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EX-31.2 - CERTIFICATION - SharpSpring, Inc.smtp_ex31z2.htm

 



 

 

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: June 30, 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 issuers classes of common stock, as of the latest practicable date: 5,019,957 shares of common stock as of August 8, 2014.

 

 





 


SMTP, INC.


Table of Contents


 

Page

 

 

PART I – FINANCIAL INFORMATION

1

Item 1. Financial Statements:.

2

Balance Sheets—December 31, 2013 and June 30, 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

14

Item 3. Quantitative and Qualitative Disclosure About Market Risk

17

Item 4. Controls and Procedures

18

PART II – OTHER INFORMATION

19

Item 1. Legal Proceedings.

19

Item 1A. Risk Factors.

19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

19

Item 3. Defaults Upon Senior Securities

19

Item 4. Mine Safety Disclosures

19

Item 5. Other Information.

19

Item 6. Exhibits

20

SIGNATURES

21





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

 

 

 

June 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

 

 

(unaudited)

 

 

 

 

Assets

  

                       

  

  

                       

  

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,453,404

 

 

$

1,731,243

 

Accounts receivable

 

 

19,489

 

 

 

25,024

 

Deferred income taxes

 

 

237,226

 

 

 

183,435

 

Income taxes receivable

 

 

219,907

 

 

 

 

Other current assets

 

 

110,169

 

 

 

116,522

 

Total current assets

 

 

12,040,195

 

 

 

2,056,224

 

Property and equipment, net of accumulated depreciation of $205,395 and $145,261

 

 

269,324

 

 

 

327,342

 

Deferred income taxes

 

 

70,432

 

 

 

50,099

 

Deposits

 

 

29,995

 

 

 

29,995

 

Total assets

 

$

12,409,946

 

 

$

2,463,660

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

373,065

 

 

$

334,328

 

Income taxes payable

 

 

 

 

 

144,280

 

Allowance for refunds and chargebacks

 

 

2,067

 

 

 

2,965

 

Accrued expenses and other current liabilities

 

 

119,935

 

 

 

106,748

 

Total current liabilities

 

 

495,067

 

 

 

588,321

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at June 30, 2014 and December 31, 2013

 

 

 

 

 

 

Common stock, $0.001 par value, 50,000,000 shares authorized, 5,017,433 and 3,127,598 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

 

5,017

 

 

 

3,126

 

Additional paid in capital

 

 

11,909,862

 

 

 

2,241,749

 

Accumulated deficit

 

 

 

 

 

(369,536

)

Total shareholders' equity

 

 

11,914,879

 

 

 

1,875,339

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

12,409,946

 

 

$

2,463,660

 


See accompanying notes to the financial statements




2



 


SMTP, INC.

STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

  

                       

  

  

                       

  

  

                       

  

  

                       

  

Net revenue

 

$

1,480,770

 

 

$

1,395,147

 

 

$

2,970,824

 

 

$

2,764,585

 

Cost of services

 

 

351,153

 

 

 

253,196

 

 

 

678,383

 

 

 

527,754

 

Gross profit

 

 

1,129,617

 

 

 

1,141,951

 

 

 

2,292,441

 

 

 

2,236,831

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

228,013

 

 

 

179,594

 

 

 

396,313

 

 

 

382,360

 

General and administrative

 

 

563,786

 

 

 

334,404

 

 

 

1,047,601

 

 

 

800,698

 

Research and development

 

 

101,387

 

 

 

52,438

 

 

 

220,008

 

 

 

104,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

893,186

 

 

 

566,436

 

 

 

1,663,922

 

 

 

1,288,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

236,431

 

 

 

575,515

 

 

 

628,519

 

 

 

948,803

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

144

 

 

 

 

 

 

153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income

 

 

144

 

 

 

 

 

 

153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

236,575

 

 

 

575,515

 

 

 

628,672

 

 

 

948,803

 

Provision for income tax

 

