proceedings arising from the normal course of business. There are no pending or threatened legal proceedings as of September 30, 2011.

Operating Leases and Service Contracts

The Company rents its facilities on a month-to-month basis. Most of its service contracts are also on a month-to-month basis. However, the Company entered into a couple of noncancelable service contracts during the nine months ended September 30, 2011.  Future minimum payments under noncancelable service contracts are as follows for the years ended December 31:

Note 8:

Related Party Transactions

Amounts Due to Shareholder

In February 2010, the Company provided a loan of $100,000 at an annualized interest rate of 3% to one of its shareholders. The loan, plus $1,000 in interest, was repaid by the shareholder in July 2010.

Note 9:

Income Taxes

During the quarter ended September 30, 2011, the Company recorded an income tax provision of $233,701, which was comprised of a current provision of $238,514 offset by a deferred benefits of $4,813.

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Except for the historical information contained in this report on Form 10-Q, the matters discussed herein are forward-looking statements. Words such as “anticipates,” “believes,” “expects,” “future,” and “intends,” and similar expressions are used to identify forward-looking statements. These and other statements regarding matters that are not historical are forward-looking statements. These matters involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed below as well as those discussed elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. This information should also be read in conjunction with our audited historical financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission on March 31, 2011.

Background Overview

We provide Internet email delivery and related services, including email marketing and transactional email sending, sender reputation management, email complaint processing, and email delivery diagnostics. 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. Our stock is publicly traded on the Over-the-Counter Bulletin Board, under the trading symbol SMTP (OTCBB:SMTP).

Results of Operations

Net Revenues

Revenues increased for the three and nine months ended September 30, 2011 as compared to the three and nine months ended September 30, 2010, due to increased sales of our email delivery services to consumers. Revenue growth is attributable to an increase in our number of subscribers as well as to organic growth in our customer base, especially among our larger business users who require dedicated computer and software systems and typically pay a higher average monthly fee.

Cost of Services

Cost of services increased for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010 primarily due to increased revenues. As a percentage of revenues, cost of services were 18% and 19% of net revenues for the three and nine months ended September 30, 2011, respectively, as compared to 20% and 24% for the three and nine months ended September 30, 2010, respectively. This decrease in cost of services as a percentage of revenues is due to decreased partner share commissions during 2011 as a lower volume of customers were provided by our resellers.

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Sales and Marketing

Sales and marketing expenses increased for the three and nine months ended September 30, 2011 as compared to the three and nine months ended September 30, 2010 as we have increased our marketing and sales strategies. We have experienced substantial increases in our net revenues during the three and nine months ended September 30, 2011 as compared to the three and nine months ended September 30, 2010 due to these increased marketing and sales strategies.  

General and Administrative

General and administrative expenses increased for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010 based on the following:

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An increase of approximately $75,000 in facilities and other general costs as we develop our infrastructure for future growth;

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An increase of approximately $142,000 of professional services related to our newly acquired status as a publicly traded company;

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An increase in stock compensation expense of approximately $38,000 related to stock options issued;

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A decrease in payroll and related costs of approximately $60,000 primarily due to a lower bonus paid to our Chief Executive Officer.

General and administrative expenses remained consistent for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.

Research and Development

Research and development expenses increased for the three and nine months ended September 30, 2011 as compared to the three and nine months ended September 30, 2010 as we utilized more subcontractors devoted to research and development. Our research and development efforts are focused around expanding our service offerings and improving the functionality of our services.

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Provision for Income Tax

Changes in our income tax expense related primarily to an increase in pretax income. Our effective tax rate was 40% and 43% during the three and nine months ended September 30, 2011 as compared to 44% and 44% during the three and nine months ended September 30, 2010. The changes in effective tax rates are due to adjustments to our income tax returns that were filed during the three months ended June 30, 2011.  

Net Income

Net income increased for the three and nine months ended September 30, 2011 as compared to the three and nine months ended September 30, 2010, respectively, primarily due to revenue growth partially offset by increases in cost of services, operating expenses and income taxes 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.

Net cash generated by operating activities increased approximately $572,000, or 157%, to $935,285 for the nine months ended September 30, 2011, compared to $363,469 for the nine months ended September 30, 2010. The increase of cash generated by operating activities was attributable to an increase in net income of $433,506 and an increase in noncash charges of approximately $112,000 and $26,000 in increases in working capital and other net operating assets.

Net cash used in investing activities was $(150,349) and $(3,164) during the nine months ended September 30, 2011, and 2010, respectively, consisting of investments in computers, servers, other equipment and licensed software.

Net cash provided by financing activities was $96,816 and $0 during the nine months ended September 30, 2011 and 2010, respectively. During February and March of 2011, we issued and sold 400,000 shares of our common stock and received net proceeds of $96,816 after deducting offering costs of $3,184. In February 2010, we provided a loan of $100,000 to one of our shareholders. The loan was repaid by the shareholder in July 2010.

We had net working capital of $1,025,947 and $220,940 as of September 30, 2011 and December 31, 2010, respectively. Our increase in net working capital from December 31, 2010 to September 30, 2011 primarily attributable to our increased cash, which increased to $1,472,815 at September 30, 2011 compared to $591,063 at December 31, 2010 and our reduced accrued liabilities, which decreased to $26,320 at September 30, 2011 compared to $172,282 at December 31, 2010.

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Off-balance sheet arrangements

We did not have any off-balance sheet arrangements at September 30, 2011 or December 31, 2010.

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 September 30, 2011. Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of September 30, 2011 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.

This quarterly report does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

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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.

Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4.

REMOVED AND RESERVED.

Not applicable.

ITEM 5.

OTHER INFORMATION.

Not applicable.

ITEM 6.

EXHIBITS.

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*

Incorporated by reference to Registration Statement on Form S-1 filed on December 2, 2010.

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

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SIGNATURES

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

Dated: November 14, 2011

Dated: November 14, 2011

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