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: September 30, 2015

 

Or

 

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

 

Commission File Number: 001-36280

 

SMTP, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		05-0502529
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
304 West University Avenue Gainesville, FL		32601
(Address of principal executive offices)		(Zip Code)

 

877-705-9362

(Registrant’s telephone number, including area code)

 

10 Tara Blvd, Suite 430

Nashua, NH 03062

(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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [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]

 

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 issuer’s classes of common stock, as of the latest practicable date: 7,233,050 shares of common stock as of November 9, 2015.

 

 

 

SMTP, INC.

 

Table of Contents

 

	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:	2
Consolidated Balance Sheets—September 30, 2015 (unaudited) and December 31, 2014	2
Consolidated Statements of Comprehensive Income (Loss) (unaudited)	3
Consolidated Statements of Cash Flows (unaudited)	4
Notes to Consolidated Financial Statements (unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosure About Market Risk	23
Item 4. Controls and Procedures	23
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3. Defaults Upon Senior Securities	24
Item 4. Mine Safety Disclosures	24
Item 5. Other Information.	24
Item 6. Exhibits	25
SIGNATURES	26

 

 

PART I – FINANCIAL INFORMATION

 

Forward-Looking Information

 

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

 

Examples of forward-looking statements include:

 

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

 

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

 

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

 

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. 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. Financial Statements.

 

SMTP, INC.

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2015				December 31, 2014
		(unaudited)				(audited)
Assets
Cash and cash equivalents		$	4,480,086			$	2,825,520
Accounts receivable			622,845				393,922
Deferred income taxes			240,622				240,648
Income taxes receivable			1,625,736				328,807
Other current assets			336,274				197,719
Total current assets			7,305,563				3,986,616
Property and equipment, net			562,182				281,555
Goodwill			8,893,508				8,901,106
Other intangible assets, net			6,688,826				7,895,238
Deferred income taxes			612,941				612,941
Deposits and other			21,809				30,172
Total assets		$	24,084,829			$	21,707,628
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	469,460			$	397,262
Accrued expenses and other current liabilities			361,341				355,796
Deferred revenue			867,112				1,006,031
Earn out liabilities			5,291,544				-
Income taxes payable			12,212				14,622
Deferred income taxes			7,658				2,119
Total current liabilities			7,009,327				1,775,830
Earn out liabilities			-				7,679,311
Total liabilities		$	7,009,327			$	9,455,141
Shareholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at September 30, 2015 and December 31, 2014 no shares issued or outstanding at September 30, 2015 and
Common stock, $0.001 par value, 50,000,000 shares authorized, 7,222,079 and 5,447,528 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively			7,221				5,447
Additional paid in capital			22,370,144				13,248,992
Accumulated deficit			(5,149,909	)			(824,185	)
Accumulated other comprehensive loss			(151,954	)			(177,767	)
Total shareholders’ equity			17,075,502				12,252,487
Total liabilities and shareholders’ equity		$	24,084,829			$	21,707,628

 

See accompanying notes to the consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Revenue		$	3,742,312			$	1,631,244			$	10,619,368			$	4,602,068
Cost of services			1,027,442				340,649				2,742,691				1,019,032
Gross profit			2,714,870				1,290,595				7,876,677				3,583,036
Operating expenses:
Sales and marketing			1,529,054				380,172				4,216,254				776,485
Research and development			530,163				141,923				1,538,528				361,932
General and administrative			1,609,753				973,016				3,766,036				2,020,617
Earn out liability adjustment			270,065				-				2,641,397				-
Amortization of intangible assets			379,053				25,667				1,140,627				25,667
Total operating expenses			4,318,088				1,520,778				13,302,842				3,184,701
Operating income (loss)			(1,603,218	)			(230,183	)			(5,426,165	)			398,335
Other income (expense)			(64,681	)			(9,805	)			(130,328	)			(9,651	)
Income (loss) before income taxes			(1,667,899	)			(239,988	)			(5,556,493	)			388,684
Provision (benefit) for income tax			(378,862	)			(142,160	)			(1,230,777	)			111,972
Net income (loss)		$	(1,289,037	)		$	(97,828	)		$	(4,325,716	)		$	276,712
Basic net income (loss) per share		$	(0.19	)		$	(0.02	)		$	(0.71	)		$	0.06
Diluted net income (loss) per share		$	(0.19	)		$	(0.02	)		$	(0.71	)		$	0.06
Shares used in computing basic net income (loss) per share			6,858,407				5,020,005				6,062,196				4,761,469
Shares used in computing diluted net income (loss) per share			6,858,407				5,020,005				6,062,196				4,814,774
Other comprehensive income (loss):
Foreign currency translation adjustment			(106,926	)			-				25,813				-
Comprehensive income (loss)		$	(1,395,963	)		$	(97,828	)		$	(4,299,903	)		$	276,712

