10-Q 1 smtp033111_10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

[X]

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

For the quarterly period ended: March 31, 2011

Or

[  ]

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

Commission File Number: 333-170912

 

SMTP, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

05-0502529

(State or other jurisdiction of incorporation
or organization)

(I.R.S. Employer Identification No.)

 

 

95 Fulkerson Street
Cambridge, Massachusetts


02141

(Address of principal executive offices)

(Zip Code)

 

 

617-500-8635

(Registrant’s telephone number, including area code)

 

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

 

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


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


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


Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

 Smaller reporting company

x



i








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


Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:  13,840,000 shares of common stock as of May 1, 2011.





ii





SMTP, INC.




Table of Contents


 

Page

 

 

PART I – FINANCIAL INFORMATION

1

Item 1. Financial Statements:.

2

Balance Sheets (unaudited)

2

Statements of Operations (unaudited)

3

Statements of Cash Flows (unaudited)

4

Notes to Financial Statements (unaudited)

5

Item 2. Management's Discussion and Analysis of Financial Condition and Results of  Operations

9

Item 3. Quantitative and Qualitative Disclosure About Market Risk

11

Item 4. Controls and Procedures

12

PART II – OTHER INFORMATION

12

Item 1. Legal Proceedings.

12

Item 1A. Risk Factors.

12

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

12

Item 3. Defaults Upon Senior Securities

13

Item 4. (Removed and Reserved)

13

Item 5. Other Information.

13

Item 6. Exhibits

14

SIGNATURES

15





iii



PART I – FINANCIAL INFORMATION


Forward-Looking Information

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

Examples of forward-looking statements include:

·

the timing of the development of future products;

·

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

·

statements of our plans and objectives;

·

statements regarding the capabilities of our business operations;

·

statements of expected future economic performance;

·

statements regarding competition in our market; and

·

assumptions underlying statements regarding us or our business.


The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


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




1



Item 1.

Financial Statements.


SMTP, INC.

BALANCE SHEETS


 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(unaudited)

 

 

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

 $            707,927

 

 $            591,063

Accounts Receivable

 

                 11,524

 

                 15,577

Deferred income taxes

 

               175,888

 

               157,962

Other current assets

 

                 64,509

 

                 28,250

 

Total current assets

 

               959,848

 

               792,852

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $7,047 and $6,555

 

                   3,527

 

                   4,019

Intangibles, net of accumulated amortization of $6,430 and $6,264

 

                   2,570

 

                   2,736

Deferred income taxes

 

                      775

 

                      709

Deposits

 

                 69,400

 

                 69,400

 

Total assets

 

 $         1,036,120

 

 $            869,716

 

 

 

 

 

 

Liabilities and Shareholder's Equity

 

 

 

 

 

 

Deferred revenue

 

 $            318,583

 

 $            297,158

Income taxes payable 

 

                         -   

 

               100,306

Allowance for refunds and chargebacks 

 

                   5,677

 

                   2,166

Accrued expenses and other 

 

                 72,485

 

               172,282

 

Total current liabilities

 

               396,745

 

               571,912

 

 

 

 

 

 

Shareholder's equity:

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized,

 

 

 

 

   no shares issued or outstanding

 

                           -

 

                           -

Common stock, $0.001 par value, 50,000,000 shares authorized,

 

 

 

 

13,840,000 shares issued and outstanding

 

                 13,840

 

                 13,440

Additional paid in capital

 

               240,965

 

                 57,155

Retained earnings

 

               384,570

 

               227,209

 

 

 

 

 

Total shareholder's equity

 

               639,375

 

               297,804

 

 

 

 

 

 

 

Total liabilities and shareholder's equity

 

 $         1,036,120

 

 $            869,716



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





2



SMTP, INC.

