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SMTP > SEC Filings for SMTP > Form 10-Q on 1-Nov-2012All Recent SEC Filings

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Form 10-Q for SMTP, INC.


1-Nov-2012

Quarterly Report

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

Except for the historical information contained in this report on Form 10-Q, the matters discussed herein are forward-looking statements. Words such as "anticipates," "believes," "expects," "future," and "intends," and similar expressions are used to identify forward-looking statements. These and other statements regarding matters that are not historical are forward-looking statements. These matters involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed below as well as those discussed elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. This information should also be read in conjunction with our audited historical financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on March 30, 2012.

Background Overview

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

Results of Operations

                                                                 Change from   Percent Change
      Net Revenues               2012              2011          Prior Year    from Prior Year
   Three Months Ended       $                 $                  $
     September 30,               1,362,504          1,134,074        228,430             20.1%
   Nine Months Ended        $                 $                  $
     September 30,               3,961,943          3,066,887        895,056             29.2%

Revenues increased for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011, due to increased sales of our email service products to consumers. Revenue growth is attributable primarily to an increase in our number of subscribers of these products. Most of this growth is by organic growth in our customer base.

                                                         Change from   Percent Change
          Cost of Service             2012      2011     Prior Year    from Prior Year
                                     $         $         $
  Three Months Ended September 30,   302,746   199,856       102,890             51.5%
                                     $         $         $
  Nine Months Ended September 30,    940,941   577,336       363,605             63.0%

Cost of services increased for the three and nine months ended September 30, 2012 as compared to the three months ended September 30, 2011 primarily due to increased revenues. As a percentage of revenues, cost of services were 22% and 18% of net revenues for the three months ended September 30, 2012 and 2011, respectively. As a percentage of revenues, cost of services were 24% and 19% of net revenues for the nine months ended September 30, 2012 and 2011, respectively. Cost of services decreased for the quarter ended September 30, 2012 due to the use of the new Message Systems platform and consolidation of the servers. This provided a savings on virtual servers that were rented in past quarters.

                                                         Change from   Percent Change
        Sales and Marketing           2012      2011     Prior Year    from Prior Year
                                     $         $         $
  Three Months Ended September 30,   164,513    71,876        92,637            128.9%
                                     $         $         $
  Nine Months Ended September 30,    585,594   226,109       359,485            159.0%


Sales and marketing expenses increased for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011. We spent more on online advertising and marketing and website support to fuel additional growth.. Additionally, we increased our sales and marketing workforce through increased employees and subcontractors.

                                                         Change from   Percent Change
     General and Administrative       2012      2011     Prior Year    from Prior Year
                                     $         $         $
  Three Months Ended September 30,   275,416   206,919        68,497             33.1%
                                     $         $         $
  Nine Months Ended September 30,    846,846   773,966        72,880              9.4%

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

An increase in stock compensation expense of approximately $39,000 related to additional stock options issued in January 2012;

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

A decrease in other general and administrative expense of approximately $2,000.

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

A decrease of approximately $90,000 of professional services due to the filing of our registration statement with the Securities and Exchange Commission in 2011;

An increase in stock compensation expense of approximately $79,000 related to additional stock options issued in January 2012;

An increase in board of director compensation fees of approximately $30,000, which started in 2012;

An increase in other general and administrative expense of approximately $32,000.

                                                         Change from   Percent Change
      Research and Development        2012      2011     Prior Year    from Prior Year
                                     $         $         $
  Three Months Ended September 30,    93,598    77,742        15,856             20.4%
                                     $         $         $
  Nine Months Ended September 30,    316,063   256,599        59,464             23.2%

Research and development expenses increased for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011 as we utilized more subcontractors devoted to research and development.
Our research and development efforts are focused around expanding our service offerings and improving the functionality of our products.

   Income Tax Benefit                                         Change from   Percent Change
       (Expense)                2012             2011         Prior Year    from Prior Year
   Three Months Ended      $                $                 $
     September 30,              (212,377)         (233,701)        21,324            (9.1)%
   Nine Months Ended       $                $                 $
     September 30,              (513,589)         (529,051)        15,462            (2.9)%

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

                                                         Change from   Percent Change
             Net Income               2012      2011     Prior Year    from Prior Year
                                     $         $         $
  Three Months Ended September 30,   313,854   344,096      (30,242)            (8.8)%
                                     $         $         $
  Nine Months Ended September 30,    758,910   704,384       54,526               7.7%


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

Liquidity and Capital Resources

Sources and Uses of Cash

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

Our primary sources of cash outflows include payroll, income tax payments and payments to vendors and third party service providers. With the exception of income taxes, which occur on a periodic basis, cash outflows typically occur in close proximity of expense recognition. We also recently commenced paying quarterly dividends on a regular basis. The Company distributed its last quarterly dividends of $220,550 in cash to its shareholders on August 31, 2012.

Analysis of Cash Flows

Nine Months Ended September 30, 2012 and 2011

Net cash generated by operating activities decreased by $534,908, or 57%, to $400,377 for the nine months ended September 30, 2012, compared to $935,285 for the nine months ended September 30, 2011. The decrease of cash generated by operating activities was primarily attributable to changes in working capital and other adjustments, the most significant of which was the decrease in 2012 in income taxes payable of approximately $577,404 meaning that cash spent was more than the expense recognition by those amounts. The change in working capital was offset by an increase in net income of approximately $54,526.

Net cash used in investing activities was $(12,956) and $(150,349) during the nine months ended September 30, 2012, and 2011, respectively, consisting of investments in computers, servers, other equipment and licensed software.

Net cash provided by (used in) financing activities was ($1,807,249) and $96,816 during the nine months ended September 30, 2012 and 2011, respectively. During February and March of 2011, we issued and sold 400,000 shares of our common stock and received net proceeds of $96,816 after deducting offering costs of $3,184. During the three months ended June 30, 2012 and September 30, 2012 we distributed $2,103,137and $220,550, respectively, in cash to our shareholders in the form of a dividend which was offset by proceeds of $516,438 received from the issuance of our common stock.

We had net working capital of $323,661 and $1,240,515 as of September 30, 2012 and December 31, 2011, respectively. Our decrease in net working capital as of September 30, 2012 was primarily attributable to a distribution of $2,323,687 in cash to our shareholders in the form of quarterly and special dividends offset by proceeds of $516,438 received from the issuance of our common stock in the second quarter of 2012.

Contractual Obligations

On October 23, 2012 SMTP engaged a consulting firm to aid in increasing SMTP's online presence, brand awareness and sales. This contract is for a total value of $300,000 over the next twelve months up to 50% of which can be paid in stock and commits SMTP to make certain payments.


Significant Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates.

We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree. Our Annual Report on Form 10-K for the year ended December 31, 2011 contains a discussion of these significant accounting policies. There have been no significant changes in our significant accounting policies since December 31, 2011. See our Note 1 in our unaudited financial statements for the three and nine months ended September 30, 2012, as set forth herein.

Off-balance sheet arrangements

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

Item 3.

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