 

See accompanying notes to the consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended
		September 30,
		2015				2014
Cash flows from operating activities:
Net income (loss)		$	(4,325,716	)		$	276,712
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			1,283,865				117,236
Excess tax benefits from share-based payment arrangements			-				(84,264	)
Non-cash stock compensation			656,963				453,320
Allowance for refunds and chargebacks			-				(166	)
Non-cash earn out liability adjustment			2,641,957				-
Unrealized foreign currency losses			43,069				-
Deferred income taxes			5,654				(167,745	)
(Gain)/loss on disposal of property and equipment			2,491				10,172
Changes in operating assets and liabilities:
Accounts receivable			(240,717	)			(34,912	)
Other assets			(99,082	)			(30,337	)
Income taxes receivable and payable			(1,299,703	)			(513,462	)
Accounts payable, accruals and other current liabilities			97,284				225,382
Deferred revenue			(146,664	)			89,114
Net cash (used in) provided by operating activities			(1,380,599	)			341,050
Cash flows from investing activities
Acquisition of business, net of cash acquired			-				(4,926,317	)
Purchases of property and equipment			(432,009	)			(50,788	)
Proceeds from the sale of property and equipment			-				5,130
Net cash used in investing activities			(432,009	)			(4,971,975	)
Cash flows provided by financing activities:
Payment to reduce earn out liability			(2,000,000	)			-
Dividends to shareholders			-				(1,806,095	)
Proceeds from exercise of stock options			141,441
Proceeds from issuance of common stock			5,332,023				10,507,801
Excess tax benefits from share-based payment arrangements			-				73,301
Net cash provided by financing activities			3,473,464				8,775,007
Effect of exchange rate on cash			(6,290	)			-
Change in cash and cash equivalents			1,654,566				4,144,082
Cash and cash equivalents, beginning of period			2,825,520				1,731,243
Cash and cash equivalents, end of period		$	4,480,086			$	5,875,325
Supplemental information on consolidated statements of cash flows:
Cash paid for income taxes		$	97,598			$	803,500
Noncash investing and financing activity:
Settlement of earn out liability with common stock		$	3,000,000			$	-

 

See accompanying notes to the consolidated financial statements.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1: Organization

 

SMTP, Inc. and its subsidiaries (the “Company”) is a global provider of cloud-based marketing solutions ranging from sophisticated marketing automation (via subsidiary SharpSpring) to comprehensive email and mobile marketing (via subsidiary GraphicMail) and scalable, cost-effective email deliverability services.

 

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.

 

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 all of the outstanding equity of the GraphicMail group companies. See Note 4 for details of these acquisitions.

 

Note 2: Summary of Significant Accounting Policies

 

Basis of Presentation

 

Our consolidated financial statements include the accounts of SMTP, Inc. and our subsidiaries (collectively “SMTP”). Our consolidated financial statements reflect the elimination of all significant inter-company accounts and transactions.

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of consolidated 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 consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 31, 2015. The accounting policies are described in the “Notes to Consolidated Financial Statements” in the 2014 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end consolidated balance sheet data presented for comparative purposes was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (U.S. GAAP). The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

 

 

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.