STATEMENTS OF OPERATIONS


 

 

 

Three Months Ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

Net revenues

$

932,258 

 

$

566,339 

Cost of services

195,847 

 

153,060 

Gross profit

736,411 

 

413,279 

Operating expenses:

 

 

 

 

Sales and marketing

70,805 

 

64,810 

 

General and administrative

318,370 

 

181,497 

 

Research and development

75,995 

 

46,317 

 

 

 

 

 

 

 

 

Total operating expenses

465,170 

 

292,624 

 

 

 

 

 

 

Operating income:

271,241 

 

120,655 

Other income:

 

 

 

 

Interest income

184 

 

 

 

 

 

 

 

Total other income

184 

 

 

 

 

 

 

 

Income before income taxes

271,425 

 

120,655 

Income tax

(114,064)

 

(52,270)

 

 

 

 

 

 

Net income

157,361 

 

68,385 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

Basic and diluted

$

0.01 

 

$

0.01 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

Basic and diluted

13,567,222 

 

13,440,000 



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




3



SMTP, INC.

STATEMENTS OF CASH FLOWS

 

 

 

Three Months Ended March 31,

 

 

2011

 

2010

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

 $                 157,361

 

 $                   68,385

Adjustments to reconcile net income to

 

 

 

 

net cash provided by operating activities:

 

 

 

 

  Depreciation and amortization

 

                           658

 

                           859

  Stock-based compensation

 

                      87,394

 

                               -

  Allowance for refunds and chargebacks

 

                        3,511

 

                        4,859

  Deferred Income Taxes

 

                    (17,992)

 

                        6,181

Changes in assets and liabilities:

 

 

 

 

  Accounts receivable

 

                        4,053

 

                               -

  Other current assets

 

                    (36,259)

 

                               -

  Income taxes payable

 

                  (100,306)

 

                        3,941

  Accrued expenses and other

 

                    (99,797)

 

                      13,522

  Deferred revenue

 

                      21,425

 

                           170

          Net cash provided by operating activities

 

                      20,048

 

                      97,917

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

  Purchases of property and equipment

 

                               -

 

                      (3,164)

          Net cash used in by investing activities

 

                               -

 

                      (3,164)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

                      96,816

 

                             -   

Short term loan to shareholder

 

                             -   

 

                  (100,000)

          Net cash provided by (used) in financing activities

 

                      96,816

 

                  (100,000)

 

 

 

 

 

Change in cash and cash equivalents

 

                    116,864

 

                      (5,247)

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

                    591,063

 

                    122,664

 

 

 

 

 

Cash and cash equivalents, end of period

 

 $                 707,927

 

 $                 117,417

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

Cash paid for income taxes

 

 $                 279,362

 

 $                   14,196


 

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




4




SMTP, INC.

Notes to the Financial Statements

(unaudited)


Note 1:  Organization and Basis of Presentation


Background


The Company was incorporated in Massachusetts on October 14, 1998 as EMUmail, Inc. and changed its name on April 1, 2010 to SMTP.com, Inc.  The Company focuses on the execution of email delivery for marketing and enterprise application customers.  The Company has customers for both corporate and personal email delivery. The Company’s services are marketed directly by the Company and through reseller partners.


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


Basis of Presentation

In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of financial position, results of operations, and cash flows. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The accounting policies are described in the “Notes to Financial Statements” in the 2010 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.


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


Fair Value of Financial Instruments

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


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


Income Taxes


Provision for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are



5



included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.


The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. There are no uncertain tax positions taken by the Company on its tax returns. Tax years subsequent to 2006 remain open to examination by U.S. federal and state tax jurisdictions.  


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


Revenue Recognition


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


The Company provides Internet-based services to facilitate email deliverability, including bulk and transactional sending, reputation management, compliance auditing, abuse processing and diagnostics.  The Company’s services are offered over various contractual periods for a fixed fee that varies based on a maximum volume of transactions.  Revenues are typically paid by clients via credit card, check or wire payments at the inception of the contractual period.  Revenue is recognized on a straight-line basis over the contractual period.


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


Net Income (Loss) Per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period.  The Company’s options and warrants to purchase shares of common stock were excluded from the calculation of net income per share because the average market price of the underlying shares during the period was not greater than the exercise price of the options.  The Company had 2,144,000 and 960,000 outstanding dilutive securities as of March 31, 2011 and December 31, 2010, respectively.  