 

85,367

 

 

 

190,079

 

 

 

254,132

 

 

 

337,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

151,208

 

 

$

385,436

 

 

$

374,540

 

 

$

611,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.13

 

 

$

0.08

 

 

$

0.21

 

Diluted

 

$

0.03

 

 

$

0.13

 

 

$

0.08

 

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

5,016,461

 

 

 

2,973,928

 

 

 

4,630,059

 

 

 

2,966,064

 

Diluted

 

 

5,063,993

 

 

 

3,056,061

 

 

 

4,688,726

 

 

 

3,068,899

 


See accompanying notes to the financial statements




3



 


SMTP, INC.

STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2014

 

 

2013

 

Cash flows from operating activities:

  

                       

  

  

                       

  

Net income

 

$

374,540

 

 

$

611,006

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

60,134

 

 

 

36,277

 

Excess tax benefits from share-based payment arrangements

 

 

(84,264

)

 

 

(20,825

)

Non-cash stock compensation

 

 

287,431

 

 

 

281,242

 

Allowance for refunds and chargebacks

 

 

(898

)

 

 

3,378

 

Deferred income taxes

 

 

(74,124

)

 

 

(35,805

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,535

 

 

 

(25,256

)

Other assets

 

 

6,353

 

 

 

26,278

 

Net change income taxes payable

 

 

(279,923

)

 

 

28,045

 

Accrued expenses and other current liabilities

 

 

13,187

 

 

 

12,379

 

Deferred revenue

 

 

38,737

 

 

 

(30,641

)

Net cash provided by operating activities

 

 

346,708

 

 

 

886,078

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,116

)

 

 

(241,948

)

Net cash used in investing activities

 

 

(2,116

)

 

 

(241,948

)

 

 

 

 

 

 

 

 

 

Cash flows provided by (used in) financing activities:

 

 

 

 

 

 

 

 

Dividends to shareholders

 

 

(1,203,533

)

 

 

(533,383

)

Proceeds from issuance of common stock

 

 

10,507,801

 

 

 

23,624

 

Excess tax benefits from share-based payment arrangements

 

 

73,301

 

 

 

20,825

 

Net cash provided by (used in) financing activities

 

 

9,377,569

 

 

 

(488,934

)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

9,722,161

 

 

 

155,196

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

1,731,243

 

 

 

784,001

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

11,453,404

 

 

$

939,197

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

618,500

 

 

$

385,000

 

 

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 our name on April 1, 2010 to SMTP.com, Inc. The Company focuses on the execution of email delivery for marketing and enterprise application customers. The Company has customers for both corporate and personal email delivery. The Company’s services are marketed directly by the Company and through reseller partners.


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


On December 26, 2013, the Company filed a Certificate of Amendment to its Certificate of Incorporation (the "Certificate of Amendment"), with the Secretary of State of the State of Delaware, to effect a 1-for-5 reverse stock split of 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 and six months ended June 30, 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 $50,323 and $100,439 were reclassified from cost of services to general and administrative expenses for the three and six months ended June 30, 2013.




5



 


Until August 15, 2013 the Company was being managed by an Executive Committee of Maxim Ilin, Ruslan Bondarev, and Alena Chuprakova, after which Jonathan Strimling assumed the role of Chief Executive Officer. Following the arrival of Mr. Strimling, Mr. Ilin’s role became more focused in the area of customer service as VP of Customer Service and Mr. Bondarev’s role became more focused on technology development as CTO. Additionally, some other new employees in sales and marketing (along with their stock option compensation) were recorded as general and administrative expenses instead of in their respective departments. Accordingly, for the three and six months ended June 30, 2014, the financials are herein restated to more appropriately classify certain salary and option expenses in their respective departments.


Fair Value of Financial Instruments


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


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


Income Taxes


Provision for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.


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


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.