 

Foreign Currencies

 

The Company’s subsidiaries utilize the U.S. Dollar, Swiss Franc, South African Rand and British Pound as their functional currencies. The assets and liabilities of these subsidiaries are translated at ending exchange rates for the respective periods, 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 most 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 and cash equivalents, accounts receivable, deposits and accounts payable. The carrying amount of cash and cash equivalents, 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 September 30, 2015 and December 31, 2014, we had recorded goodwill of $8,893,508 and $8,901,106, respectively. 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.

 

Income Taxes

 

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

 

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

 

In determining the provision for income taxes, the Company uses 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 consolidated 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 period in which they occur. The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions. As of September 30, 2015, the Company is not being examined by domestic or foreign tax authorities.

 

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.

 

 

Property and equipment is as follows:

 

		September 30, 2015				December 31, 2014
Property and equipment, net:
Leasehold improvements		$	18,155			$	18,154
Furniture and fixtures			141,882				84,377
Computer equipment and software			849,779				496,429
Total			1,009,816				598,960
Less: Accumulated depreciation and amortization			(447,634	)			(317,405	)
		$	562,182			$	281,555

 

Estimated useful lives are as follows:

 

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

 

Revenue Recognition

 

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

 

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 SharpSpring 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. The Company also charges transactional-based fees if monthly email volume limitations are reached or other chargeable activity occurs. Additionally, during part of 2014, 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. Starting in the fourth quarter of 2014, customers were 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

 

Some of the Company’s customers pay for services in advance on a periodic basis (such as monthly, quarterly, annually or bi-annually). Also, the Company charges an upfront implementation and training fee for its SharpSpring marketing automation solution that is paid in advance, for which services are performed over a 60-day period. 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.

 

Accrued Revenue

 

In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition is met.

 

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 September 30, 2015 and December 31, 2014, 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 nine months ended September 30, 2015, and 2014, there were no customers that accounted for more than 10% of total revenue.

 

Cost of Services

 

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

 

Credit Card Processing Fees

 

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

 

Advertising Costs

 

The Company expenses advertising costs as incurred.

 

Research and Development Costs and Capitalized Software Costs

 

The Company capitalizes certain costs associated with internal use software during the application development stage, mostly related to software that we use in providing our hosted solutions. The Company expenses costs associated with preliminary project phase activities, training, maintenance and any post-implementation period costs as incurred. For the nine months ended September 30, 2015, the Company capitalized $98,100 in software development costs. There were no material costs capitalized in prior periods. Capitalized software costs are amortized over the estimated useful life of the software, which has been estimated to be 3 years, once the related project has been completed and deployed for customer use. At September 30, 2015, the net carrying value of capitalized software was $92,312.

 

All other software development costs are charged to expenses when incurred, and generally consist of salaries and related cost of personnel engaged in research and development activities.

 

Net Income (Loss) Per Share

 

Basic net income (loss) 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

 

Effective January 1, 2016, the Company will be required to adopt the amended guidance of Accounting Standards Codification (ASC) Topic 718, Compensation - Stock Compensation, which seeks to resolve the diversity in practice that exists when accounting for share-based payments. The amended guidance requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. The Company will be required to adopt the amended guidance either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the consolidated financial statements and to all new or modified awards thereafter. The Company does not expect the adoption of this amended guidance to impact financial results.

 

Effective January 1, 2016, the Company will be required to adopt the amended guidance of ASC Topic 810, Consolidation (Topic 810), which seeks to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amended guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The changes include, among others, modification of the evaluation whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and elimination of the presumption that a general partner should consolidate a limited partnership. The Company will be required to adopt Topic 810 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company has not yet completed its assessment of the impact of the amended guidance on its consolidated financial statements but does not expect the adoption of this amended guidance to have a significant impact on financial results.

 

The Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of 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. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. If the Company elects the modified retrospective approach, it will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The Company has not yet completed its assessment of the impact of the new guidance on its consolidated financial statements. On October 5, 2015, the Financial Accounting Standards Board issued a proposed Accounting Standards Update (FASB) to defer the effective date of Topic 606 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Earlier application is permitted only as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period, or an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period. If the FASB proceeds with the deferral of the effective date as proposed, this will mean the Company will be required to adopt the new guidance of ASC 606 effective January 1, 2019.