Recently Issued Accounting Standards


In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”), which provides guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. ASU 2009-13 requires an entity to allocate revenue in an arrangement



6



using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price. ASU 2009-13 was effective for the first annual reporting period beginning on or after June 15, 2010 and could be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date. Early adoption was permitted provided that the revised guidance was retroactively applied to the beginning of the year of adoption. ASU 2009-13 was effective for the Company on January 1, 2011. The adoption of these amendments did not have any impact on the consolidated financial statements.  



Note 2:  Commitments and Contingencies


Litigation

The Company may from time to time be involved in legal proceedings arising from the normal course of business.  There are no pending or threatened legal proceedings as of March 31, 2011.


Consulting Services

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


On March 23, 2011, in relation to the agreement entered into with a third party to provide various consulting services for the Company, the Company issued 800,000 warrants to purchase common stock at an exercise price of $0.625 per share with a term of 5 years.  The warrants were fully vested at the date of grant and the Company recognized an expense of $73,768 equal to the grant date fair value of the warrants using the following assumptions: volatility of 68%; risk-free interest rate of 2.07%; and expected term of 5 years.  The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on March 23, 2016 and have a remaining contractual life of 4.98 years as of March 31, 2011.  There are no other warrants outstanding as of March 31, 2011.


As of March 31, 2011, the Company paid $30,000 for the consulting services under the contract.


Note 3:  Shareholders’ Equity


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


Note 4:  Related Party Transactions


Amounts due to shareholder

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




7




Leased administrative facilities

During the first six months of 2010, the Company’s shareholder leased certain administrative facilities to the Company.  Rent expense on the facilities during the three months ended March 31, 2010 was $900.  In lieu of rental payments, the Company paid for certain repairs and maintenance on the facilities.  Additionally, the Company paid for additional repairs and maintenance and improvements on the facilities totaling $19,137 for the three months ended March 31, 2010, which was deemed compensation to the Company’s shareholder.  In July 2010 the Company started paying rent of $300 on a month to month basis to a third party for use of the Company’s corporate headquarters.  The Company’s technology office in Kiev, Ukraine is rented on a month to month basis at $1,700 per month.  As of March 31, 2011, there were no future lease commitments related to any lease agreements.


Note 5:  Stock-Based Compensation


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


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


Stock option awards are expensed on a straight-line basis over the requisite service period.  During the three months ended March 31, 2011 and 2010, the Company recognized expense of $13,626 and $0, respectively. At March 31, 2011, future stock compensation expense (net of estimated forfeitures) not yet recognized was $160,753 and will be recognized over a weighted average remaining vesting period of 1.9 years.  The following summarizes stock option activity for the three months ended March 31, 2011:


 

 

 

 

Weighted

 

Weighted

 

Weighted

 

 

 

 

Average

 

Average

 

Average

 

 

Number of

 

Exercise

 

Fair

 

Remaining

 

 

Shares

 

Price

 

Value

 

Contractual Life

Outstanding at December 31, 2010

 

960,000

 

$

0.25

 

$

0.2

 

 

Granted at market price

 

384,000

 

$

0.25

 

0.1

 

 

Exercised

 

-

 

 

 

 

 

 

Forfeited

 

-

 

 

 

 

 

 

Outstanding at March 31, 2011

 

1,344,000

 

$

0.25

 

0.2

 

9.4

Exercisable

 

133,333

 

$

0.25

 

$

0.2

 

9.3



The following table summarizes information about the Company’s stock options at March 31, 2011:


 

 

Exercisable

 

Unexercisable

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

Weighted

 

 

Number

 

Average

 

Number

 

Average

 

Number

 

Average

Range of Exercise Prices

 

Outstanding

 

Exercise Price

 

Outstanding

 

Exercise Price

 

Outstanding

 

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$.25 per share

 

133,333

 

$

0.25

 

1,210,667

 

$

0.25

 

1,344,000

 

$

0.25



8



Item 2.

