SharpSpring, Inc. - FORM 10-K

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EX-31.1 - CERTIFICATION - SharpSpring, Inc.	smtp_ex31z1.htm
EXCEL - IDEA: XBRL DOCUMENT - SharpSpring, Inc.	Financial_Report.xls
EX-32.2 - CERTIFICATION - SharpSpring, Inc.	smtp_ex32z2.htm
EX-32.1 - CERTIFICATION - SharpSpring, Inc.	smtp_ex32z1.htm
EX-31.2 - CERTIFICATION - SharpSpring, Inc.	smtp_ex31z2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


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

	For the fiscal year ended December 31, 2014


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

	For the transition period from ______________ to ______________

Commission file number 001-36280

SMTP, Inc.

(Exact name of Registrant as specified in its charter)


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

10 Tara Blvd, Suite 430, Nashua, NH		03062
(Address of principal executive offices)		(Zip Code)

877-705-9362

(Registrant’s telephone number)

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


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

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

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 o

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

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

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 o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant was $13,793,455 as of June 30, 2014.

As of March 24, 2015, there were 5,462,661 outstanding shares of the registrant’s common stock, $.001 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy or information statement to be filed in conjunction with the registrant’s annual meeting of stockholders to be held in 2015 are incorporated by reference in Part III of this Annual Report on Form 10-K. The proxy or information statement will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the end of the registrant’s fiscal year ended December 31, 2014.

TABLE OF CONTENTS


		Page
	PART I
Item 1.	Business	2
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	25
Item 2.	Properties	26
Item 3.	Legal Proceedings	26
Item 4	Mine Safety Disclosures	26
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	34
Item 9A.	Controls and Procedures	34
Item 9B.	Other Information	34
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	35
Item 11.	Executive Compensation	35
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	35
Item 13.	Certain Relationships and Related Transactions, and Director Independence	35
Item 14.	Principal Accounting Fees and Services	35
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	36
Signatures		37

PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

Examples of forward-looking statements include:


·	the timing of the development of future products;
·	projections of costs, revenue, earnings, capital structure and other financial items;
·	statements of our plans and objectives;
·	statements regarding the capabilities of our business operations;
·	statements of expected future economic performance;
·	statements regarding competition in our market; and
·	assumptions underlying statements regarding us or our business.

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


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

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A “Risk Factors.” Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

ITEM 1.

BUSINESS

Overview

SMTP, Inc. (the “Company”) was one of the early pioneers of cloud-based email services and has grown over the last decade to provide a wide range of business-to-business marketing and communications products and services worldwide. Today, the Company is a NASDAQ-listed provider of services ranging from sophisticated marketing automation to cost-effective email infrastructure and relay services. All of our products are designed and built as Software as a Service (or SaaS) offerings. We provide our products primarily on a subscription basis, with additional fees charged if specified volume limits are exceeded. We operate globally with offices on three continents that serve more than 100 countries in 13 languages.

The Company’s offering of products and services is built around a combination of proven email delivery technology and industry-leading customer support that provides assistance, guidance and expertise to customers around the world. As a result, we enable our customers to build effective and highly scalable marketing campaigns that can deliver hundreds of millions of emails per month.

In late 2013, to supplement a decade of email delivery leadership, we announced our intent to pursue strategic acquisitions in order to broaden our product offering, to add new sales channels, and increase the global scale of our operations. During the first quarter of 2014, we secured a secondary offering of $11.5million (gross proceeds) to execute this strategy.

In the third quarter of 2014, we announced the acquisitions of GraphicMail and SharpSpring. In August 2014, our newly formed wholly owned subsidiary SharpSpring, Inc. (“SharpSpring”) acquired substantially all of the assets and assumed the liabilities of SharpSpring LLC., a rapidly-growing provider of marketing automation services. In October 2014, we acquired 100% of the equity of the GraphicMail group companies, (“GraphicMail”) an email services provider operating globally, which provided us new channels to market. We feel these acquisitions provide us with a much richer and more capable product set with which to compete, a much larger total addressable market, and a stronger global footprint from which to drive further growth.

With these acquisitions, we now offer our customers a suite of marketing automation, email creation and email delivery capabilities that consists of SharpSpring, our next-generation marketing automation platform, GraphicMail, our advanced email generation tool and SMTP, our cloud-based email relay delivery service. These proven tools help customers around the world boost sales lead conversion and drive increased revenues via a wide variety of digital marketing techniques, from simple email newsletters to highly sophisticated one-on-one marketing.

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

Products and Services

SMTP Relay Services

The Company’s historic strength is as a provider of SMTP relay services. For over a decade, customers have turned to SMTP to ensure their emails are delivered to the inbox of their intended recipients, just as companies turn to couriers such as FedEx to ensure their packages are delivered to correct destinations. Permission-based or opt-in email (email that a person has agreed to receive) that doesn’t reach its intended audience is a growing concern for companies. In fact, a recent study noted that 22% of marketing email sent with subscribers’ permission never reached their inbox. While most people can easily send individual messages that flow freely through SPAM filters, the risks of non-delivery are much higher for high volume senders, even for those sending opt-in messages. In recent years, Internet Service Providers (ISPs) have been forced to tighten filters resulting in billions of legitimate emails never reaching their intended recipients. SMTP utilizes the same underlying technology platform for sending email that is utilized by Facebook and LinkedIn, which allows for sophisticated control of extremely high volumes of email. That technology is supported by an international team with over a decade’s experience improving deliverability for customers. By helping them reach the inbox, SMTP improves the effectiveness of our customers’ email marketing and supports their revenue growth.

SharpSpring Marketing Automation

Our SharpSpring marketing automation solution brings powerful digital marketing tools to small and medium-sized enterprises and is especially appealing to marketing agencies who use the platform on behalf of their clients. SharpSpring’s powerful features, flexible platform, and ease-of-use allow customers to simply and effectively nurture a lead through the entire marketing funnel from first contact to sales conversion and retention. SharpSpring’s sophisticated analytics track campaigns and points of interaction to measure end-to-end ROI for a user. Additionally, SharpSpring provides this powerful, but simple-to-use marketing automation platform at a lower price than its competitors and in a framework that is especially appealing because of its inherently flexible architecture. The solution can act as an all-in-one marketing automation platform, CRM tool, and call tracking system, or it can integrate seamlessly with other online marketing, sales and communications platforms. The system is fully compatible with SalesForce, Sugar, Zoho and other CRM platforms and is also compatible with WordPress, Drupal and a multitude of content management solution platforms. SharpSpring’s integration with LinkedIn, Facebook and other social and data platforms is designed to provide businesses with detailed insights into their website visitors and customer base.

GraphicMail Email Marketing

GraphicMail, is a provider of digital communication tools that enable businesses to effectively engage and communicate with their customers. The core platform focuses on email, social and mobile marketing and is typically used by companies wishing to communicate with a list of subscribers or customers. Email marketing remains an effective form of digital marketing today and provides users with a high ROI on their marketing budget, which continues to drive email marketing industry growth. GraphicMail integrated design tools, campaign reporting capabilities, social media integration for platforms like Facebook and Twitter, and mobile messaging strengths have made it a strong choice for customers in 14 different countries and 13 languages. This product is sold and supported through its network of subsidiaries and third party resellers around the globe.

Deliverability

The successful delivery of email is the backbone of the SMTP product and service family. SharpSpring and GraphicMail can now offer delivery using the same robust delivery technologies, so that those customers will benefit from the same delivery excellence that previous SMTP customers have experienced. We believe this will improve deliverability statistics for both sets of customers, and allow SharpSpring and GraphicMail to target higher volume senders and larger enterprises as potential customers.

Markets & Competition

The domestic email services market is estimated by Forrester at greater than $2 billion and expected to exceed $3 billion by the end of the decade. The email services market is a subset of the global market for marketing software, which is estimated at over $20 billion and is expected to exceed $30 billion by 2018, according to International Data Corporation’s October, 2014 estimates. We estimate that the addressable market in email marketing services is over $4 billion globally today, based on our current product offering. Longer term, we believe that our acquisition of SharpSpring’s technology (with features like CRM and call tracking) and GraphicMail’s global distribution position us well for longer-term penetration into the broader global marketing services market.

The email marketing services market is dominated by three segments, and with the acquisition of GraphicMail and SharpSpring, we now are able to serve each of these segments on a global basis:

Traditional email marketing services (newsletters and one-to-many communications)

Marketing automation products (highly targeted one-to-one messaging with sophisticated analytics)

Email delivery services (robust infrastructure for relaying the delivery of high volumes of email)

Our SharpSpring product competes primarily in the marketing automation market, which is the fastest-growing segment of the market. The market for marketing automation software and related solutions is new and evolving, highly competitive and significantly fragmented. SharpSpring entered the market in 2014 with a highly competitive offering that achieved meaningful customer adoption in its first year after launch. Notably, SharpSpring includes customer relationship management (CRM) and call-tracking capabilities not typically found in baseline marketing automation systems. We face competition from cloud-based software and SaaS companies including Marketo, Act-On, Eloqua (acquired by Oracle in late 2012), Pardot (acquired by SalesForce.com in July 2013) and HubSpot. We differentiate ourselves from the competition with SharpSpring’s advanced features, ease of use, flexibility of implementation, and value compared to other competitive offerings. SharpSpring also focuses on and caters to marketing agencies as marketing partners and a distribution channel to a degree that competitors do not.

GraphicMail, our email marketing product, has historically competed with vendors focused on the small and medium-size business market (SMB). Competing vendors also focused on the SMB market include: Constant Contact, AWeber Systems, Inc., iContact Corporation, a subsidiary of Vocus, Inc., Protus, a subsidiary of j2 Global Communications, Inc. (Campaigner^®), The Rocket Science Group LLC (MailChimp^®), and VerticalResponse, Inc., a subsidiary of Deluxe Corporation, and others. These vendors typically charge a monthly fee or a fee per number of emails sent and, in some cases, they have a free offering for low-volume or non-profit customers. Historically, GraphicMail has not competed with vendors that focus on larger enterprise customers. Today, with the integration of the SMTP delivery services, GraphicMail has the ability to target larger-volume and higher-value customers. GraphicMail’s rich feature set, comparative value and local language support have been key market differentiators. In the future, however, improved deliverability will serve as an added incentive for customers to select GraphicMail over its competitors.