 

In September 2015, the FASB amended its guidance related to the accounting for measurement period adjustments. The amended guidance eliminates the requirement to restate prior period financial statements for measurement period adjustments resulting from a business combination. The amended guidance is effective prospectively for interim and annual periods beginning after December 15, 2015. Early adoption is permitted.

 

 

Note 3: Commitments and Contingencies

 

Litigation

 

The Company may from time to time be involved in legal proceedings arising from the normal course of business.

 

The Company is not a party to any litigation of a material nature.

 

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 as of September 30, 2015:

 

Remainder of 2015			$	82,376
2016				279,652
2017				140,569
2018				89,084
2019				22,618
Thereafter				-
			$	614,299

 

Employment Agreements

 

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

 

Note 4: 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 was contingent on the SharpSpring product achieving certain levels of revenue in 2015. The earn out consideration, was scheduled to be paid 60% in cash and 40% in stock following the audit of the 2015 consolidated financial statements. However, during May 2015, the Company and RCTW, LLC (“RCTW”), the former owner of the SharpSpring assets, agreed that the earn out consideration would be paid in its entirety, with a portion of the cash-based earn out paid early in a cash and stock transaction. During this May 2015 transaction, the Company paid $2,000,000 in cash to RCTW and issued RCTW 545,455 shares in lieu of cash to settle an additional $3,000,000 of the original cash-based earn out liability. As of September 30, 2015, the remaining payment due for the SharpSpring assets is $5,000,000, of which $1,000,000 will be paid in cash and $4,000,000 will be paid in stock during April 2016. The SharpSpring 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

 

 

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). 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 was originally 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. At the time of the acquisition, 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 originally recorded as a liability during purchase accounting. This was re-measured in each subsequent quarter since the transaction, resulting in additional charges of $682,000 in the quarter ended December 31, 2014, $704,000 in the quarter ended March 31, 2015, $1,030,000 in the quarter ended June 30, 2015 and $195,000 in the quarter ended September 30, 2015. These earn out adjustments have been recorded on the consolidated statement of comprehensive income (loss) for the respective periods. As noted above, the Company entered into a transaction with RCTW during May 2015 to pay a portion of the cash-based earn out early, as well as to agree that the future earn out for the SharpSpring assets would be paid in its entirety. Although we are obligated to pay the full earn out for the SharpSpring assets, the earn out liability value will continue to increase over time as a result of the discount factor applied to the liability, with ultimate payment occurring in April 2016. As of September 30, 2015, the earn out liability for the $5 million remaining earn out payment is recorded as $4,574,000 as a result of this discount factor. The Company will continue to increase the earn out liability over time as we get close to the ultimate payment date of April 2016 and record the expense related to those adjustments through the consolidated statements of comprehensive income (loss).

 

As of September 30, 2015, management had completed its evaluation of the fair value of certain intangible and other net assets acquired and does not expect future changes except for future changes to the earn out liability.

 

 

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, InterCloud Limited, a Gibraltar limited company, 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 a campaign management solution, 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 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 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). Goodwill arose primarily as a result of the expected future growth of the GraphicMail product and the assembled workforce.

 

 

Pursuant to the equity interest 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. This was re-measured in the quarters ended June 30, 2015, and September 30, 2015, resulting in an additional charge of $637,332 and $75,065, respectively. 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 comprehensive income (loss).

 

As of September 30, 2015, management had completed its evaluation of the fair value of certain intangible and other net assets acquired and does not expect future changes except for future changes to the earn out liability.

 

Note 5: Intangible Assets

 

Intangible assets are as follows:

 

		September 30, 2015				December 31, 2014
Intangible assets:
Trade names		$	373,632			$	381,473
Technology			4,037,358				4,095,892
Customer relationships			3,672,873				3,699,237
Total			8,083,863				8,176,602
Less: Accumulated amortization			(1,395,037	)			(281,364	)
		$	6,688,826			$	7,895,238

 

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

 

Remainder of 2015			$	372,386
2016				1,381,714
2017				1,144,987
2018				977,511
2019				763,379
2020				589,409
Thereafter				1,459,440
Total			$	6,688,826

 

Amortization expense for the three and nine months ended September 30, 2015 was $379,053 and $1,140,627, respectively. Amortization expense for the three and nine months ended September 30, 2014 was $25,677.