6



 


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 amortized 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:


 

 

June 30,

 

 

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

 

 

429,402

 

 

 

427,286

 

Construction in progress

 

 

15,453

 

 

 

15,453

 

Total

 

 

474,719

 

 

 

472,603

 

Less: Accumulated depreciation

 

 

(205,395

)

 

 

(145,261

)

 

 

$

269,324

 

 

$

327,342

 


Estimated useful lives are as follows:


Leasehold improvements

3 - 5 years

Furniture and fixtures

3 - 5 years

Computing equipment

3 years

Software

3 - 5 years

 

Revenue Recognition


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


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 June 30, 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.




7



 


For the periods ended June 30, 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.


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


In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the first quarter of 2017. An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or recognizing the cumulative effect of adoption at the date of initial application. The Company is in the process of evaluating the new standard and does not know the effect, if any, ASU 2014-09 will have on the Financial Statements or which adoption method will be used.


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.




8



 


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 June 30:


2014

 

$

939

 

2015

 

 

 

2016

 

 

 

2017

 

 

 

2018

 

 

 

Thereafter

 

 

 

 

 

$

939

 


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.


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 replace both part-time roles with full-time personnel. The company has hired a Director of Engineering and is moving to hire a full-time Chief Financial Officer.  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.


On May 13, 2014, the Company retained Todd Donahue as a consultant to provide financial oversight of its intended acquisition-related activities. On May 13, 2014, the Company retained Minuteman Advisory Services to provide services related to its Corporate Development efforts. On August 12, 2014 the Company reached an agreement with Ed Lawton to serve as Chief Financial Officer, and Mr. Lawton is expected to start work on September 3, 2014.


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.




9



 


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  receives 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 was 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, which was issued from the Company’s 2010 Employee Stock Plan. The options vest over a period of four years as follows: 1,000 options 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 receives compensation as the Company’s Chief Executive Officer under his existing employment agreement but receives no additional compensation for serving on the Board of Directors.


Note 4:  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.


For the three and six months ending June 30, 2014, the Company paid quarterly dividends of $601,766 and $1,203,533, respectively. For the three and six months ending June 30, 2013, the Company paid quarterly dividends of $267,381 and $533,383, respectively.


On December 26, 2013, the Company filed with the Securities Exchange Commission a Form S-1 registration statement. The S-1 became effective on January 30, 2014. Pursuant to the Form S-1, in February, 2014, 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.  


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. General and administrative expense of $5,000 was recorded based on the fair value of the shares for services provided.


In May 2014, 300 stock options were exercised at a price of $1.25 per share with total proceeds to the Company of $375 cash.


In May 2014, the Company issued a total of 1,212 shares of the Company’s common stock to the directors. General and administrative expense of $7,500 was recorded based on the fair value of shares for services provided.




10



 


Note 5: Net Income Per Share


Computation of net income per share is as follows:


 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

  

 

 

 

 

 

 

 

 

 

 

  

Net income attributable to SMTP.com

 

$

151,208

 

 

$

385,436

 

 

$

374,540

 

 

$

611,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

5,016,461

 

 

 

2,973,928

 

 

 

4,630,059

 

 

 

2,966,064

 

Add incremental shares for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

23,625

 

 

 

5,248

 

 

 

28,319

 

 

 

12,768

 

Stock options

 

 

23,907

 

 

 

76,885

 

 

 

30,348

 

 

 

90,067

 

Diluted weighted average common shares outstanding

 

 

5,063,993

 

 

 

3,056,061

 

 

 

4,688,726

 

 

 

3,068,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

0.13

 

 

$

0.08

 

 

$

0.21

 

Diluted

 

$

0.03

 

 

$

0.13

 

 

$

0.08

 

 

$

0.20

 


Note 6:  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.  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.  At June 30, 2014, the Company had 616,690 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:


 

 

Six Months Ended

June 30,

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

Volatility

 

 

73

%

 

 

 

Risk-free interest rate

 

 

1.93

%

 

 

 

Expected term

 

 

6.25

 

 

 

 


The volatility used was based on historical volatility of similar sized companies, in a similar industry, 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.