Stand-alone SMTP relay services customers seek the highest levels of marketing and transactional email deliverability. Those customers may have in-house design teams, and internal analytics capabilities so are typically less concerned with some of the “front end” capabilities of a full-service email marketing system. They often send significantly higher volumes of email and are therefore subject to higher risks of having their legitimate opt-in email inadvertently intercepted by SPAM filters. As a result, SMTP relay customers are typically far more concerned with successful email delivery than with the design and creation of email content. SMTP’s technology is buttressed by our multi-national team of deliverability experts – a significant differentiator from our competitors. At the same time, SMTP’s relay services for improving deliverability are typically significantly lower in cost than sending via these integrated packages. Fundamentally, SMTP customers remain once they see demonstrable improvements in their inbox delivery, thanks to the enhanced sending reputations we create and maintain for them (which are non-transferrable), and the 24x7 deep technical support we provide for any deliverability issues.

We are part of a constantly evolving and highly competitive marketplace. Some of our competitors have more extensive customer bases and broader customer relationships than we have, and have longer operating histories and greater name recognition than we have. Additionally, some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we have, and are able to devote greater resources to the development, promotion, sale and support of their products and services. Barriers to entry in this cloud-based email services market are relatively low and so, in addition to the competitors mentioned above, we may face future competition in the email marketing market from new companies entering our market, which may include large, established companies.

Sales and Marketing

We sell our products through our internal sales teams as well as through third party resellers. Until the acquisitions of GraphicMail and SharpSpring, SMTP has utilized a small inside sales team of 2-4 people based in the USA to close relay sales. With the closing of the GraphicMail and SharpSpring acquisitions, the sales force size has increased significantly, along with its global reach. At the end of 2014, the sales team consisted of 10 people in the USA, 7 employees overseas focused on sales, plus a network of third party resellers which operate in 14 countries.

In general, we use our own marketing technology products to market to prospects and existing customers. Our websites at www.smtp.com, www.sharpspring.com and www.graphicmail.com serve as primary lead generation sources and we use a variety of other digital marketing tools to attract new customers.

Our SharpSpring product sales process involves targeting customers, completing product demos and advancing customers through our sales pipeline to conversion using our SharpSpring marketing automation product. Since SharpSpring was just launched in 2014, brand recognition today is limited, though on the increase. Therefore, we are more reliant on outbound marketing and search engine traffic to attract potential customers. In addition, we have had success signing up approximately 300 marketing agency partners, who have become customers and are able to resell SharpSpring to their clients. These marketing agency partners pay increased fees to us if the number of clients on the SharpSpring product reaches certain levels, and provide first level support for their clients. We also sell SharpSpring directly to end-users. Through the end of 2014, SharpSpring had been sold by a small team fewer than 10 salespeople based in the United States. Starting in the first quarter of 2015, SharpSpring will begin to leverage the GraphicMail international sales team and third party reseller network for significantly enhanced sales reach.

Our GraphicMail sales and marketing efforts are designed to attract potential customers to our website, enroll them in a free trial, encourage them to engage with our products, convert them to paying customers and retain them as ongoing customers. We employ sophisticated strategies to acquire our customers by using a variety of sources, including online advertising and partner relationships and referrals. We also invest in public relations and thought leadership to build our overall brand and visibility. We advertise online through pay-per-click advertising with search engines, including Google, Yahoo!, Bing and others. We deploy banner advertising with online advertising networks and other websites likely to be frequented by SMB organizations. Additionally, GraphicMail uses a network of third party resellers who distribute and sell GraphicMail in 14 countries. These resellers act as local sales resources, perform marketing for the product and provide first level support, and receive a large portion of the revenue related to sales of GraphicMail through their organization. Following the acquisition of GraphicMail, the Company anticipates selling SharpSpring and SMTP relay services through the GraphicMail country partner network.

SMTP relay services are sold and leads are largely generated by our SMTP.com website. SMTP stands for “Simple Mail Transfer Protocol”, which is the internet protocol by which all email is sent globally. Despite the fact that we do not own the protocol, our name provides us immediate name recognition and domain context worldwide. In addition, the services we provide may be searched for online as “SMTP”, “SMTP relay services”, “SMTP services”, “SMTP providers”, or using similar terms. Our website may appear in search engine results for these and other queries in common search engines, such as Google, Yahoo!, Bing, and others. In addition, SMTP purchases online search advertising and other forms of online advertising to drive traffic to our website and referring partners provide us with more leads. Referring partners are typically other service providers operating in the email ecosystem, who may provide related products and services that are non-competitive with our own. We pay these third parties between 15% and 30% of the revenue generated from their referrals.

Customers

We have tens of thousands of users on our SMTP relay service and GraphicMail products, some as direct customers and some as customers of our resellers. As of December 31, 2014, we earned approximately 300 customers for our SharpSpring product after launching the product in early 2014.

We are not heavily dependent on any one customer or even a few major customers. Our user base is diverse and the largest single customer represents less than 3% of our aggregate revenues. The loss of any one customer would not represent a material loss of sales. A large majority of our SharpSpring customers are marketing agencies who resell the SharpSpring product to their clients. Our SMTP relay service and GraphicMail products also have a significant number of agency customers, but otherwise do not have a high concentration of customers from a particular industry.

Technology & Technology Suppliers

Our SharpSpring product technology was developed internally over the past three years. SharpSpring’s key features include web tracking, customer relationship management, call tracking, lead scoring and nurturing, rule-based triggers and notifications and deep analytics to measure ROI. We offer value to our customers by providing integration with industry standard technologies and third-party data providers like Zoom info, Salesforce, sugarCRM, Zapier, GoToMeeting, Magento Shopping Cart and many others.

Our GraphicMail product technology was developed by our team of experienced developers over the past seven years. GraphicMail’s product consists of an advanced email editor that customers use to create sharp, professional email campaigns. It has an easy to use interface, integrates with social media channels, offers mobile messaging and includes tools to effectively track campaign results. GraphicMail has historically utilized Postfix software to assist in spooling emails. Postfix, is an open source technology and can be used by anyone without cost but the technology has significant limitations in terms of its ability to support high-volume senders. Now GraphicMail has started to send emails through our internal SMTP relay service thereby exploiting SMTP’s many years of experience in email delivery and robust technical infrastructure on behalf of GraphicMail customers.

The Company’s SMTP relay service product uses Message Transfer Agent (MTA) technology provided by Message Systems. This software can handle large volumes of email and provides unique features such as adaptive delivery for managing email delivery issues, such as throttling by the ISP’s. Facebook, LinkedIn, and other very large email senders employ this same sophisticated software. Typically, SMTP’s customers would be too small and spend too little on email to be able to afford this type of sophisticated system. The Company’s solution to this problem is to provide our customers with these systems by pooling a large number of customers into our proprietary and scalable system that handles billions of emails. We customized various aspects of the software to optimize the speed at which email is delivered, and to manage the process of maximizing inbox delivery. Our proprietary systems manage how emails are sent, and which IP addresses or pools of IP addresses are used for sending. We control the speed and volume with which emails are released to various ISPs. For example, we may allow sending to Gmail addresses to ramp more quickly than to MSN addresses, depending upon our interactions with the various ISPs all over the world. Another key part of our technological assets are our 12,286 portable IPv4 addresses. We can allow our customers to use our IP addresses to improve the inbox delivery of their email campaigns. We have over a decade of experience building the reputation of IP addresses, and the reputation we have established for our IP addresses is one of the Company’s key assets.

While we employ Message Systems as the backbone of our sending, we still employ Postfix software for certain functions. PostFix software is open source and has been released under the IBM Public License 1.0, giving us and others rights to freely utilize and modify the software at our discretion and without cost. At this time, we operate the software in a clean unmodified state. We developed proprietary extensions that plug into the software in an effort to optimize the speed at which email is delivered, and to manage the process of maximizing inbox delivery. Customizations to open source software code generally require developers to make their work available at no cost. Since we have developed our software by creating extensions which live outside of the open source software layer, we do not believe there is a risk we could be required to offer our products or make our source code available which maintains the Company’s hold on a competitive advantage.

All of our products are developed utilizing message queues and other architectural methodologies that enable scalability. Our platforms are hosted in third party data centers on equipment that is leased or rented from the provider. These providers include Amazon Web Services, Rackspace, Softlayer, Linode, Hetzner and Sadecehosting, Data Realms, Sprocket Networks, MongoHQ, Microsoft Azure, and others. These data centers use biometric access controls, redundant power, environmental controls and secure internet connection points to ensure uptime and data security. The Company continuously monitors our services for availability, performance and security. When necessary we send engineers to these third-party providers’ locations to maintain quality control and oversight. We rely on our data center providers to maintain peak operating conditions in their businesses and to quickly address issues related to their service as they arise.

Intellectual Property

We do not own any patents, trademarks, licenses, franchises or concessions. We are currently in process of applying for a patent for the proprietary call tracking technology developed by SharpSpring. Additionally, we have an exclusive license to a patent on a technology that can determines the emotional tone of a speaker in a recorded call, which was acquired as part of the SharpSpring acquisition.

Our trade secrets include our competencies in marketing automation, workflow, email editing and managing the transmission of high volumes of email messages to various Internet Service Providers.

We registered “GraphicMail”, “SMTP”, the related logos and certain other marks as trademarks in the United States and several other jurisdictions.

We are the registered holder of a variety of domestic and international domain names that include “smtp”, “graphicmail”, “sharpspring”, and similar variations.