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


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


Background Overview

 

We provide Internet-based services to facilitate email deliverability, including bulk and transactional sending, reputation management, compliance auditing, abuse processing and diagnostics. Our services provide customers with the ability to increase the deliverability of email with less time, cost and complexity than handling it themselves. We believe our growth since inception has been driven by the compelling value proposition for our services. Our stock is publicly traded on the Over-the-Counter Bulletin Board, under the trading symbol SMTP (OTCBB:SMTP).



Results of Operations

Three Months Ended March 31, 2011 and 2010


Three months ended
March 31,

 

Net
Revenues

 

Change from
Prior Year

 

Percent Change
from Prior Year

 

 

 

 

 

 

 

2011

 

$

932,258

 

$

365,919

 

64.6%

2010

 

$

566,339

 

 

 

 



Revenues increased for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, due to increased sales of our email service products to consumers.  Revenue growth is attributable primarily to an increase in our number of subscribers of these products.  Most of this growth is attributable to organic growth in our customer base, specifically our larger business users who require dedicated computer and software systems and typically pay a higher average monthly fee.  


Three months ended
March 31,

 

Cost of Services

 

Change from
Prior Year

 

Percent Change
from Prior Year

 

 

 

 

 

 

 

2011

 

$

195,847

 

$

42,787

 

28.0%

2010

 

$

153,060

 

 

 

 



Cost of services increased for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 primarily due to increased revenues.  As a percentage of revenues, cost of services were 21% and 27% of net revenues for the three months ended March 31, 2011 and 2010, respectively.  This decrease in cost of services as a percentage of revenues is due to decreased partner share commissions in the three months ended March 31, 2011 as a lower volume of customers were provided by our resellers.  Also, there were specific one-time subcontractor costs for customer technical support that occurred during the three months ended March 31, 2010 that did not occur during the three months ended March 31, 2011.  



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Three months ended
March 31,

 

Sales and Marketing

 

Change from
Prior Year

 

Percent Change
from Prior Year

 

 

 

 

 

 

 

2011

 

$

70,805

 

$

5,995

 

9.3%

2010

 

$

64,810

 

 

 

 



Sales and marketing expenses increased for the for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 primarily due to our attendance at a trade show in January 2011 that we did not attend in the prior year, slightly offset by decreased spending in general marketing and advertising activities.    


Three months ended
March 31,

 

General and Administrative

 

Change from
Prior Year

 

Percent Change
from Prior Year

 

 

 

 

 

 

 

2011

 

$

318,370

 

$

136,873

 

75.4%

2010

 

$

181,497

 

 

 

 



General and administrative expenses increased for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 based on the following:

 

·

An increase of approximately $121,000 of professional services used in relation to the filing of our registration statement with the Securities and Exchange Commission;

·

An increase in stock compensation expense of approximately $14,000 related to stock options issued; and

·

An increase in other general and administrative expenses of approximately $2,000.


Three months ended
March 31,

 

Research and Development

 

Change from
Prior Year

 

Percent Change
from Prior Year

 

 

 

 

 

 

 

2011

 

$

75,995

 

$

29,678

 

64.1%

2010

 

$

46,317

 

 

 

 



Research and development expenses increased for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 as we utilized more subcontractors devoted to research and development.  Our research and development efforts are focused around expanding our service offerings and improving the functionality of our products.  



Three months ended
March 31,

 

Income Tax Expense

 

Change from
Prior Year

 

Percent Change
from Prior Year

 

 

 

 

 

 

 

2011

 

$

(114,064)

 

$

(61,794)

 

118.2%

2010

 

$

(52,270)

 

 

 

 





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Changes in our income tax expense related primarily to an increase in pretax income during the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, and the effects of temporary differences that vary from year to year.   


Three months ended
March 31,

 

Net Income

 

Change from
Prior Year

 

Percent Change
from Prior Year

 

 

 

 

 

 

 

2011

 

$

157,361

 

$

88,976

 

130.1%

2010

 

$

68,385

 

 

 

 


Net income increased for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 primarily due to revenue growth partially offset by increases in cost of services, operating expenses and income taxes related to the growth in our business, each of which is described above.