11



 


Stock option awards are expensed on a straight-line basis over the requisite service period. During the three and six months ended June 30, 2014, the Company recognized expense of $123,879 and $274,931, respectively, associated with stock option awards. During the three and six months ended June 30, 2013, the Company recognized expense of $24,115 and $60,144, respectively, associated with stock option awards. At June 30, 2014, future stock compensation expense (net of estimated forfeitures) not yet recognized was $974,629 and will be recognized over a weighted average remaining vesting period of 3.07 years.  The following summarizes stock option activity for the six months ended June 30, 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

 

 

129,400

 

 

 

6.94

 

 

 

 

 

 

 

 

Exercised

 

 

(47,867

)

 

$

0.47

 

 

 

 

 

 

 

 

Forfeited

 

 

(92,150

)

 

$

6.80

 

 

 

 

 

 

 

 

Outstanding at June 30, 2014

 

 

616,690

 

 

 

5.25

 

 

 

3.21

 

 

 

8.7

 

Exercisable

 

 

170,151

 

 

$

5.26

 

 

$

3.05

 

 

 

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 June 30, 2014:


 

 

Exercisable

 

 

Unexercisable

 

 

Total

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

Number

 

 

Exercise

 

 

Number

 

 

Exercise

 

 

Number

 

 

Exercise

 

Range of Exercise Prices

 

Outstanding

 

 

Price

 

 

Outstanding

 

 

Price

 

 

Outstanding

 

 

Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.25 per share

 

 

20,150

 

 

$

1.25

 

 

 

11,150

 

 

$

1.25

 

 

 

31,300

 

 

$

1.25

 

$4.95 per share

 

 

46,375

 

 

$

4.95

 

 

 

88,125

 

 

$

4.95

 

 

 

134,500

 

 

$

4.95

 

$5.00 per share

 

 

62,226

 

 

$

5.00

 

 

 

236,464

 

 

$

5.00

 

 

 

298,690

 

 

$

5.00

 

$5.15 per share

 

 

 

 

$

5.15

 

 

 

25,000

 

 

$

5.15

 

 

 

25,000

 

 

$

5.15

 

$6.04 per share

 

 

 

 

$

6.04

 

 

 

15,000

 

 

$

6.04

 

 

 

15,000

 

 

$

6.04

 

$6.08 per share

 

 

 

 

$

6.08

 

 

 

5,000

 

 

$

6.08

 

 

 

5,000

 

 

$

6.08

 

$6.10 per share

 

 

 

 

$

6.10

 

 

 

18,400

 

 

$

6.10

 

 

 

18,400

 

 

$

6.10

 

$6.34 per share

 

 

 

 

$

6.34

 

 

 

15,000

 

 

$

6.34

 

 

 

15,000

 

 

$

6.34

 

$7.50 per share

 

 

 

 

$

7.50

 

 

 

16,000

 

 

$

7.50

 

 

 

16,000

 

 

$

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 $526,859 at June 30, 2014.


Note 7: Income Taxes


During the quarter ended June 30, 2014, the Company recorded an income tax provision of $85,367, which was comprised of a current provision of $142,748 and a deferred benefit of $57,381.


Note 8: Warrants


On January 30, 2014, in connection with an $11.5 million financing transaction, 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 and six months ended June 30, 2014, the Company recognized a net expense of $0 and $184,415 was recorded against proceeds under additional paid in capital, 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 5.58 years as of June 30, 2014. These warrants are not exercisable prior to January 30, 2015.



