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SMTP > SEC Filings for SMTP > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for SMTP, INC.


14-Aug-2013

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, 2012, filed with the Securities and Exchange Commission on March 29, 2013.

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.

Results of Operations


                                                               Change from       Percent Change
       Net Revenues              2013            2012          Prior Year        from Prior Year

Three Months Ended June 30,   $ 1,395,147     $ 1,352,025     $      43,122                   3.2 %
 Six Months Ended June 30,    $ 2,764,585     $ 2,599,439     $     165,146                   6.4 %

Revenues increased for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012, 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           2013          2012         Prior Year       from Prior Year

Three Months Ended June 30,   $ 303,519     $ 331,848     $     (28,329 )               (8.5 )%
 Six Months Ended June 30,    $ 628,193     $ 638,195     $     (10,002 )               (1.6 )%

Cost of services decreased for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012 primarily due to a decrease in managed server costs and partner commissions. As a percentage of revenues, cost of services were 22% and 25% of net revenues for the three months ended June 30, 2013 and 2012, respectively. As a percentage of revenues, cost of services were 23% and 25% of net revenues for the six months ended June 30, 2013 and 2012, respectively.

                                                           Change from       Percent Change
    Sales and Marketing         2013          2012         Prior Year       from Prior Year

Three Months Ended June 30,   $ 179,594     $ 194,307     $     (14,713 )               (7.6 )%
 Six Months Ended June 30,    $ 382,360     $ 421,081     $     (38,721 )               (9.2 )%


Sales and marketing expenses decreased for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012. The decrease relates to a reduction in money spent on online advertising in 2013 compared to 2012.

                                                           Change from       Percent Change
General and Administrative      2013          2012         Prior Year       from Prior Year

Three Months Ended June 30,   $ 284,081     $ 293,047     $      (8,966 )               (3.1 )%
 Six Months Ended June 30,    $ 700,259     $ 571,701     $     128,558                 22.5 %

General and administrative expenses decreased for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 based on the following:

A decrease in payroll and benefits of approximately $41,000 related to the previous CEO's resignation;

A decrease in stock compensation expense of approximately $12,000;

A decrease in board of director fees of $5,000;

An increase in other general and administrative expense of approximately $3,000;

An increase in professional fees of approximately $32,000, primarily related to increased legal expenses connected with the S-1 filing;

An increase in depreciation and amortization of approximately $14,000.

General and administrative expenses increased for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 based on the following:

An increase in professional fees of approximately $174,000; primarily related to warrants issued for services and an increase in accounting and legal fees;

An increase in depreciation and amortization of approximately $30,000;

An increase in other general and administrative expense of approximately $10,000;

A decrease in payroll and benefits of approximately $75,000 related to the previous CEO's resignation;

A decrease in board of director fees of $5,000;

A decrease in stock compensation expense of approximately $6,000.

                                                               Change from       Percent Change
 Research and Development        2013            2012          Prior Year        from Prior Year

Three Months Ended June 30,   $    52,438     $   108,595     $     (56,157 )               (51.7 )%
 Six Months Ended June 30,    $   104,970     $   222,194     $    (117,224 )               (52.8 )%

Research and development expenses decreased for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012 as we have decided to outsource our development rather than having it in-house.
However, our research and development efforts are still focused around expanding our service offerings and improving the functionality of our products.

                                                                Change from       Percent Change
Income Tax Benefit (Expense)      2013            2012          Prior Year       from Prior Year

Three Months Ended June 30,    $  (190,079 )   $  (184,000 )   $      (6,079 )                3.3 %
 Six Months Ended June 30,     $  (337,797 )   $  (301,212 )   $     (36,585 )               12.1 %


Changes in our income tax expense related primarily to an increase in pretax income during the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012, and we accrued a provision at a slightly higher rate in the first half of fiscal 2013 than the first half of fiscal 2012.

                                                            Change from       Percent Change
         Net Income              2013          2012         Prior Year       from Prior Year

 Three Months Ended June 30,   $ 385,436     $ 240,228     $     145,208                 60.4 %
  Six Months Ended June 30,    $ 611,006     $ 445,056     $     165,950                 37.3 %

Net income increased for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012 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.

