UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2012
Or
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-54309
SMTP, Inc.
(Exact name of registrant as specified in its charter)
Delaware	05-0502529
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One Broadway, 14th Floor Cambridge, Massachusetts	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)

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

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  x 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	x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,707,250 shares of common stock as of July 20, 2012.

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SMTP, INC.

Table of Contents

	Page
PART I – FINANCIAL INFORMATION	1
Item 1. Financial Statements:.	2
Balance Sheets—December 31, 2011 and June 30, 2012 (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	10
Item 3. Quantitative and Qualitative Disclosure About Market Risk	13
Item 4. Controls and Procedures	13
PART II – OTHER INFORMATION	14
Item 1. Legal Proceedings.	14
Item 1A. Risk Factors.	14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3. Defaults Upon Senior Securities	13
Item 4. Mine Safety Disclosures	14
Item 5. Other Information.	14
Item 6. Exhibits	14
SIGNATURES	15

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PART I – FINANCIAL INFORMATION

Forward-Looking Information

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

Examples of forward-looking statements include:

·

the timing of the development of future products;

·

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

·

statements of our plans and objectives;

·

statements regarding the capabilities of our business operations;

·

statements of expected future economic performance;

·

statements regarding competition in our market; and

·

assumptions underlying statements regarding us or our business.

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, 2011. 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

			June 30,		December 31,
			2012		2011
			(unaudited)
Assets
Cash and cash equivalents			$ 447,682		$ 1,978,809
Accounts receivable			32,185		4,226
Deferred income taxes			171,619		206,283
Other current assets			45,748		26,042
Total current assets			697,234		2,215,360
Property and equipment, net of accumulated depreciation      of $22,281 and $11,608			141,135		149,315
Intangibles, net of accumulated amortization     of $8,100 and $7,432			900		1,568
Deferred income taxes			6,255		2,214
Deposits			29,995		29,995
Total assets			$ 875,519		$ 2,398,452
Liabilities and Shareholders' Equity
Deferred revenue			$ 365,887		$ 335,425
Income taxes payable			18,348		458,631
Allowance for refunds and chargebacks			8,353		7,202
Accrued expenses and other			119,948		173,587
Total current liabilities			512,536		974,845
Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares      authorized,no shares issued or outstanding at June 30, 2012     and December 31, 2011			-		-
Common stock, $0.001 par value, 50,000,000 shares authorized,     14,707,250 and 13,841,000 shares issued and outstanding at     June 30, 2012  and December 31, 2011, respectively			14,708		13,842
Additional paid in capital			873,515		276,924
(Accumulated deficit) retained earnings			(525,240)		1,132,841
Total shareholders' equity			362,983		1,423,607
Total liabilities and shareholders' equity			$ 875,519		$ 2,398,452

See accompanying notes to the financial statements

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SMTP, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

			Three Months Ended June 30,				Six Months Ended June 30,
			2012		2011		2012		2011
Net revenue			$ 1,352,025		$ 1,000,555		$ 2,599,439		$ 1,932,813
Cost of services			331,848		181,634		638,195		377,480
Gross profit			1,020,177		818,921		1,961,244		1,555,333
Operating expenses:
	Sales and marketing		194,307		83,429		421,081		154,234
	General and administrative		293,047		248,676		571,701		567,046
	Research and development		108,595		102,862		222,194		178,857
		Total operating expenses	595,949		434,967		1,214,976		900,137
Operating income:			424,228		383,954		746,268		655,196
Other income:
	Interest income		-		259		-		443
Total other income			-		259		-		443
Income before income taxes			424,228		384,213		746,268		655,639
Provision for income tax			184,000		181,286		301,212		295,350
Net income			$ 240,228		$ 202,927		$ 445,056		$ 360,289
Net income per share:
	Basic		$ 0.02		$ 0.01		$ 0.03		$ 0.03
	Diluted		$ 0.02		$ 0.01		$ 0.03		$ 0.02
Weighted average common   shares outstanding:
	Basic		14,339,434		13,840,264		14,090,467		13,703,743
	Diluted		15,159,016		15,484,904		14,974,691		14,886,013

See accompanying notes to the financial statements

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SMTP, INC.