12



 


The following table summarizes information about the Company’s warrants at June 30, 2014:


 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

 

 

 

 

 

 

 

Average

 

 

Contractual

 

 

 

 

 

 

Number of

 

 

Exercise

 

 

Term

 

 

Intrinsic

 

 

 

Units

 

 

Price

 

 

(in years)

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2013

 

 

120,973

 

 

$

4.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

80,000

 

 

 

7.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2014

 

 

200,973

 

 

$

6.07

 

 

 

4.0

 

 

 

5,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2014

 

 

120,973

 

 

$

6.07

 

 

 

1.8

 

 

 

142,171

 


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


 

 

Six Months Ended

June 30,

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

Volatility

 

 

72

%

 

 

66%-67

%

Risk-free interest rate

 

 

0.54

%

 

 

.31% -.37

%

Expected term

 

2.5 years

 

 

2.5 years

 


Note 9:  Subsequent Events


On August 4, 2014, the Company issued 2,514 shares to a consultant pursuant to a consulting agreement with a value of $12,792.50.


On August 7, 2014, the Company’s Board of Directors approved a quarterly dividend of $0.12 per share to be paid out on August 29, 2014 to its shareholders of record as of August 20, 2014.


On August 12, 2014, we entered into an asset purchase agreement (“Asset Purchase Agreement”) with SharpSpring, LLC (“SharpSpring”), a company providing marketing automation to customers on a subscription basis. The total purchase price for the assets to be acquired net of assumed liabilities will be $15.0 million providing that SharpSpring reaches its earn-out targets. The purchase price is payable as follows: $5.0 million in cash payable by the Company to SharpSpring at closing, subject to adjustment to the extent the net assets of SharpSpring on the closing date was less than the estimate, plus up to $6.0 million in cash and $4.0 million in common stock of the Company pursuant to the earn-out provisions of the Asset Purchase Agreement.


On August 14, 2014, we entered into an equity interest purchase agreement (“Equity Interest Purchase Agreement”) to purchase 100% of the equity interest owned in InterInbox SA, a Swiss corporation, ERNEPH 2012A (Pty) Ltd. dba ISMS, a South African limited company, ERNEPH 2012B (Pty) Ltd. dba GraphicMail South Africa, a South African limited company, and Quattro Hosting LLC, a Delaware limited liability company (collectively the “GraphicMail Group”). The Equity Interest Purchase Agreement was entered into among the Company and the owners of the GraphicMail Group. The purchase price the Company will pay for the GraphicMail Group is $2.6 million in cash, $2.6 million in stock of the Company, and up to $0.6 million in cash pursuant to the earn-out provisions of the Equity Interest Purchase Agreement. The price for the equity interest is subject to certain adjustments as contemplated in the Equity Interest Purchase Agreement. The GrapicMail Group operates collectively as the GraphicMail email marketing platform business that is distributed directly and indirectly through channel partners to its international client base of approximately 35,000 customers. The $2.6 million cash and $2.6 million stock payments, subject to the adjustments as contemplated in the Equity Interest Purchase Agreement, will be provided by the Company to the sellers of the GraphicMail Group upon the closing of the Equity Interest Purchase Agreement.




13



 


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.


In August of 2013, the Company hired a new Chief Executive Officer, Jonathan Strimling, to accelerate the company’s growth. In January of 2014 the Company conducted a secondary public offering of $11.5M (gross) which allowed it to uplist to The NASDAQ Capital Market. In conjunction with that offering, the Company indicated its intent to make acquisitions to broaden its product offering and to accelerate its growth. During the first two quarters, the Company strengthened its team in the areas of Corporate Development, sales and marketing, in preparation for its intended strategic expansion.


Results of Operations


Net Revenues

 

2014

 

 

2013

 

 

Change from

Prior Year

 

 

Percent

Change from

Prior Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

$

1,480,770

 

 

$

1,395,147

 

 

$

85,623

 

 

 

6.1

%

Six Months Ended June 30,

 

$

2,970,824

 

 

$

2,764,585

 

 

$

206,239

 

 

 

7.5

%


Revenues increased for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 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.