 

Note 6: Shareholders’ Equity

 

In February 2015, the Company announced it was suspending its quarterly dividends with no dividends being paid during 2015. For the three and nine months ending September 30, 2014, the Company paid quarterly dividends of $602,562 and $1,806,094, respectively.

 

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

 

 

On, January 28, 2015, the Company transferred 30,000 warrants issued on August 1, 2013 in connection with a consulting agreement in exchange for the Company issuing 5,000 shares of Company common stock.

 

On May 18, 2015, the Company entered into a subscription agreement with investors for the sale of an aggregate of 363,909 shares of the Company’s common stock, at a price of $5.50 per share, which shares have been registered with the Securities and Exchange Commission on the Company’s registration statement on Form S-3. The closing occurred on May 21, 2015.

 

On May 18, 2015, the Company entered into a subscription agreement with RCTW, LLC, a Delaware limited liability company, f/k/a SharpSpring, LLC (“RCTW”), for the issuance of 545,455 shares of common stock to RCTW for an aggregate value of $3,000,000, which is in satisfaction of an equal amount of the earn-out due and payable by the Company to RCTW under that certain Asset Purchase Agreement dated August 12, 2014 between the Company and RCTW. The closing occurred on May 21, 2015.

 

In August 2015 the Company completed a registered public offering, which raised $3.4 million of funding (net of expenses) by offering shares of common stock for sale.

 

Note 7: Changes in Accumulated Other Comprehensive (Income) Loss

 

		Foreign Currency
		Translation
		Adjustment
Balance as of December 31, 2014		$	(177,767	)
Other comprehensive income (loss) prior to reclassifications			-
Amounts reclassified from accumulated other comprehensive income			-
Tax effect			-
Net current period other comprehensive loss			25,813
Balance as of September 30, 2015		$	(151,954	)

 

Note 8: Net Income (Loss) Per Share

 

Computation of net income (loss) per share is as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net income (loss)		$	(1,289,037	)		$	(97,828	)		$	(4,325,716	)		$	276,712
Basic weighted average common shares outstanding			6,858,407				5,020,005				6,062,196				4,761,469
Add incremental shares for:
Warrants			-				-				-				27,128
Stock options			-				-				-				26,177
Diluted weighted average common shares outstanding			6,858,407				5,020,005				6,062,196				4,814,774
Net income (loss) per share:
Basic		$	(0.19	)		$	(0.02	)		$	(0.71	)		$	0.06
Diluted		$	(0.19	)		$	(0.02	)		$	(0.71	)		$	0.06

 

 

For the three and nine months ended September 30, 2015, 1,026,279 stock options and 170,973 warrants were excluded from diluted net loss per share, because the effect of including these potential shares was anti-dilutive. For the three months ended September 30, 2014, 740,640 stock options and 200,973 warrants were excluded from diluted net loss per share, because the effect of including these potential shares was anti-dilutive.

 

Note 9: Income Taxes

 

During the three and nine months ended September 30, 2015, the Company recorded income tax benefits of $378,862 and $1,230,777, respectively. The effective tax rate for the three months ending September 30, 2015 and 2014 was 23% and 59%, respectively. The effective rate for the nine months ending September 30, 2015 and 2014 was 22% and 29%, respectively.

 

Note 10: Stock-Based Compensation

 

From time to time, the Company grants stock option awards to officers and employees under the 2010 Stock Incentive Plan (“the Plan”) which, as amended, provides us with the ability to issue options on up to 1,350,000 common shares. At September 30, 2015, the Company had 1,026,279 outstanding options issued under the plan.