CONDENSED STATEMENTS OF CASH FLOWS

 

		Six Months Ended June 30,
		2012		2011
Cash flows from operating activities:
Net income		$ 445,056		$ 360,289
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization		11,342		1,998
Stock-based compensation		66,270		99,775
Allowance for refunds and chargebacks		1,151		4,859
Deferred income taxes		30,623		5,859
Changes in assets and liabilities:
Accounts receivable		(27,959)		3,877
Other assets		(19,706)		(6,123)
Deposits		-		39,405
Income taxes payable		(425,534)		(19,871)
Accrued expenses and other		(53,639)		(146,607)
Deferred revenue		30,462		51,412
Net cash provided by operating activities		58,066		394,873
Cash flows from investing activities
Purchases of property and equipment		(2,494)		(148,225)
Net cash used in investing activities		(2,494)		(148,225)
Cash flows from financing activities:
Dividend to shareholder		(2,103,137)		-
Proceeds from issuance of common stock		516,438		96,816
Net cash (used in) provided by financing activities		(1,586,699)		96,816
Change in cash and cash equivalents		(1,531,127)		343,464
Cash and cash equivalents, beginning of period		1,978,809		591,063
Cash and cash equivalents, end of period		$ 447,682		$ 934,527
Supplemental cash flow disclosures:
Cash paid for income taxes		$ 348,000		$ 309,362

 

See accompanying notes to the financial statements

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SMTP, INC.

Notes to the Financial Statements

(unaudited)

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 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.  

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, 2011. The accounting policies are described in the “Notes to Financial Statements” in the 2011 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 six months ended June 30, 2012 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

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

Fair Value of Financial Instruments

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

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

Income Taxes

Provision for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the

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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-based services to facilitate email deliverability, including bulk and transactional sending, reputation management, compliance auditing, abuse processing and 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 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 (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. 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.

Note 2:  Commitments and Contingencies

Litigation

The Company may from time to time be involved in legal proceedings arising from the normal course of business.  There are no pending or threatened legal proceedings as of June 30, 2012.

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Consulting Services

On July 15, 2010, the Company entered into an agreement with a third party to provide various consulting services for the Company in connection with an anticipated filing of a registration statement with the Securities and Exchange Commission.  Under the terms of the agreement, which was amended in November 2010 to clarify certain provisions, the consultant is to receive $40,000 cash and 800,000 warrants to purchase the Company’s common stock at an exercise price of $0.625 per share with a contractual term of 5 years.  The warrants are contingently issuable upon the earlier (a) twenty business days after notification by the SEC that any registration statement filed on behalf of the Company has been declared effective or (b) upon a change of control of the Company or (c) upon notification by the Company that it decided not to continue retaining the services of the consultant.  The warrants are fully vested upon issuance. 

On March 23, 2011, in relation to the agreement entered into with a third party to provide various consulting services for the Company, 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.  

During fiscal year December 31, 2011, the Company paid $40,000 for the consulting services under the contract.

On May 9, 2012, the warrant to purchase 800,000 shares of common stock at an exercise price of $.625 per share was exercised with total proceeds to the Company of $500,000.   There were no other warrants outstanding as of June 30, 2012.

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. Future minimum payments under noncancelable service contracts are as follows for the years ended December 31:

2012		9,210
2013		18,420
2014		6,905
2015		-
2016		-
Thereafter		-
Total		$ 34,535

Change 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 100,000 options granted on January 26, 2011, 25,000 vested and 75,000 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 shall receive 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 Chairman of the Board of Directors, which is an executive position with the Company, effective June 13, 2012.  Mr. Dukach receives no compensation for serving as the registrant’s Chairman 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.  Mr. Semyon does not receive a stipend for attending Board of

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Directors meetings.  All other Board of Directors receive a stipend of $10,000 per year for serving as members of our Board of Directors.

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.  

On May 8, 2012 the Company filed with the Securities Exchange Commission form S-1 for the registration of their Common Stock, $.001 par value.  The amount of shares to be registered was 800,000. On May 9, 2012, the warrant to purchase 800,000 shares of common stock at an exercise price of $.625 per share was exercised with total proceeds to the Company of $500,000 (see Note 2: Commitments and Contingencies).

On May 31, 2012, the Company distributed a $0.013 per share quarterly cash dividend and a $0.13 per share special cash dividend to its shareholders of record as of May 21, 2012.

Note 4: Net Income Per Share

Computation of net income per share is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Net income attributable to SMTP.com	$ 240,228		$ 202,927		$ 445,056		$ 360,289
Basic weighted average common shares outstanding	14,339,434		13,840,264		14,090,467		13,703,743
Add incremental shares for:
Warrants	-		547,089		-		330,957
Stock options	819,582		1,097,552		884,224		851,313
Diluted weighted average common shares outstanding	15,159,016		15,484,904		14,974,691		14,886,013
Net income per share:
Basic	$ 0.02		$ 0.01		$ 0.03		$ 0.03
Diluted	$ 0.02		$ 0.01		$ 0.03		$ 0.02

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.