14



 



Cost of Service

 

2014

 

 

2013

 

 

Change from

Prior Year

 

 

Percent

Change from

Prior Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

$

351,153

 

 

$

253,196

 

 

$

97,957

 

 

 

38.7

%

Six Months Ended June 30,

 

$

678,383

 

 

$

527,754

 

 

$

150,269

 

 

 

28.5

%


Cost of services increased for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 primarily due to increased revenues. As a percentage of revenues, cost of services were 24% and 18% of net revenues for the three months ended June 30, 2014 and 2013, respectively and 23% and 19% of net revenues for the six months ended June 30, 2014 and 2013, respectively. This increase is primarily due to increase in support and network operations personnel and increase in the cost of managed servers that are essential in providing quality customer support.


Sales and Marketing

 

2014

 

 

2013

 

 

Change from

Prior Year

 

 

Percent

Change from

Prior Year

 

 

    

 

                   

  

  

 

                   

  

  

 

                   

  

  

 

                   

 

Three Months Ended June 30,

 

$

228,013

 

 

$

179,594

 

 

$

48,419

 

 

 

27

%

Six Months Ended June 30,

 

$

396,313

 

 

$

382,360

 

 

$

13,953

 

 

 

3.6

%


Sales and marketing expenses increased for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013.  The increase primarily relates to the increase in sales and marketing wages due to recent hires.

 

General and Administrative

 

2014

 

 

2013

 

 

Change from

Prior Year

 

 

Percent

Change from

Prior Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

$

563,786

 

 

$

334,404

 

 

$

229,382

 

 

 

68.6

%

Six Months Ended June 30,

 

$

1,047,601

 

 

$

800,698

 

 

$

246,903

 

 

 

30.8

%


General and administrative expenses increased for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 based on the following:


·

An increase in stock compensation expense of approximately $58,000;

·

An increase in depreciation and amortization of approximately $11,000;

·

An increase in other general and administrative expense of approximately $28,000;

·

An increase in payroll and benefits of approximately $55,000 related to recent hires;

·

An increase in board of director fees of $2,500;

·

An increase in professional fees of approximately $75,000, of which approximately $43,000 is related to corporate development, and the remainder is due to SEC filing fees, payments to a third-party accounting firm in conjunction with our SEC filings, and recruiting services.

 

General and administrative expenses increased for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 based on the following:


·

An increase in stock compensation expense of approximately $126,000 related to additional stock options issued;

·

An increase in depreciation and amortization of approximately $24,000;

·

An increase in other general and administrative expense of approximately $16,000;

·

An increase in payroll and benefits of approximately $108,000 related to recent hires;

·

An increase in travel of approximately $30,000 connected with corporate development activities;

·

A decrease in professional fees of approximately $57,000; primarily related to expensing warrants issued to Bowen Advisors in 2013, partially offset by growing corporate development fees, SEC filing fees, payments to a third-party accounting firm in conjunction with our SEC filings, and recruiting services.



15



 



Research and Development

 

2014

 

 

2013

 

 

Change from

Prior Year

 

 

Percent

Change from

Prior Year

 

 

    

 

                   

  

  

 

                   

  

  

 

                   

  

  

 

                   

 

Three Months Ended June 30,

 

$

101,387

 

 

$

52,438

 

 

$

48,949

 

 

 

93.3

%

Six Months Ended June 30,

 

$

220,008

 

 

$

104,970

 

 

$

115,038

 

 

 

109.6

%


Research and development expenses increased for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 due to hiring additional development personnel in order to focus on expanding our service offerings and improving the functionality of our products.


Income Tax Expense

 

2014

 

 

2013

 

 

Change from

Prior Year

 

 

Percent

Change from

Prior Year

 

 

    

 

                   

  

  

 

                   

  

  

 

                   

  

  

 

                   

 

Three Months Ended June 30,

 

$

85,367

 

 

$

190,079

 

 

$

(104,712

)

 

 

(55.1

)%

Six Months Ended June 30,

 

$

254,132

 

 

$

337,797

 

 

$

(83,665

)

 

 

(24.8

)%


Changes in our income tax expense related primarily to changes in pretax income during the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013.