Recent Acquisitions

On August 15, 2014, we acquired substantially all the assets and assumed the liabilities of SharpSpring LLC, a Delaware limited liability company for a cash payment of $5,000,000 plus potential earn out consideration of $10,000,000 that is contingent on the SharpSpring product achieving certain levels of revenue in 2015. The target for full payment of the earn out is that SharpSpring will achieve a run rate of $5,000,000 in annual recurring revenues by the end of 2015, and is subject to additional conditions as described more fully in the purchase agreement. The earn-out consideration, if met, will be paid 60% in cash and 40% in stock following the audit of the 2015 financial statements at the end of the first quarter of 2016.

On October 17, 2014, we acquired 100% of the equity interest owned, directly or indirectly, in GraphicMail group companies (“GraphicMail”) consisting of 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. The acquisition consideration consisted of $5.3 million, $2.6 million of which was paid in cash and $2.7 million of which was paid in stock, plus potential earn out consideration of $0.8 million based on achieving certain revenue levels in 2015. Assuming the revenue targets are met, the earn-out consideration will be paid 50% in cash and 50% in stock. On October 17, 2014, the Company issued 423,426 unregistered shares of common stock which represents the $2.7 million portion of the consideration.

Regulation of our Business

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

The CAN-SPAM Act’s main provisions include:


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

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

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

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

Additionally, certain aspects of how our customers utilize our platform are subject to regulations in the United States, European Union and elsewhere. In recent years, U.S. and European lawmakers and regulators have expressed concern over the use of third-party cookies or web beacons for online behavioral advertising, and legislation adopted recently in the European Union requires informed consent for the placement of a cookie on a user’s device. Regulation of cookies and web beacons may lead to restrictions on our activities, such as efforts to understand users’ Internet usage. New and expanding “Do Not Track” regulations have recently been enacted or proposed that protect users’ right to choose whether or not to be tracked online. These regulations seek, among other things, to allow end users to have greater control over the use of private information collected online, to forbid the collection or use of online information, to demand a business to comply with their choice to opt out of such collection or use, and to place limits upon the disclosure of information to third party websites. These policies could have a significant impact on the operation of our marketing automation platform and could impair our attractiveness to customers, which would harm our business.

Customers and potential customers in the healthcare, financial services and other industries are subject to substantial regulation regarding their collection, use and protection of data and may be the subject of further regulation in the future. Accordingly, these laws or significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change the way these customers do business and may require us to implement additional features or offer additional contractual terms to satisfy customer and regulatory requirements, or could cause the demand for and sales of our marketing automation platform to decrease and adversely impact our financial results.

Employees

As of March 24, 2015, we have approximately 134 people supporting our operations, including approximately 104 employees and 30 contractors. Nearly all of our employees and contractors devote their full effort to the company. Our full-time resources include 38 sales and marketing resources, 29 development resources, 21 general & administrative resources and 46 customer services and support resources.

None of our employees are covered by collective bargaining agreements.

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

Properties

Our corporate headquarters is located in Nashua, NH. We have additional offices in Cambridge, MA, Gainesville, FL, Geneva, Switzerland, Kiev, Ukraine, Odessa, Ukraine, and Bellville (Cape Town), South Africa and Johannesburg, South Africa. Presently, we rent all of the offices.

Corporate Information

SMTP, Inc. is a Delaware corporation. Its wholly owned subsidiaries consist of (i) SharpSpring, Inc., a Delaware corporation (“SharpSpring”); and (ii) the GraphicMail group companies (“GraphicMail”) consisting of 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.

Our corporate headquarters is located at 10 Tara Blvd, Suite 430, Nashua, New Hampshire 03062. Our telephone number is 877-705-9362. Our corporate website is www.SMTP.com. The information on our website is not incorporated herein by reference and is not part of this Form 10-K Annual Report. Also, this report includes the trade names of other companies. Unless specifically stated otherwise, the use or display by us of such other parties' names and trade names in this report is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, any of these other parties.

ITEM 1A.

RISK FACTORS

Risks Related To Our Business

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

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

We may not be able to scale our business quickly enough to meet our customers' growing needs, and if we are not able to grow efficiently, our operating results could be harmed.

As usage of our marketing software grows and as customers use our solutions for more advanced relationship marketing programs, we will need to devote additional resources to improving our application architecture, integrating with third-party systems, and maintaining infrastructure performance. In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support and professional services, to serve our growing customer base, particularly as our customer demographics expand over time. Any failure of or delay in these efforts could cause impaired system performance and reduced customer satisfaction. These issues could reduce the attractiveness of our marketing software to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers, the issuance of service credits, or requested refunds, which could adversely affect our revenue growth and harm our reputation. Even if we are able to upgrade our systems and expand our staff, any such expansion will be expensive and complex, requiring management time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely affect our financial results.

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

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

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

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

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

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

Additionally, in the future, we may choose to change the names of our products or update our corporate brand identity, which may lead to confusion about our products and may impede our ability to create brand recognition in the short term.

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

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

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

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

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

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

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

Our international operations subject us to additional risks and uncertainties.

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


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

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

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

We could be materially affected by the fluctuations of the U.S. Dollar against the Euro, Swiss Franc, South African Rand or British Pound.

Approximately 75% of our revenues are currently generated in U.S. Dollars, while approximately 25% of our revenues are denominated in other currencies including the Euro, Swiss Franc, South African Rand and British Pound. Our costs are generally incurred in similar currencies. Currency exchange rates can fluctuate dramatically, which will impact the amount of revenue we will record when translated to U.S. Dollars and will impact the amount of costs that we incur when translated to U.S. Dollars. Although our cost currencies are generally aligned to our revenue currencies, variances exist between the rate we incur costs in each currency compared to the revenue. Therefore, changes to currency rates may dramatically impact profitability.

If we do not or cannot maintain the compatibility of our marketing software with third-party applications that our customers use in their businesses, our revenue will decline.

The functionality and popularity of our marketing software depends, in part, on our ability to integrate our solutions with third-party applications and platforms, including CRM, event management, e-commerce, call center, and social media sites that our customers use and from which they obtain data. Third-party providers of applications and APIs may change the features of their applications and platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications and APIs and access to those applications and platforms in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party applications and platforms in conjunction with our solution, which could negatively impact our offerings and harm our business. If we fail to integrate our software with new third-party applications and platforms that our customers use for marketing purposes, we may not be able to offer the functionality that our customers need, which would negatively impact our ability to generate revenue and adversely impact our business.

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

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

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

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

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

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

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

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

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

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

We are a small public company. The requirements of being a public company are a strain on our systems and resources, are a diversion to management’s attention and are costly.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 (Exchange Act) the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and the rules and regulations of The NASDAQ Stock Market. The requirements of these rules and regulations increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to manage our growth and to implement internal controls. We are and will continue to be required to implement and maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of this implementation and maintenance, management's attention may be diverted from other business concerns, which could adversely affect our business. Furthermore, we rely on third-party software and system providers for ensuring our reporting obligations and effective internal controls, and to the extent these third parties fail to provide adequate service including as a result of any inability to scale to handle our growth and the imposition of these increased reporting and internal controls and procedures, we could incur material costs for upgrading or switching systems and our business could be materially affected.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

In addition, we expect these laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

As a result of being a public company, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the time and resources of our management and adversely affect our business and operating results.

Risks Related To Our Management

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

Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued efforts and abilities of our executive officers, including our Chief Executive Officer and other key personnel, each of whom would be difficult to replace. In particular, Jonathan M. Strimling, our Chief Executive Officer, Richard Carlson, President of SharpSpring and Nick Eckert, President of GraphicMial are critical to the development of our strategic direction. The loss of the services of Messrs. Strimling, Carlson and Eckert, or other key personnel, and the process to replace any of our key personnel, would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives. We currently do not maintain key person life insurance on any of our executives. Accordingly, the loss of the services of any of these persons would adversely affect our business.

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

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

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

As of December 31, 2014, our officers and directors, in the aggregate, beneficially own approximately or have the right to vote approximately 51% of our outstanding common shares on a fully diluted basis. As a result, these stockholders, acting together, have the ability to control substantially all matters submitted to our stockholders for approval including:


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

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

Substantial future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

The market price for our common stock could decline as a result of the sale of substantial amounts of our common stock, particularly sales by our chairman, directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares.

We do not yet have an effective system of internal controls, and we may not be able to accurately report our financial results or to prevent fraud.

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

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

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

Risks Related To Our Systems

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We have applied for a patent of our proprietary call tracking technology developed by SharpSpring; but we have not applied for patent protection of our other licensed technologies or processes with the US Patent and Trademark Office; if we fail to obtain a patent for our proprietary call tracking technology, or fail to obtain patents on our other technologies and processes, we may be unable to adequately protect our intellectual property, especially if the designs and materials used in our products are replicated by our competitors. Further, even if we file for patent protection, there is no assurance that it will be approved by the US Patent and Trademark Office.

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

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


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

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

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

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

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

We may be the subjected of intentional cyber disruptions and attacks.

We expect to be an ongoing target of attacks specifically designed to impede the performance of our products. Experienced computer programmers, or hackers, may attempt to penetrate our network security or the security of our data centers and IT environments. These hackers, or others, which may include our employees or vendors, may cause interruptions of our services. Although we continually seek to improve our countermeasures to prevent and detect such incidents, if these efforts are not successful, our business operations, and those of our customers, could be adversely affected, losses or theft of data could occur, our reputation and future sales could be harmed, governmental regulatory action or litigation could be commenced against us and our business, financial condition, operating results and cash flow could be materially adversely affected.

Risks Related To Our Industry

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

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

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

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

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

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

Existing federal, state and foreign laws regulate Internet tracking software, the senders of commercial emails and text messages, website owners and other activities, and could impact the use of our marketing tools and potentially subject us to regulatory enforcement or private litigation.