On January 23, 2012, the Company granted 533,000 stock options at a strike price of $1.59 that vest equally over a four year period.  The grant date fair value of the awards was $394,625 (net of estimated forfeitures of 10%) which was determined using a Black Scholes option pricing model using the following assumptions:  volatility of 54%, risk-free rate of return of 1.2%, stock price of $1.59 and expected term of 6.25 years.  The options expire in 2022.

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.

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Stock option awards are expensed on a straight-line basis over the requisite service period.  During the three and six months ended June 30, 2012 the Company recognized expense of $36,241 and $66,270, respectively. During the three and six months ended June 30, 2011 the Company recognized expense of $11,662 and $25,288, respectively.  At June 30, 2012, future stock compensation expense (net of estimated forfeitures) not yet recognized was $455,997 and will be recognized over a weighted average remaining vesting period of 1.8 years.  The following summarizes stock option activity for the six months ended June 30, 2012:

		Number of		Exercise		Fair		Remaining
		Shares		Price		Value		Contractual Life
Outstanding at December 31, 2011		1,318,000		$ 0.25		$ 0.16
Granted at market price		533,000		1.59		0.82
Exercised		(65,750)
Forfeited		(90,000)
Outstanding at June 30, 2012		1,695,250		0.60		0.33		7.8
Exercisable		407,083		$ 0.25		$ 0.16		8.0

The following table summarizes information about the Company’s stock options at June 30, 2012:

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

$.25 per share

407,083

$ 0.25

770,167

0.25

1,177,250

$ 0.25

$1.59 per share

-

-

518,000

1.59

518,000

$ 1.59

Note 6: Income Taxes

During the quarter ended June 30, 2012, the Company recorded an income tax provision of $184,000, which was comprised of a current provision of $205,813 and a deferred benefit of $21,813.

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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, 2011, filed with the Securities and Exchange Commission on March 30, 2012.

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. Our stock is publicly traded on the Over-the-Counter Bulletin Board, under the trading symbol SMTP (OTCBB:SMTP).

Results of Operations

Net Revenues		2012		2011		Change from Prior Year		Percent Change from Prior Year
Three Months Ended June 30,		$ 1,352,025		$ 1,000,555		$ 351,470		35.1%
Six Months Ended June 30,		$ 2,599,439		$ 1,932,813		$ 666,626		34.5%

Revenues increased for the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011, due to increased sales of our email service products to consumers.  Revenue growth is attributable primarily to an increase in our number of subscribers of these products.  Most of this growth is by organic growth in our customer base, specifically our larger business users who require dedicated computer and software systems and typically pay a higher average monthly fee.  

Cost of Service		2012		2011		Change from Prior Year		Percent Change from Prior Year
Three Months Ended June 30,		$ 331,848		$ 181,634		$ 150,214		82.7%
Six Months Ended June 30,		$ 638,195		$ 377,480		$ 260,715		69.1%

Cost of services increased for the three and six months ended June 30, 2012 as compared to the three months ended June 30, 2011 primarily due to increased revenues.  As a percentage of revenues, cost of services were 25% and 18% of net revenues for the three months ended June 30, 2012 and 2011, respectively.   As a percentage of revenues, cost of services were 25% and 20% of net revenues for the six months ended June 30, 2012 and 2011, respectively.  This increase in cost of services as a percentage of revenues is due to increased use of subcontractors in network operations and increased costs of managed services offset by slightly by decreased reseller partner share commissions.

Sales and Marketing		2012		2011		Change from Prior Year		Percent Change from Prior Year
Three Months Ended June 30,		$ 194,307		$ 83,429		$ 110,878		132.9%
Six Months Ended June 30,		$ 421,081		$ 154,234		$ 266,847		173.0%

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Sales and marketing expenses increased for the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011.  We spent more on online advertising and marketing and website support to fuel additional growth, but there was no direct correlation between revenues and marketing expenses.  Additionally, we increased our sales and marketing workforce through increased employees and subcontractors.

General and Administrative		2012		2011		Change from Prior Year		Percent Change from Prior Year
Three Months Ended June 30,		$ 293,047		$ 248,676		$ 44,371		17.8%
Six Months Ended June 30,		$ 571,701		$ 567,046		$ 4,655		0.8%

General and administrative expenses increased for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 based on the following:

 

·

A decrease of approximately $6,000 of professional services due to less legal and accounting fees;

·

An increase in stock compensation expense of approximately $24,000 related to additional stock options issued in January 2012;

·

An increase board of director compensation fees of approximately $10,000, which started in  2012;

·

An increase payroll and benefits of approximately $2,000 due to contributions to our 401K; and

·

An increase in other general and administrative expense of approximately $14,000.