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

In May 2013 we signed an investment agreement ("Investment Agreement") with Dutchess Opportunity Fund, II, LP, a Delaware limited partnership (the "Dutchess") whereby subject to certain restrictions and conditions, at our sole discretion, we may issue and sell to Dutchess, and Dutchess shall purchase from our Company, up to that number of shares of our Company's common stock having an aggregate purchase price of two million five hundred thousand dollars ($2,500,000), over a period of 36 months commencing on June 28, 2013. We registered for resale by Dutchess 2,500,000 shares of our common stock in June 2013. Dutchess is obligated to make purchases as the Company directs in accordance with the Investment Agreement, which may be terminated by the Company at any time, without cost or penalty. Sales of shares will be made in specified amounts and at prices that are based upon the market prices of our Company's common stock immediately preceding the sales to Dutchess. We anticipate the proceeds from the sale of our shares of common stock to Dutchess under the Investment Agreement will be used for working capital purposes and acquisitions of assets, businesses or operations, if such acquisition opportunities arise. We cannot assure you that we will meet the conditions of the Investment Agreement with Dutchess in order to obligate Dutchess to purchase our shares of common stock. In the event we fail to do so, we will not have access to this funding resource; however, we do not believe that our operations will suffer adversely if we are not able to access the Dutchess funding source. We will control the timing and amount of any sales of our common stock to Dutchess. Dutchess has no right to require any sales by us, but is obligated to make purchases from us as we direct in accordance with the Investment Agreement. There are no limitations on use of proceeds, restrictions on future funding, rights of first refusal or participation rights in the Investment Agreement. We may terminate the Investment Agreement at any time, at our discretion, without any penalty or cost to us. Dutchess may not assign or transfer its rights and obligations under the Investment Agreement.

On June 20, 2013, as part of this investment agreement, the Company filed with the Securities Exchange Commission form S-1 for the registration of its Common Stock, $.001 par value. The amount of shares to be registered was 2.5 million. The S-1 became effective on June 27, 2013. No shares were issued during the period covered by this report.


Analysis of Cash Flows

Six Months Ended June 30, 2013 and 2012

Net cash generated by operating activities increased by $828,012 or 1426%, to $886,078 for the six months ended June 30, 2013, compared to $58,066 for the six months ended June 30, 2012. The increase in 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 $453,579. The change in working capital was offset by an increase in net income of approximately $165,950.

Net cash used in investing activities was $241,948 and $2,494 during the six months ended June 30, 2013, and 2012, respectively. During the six months ended June 30, 2013, investing activities consisted of $160,000 of investments in computers equipment and licensed software related to an asset purchase agreement discussed in Note 3. The remaining cash used in investing activities was related to leasehold improvements, purchases of furniture and fixtures and construction in progress related to website construction discussed in Note 2.
During the six months ended June 30, 2012, cash used in investing activities was for purchases of computer equipment.

Net cash used in financing activities was $488,934 and $1,586,699 during the six months ended June 30, 2013 and 2012, respectively. During the six months ended June 30, 2013 we distributed $533,383 in cash to our shareholders in the form of a regular quarterly dividend which was offset by proceeds of $23,624 received from the issuance of our common stock and excess tax benefits of share-based payment arrangements of $20,825. During the six months ended June 30, 2012 we distributed $2,103,137 in cash to our shareholders in the form of dividends which was offset by proceeds of $516,438 received from the issuance of our common stock.

We had net working capital of $737,092 and $552,669 as of June 30, 2013 and December 31, 2012, respectively. Our increase in net working capital as of June 30, 2013 was primarily attributable to cash provided by operating activities of $866,078 offset by a distribution of $533,383 in cash to our shareholders in the form of regular quarterly dividends.

Contractual Obligations

On October 18, 2012, the Company entered into a professional services agreement with a consulting firm to aid in increasing SMTP's online presence, brand awareness and sales. The agreement requires the Company to pay a monthly cash retainer of $25,000 of which $12,500 is to be paid in cash and $12,500 to be paid through issuances of the Company's common stock with a vesting schedule of six months from delivery date. This agreement expires in October 2013. On July 1, 2013, the Company terminated the consulting services agreement and issued 70,414 shares of common stock to pay the outstanding balance of approximately $75,000 due to the consultants.

The Company rents its facilities on a month-to-month or quarter-to-quarter basis. All of its service contracts are also on a month-to-month basis. Future minimum lease payments are as follows as of June 30:

                              2013            9,210
                              2014            6,905
                              2015                -
                              2016                -
                              2017                -
                              Thereafter          -
                                           $ 16,115

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, 2012 contains a discussion of these significant accounting policies. There have been no significant changes in our significant accounting policies since December 31, 2012. See our Note 1 in our unaudited financial statements for the six months ended June 30, 2013, as set forth herein.

Off-balance sheet arrangements

We did not have any off-balance sheet arrangements at June 30, 2013.

Item 3.

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