Certain aspects of how our customers utilize our marketing tools are subject to regulations in the United States, European Union and elsewhere. New and expanding “Do Not Track” regulations have recently been enacted or proposed that protect users' right to choose whether or not to be tracked online. These regulations seek, among other things, to allow consumers to have greater control over the use of private information collected online, to forbid the collection or use of online information, to demand a business to comply with their choice to opt out of such collection or use, and to place limits upon the disclosure of information to third party websites. These policies could have a significant impact on the operation of our marketing software and could impair our attractiveness to customers, which would harm our business.

Customers and potential customers in the healthcare, financial services and other industries are subject to substantial regulation regarding their collection, use and protection of data and may be the subject of further regulation in the future. Accordingly, these laws or significant new laws or regulations or changes in, or repeals of, existing laws, regulations or governmental policy may change the way these customers do business and may require us to implement additional features or offer additional contractual terms to satisfy customer and regulatory requirements, or could cause the demand for and sales of our marketing software to decrease and adversely impact our financial results.

In addition, U.S., state and foreign jurisdictions are considering and may in the future enact legislation or laws restricting the ability to conduct marketing activities in mobile, social and web channels. Any of the foregoing existing or future restrictions could require us to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers, or increase our operating costs or otherwise harm our business. We may be unable to pass along those costs to our customers in the form of increased subscription fees.

While these laws and regulations generally govern our customers’ use of our marketing tools, we may be subject to certain laws as a data processor on behalf of, or as a business associate of, our customers. For example, these laws and regulations governing the collection, use and disclosure of personal information include, in the United States, rules and regulations promulgated under the authority of the Federal Trade Commission, the Health Insurance Portability and Accountability Act of 1996, the Gramm-Leach-Bliley Act of 1999 and state breach notification laws, and internationally, the Data Protection Directive in the European Union and the Federal Data Protection Act in Germany. If we were found to be in violation of any of these laws or regulations as a result of government enforcement or private litigation, we could be subjected to civil and criminal sanctions, including both monetary fines and injunctive action that could force us to change our business practices, all of which could adversely affect our financial performance and significantly harm our reputation and our business.

Privacy concerns and consumers' acceptance of Internet behavior tracking may limit the applicability, use and adoption of our marketing software.

Privacy concerns may cause consumers to resist providing the personal data necessary to allow our customers to use our services effectively. We have implemented various features intended to enable our customers to better protect consumer privacy, but these measures may not alleviate all potential privacy concerns and threats. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our services in certain industries. In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. There are numerous lawsuits in process against various technology companies that collect and use personal information. If those lawsuits are successful, it could impact the way we conduct our business and adversely affect our financial results. The costs of compliance with, and other burdens imposed by, the foregoing laws, regulations, policies and actions may limit the use and adoption of our cloud-based marketing software and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance or loss of any such action.

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

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

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

Risks Related To Owning Our Securities

We anticipate making significant earn out payments related to our SharpSpring and GraphicMail acquisitions which could dilute your ownership of our common stock.

We may be required to pay earn out consideration of up to (i) $10.0 million in connection with our SharpSpring acquisition, which will be paid 60% in cash and 40% in stock; and (ii) $0.8 million in connection with our GraphicMail acquisition, which will be paid 50% in cash and 50% in stock. If these earn out milestones are achieved and become fully payable, we will need to fund approximately $6.8 million of cash payments in April 2016 and issue a significant number of shares of our common stock. Therefore, we will need to raise additional capital before April 2016, which may not be available to us on favorable terms, which could dilute your ownership of our common stock.

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

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


· ·	make earn out payments in connection with our SharpSpring and GraphicMail acquisitions; fund our operations;
·	respond to competitive pressures;
·	take advantage of strategic opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses; and
·	develop new products or enhancements to existing products.

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

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

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

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


·	issue additional equity securities that would dilute our stockholders;
·	use cash that we may need in the future to operate our business;
·	incur debt on terms unfavorable to us or that we are unable to repay;
·	incur large charges or substantial liabilities;
·	encounter difficulties retaining key employees of the acquired company or integrating diverse business cultures;
·	become subject to adverse tax consequences, substantial depreciation or deferred compensation charges; and
·	encounter unfavorable reactions from investment banking market analysts who disapprove of our completed acquisitions.

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

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

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

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

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

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

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

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


·	authorize our board of directors to create and issue, without stockholder approval, preferred stock, thereby increasing the number of outstanding shares, which can deter or prevent a takeover attempt;
·	prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
·	empower our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
·	provide that our board of directors is expressly authorized to adopt, amend or repeal our bylaws; and
·	provide that our directors will be elected by a plurality of the votes cast in the election of directors.

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

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

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

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


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

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

Our common stock is subject to volatility.

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


·	announcements or press releases relating to our industry or to our own business or prospects;
·	regulatory, legislative, or other developments affecting us or our industry generally;
·	sales by holders of restricted securities pursuant to effective registration statements or exemptions from registration; and
·	market conditions specific to email delivery companies, our industry and the stock market generally.

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

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have one independent research analyst covering our stock and may not obtain additional research coverage by securities and industry analysts. If no additional securities or industry analysts commence coverage of us, the trading price for our common stock could be negatively affected. In the event any analyst who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and its trading volume to decline.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None

ITEM 2.

PROPERTIES

Our corporate headquarters is located in Nashua, NH. We have additional offices in Gainesville, FL; Cambridge, MA; Kiev, Ukraine; Odessa, Ukraine; Geneva, Switzerland and Cape Town, South Africa. Presently, we rent all of the offices.

ITEM 3.

LEGAL PROCEEDINGS

We are not a party to any litigation of a material nature.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

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

Market Information

Our common stock trades on The NASDAQ Capital Market under the symbol “SMTP”. Prior to January 31, 2014 our common stock traded on the OTCQB under the symbol “SMTP”. The following table set forth below lists the range of high and low bids for our common stock for our two most recent fiscal years.


		High		Low

2013*	1st Quarter	$	7.25	$	5.05
	2nd Quarter	$	5.50	$	4.25
	3rd Quarter	$	5.95	$	4.35
	4th Quarter	$	9.25	$	1.43

2014	1st Quarter	$	10.00	$	5.93
	2nd Quarter	$	6.50	$	5.87
	3rd Quarter	$	6.70	$	5.95
	4th Quarter	$	6.65	$	5.42

*The prices in the table reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions or a liquid trading market. The prices also give pro forma effect to the 1-for-5 reverse stock split of our outstanding shares of common stock that occurred on December 26, 2013.

Stockholders

As of March 24, 2015 we have a total of 5,462,661 shares of common stock outstanding, held of record by approximately 70 stockholders. We do not have any shares of preferred stock outstanding.

Dividends

Our Company began paying regular cash dividends during the year ended December 31, 2012. During fiscal year 2014 and 2013, our Company distributed quarterly dividends of $2,459,711 and $1,255,936, respectively, in cash to its stockholders. Our Company did not distribute a cash dividend in the first quarter of 2015.

No restrictions limit our ability to pay cash dividends on our common stock. The payment of cash dividends in the future is contingent upon our Company's revenues and earnings, capital requirements and general financial condition. Our board of directors presently has no intention to resume paying cash dividends in the foreseeable future. The payment of any dividends is within the discretion of our board of directors.

Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plans as of December 31, 2014.

Equity Compensation Plan Information


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders (1)	805,840	$5.51	445,993
Equity compensation plans not approved by security holders (2)	200,973	$6.07	-0-
Total	1,006,813	$5.62	495,993


(1)	Reflects our 2010 Employee Stock Plan, as amended for the benefit of our directors, officers, employees and consultants. We have reserved 1,350,000 shares of common stock for such persons pursuant to that plan.
(2)	Comprised of common stock purchase warrants we issued for services.

Recent Sales of Unregistered Securities

During the period covered by this report, our Company issued the following securities without registering the securities under the Securities Act:

Securities issued for services



Date		Security
February 2014		Common stock – 750 shares of common stock. The common stock was valued at $5,000.

February 2014		Warrant – right to buy 80,000 shares of common stock at $7.8125 per share for professional services.

May 2014		Common stock – 1,212 shares of common stock. The common stock was valued at $7,500.

August 2014		Common stock – 5,171 shares of common stock. The common stock was valued at $32,276.

October 2014		Common stock – 1,203 shares of common stock. The common stock was valued at $7,500.

Securities issued pursuant to our Employee Stock Plan



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

February 2014		Stock options – right to buy 15,000 shares of common stock at $6.34 per share.

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.

August 2014		Stock options – right to buy 50,000 shares of common stock at $6.29 per share and 5,000 shares at $6.05 per share.

September 2014		Stock options – right to buy 76,000 shares of common stock at $6.43 per share.

November 2014		Stock options – right to buy 49,500 shares of common stock at $6.34 per share and 4,000 shares at $6.51 per share.

December 2014		Stock options – right to buy 12,000 shares of common stock at $6.04 per share.

Securities issued as consideration for acquisition


Date		Security
October 2014		Common stock – 423,426 shares of common stock. The common stock was valued at $2.6 million.

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

ITEM 6.

SELECTED FINANCIAL DATA

Not Applicable.

ITEM 7.

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

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

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

Background Overview

We provide SaaS based marketing technologies, ranging from advanced marketing automation tools to email delivery services. Our marketing automation solution (SharpSpring) allows customers to track a potential customer from an early stage and nurture that potential customer using marketing automation techniques until it becomes a qualified sales lead or customer. Our email marketing solution (GraphicMail) allows customers to conduct email marketing campaigns using template-driven tools with easy-to-use graphical interfaces and associated analytics. Our SMTP relay service provides 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 combination of our technological offering with our excellent service and support, all offered at competitive pricing. We currently operate in over 100 countries worldwide, with approximately half of our revenues coming from the United States and half of our revenues being derived overseas. We employ a subscription-based revenue model. 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.