 

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

 

			Nine Months Ended September 30,
			2015				2014
Volatility			29% - 39	%			73% - 76	%
Risk-free interest rate			1.31% - 2.10	%			1.76% - 1.93	%
Expected term			6.25 - 8.68 years				6.25 years

 

For grants prior to January 1, 2015, the volatility assumption was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. For all grants subsequent to January 1, 2015, the volatility assumption reflects the Company’s historic stock volatility for the period of February 1, 2014 forward, which is the date the Company’s stock started actively trading. 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 and nine months ended September 30, 2015, the Company recognized expense of $221,636 and $656,963, respectively, associated with stock and option awards. During the three and nine months ended September 30, 2014, the Company recognized expense of $133,613 and $408,544, respectively, associated with stock and option awards. At September 30, 2015, future stock compensation expense (net of estimated forfeitures) not yet recognized was $1,824,038 and will be recognized over a weighted average remaining vesting period of 2.8 years. The following summarizes stock option activity for the nine months ended September 30, 2015:

 

						Weighted				Weighted				Weighted
						Average				Average				Average
		Number of				Exercise				Fair				Remaining
		Shares				Price				Value				Contractual Life
Outstanding at December 31, 2014			805,840			$	5.51			$	3.47				8.6
Granted at market price			392,000				5.61
Exercised			(34,325	)			4.09
Forfeited			(137,586	)			5.92
Outstanding at September 30, 2015			1,025,929				5.50				2.90				8.4
Exercisable at September 30, 2015			290,818				5.21				3.21				7.3

 

The intrinsic value of the Company’s stock options outstanding was $76,318 at September 30, 2015.

 

 

Note 11: Warrants

 

On January 30, 2014, in connection with an $11.5 million financing transaction, the Company issued 80,000 warrants to purchase common stock at an exercise price of $7.81 per share with a term of 5 years. 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 4.3 years as of September 30, 2015. These warrants became exercisable on January 30, 2015.

 

On, January 28, 2015, the Company cancelled 30,000 warrants issued on August 1, 2013 in connection with a consulting agreement in exchange for the Company issuing 5,000 shares of restricted Company common stock.

 

The following table summarizes information about the Company’s warrants at September 30, 2015:

 

							Weighted				Weighted
			Number of				Average				Average Remaining				Intrinsic
			Units				Exercise Price				Contractual Term				Value
Outstanding at December 31, 2014				200,973			$	6.07
Granted				-				-
Cancelled				(30,000	)			5.00
Outstanding at September 30, 2015				170,973			$	6.26				3.1			$	-
Exercisable at September 30, 2015				170,973			$	6.26				3.1			$	-

 

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

 

		Nine Months Ended September 30,
		2015				2014
Volatility			-				72	%
Risk-free interest rate			-				0.54	%
Expected term			-				2.5 years

 

Note 12: Subsequent Events

 

On October 8, 2015, the Company received a notification from GraphicMail Ltd, the Company’s third-party GraphicMail reseller in the United Kingdom, in which GraphicMail Ltd indicated its decision to terminate the reseller relationship with the Company. Under the provisions of the termination letter and the reseller agreement, GraphicMail Ltd will cease to sell and market GraphicMail on November 12, 2015. Provisions in the reseller agreement call for a 60-day transition period followed by the transfer of all customers to the Company. The reseller agreement also stipulates that the Company will pay GraphicMail Ltd up to one times the annual net revenues on these transferred customers over four quarterly installments over the next year following the transition period.

 

On November 4, 2015, the Company announced its intentions to eventually discontinue the GraphicMail brand and migrate its existing GraphicMail product customers to its SharpSpring product.

 

Also on November 4, 2015, the Company announced its intentions to change its name to SharpSpring, Inc. as of December 1, 2015 and change its trading ticker to SHSP on the same day.

 

 

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

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on March 31, 2015.

 

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 strategic acquisitions we completed in 2014 and by the combination of our technological offering with our excellent service and support, all offered at competitive pricing. We currently have customers 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, InterCloud Limited, a Gibraltar limited company, 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

 

Three Months Ended September 30, 2015

 

		Three Months Ended Sept 30,								Change from				Percent Change from
		2015				2014				Prior Year				Prior Year
Revenues and Cost of Sales:
Revenues		$	3,742,312			$	1,631,244			$	2,111,068				129	%
Cost of Sales			1,027,442				340,649				686,793				202	%
Gross Profit		$	2,714,870			$	1,290,595			$	1,424,275				110	%

 

Revenues increased for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014, primarily due to the acquisitions of GraphicMail and SharpSpring. Additionally, revenues have increased considerably for our SharpSpring product since its acquisition in August 2014.