General and administrative expenses increased for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 based on the following:

 

·

A decrease of approximately $93,000 of professional services due to the filing of our registration statement with the Securities and Exchange Commission in 2011;

·

An increase in stock compensation expense of approximately $40,000 related to additional stock options issued in January 2012;

·

An increase board of director compensation fees of approximately $20,000, which started in  2012;

·

An increase payroll and benefits of approximately $13,000 due to contributions to our 401K; and

·

An increase in other general and administrative expense of approximately $24,000.

Research and Development		2012		2011		Change from Prior Year		Percent Change from Prior Year
Three Months Ended June 30,		$ 108,595		$ 102,862		$ 5,733		5.6%
Six Months Ended June 30,		$ 222,194		$ 178,857		$ 43,337		24.2%

Research and development expenses increased for the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011 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 products.  

Income Tax Benefit (Expense)		2012		2011		Change from Prior Year		Percent Change from Prior Year
Three Months Ended June 30,		$ (184,000)		$ (181,286)		$ (2,714)		1.5%
Six Months Ended June 30,		$ (301,212)		$ (295,350)		$ (5,862)		2.0%

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Changes in our income tax expense related primarily to an increase in pretax income during the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011, and the effects of temporary differences that vary from period to period.   

Net Income		2012		2011		Change from Prior Year		Percent Change from Prior Year
Three Months Ended June 30,		$ 240,228		$ 202,927		$ 37,301		18.4%
Six Months Ended June 30,		$ 445,056		$ 360,289		$ 84,767		23.5%

Net income increased for the three and six months ended June 30, 2012 as compared to the three and six months ended June 30, 2011 primarily due to revenue growth partially offset by increases in cost of services and operating expenses related to the growth in our business, each of which is described above.

Liquidity and Capital Resources

Sources and Uses of Cash

Our primary source of cash inflows are net remittances from customers for email services.  Such payments are typically received in advance of providing the services, yielding a deferred revenue liability on our balance sheet.  We have also received cash from equity offerings, exercise of stock options, and warrants; but we cannot assure you that such equity will continue to be available to us or, if available, will be at prices acceptable to us.

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.  We also intend to pay dividends on a regular basis.

On May 31, 2012, the Company distributed a $0.13 per share special cash dividend and a $0.013 per share quarterly cash dividend to its shareholders of record as of May 21, 2012.

Analysis of Cash Flows

Six Months Ended June 30, 2012 and 2011

Net cash generated by operating activities decreased by $336,807, or 85%, to $58,066 for the six months ended June 30, 2012, compared to $394,873 for the six months ended June 30, 2011.  The decrease of cash generated by operating activities was primarily attributable to changes in working capital and other adjustments, the most significant of which was the decrease in 2012 in income taxes payable of approximately $420,412 meaning that cash spent was more than the expense recognition by those amounts.  The change in working capital was offset by an increase in net income of approximately $84,767.

Net cash used in investing activities was $(2,494) and $(148,225) during the six months ended June 30, 2012, and 2011, respectively, consisting of investments in computers, servers, other equipment and licensed software.

Net cash provided by (used in) financing activities was ($1,586,699) and $96,816 during the six months ended June 30, 2012 and 2011, 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.  During the three months ended June 30, 2012, we distributed $2,103,137 million in cash to our shareholders in the form of a dividend which was offset by proceeds of $516,438 received from the issuance of our common stock.

We had net working capital of $184,698 and $1,240,515 as of June 30, 2012 and December 31, 2011, respectively.  Our decrease in net working capital as of June 30, 2012 was primarily attributable to a distribution of $2,103,137 million in cash to our shareholders in the form of a dividend offset by proceeds of $516,438 received from the issuance of our common stock.

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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.

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, 2011 contains a discussion of these significant accounting policies. There have been no significant changes in our significant accounting policies since December 31, 2011.  See our Note 1 in our unaudited financial statements for the three months ended June 30, 2012, as set forth herein.

Off-balance sheet arrangements

We did not have any off-balance sheet arrangements at June 30, 2012.

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 June 30, 2012. Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of June 30, 2012 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

Not applicable.

Item 1A. Risk Factors.

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Securities issued for services

Date		Security/Value
May 9, 2012		Common Stock – 800,000 shares of common stock issued at $.625 per share with total proceeds to the Company of $500,000 pursuant to the exercise of a warrant.

No underwriters were utilized and no commissions were paid with respect to any of the above transactions.  We relied on Section 4(2) and Regulation S of the Securities Act 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.

Item 6.

Exhibits.

INDEX TO EXHIBITS
SEC Reference Number	Title of Document	Location
10.1	Employment Agreement – Richard T. Harrison	*
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

* Incorporated by reference to Form 8-K filed on June 18, 2012.

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.

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