Liquidity and Capital Resources


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


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


Three Months Ended March 31, 2011 and 2010


Net cash generated by operating activities decreased approximately $78,000, or 80%, to $20,048 for the three months ended March 31, 2011, compared to $97,917 for the three months ended March 31, 2010.  The decrease of cash generated by operating activities was primarily attributable to changes in working capital and other adjustments, the most significant of which was the decrease in 2011 in accrued expenses and income taxes payable of approximately $100,000 and $100,000, respectively, meaning that cash spent was more than the expense recognition by that amount.  We had only modest changes in accrued expense balances during 2010.  The change in working capital was offset by an increase in net income of approximately $89,000.

  

Net cash used in investing activities was $0 and ($3,164) during the three months ended March 31, 2011, and 2010, respectively, consisting of investments in computers for employees in 2010.


Net cash provided by (used in) financing activities was $96,816 and ($100,000) during the three months ended March 31, 2011 and 2010, respectively.  During February and March of 2011, we issued and sold 400,000 shares of our common stock and received net proceeds of $96,816 after deducting offering costs of $3,184.  In February 2010, we provided a loan of $100,000 to our shareholder.  The loan was repaid by the shareholder in July 2010.


We had net working capital of $563,103 and $220,940 as of March 31, 2011 and December 31, 2010, respectively.  Our net working capital as of March 31, 2011 was primarily attributable to our increased cash, which increased to $707,927 at March 31, 2011 compared to $591,063 at December 31, 2010 and our reduced accrued liabilities, which decreased to $72,485 at March 31, 2011 compared to $172,282 at December 31, 2010.


Off-balance sheet arrangements


We did not have any off-balance sheet arrangements at March 31, 2011.


Item 3.

Quantitative and Qualitative Disclosure About Market Risk


Not applicable.




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Item 4.

Controls and Procedures.  


Evaluation of Disclosure Controls and Procedures.  The Company’s management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2011.  Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of March 31, 2011 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


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



PART II – OTHER INFORMATION


Item 1.

Legal Proceedings.


Not applicable.


Item 1A. Risk Factors.


Not Applicable.


Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.


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


Securities issued for services


Date

 

Security

March 23, 2011

 

Warrant to purchase 800,000 shares of common stock at $0.625 per share for consulting services. The warrants are for a term of 5 years and were fully vested at the date of grant. The Company recognized an expense of $73,768 equal to the grant date fair value of the warrants using the Black-Scholes option valuation model.


Securities issued pursuant to our Employee Stock Plan



Date

 

Security

January 26, 2011

 

Stock Options to purchase 384,000 shares of common stock at $.25 per share. The options are for a term of 10 years and 25% vest annually over a four year period.  Over the vesting period of the options the Company will recognize an expense of $54,736 (net of estimated forfeitures of 10%) equal to the grant date fair value of the options using the Black-Scholes option valuation model.  




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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) of the Securities Act since these transactions do not involve any public offering.


Item 3.

Defaults Upon Senior Securities.


Not Applicable.


Item 4.

Reserved.


Not Applicable.


Item 5.

Other Information.


We have retained Interwest Transfer Company, Inc.  to serve as our stock transfer agent. Interwest Transfer Company, Inc. is located at 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT  84117. Mailing address: P.O. Box 17136, Salt Lake City, UT  84117. Phone: (801) 272-9294. Fax: (801) 277-3147.




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Item 6.

Exhibits.



INDEX TO EXHIBITS

 

 

 

SEC Reference
Number

Title of Document

Location

 

 

 

3.1

Articles of Incorporation

*

3.2

Bylaws

*

3.3

Plan of Merger

*

10.1

2010 Stock Incentive Plan

*

31.1

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

Filed herewith

31.2

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

Filed herewith

32.1

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

Filed herewith

32.2

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

Filed herewith


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


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






14




SIGNATURES


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


SMTP, INC.

 

 

By:

/s/ Semyon Dukach

 

Semyon Dukach

 

Principal Executive Officer



SMTP, INC.

 

 

By:

/s/ Semyon Dukach

 

Semyon Dukach

 

Principal Financial Officer






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