On August 15, 2014, we acquired substantially all the assets and assumed certain liabilities of SharpSpring LLC, a Delaware limited liability company, which were assigned to our wholly owned subsidiary SharpSpring, Inc. (“SharpSpring”). SharpSpring engages in the business of creating, marketing, and selling software that provides marketing automation, call tracking, and website traffic analysis and customer relationship management. It is a cloud-based marketing automation platform that enables users to connect with customers and build relationships to drive revenue.

On October 17, 2014, we acquired the GraphicMail group companies (“GraphicMail”) consisting of 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. GraphicMail operates as an email service provider, enabling customers to create content and manage emails being sent to customers and distribution lists.

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, inclusive of SharpSpring, Inc., a Delaware corporation and GraphicMail group companies as of the dates of their respective acquisitions.

Results of Operations


							Percent
					Change from		Change from
Net Revenues	2014		2013		Prior Year		Prior Year

Year Ended December 31,	$	7,499,497	$	5,753,929	$	1,745,568		30.3	%

Revenues increased for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily due to the acquisitions of GraphicMail and SharpSpring. In addition, during the first half of 2014, we drove year over year organic growth of our SMTP relay business versus 2013 by adding new customers and expanding existing relationships with customers.


							Percent
					Change from		Change from
Cost of Service	2014		2013		Prior Year		Prior Year

Year Ended December 31,	$	1,715,613	$	1,049,325	$	666,288		63.5	%

Cost of services increased for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily due to increased revenues and incremental business from the acquisitions of GraphicMail and SharpSpring. As a percentage of revenues, cost of services were 21% and 18% of net revenues for the years ended December 31, 2014 and 2013, respectively, reflecting a lower gross margin for our newly acquired SharpSpring product as we invest in resources to support the future growth of that product.


							Percent
					Change from		Change from
Sales and Marketing	2014		2013		Prior Year		Prior Year

Year Ended December 31,	$	1,832,966	$	817,971	$	1,014,995		124.1	%

Sales and marketing expenses increased for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily due to acquisitions of GraphicMail and SharpSpring and due to the increase in sales and marketing wages due to recent hires.


							Percent
					Change from		Change from
Research and Development	2014		2013		Prior Year		Prior Year

Year Ended December 31,	$	803,427	$	234,581	$	568,846		242.5	%

Research and development expenses increased for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily due to additional expenses relating to our acquisitions of SharpSpring and GraphicMail, each of which had product development groups.


							Percent
					Change from		Change from
General and Administrative	2014		2013		Prior Year		Prior Year

Year Ended December 31,	$	3,136,612	$	1,710,702	$	1,425,910		83.4	%

General and administrative expenses increased for the year ended December 31, 2014 as compared to the year ended December 31, 2013 primarily due to the acquisitions of SharpSpring and GraphicMail, and the addition of new resources hired to support general business growth. Other increases were related to increased legal and professional services costs associated with our acquisitions in our third and fourth quarter and our stock offering during the first quarter of 2014.

Percent

Change from

Earn Out Liability Adjustment

2014

2013

Prior Year

Year Ended December 31,

682,000

—

682,000

N/A

During the fourth quarter of 2014, we incurred a charge of $682,000 related to an adjustment to the earn out liability for SharpSpring. The acquisition of SharpSpring included liability-based contingent consideration which was re-measured in the fourth quarter of 2014, resulting in an additional charge of $682,000 that is recorded on the income statement.


									Percent
						Change from			Change from
Other Income (Expense)	2014			2013		Prior Year			Prior Year

Year Ended December 31,	$	(16,278	)	$	—	$	(16,278	)		N/A

Other income (expense) is related to foreign exchange gains and losses of $6,686 and a loss on sale of fixed assets of $10,172 and is an immaterial component of our income statement.


									Percent
						Change from			Change from
Income Tax Benefit (Expense)	2014			2013		Prior Year			Prior Year

Year Ended December 31,	$	(131,258	)	$	668,155	$	(799,413	)		(119.6	)%

Changes in our income tax expense related primarily to differences in pretax income during the years ended December 31, 2014 and 2013, respectively, and the effects of certain balancing items to our tax returns that vary from year to year.


									Percent
						Change from			Change from
Net Income (Loss)	2014			2013		Prior Year			Prior Year

Year Ended December 31,	$	(841,212	)	$	1,272,963	$	(2,114,175	)		(166.1	)%

Changes in net income (loss) for the year ended December 31, 2014 as compared to the year ended December 31, 2013 was due to increases in cost of services and operating expenses related to corporate development and our acquisitions of SharpSpring and GraphicMail, each of which is described above.

Liquidity and Capital Resources

Our primary source of cash inflows are net remittances from customers for our services. Such payments are sometimes received in advance of providing the services, yielding a deferred revenue liability on our balance sheet. In addition, we raised approximately $10.5 million (net) during a stock offering in the first quarter of 2014.

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. During 2014, we also used cash for our SharpSpring and GraphicMail acquisitions.

Years Ended December 31, 2014 and 2013

Net cash provided by operating activities decreased $1,521,357, or 78%, to $427,186 for the year ended December 31, 2014, compared to $1,948,543 for the year ended December 31, 2013. The decrease of cash provided by operating activities was primarily attributable to lower profits during 2014 compared to 2013 as described above, offset by higher adjustments for non-cash income items such as depreciation and amortization and the earn out liability adjustment. Specifically, we had an increase in depreciation and amortization of $322,388, an increase in other assets of $305,167, an increase in deferred revenue of $291,414, offset by a decrease in income taxes payable of $560,286, a decrease in deferred income taxes of $594,951 and a decrease in net income (loss) of approximately $2,114,175.

Net cash used in investing activities was $7,442,237 and $287,475 during the year ended December 31, 2014, and 2013, respectively. During the year ended December 31, 2014, investing activities consisted of acquisitions of SharpSpring and GraphicMail totaling $7,380,603, purchases of fixed assets of $66,764 and proceeds from the sale of fixed assets of $5,130. During the year ended December 31, 2013, investing activities consisted of the purchase of software licenses and investments in servers and computers for employees of $287,475.

Net cash provided by (used in) financing activities was $8,115,306 and ($713,826) during the years ended December 31, 2014 and 2013, respectively. During the year ended December 31, 2014, financing activities consisted primarily of proceeds from the issuance of common stock of $10,508,174, partially offset by dividends paid to shareholders of $2,459,711 and excess tax benefits from share-based payment arrangements of $66,843. During the year ended December 31, 2013, financing activities consisted primarily of dividends paid of $1,255,936, partly offset from proceeds from the issuance of common stock of $471,301 and excess tax benefits from share-based payment arrangements of $70,809.

We had net working capital of $2,210,786 as of December 31, 2014 and $1,467,903 as of December 31, 2013. The increase in net working capital as of December 31, 2014 was primarily attributable to our increased cash, which increased to $2,825,520 at December 31, 2014 compared to $1,731,243 at December 31, 2013.

Public Offering of Common Stock. During February 2014 we closed on an $11,500,000 underwritten public offering of our common stock, including the exercise of the entire over-allotment option granted to the underwriters. The net proceeds to our Company after underwriting discounts and commissions and other expenses approximated $10,446,000.

Contractual Obligations

We rent our facilities with leases ranging from month-to-month to several years in duration. Most of our service contracts are also on a month-to-month basis. However, we entered into several non-cancelable service contracts during 2013 and 2014. Future minimum lease payments and payments due under non-cancelable service contracts are as follows as of December 31:


2015	$	261,758
2016		218,756
2017		97,134
2018		5,948
2019		—
Thereafter		—
	$	583,596

Significant Accounting Policies

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

Off-Balance Sheet Arrangements

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

New Accounting Pronouncements

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.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2014 due to gaps in segregation of duties and documentation of management’s assessment of internal controls. Management intends to improve the structure and documentation of internal controls in the future.

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

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

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

Changes in Company Internal Controls

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

ITEM 9B.

OTHER INFORMATION

Not Applicable.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

ITEM 11.

EXECUTIVE COMPENSATION

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

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report:

1. Financial Statements and Reports

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

2. Financial Statements Schedule

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

3. Exhibits

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2015.


	SMTP, Inc.

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

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


Signature	Title	Date

/s/ Jonathan M. Strimling	Chief Executive Officer (Principal Executive Officer), Director	March 31, 2015
Jonathan M. Strimling		March 31, 2015

/s/ Edward Lawton	Chief Financial Officer (Principal Financial Officer)	March 31, 2015
Edward Lawton	Chief Financial Officer (Principal Financial Officer)

/s/ Semyon Dukach	Chair of the Board of Directors	March 31, 2015
Semyon Dukach

/s/ Vadim Yasinovsky	Director	March 31, 2015
Vadim Yasinovsky

/s/ John L. Troost	Director	March 31, 2015
John L. Troost

/s/ David A. Buckel	Director	March 31, 2015
David A. Buckel

INDEX TO FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Comprehensive Income (Loss)	F-4
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)	F-5
Consolidated Statements of Cash Flows	F-6
Notes to the Consolidated Financial Statements	F-7

F-1

[smtp_10k002.gif]

Report of Independent Registered Public Accounting Firm

To the Board of Directors

SMTP, Inc.