Net Income

 

2014

 

 

2013

 

 

Change from

Prior Year

 

 

Percent

Change from

Prior Year

 

 

    

 

                   

  

  

 

                   

  

  

 

                   

  

  

 

                   

 

Three Months Ended June 30,

 

$

151,208

 

 

$

385,436

 

 

$

(234,228

)

 

 

(60.8

)%

Six Months Ended June 30,

 

$

374,540

 

 

$

611,006

 

 

$

(236,466

)

 

 

(38.7

)%


Net income decreased for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013, due to revenue growth partially offset by increases in cost of services and operating expenses related to corporate development, 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.


Analysis of Cash Flows


Net cash provided by operating activities decreased by $539,370 or 61%, to $346,708 for the six months ended June 30, 2014, compared to $886,078 for the six months ended June 30, 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 $236,466.


Net cash used in investing activities was $2,116 and $241,948 during the six months ended June 30, 2014, and 2013, respectively, consisting of investments in computers, servers, other equipment and licensed software related to an asset purchase agreement.

  



16



 


Net cash provided by (used in) financing activities was $9,377,569 and ($488,934) during the six months ended June 30, 2014 and 2013, respectively.  During the six months ended June 30, 2014, we distributed $1,203,533 in cash to our shareholders in the form of a regular quarterly dividend which was offset by excess tax benefits from share-based payment arrangements of $73,301 and proceeds of $10,507,801 received from the issuance of common stock, which is being used for working capital and general corporate purposes and possibly acquisitions of other companies, products or technologies. During the six months ended June 30, 2013 we distributed $533,383 in cash to our shareholders in the form of a regular quarterly dividend which was offset by proceeds of $23,624 received from the issuance of our common stock and excess tax benefits of share-based payment arrangements of $20,825.

We had net working capital of $11,545,128 and $1,467,903 as of June 30, 2014 and December 31, 2013, respectively.  Our increase in net working capital as of June 30, 2014 was primarily attributable to proceeds of $10,507,801 received from the issuance of our common stock in the first six months of 2014 offset by a distribution of $1,203,533 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 June 30:


2014

 

$

939

 

2015

 

 

 

2016

 

 

 

2017

 

 

 

2018

 

 

 

Thereafter

 

 

 

 

 

$

939

 


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, 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 and six months ended June 30, 2014 as set forth herein.


Off-balance sheet arrangements


We did not have any off-balance sheet arrangements at June 30, 2014.


Item 3.

Quantitative and Qualitative Disclosure About Market Risk.


Not applicable.




17



 


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, 2014. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of June 30, 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 June 30, 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 June 30, 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.




18



 


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 2014

 

Common stock – 1,212 shares of common stock. The common stock was valued at $7,500.


Securities issued for cash


Date

 

Security/Value

 

 

 

May 2014

 

Common stock – 300 shares of common stock at $1.25 per share for aggregate proceeds of $375 pursuant to option exercises.


Securities issued pursuant to our Employee Stock Plan


Date

 

Security/Value

 

 

 

May  2014

 

Stock options – right to buy 18,400 shares of common stock at $6.10 per share and 5,000 shares at $6.08 per share.

 

 

 

June 2014

 

Stock options – right to buy 15,000 shares of common stock at $6.04 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(a)(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.




19



 


Item 6.

Exhibits.



INDEX TO EXHIBITS


SEC Reference
Number

 

Title of Document

 

Location

 

 

 

     

 

31.1

 

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

31.2

 

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

32.1

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

32.2

 

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

101

 

XBRL

 

Furnished herewith




20



 



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: August 14, 2014


SMTP, INC.

 

 

By:

/s/ Alena Chuprakova

 

Alena Chuprakova

Controller

 

(Principal Financial Officer)

Date: August 14, 2014












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