We have audited the accompanying consolidated balance sheets of SMTP, Inc. (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), changes in shareholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SMTP, Inc as of December 31, 2014 and 2013 and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ McConnell & Jones, LLP

Houston, Texas

March 31, 2015

4828 Loop Central Drive, Suite 1000

Houston, TX 77081

Phone: 713.968.1600

WWW.MCCONNELLJONES.COM

F-2

SMTP, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
	2014			2013

Assets

Cash and cash equivalents	$	2,825,520		$	1,731,243
Accounts receivable		393,922			25,024
Deferred income taxes		240,648			97,088
Income taxes receivable		328,807			—
Other current assets		197,719			116,522
Total current assets		3,986,616			1,969,877
Property and equipment, net		281,555			327,342
Goodwill		8,901,106			—
Other intangible assets, net		7,895,238			—
Deferred income taxes		612,941			136,446
Deposits and other		30,172			29,995
Total assets	$	21,707,628		$	2,463,660

Liabilities and Shareholders' Equity

Deferred revenue	$	1,006,031		$	334,328
Deferred income taxes		2,119			—
Income taxes payable		14,622			144,280
Accounts payable		397,262			79,572
Accrued expenses and other current liabilities		355,796			30,139
Total current liabilities		1,775,830			588,319

Earn out liability		7,679,311			—
Total liabilities	$	9,455,141		$	588,319

Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at December 31, 2014 and December 31, 2013		—			—
Common stock, $0.001 par value, 50,000,000 shares authorized, 5,447,528 and 3,127,598 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively		5,447			3,128
Additional paid in capital		13,248,992			1,855,186
Accumulated deficit		(824,185	)		17,027
Accumulated other comprehensive loss		(177,767	)		—
Total shareholders' equity		12,252,487			1,875,341

Total liabilities and shareholders' equity	$	21,707,628		$	2,463,660

See accompanying notes to the consolidated financial statements.

F-3

SMTP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Year Ended
	December 31,
	2014			2013

Revenue	$	7,499,497		$	5,753,929
Cost of services		1,715,613			1,049,325
Gross profit		5,783,884			4,704,604
Operating expenses:
Sales and marketing		1,832,966			817,971
Research and development		803,427			234,581
General and administrative		3,136,612			1,710,702
Earn out liability adjustment		682,000			—
Amortization of intangible assets		285,071			232

Total operating expenses		6,740,076			2,763,486

Operating income (loss):		(956,192	)		1,941,118
Other income (expense)		(16,278	)		—

Income (loss) before income taxes		(972,470	)		1,941,118
Provision (benefit) for income tax		(131,258	)		668,155
Net income (loss)	$	(841,212	)	$	1,272,963

Basic net income (loss) per share	$	(0.17	)	$	0.42
Diluted net income (loss) per share	$	(0.17	)	$	0.41
Shares used in computing basic net income (loss) per share		4,913,903			3,004,541
Shares used in computing diluted net income (loss) per share		4,913,903			3,069,273
Other comprehensive income (loss):
Foreign currency translation adjustment		(177,767	)		—
Comprehensive income (loss)	$	(1,018,979	)	$	1,272,963

See accompanying notes to the consolidated financial statements.

F-4

SMTP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)


								Accumulated			Retained
					Additional			Other			Earnings
	Common Stock				Paid in			Comprehensive			(Accumulated
	Shares		Amount		Capital			Loss			Deficit)			Total
Balance, December 31, 2012		2,953,450	$	2,953	$	736,427		$	—		$	—		$	739,380
Stock based compensation - stock options		—		—		212,946			—			—			212,946
Warrant for services rendered		—		—		188,077			—			—			188,077
Dividends paid to shareholders		—		—		—			—			(1,255,936	)		(1,255,936	)
Issuance of common stock for cash		143,569		144		471,158			—			—			471,302
Issuance of common stock for services		30,579		31		175,769			—			—			175,800
Tax benefit from stock-based award activity, net		—		—		70,809			—			—			70,809
Net income		—		—		—			—			1,272,963			1,272,963
Balance, December 31, 2013		3,127,598		3,128		1,855,186			—			17,027			1,875,341
Stock based compensation - stock options		—		—		560,960			—			—			560,960
Dividends paid to shareholders		—		—		(2,459,711	)		—			—			(2,459,711	)
Issuance of common stock for cash		1,888,168		1,888		10,506,286			—			—			10,508,174
Issuance of common stock for services		8,336		8		52,267			—			—			52,275
Issuance of common stock related to acquisition		423,426		423		2,667,161			—			—			2,667,584
Tax benefit from stock-based award activity, net		—		—		66,843			—			—			66,843
Foreign currency translation adjustment		—		—		—			(177,767	)		—			(177,767	)
Net loss		—		—		—			—			(841,212	)		(841,212	)
Balance, December 31, 2014		5,447,528	$	5,447	$	13,248,992		$	(177,767	)	$	(824,185	)	$	12,252,487

See accompanying notes to the consolidated financial statements.

F-5

SMTP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended
	December 31,
	2014			2013

Cash flows from operating activities:
Net income (loss)	$	(841,212	)	$	1,272,963
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		424,701			102,313
Excess tax benefits from share-based payment arrangements		(66,843	)		(70,809	)
Non-cash stock compensation		650,734			576,822
Non-cash earn out liability adjustment		682,000			—
Deferred income taxes		(617,852	)		(22,901	)
(Gain)/loss on disposal of property and equipment		10,172			—
Changes in operating assets and liabilities:
Accounts receivable		(153,056	)		13,128
Other assets		254,738			(50,429	)
Income taxes payable		(387,787	)		172,499
Accounts payable, accruals and other current liabilities		196,908			(28,312	)
Deferred revenue		274,683			(16,731	)
Net cash provided by operating activities		427,186			1,948,543

Cash flows from investing activities
Acquisition of business, net of cash acquired		(7,380,603	)		—
Purchases of property and equipment		(66,764	)		(287,475	)
Proceeds from the sale of property and equipment		5,130			—
Net cash used in investing activities		(7,442,237	)		(287,475	)

Cash flows provided by (used in) financing activities:
Dividends to shareholders		(2,459,711	)		(1,255,936	)
Proceeds from issuance of common stock		10,508,174			471,301
Excess tax benefits from share-based payment arrangements		66,843			70,809
Net cash provided by (used in) financing activities		8,115,306			(713,826	)

Effect of exchange rate on cash		(5,978	)		—

Change in cash and cash equivalents		1,094,277			947,242

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

Cash and cash equivalents, end of year	$	2,825,520		$	1,731,243

Supplemental information on consolidated statements of cash flows:
Cash paid for income taxes	$	803,500		$	708,000

Supplemental information on non-cash investing and financing activities:
Issuance of common stock to acquire GraphicMail	$	2,684,138		$	—
Contingent earn-out liability from acquisition of GraphicMail and SharpSpring	$	6,997,311		$	—

See accompanying notes to the consolidated financial statements.

F-6

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization

The Company was incorporated in Massachusetts on October 14, 1998 as EMUmail, Inc. and changed our name on April 1, 2010 to SMTP.com, Inc. The Company focuses on providing cloud-based email services to its customers. Historically, the company has provided email delivery services but the recent acquisitions of SharpSpring and GraphicMail now allow it to serve the broader markets of campaign management and marketing automation. The Company’s services are marketed directly by the Company and through reseller partners.

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

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

On August 15, 2014, the Company acquired substantially all the assets and assumed the liabilities of SharpSpring LLC. On October 17, 2014, the Company acquired substantially all of the outstanding equity of the GraphicMail, group companies. See Note 3 for details of these acquisitions.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Our Consolidated Financial Statements include the accounts of SMTP, Inc. and our subsidiaries (“SMTP”). Our Consolidated Financial Statements reflect the elimination of all significant inter-company accounts and transactions. On August 15, 2014, we completed the purchase of substantially all the assets and assumed the liabilities SharpSpring LLC. On October 17, 2014, we completed the purchase of GraphicMail. The financial results of these entities have been included in our Consolidated Financial Statements from the dates of acquisition. See Note 3.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. The Company prospectively amended the cost categories for certain individuals for the year ended December 31, 2014 to better reflect the individual’s respective departments and roles in the organization. This reclassification does not affect the net income (loss) of the Company for the year ended December 31, 2013.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-7

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Foreign Currencies

The Company’s subsidiaries utilize the US Dollar, Swiss Franc, South African Rand and British Pound as their functional currencies. The assets and liabilities of these subsidiaries are translated at current exchange rates, while revenues and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in other comprehensive income or loss within the Consolidated Statements of Comprehensive Income (Loss).

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

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

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

Accounts Receivable

Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future collection. Management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. The Company reserves for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance.

Intangibles

Finite-lived intangible assets include trade names, developed technologies and customer relationships and are amortized on a straight-line basis over their estimated useful lives, for periods ranging from 5 to 11 years. We continually evaluate the reasonableness of the useful lives of these assets. Finite-lived intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. An impairment loss, if any, would be measured as the excess of the carrying value over the fair value determined by discounted future cash flows.

Goodwill and Impairment

As of December 31, 2014, we had recorded goodwill of $8,901,106. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in the SharpSpring and GraphicMail acquisitions (See Note 5). Under FASB ASC 350, “Intangibles - Goodwill and Other” deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests, and tests between annual tests in certain circumstances, based on estimated fair value in accordance with FASB ASC 350-10, and written down when impaired.

F-8

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Income Taxes

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

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

Property and Equipment

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

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

Property and equipment as of December 31 is as follows:


	December 31,
	2014			2013
Property and equipment, net:
Leasehold improvements	$	18,154		$	16,245
Furniture and fixtures		84,377			13,619
Computer equipment and software		496,429			427,286
Construction in progress		—			15,453
Total		598,960			472,603
Less: Accumulated depreciation and amortization		(317,405	)		(145,261	)
	$	281,555		$	327,342

Useful lives are as follows:


Leasehold improvements	3-5 years
Furniture and fixtures	3-5 years
Computing equipment	3 years
Software	3-5 years

F-9

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

For the Company’s internet-based SMTP email delivery product and GraphicMail email product, the 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. If the customer’s transactions exceed contractual volume limitations, overages are charged and recorded in the periods in which the transaction overages occur.

Certain of the Company’s GraphicMail customers are sold through third party resellers. In some cases, we allow the third party resellers to collect the funds directly from the customer, withhold their own reseller fee, and remit the net amount owed back to the Company. In those situations, because the Company is the primary obligor in the arrangement, the Company records the gross revenue and expenses such that 100% of the end customer revenue is reported by the Company and a corresponding expense is recorded for the reseller fee.

For the Company’s internet-based marketing automation solution, the services are typically offered on a month-to-month basis with a fixed fee charged each month depending on the size of the engagement with the customer. Monthly fees are recorded as revenue during the month they are earned. Some customers are charged annually, for which revenues are deferred and recorded ratably over the subscription period. Additionally, some customers were charged an up-front prepayment that is credited back over the course of the first year, which is recorded as revenue ratably over the first year of service. Some customers were also charged an upfront implementation and training fee. The upfront implementation and training fees represent short-term “use it or lose it” services offered for a flat fee. Such flat fees are recognized over the service period, which is 60 days.

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 or recorded when the services are used.

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents. At December 31, 2014 and 2013, the Company had cash balances at financial institutions that exceed federally insured limits. The Company maintains its cash balances with accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

For the years ended December 31, 2014, and 2013, there were no customers that accounted for more than 10% of total revenue.

Cost of Services

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

F-10

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Credit Card Processing Fees

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

Advertising Costs

The Company expenses advertising costs as incurred.

Research and Development costs

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

Net Income (Loss) Per Share

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

Recently Issued Accounting Standards

Note 3: Acquisitions

The Company pursues strategic acquisitions from time to time to leverage its existing capabilities and further build its business. Such acquisitions are accounted for as business combinations pursuant to ASC 805 “Business Combinations.” Under this ASC, acquisition and integration costs are not included as components of consideration transferred, but are accounted for as expenses in the period in which the costs are incurred.

SharpSpring

On August 15, 2014, the Company acquired substantially all the assets and assumed the liabilities of SharpSpring LLC, a Delaware limited liability company for a cash payment of $5,000,000 plus potential earn out consideration of $10,000,000 that is contingent on the SharpSpring LLC product achieving certain levels of revenue in 2015. The earn out consideration, if met, will be paid 60% in cash and 40% in stock following the audit of the 2015 financial statements. The acquired assets and liabilities were assigned to SMTP’s wholly owned subsidiary SharpSpring, Inc. (“SharpSpring”), SharpSpring is a cloud-based marketing automation platform that enables users to connect with customers and build relationships to drive revenue through marketing automation, call tracking and customer relationship management.

The following table presents the components of the initial purchase price consideration:


Cash consideration	$	5,000,000
Earn out liability		6,963,000
Liabilities assumed		149,841
Total purchase price	$	12,112,841

F-11

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The initial allocation of the purchase price is based on management estimates and assumptions, and other information compiled by management, which utilized established valuation techniques appropriate for the industry; these techniques were the income approach, cost approach or market approach, depending upon which was the most appropriate based on the nature and reliability of the data available. These amounts are provisional and subject to finalization in the next accounting period. The income approach is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach takes into account the cost to replace (or reproduce) the asset and the effects on the assets value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is a technique used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date.

The following represents the initial allocation of the purchase price to the acquired net tangible and intangible assets acquired and liabilities assumed of SharpSpring.


Total purchase price	$	12,112,841
Less:
Net tangible assets acquired		(135,614	)
Intangible assets acquired:
Trade Name		(120,000	)
Developed Technologies		(2,130,000	)
Customer Relationships		(1,320,000	)
Total intangible assets		(3,570,000	)
Goodwill	$	8,407,227

Acquired intangible assets include trade names which are to be amortized over the useful life of five years, and technology and customer relationships which are to be amortized over the useful life of 11 years.

Goodwill of $8,407,227 was recorded. Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present). The $8,407,227 of goodwill as of December 31, 2014 is not expected to be deductible for tax purposes. Goodwill arose primarily as a result of the expected future growth of the SharpSpring product and the assembled workforce.

Pursuant to the Asset Purchase Agreement, the Company is liable for an earn out of up to $10,000,000, payable 60% in cash and 40% in stock, depending on SharpSpring achieving certain revenue levels in 2015. The Company utilized the income approach to estimate the fair value of the earn out. The Company analyzed scenarios and determined a probability weighting for each scenario. The Company calculated the earn out payments based on the respective revenues for each scenario and then weighted the resulting payment by the probabilities of achieving each scenario. In order to calculate an appropriate risk-adjusted discount rate for the earn out, the Company calculated the weighted average cash-flows of the business based on the three scenarios and their respective weightings. The Company then calculated an implied internal rate of return (“IRR”) of 18.9%, which is the discount rate necessary in order to reconcile the weighed cash-flows of the three scenarios to the total purchase price including the earn out payment. The earn out payment was then discounted by the 18.9% IRR. Based on these methods and the Company’s assessment of meeting those revenue levels in 2015, an earn out liability of $6,963,000 was recorded as a liability during purchase accounting. This was re-measured in the fourth quarter of 2014, resulting in an additional charge of $682,000 that is recorded on the consolidated statement of operations for the year ended December 31, 2014. The company will continue to refine the projection of SharpSpring revenue levels in 2015 compared to the earn out revenue levels and adjust the liability accordingly through the consolidated statements of comprehensive income (loss).

As of December 31, 2014, management had not yet completed its final evaluation of the fair value of certain intangible and personal property assets acquired. Changes related to the fair values during the measurement period may have an impact on the allocation of the purchase price, including values assigned to assets, liabilities and the amount of estimated goodwill represented in the table above.

F-12

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

GraphicMail

On October 17, 2014, we acquired 100% of the equity interest owned, directly or indirectly, in GraphicMail group companies (“GraphicMail”) consisting of 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. The acquisition consideration consisted of $5.3 million, $2.6 million of which was paid in cash and $2.7 million of which was paid in stock, plus potential earn out consideration of $0.8 million based on achieving certain revenue levels in 2015 (paid 50% in cash and 50% in stock). On October 17, 2014, the Company issued 423,426 unregistered shares of common stock which represents the $2.7 million portion of the consideration. GraphicMail operates as an email service provider, enabling customers to create content and manage emails being sent to customers and distribution lists.

The following table presents the components of the initial purchase price consideration:


Cash consideration	$	2,636,830
Stock consideration		2,684,138
Earn out liability		36,000
Liabilities assumed		663,704
Total purchase price	$	6,020,672

The following represents the initial allocation of the purchase price to the acquired net tangible and intangible assets acquired and liabilities assumed of GraphicMail. These amounts are provisional and subject to finalization in future accounting periods.


Total purchase price	$	6,020,672
Less:
Net tangible assets acquired		(730,276	)
Net intangible assets acquired		(4,779,000	)
Goodwill	$	511,396

Acquired intangible assets include trade names which are to be amortized over its estimated useful life of five years, and technology and customer relationships which are to be amortized over its estimated useful life of 11 years.

Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present) and is not expected to be deductible for tax purposes. Goodwill arose primarily as a result of the expected future growth of the GraphicMail product and the assembled workforce.

F-13

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pursuant to the Asset Purchase Agreement, the Company is liable for an earn out of up to $0.8 million, on GraphicMail achieving certain revenue levels in 2015. The Company utilized the income approach to estimate the fair value of the earn out. The Company analyzed scenarios and determined a probability weighting for each scenario. The Company calculated the earn out payments based on the respective revenues for each scenario and then weighted the resulting payment by the probabilities of achieving each scenario. In order to calculate an appropriate risk-adjusted discount rate for the earn out, the Company calculated the weighted average cash-flows of the business based on the three scenarios and their respective weightings. The Company then calculated an implied internal rate of return (“IRR”) of 29.8%, which is the discount rate necessary in order to reconcile the weighed cash-flows of the three scenarios to the total purchase price including the earn out payment. The earn out payment was then discounted by the 29.8% IRR. Based on these methods and the Company’s assessment of meeting those revenue levels in 2015, an earn out liability of $36,000 was recorded as a liability during purchase accounting. The company will continue to refine the projection of GraphicMail revenue levels in 2015 compared to the earn out revenue levels and adjust the liability accordingly through the consolidated statement of operations.

Pro Forma Results of Operations (Unaudited)

The following table summarizes selected unaudited pro forma consolidated statements of operations data for the year ended December 31, 2014 and 2013 as if both of the acquisitions had been completed at the beginning of the year.


	Year Ended December 31,
	2014			2013

Net revenues	$	10,594,621		$	9,673,502
Gross profit	$	8,541,467		$	7,573,536
Net income (loss)	$	(2,561,293	)	$	(660,409	)
Net income (loss) per common share:
Basic	$	(0.52	)	$	(0.22	)
Diluted	$	(0.52	)	$	(0.22	)

This selected unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the acquisitions had been completed on that date. Moreover, this information does not indicate what the Company's future operating results will be. The information for 2013 and 2014 prior to the acquisitions is included based on prior accounting records maintained by the acquired companies. In some cases, accounting policies differed materially from accounting policies adopted by the Company following the acquisitions. Specifically, the accounting for GraphicMail revenue collected by third-party resellers was reported on a net basis prior to the acquisition and reported on a gross basis following the Company’s acquisition of GraphicMail based on the Company’s interpretation of US GAAP. For 2014, this information includes actual data recorded in our financial statements for the period subsequent to the date of the acquisition. The Company’s consolidated statement of operations for the year ended December 31, 2014 include net revenue and net loss of $1,602,587 and $1,332,912, respectively, attributable to the acquisitions.

Note 4: Asset Purchase Agreement

On January 9, 2013 the Company entered into an asset purchase agreement (“Asset Purchase Agreement”) with Oktet Bilişim Danışmanlık Organizayon Reklamcılık Limited Şirketi, a Turkish corporation (“Octeth”). Pursuant to the Asset Purchase Agreement, the Company acquired from Octeth certain tangible assets, including servers and devices, intangible assets related to PreviewMyEmail.com, along with customer and co-location contracts, in exchange for $160,000 cash. This asset purchase agreement did not constitute a business combination for which purchase accounting would apply and therefore the purchase price was allocated to the assets acquired based on their estimated fair value.

F-14

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 5: Goodwill and Other Intangible Assets

The following tables set forth the initial information for intangible assets subject to amortization and for intangible assets not subject to amortization. These amounts are provisional and subject to finalization in future accounting periods.


	As of December 31, 2014
	Gross				Net
	Carrying		Accumulated		Carrying
	Amount		Amortization		Value
Amortized intangible assets:
Trade names	$	381,473	$	16,819	$	364,654
Technology		4,095,892		131,391		3,964,501
Customer relationships		3,699,237		133,154		3,566,083
Unamortized intangible assets:	$	8,176,602	$	281,364	$	7,895,238
Goodwill						8,901,106
Total intangible assets					$	16,796,344

Estimated amortization expense for 2015 and subsequent years is as follows:


2015	$	1,514,792
2016		1,400,670
2017		1,159,272
2018		988,313
2019		771,531
Thereafter		2,060,660
Total	$	7,895,238

Amortization expense for the year ended December 31, 2014 and 2013 was $285,071 and $232, respectively.

Note 6: Shareholders’ Equity

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

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

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. Therefore, 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 reclassification of dividends would not require a retrospective adjustment to the consolidated financial statements presented in the form 10 – K for the years ended December 31, 2013 and 2012. The reclassification has no impact on the historical net income, total equity, total assets and total liabilities.

For the years ending December 31, 2014 and 2013, the Company paid quarterly dividends of $2,459,711 and $1,255,936, respectively.

F-15

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

On October 17, 2014, the Company issued 423,426 unregistered shares of common stock which represented the $2.7 million portion of the consideration of the GraphicMail acquisition.

Note 7: Net Income Per Share

Computation of net income per share is as follows:


	Year Ended December 31,
	2014			2013

Net income (loss)	$	(841,212	)	$	1,272,963

Basic weighted average common shares outstanding		4,913,903			3,004,541
Add incremental shares for:
Warrants		—			11,255
Stock options		—			53,477
Diluted weighted average common shares outstanding		4,913,903			3,069,273

Net income (loss) per share:
Basic	$	(0.17	)	$	0.42
Diluted	$	(0.17	)	$	0.41

Note 8: Income Taxes

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

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


	2014			2013

Current provision	$	515,953		$	745,852
Payable true-up		55,259			—
Deferred provision (benefit)		(702,470	)		(77,697	)
Net income tax provision	$	(131,258	)	$	668,155

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


	2014						2013
	Amount			Percent			Amount			Percent

Federal statutory rates	$	(360,577	)		34	%	$	659,980			34	%
State income taxes, net of federal benefit		5,365			(1	)%		27,064			1	%
Stock options		—			—			27,503			1	%
Permanent differences		60,114			(6	)%		4,313			0	%
Other		97,592			(9	)%		(50,705	)		(3	)%
Foreign		21,135			(2	)%		—			—
Valuation Allowance		45,113			(4	)%		—			—
Effective rate	$	(131,258	)		12	%	$	668,155			33	%

F-16

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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


	2014			2013
Deferred tax assets (liabilities) - current:
Accrual to cash	$	240,648		$	97,088
Total current deferred tax assets (liabilities)		240,648			97,088
Deferred tax assets (liabilities) - long-term:
Stock-based compensation		281,557			86,347
Depreciation		(6,205	)		50,099
Intangibles		371,883			—
NOL		10,819			—
Net deferred tax asset valuation allowance		(45,113	)		—
Total net deferred tax assets	$	853,589		$	233,534

In assessing the realizability of deferred tax assets, we have considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the uncertainty of the level of future taxable income over the periods which the Company will realize the benefits of its net deferred tax assets, we believe it is more likely than not that the Company will not fully realize the benefits on the balance of its net deferred tax asset and, accordingly, the Company has established a partial valuation allowance of $45,113 against its net deferred tax assets as of December 31, 2014. No valuation allowance was provided for as of December 31, 2013.

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


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

Note 9: Related Party Transactions

Intercompany transactions have been eliminated in our consolidated financial statements. There were no material related party transactions for the years ended December 31, 2014 or 2013.

Note 10: Warrants

On October 29, 2012, in connection with a consulting agreement, the Company issued 90,973 warrants to purchase common stock at an exercise price of $4.90 per share with a term of 5 years. The warrants vest according to the following schedule: 15,163 shares vest immediately and 15,163 shares vest at the end of every thirty day period thereafter until the warrant is 100% vested. For the years ended December 31, 2014 and 2013, the Company recognized an expense of $0 and $130,298, respectively. The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on October 29, 2017 and have a remaining contractual life of 2.83 years as of December 31, 2014. As of December 31, 2014, all warrants were exercisable.

On August 1, 2013, in connection with a consulting agreement, the Company issued 30,000 warrants to purchase common stock at an exercise price of $5.00 per share with a term of 3 years. For the years ended December 31, 2014 and 2013, the Company recognized an expense of $0 and $57,779, respectively, associated with these awards. The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on August 1, 2016 and have a remaining contractual life of 1.59 years as of December 31, 2014. As of December 31, 2014, all warrants were exercisable.

F-17

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 year ended December 31, 2014, a net expense of $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 4.08 years as of December 31, 2014. These warrants are not exercisable prior to January 30, 2015.

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


					Weighted
			Weighted		Average
			Average		Remaining
	Number of		Exercise		Contractual		Intrinsic
	Units		Price		Term		Value

Outstanding at December 31, 2013		120,973	$	4.92

Granted		80,000		7.81

Outstanding at December 31, 2014		200,973	$	6.07		4.1	$	1,151

Exercisable at December 31, 2014		120,973	$	6.07		2.5	$	139,751

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


	Year Ended December 31,
	2014	2013

Volatility	72%	66%-67%
Risk-free interest rate	0.54%	0.31% -0.37%
Expected term	2.5 years	2.5 years

Note 11: Stock-Based Compensation

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

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

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

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

In April 2014, the Company increased the number of shares of the Company’s common stock available for issuance under the Plan from 1,000,000 to 1,350,000. The Company’s stockholders approved this increase on June 5, 2014 at the Company’s 2014 Annual Meeting of Stockholders.

F-18

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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


	Years Ended December 31,
	2014	2013

Volatility	73% - 76%	56%
Risk-free interest rate	1.76% - 1.93%	0.35%
Expected term	6.25 years	1.5 years

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

Stock option awards are expensed on a straight-line basis over the requisite service period. During the years ended December 31, 2014 and 2013, the Company recognized expense of $560,960 and $212,946, respectively, associated with stock option awards. At December 31, 2014, future stock compensation expense (net of estimated forfeitures) not yet recognized was $1,336,442 and will be recognized over a weighted average remaining vesting period of 3.1 years. The following summarizes stock option activity for the year ended December 31, 2014:


								Weighted
				Weighted		Weighted		Average
				Average		Average		Remaining
	Number of			Exercise		Fair		Contractual
	Shares			Price		Value		Life
Outstanding at December 31, 2013		627,807		$	4.83	$	2.92
Granted at market price		325,900			6.58
Exercised		(48,167	)		0.47
Forfeited		(99,700	)		6.72
Outstanding at December 31, 2014		805,840			5.51		3.47		8.6
Exercisable at December 31, 2014		230,944		$	5.09	$	3.01		7.8

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 intrinsic value of the Company’s stock options outstanding was $458,844 at December 31, 2014.

Note 12: 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.

F-19

SMTP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Operating Leases and Service Contracts

The Company rents its facilities with leases ranging from month-to-month to several years in duration. .Most of its service contracts are on a month-to-month basis, however, the Company entered into several non-cancelable service contracts during the year ended December 31, 2014. Future minimum lease payments and payments due under non-cancelable service contracts are as follows for the years ended December 31:


2015	$	261,758
2016		218,756
2017		97,134
2018		5,948
2019		—
Thereafter		—
	$	583,596

Employment Agreements

The Company has employment agreements with several members of its leadership team and executive officers.

Note 13: Subsequent Events

On February 18, 2015, the Company announced an election to suspend its quarterly dividend so that it can reinvest its capital into the business in order to accelerate growth.

The Company evaluated subsequent events through the date the financial statements were issued and filed with the U.S. Securities and Exchange Commission ("SEC").

F-20

INDEX TO EXHIBITS


Exhibit Number	Title of Document	Location

2.1	Asset Purchase Agreement – SharpSpring	Incorporated by reference to our Form 8-K filed on August 15, 2014
2.2	Equity Interest Purchase Agreement - GraphicMail	Incorporated by reference to our Form 8-K filed on August 15, 2014
2.3	Amendment to Equity Interest Purchase Agreement - GraphicMail	Incorporated by reference to our Form 8-K filed on October 20, 2014
3.1	Certificate of Incorporation	Incorporated by reference to our Form S-1 filed on December 2, 2010
3.2	Amendment to Certificate of Incorporation	Incorporated by reference to our Form 8-K filed on December 17, 2013
3.3	Bylaws	Incorporated by reference to our Registration Statement on Form S-1 filed on December 2, 2010
4.1	2010 Employee Stock Plan	Incorporated by reference to our Form S-1 filed on December 2, 2010
4.2	Amendment to 2010 Employee Stock Plan	Incorporated by reference to Appendix A to our Definitive Schedule 14C filed on April 30, 2014
4.3	Amendment to 2010 Employee Stock Plan	Incorporated by reference to our Form 8-K filed on November 12, 2014
10.1	Employee Agreement – Edward Lawton	Incorporated by reference to our Form 8-K filed on August 18, 2014
10.2	Employee Agreement – Richard Carlson	Incorporated by reference to our Form 8-K filed on November 12, 2014
10.3	Employee Agreement – Nicholas Eckert	Incorporated by reference to our Form 8-K filed on November 12, 2014
14.1	Code of Ethics and Business Standards	Incorporated by reference to our Form 8-K filed on January 14, 2014
21.1	Subsidiaries of the registrant	Incorporated by reference to Note 3 of the Financial Statements included in Part II – Item 7 of this Form 10-K
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
101.1	XBRL	Filed herewith

SharpSpring, Inc. - FORM 10-K - March 31, 2015

Attached files

SharpSpring, Inc. Reports