 

Cost of services increased for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 primarily due to costs to support increased revenues and incremental business from the acquisitions of GraphicMail and SharpSpring. Additionally, we have added to SharpSpring resources to support its business growth since acquiring the business in August 2014. As a percentage of revenues, cost of services were 27% and 21% of revenues for the three months ended September 30, 2015 and 2014, respectively. This reflects a lower gross margin for our newly acquired SharpSpring product as we invest in resources to support the future growth of that product.

 

														Percent
		Three Months Ended								Change				Change
		Sept 30,								from				from
		2015				2014				Prior Year				Prior Year
Operating Expenses:
Sales and marketing		$	1,529,054			$	380,172			$	1,148,882				302	%
Research and development			530,163				141,923				388,240				274	%
General and administrative			1,609,753				973,016				636,737				65	%
Earn out liability adjustment			270,065				—				270,065				100	%
Amortization of intangible assets			379,053				25,667				353,386				1377	%
		$	4,318,088			$	1,520,778			$	2,797,310				184	%

 

Sales and marketing expenses increased for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 primarily due to acquisitions of GraphicMail and SharpSpring and due to the increase in sales and marketing wages due to recent hires following the acquisitions. Additionally, we have incurred higher costs associated with marketing programs during the quarters ended June 30, 2015 and September 30, 2015, as we expand on programs to market and sell SharpSpring.

 

Research and development expenses increased for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 primarily due to additional expenses relating to our acquisitions of SharpSpring and GraphicMail, each of which had product development groups. We have also expanded our product development group for SharpSpring following the acquisition last year.

 

General and administrative expenses increased for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 primarily due to the acquisitions of SharpSpring and GraphicMail, and the addition of new resources hired and new facilities added to support business growth.

 

The acquisitions of SharpSpring and GraphicMail included liability-based contingent consideration which is re-measured during each reporting period until ultimate settlement in April 2016. These re-measurements resulted in additional charges that are recorded on the consolidated statements of comprehensive income (loss). During the three months ended September 30, 2015, we incurred charges of $195,000 related to an adjustment to the earn out liability for SharpSpring and $75,065 related to an adjustment to the earn out liability for GraphicMail.

 

 

Amortization of intangible assets increased for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 due to a full quarter of the amortization of intangibles acquired as part of the SharpSpring acquisition and the amortization of intangibles from the GraphicMail acquisition, which occurred in the fourth quarter of 2014.

 

		Three Months Ended								Change				Percent Change
		Sept 30,								from				from
		2015				2014				Prior Year				Prior Year
Other:
Other income (expense)		$	(64,681	)		$	(9,805	)		$	(54,876	)			560	%
Provision (benefit) for income tax			(378,862	)			(142,160	)			(236,702	)			167	%
Net income (loss)			(1,289,037	)			(97,828	)			(1,191,209	)			1,218	%

 

Other income (expense) is primarily related to the impact of foreign exchange rates on the settlement and revaluation of our receivable and payable balances that are denominated in currencies other than our functional currencies.

 

Changes in our income tax expense related primarily to differences in pretax (loss) income during the three months ended September 30, 2015 and September 30, 2014.

 

Changes in net income (loss) for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was due to the items described above.

 

Nine Months Ended September 30, 2015

 

		Nine Months Ended								Change				Percent
		Sept 30,								from				Change from
		2015				2014				Prior Year				Prior Year
Revenues and Cost of Sales:
Revenues		$	10,619,368			$	4,602,068			$	6,017,300				131	%
Cost of Sales			2,742,691				1,019,032				1,723,659				169	%
Gross Profit		$	7,876,677			$	3,583,036			$	4,293,641				120	%

 

Revenues increased for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014, primarily due to the acquisitions of GraphicMail and SharpSpring. Additionally, revenues have increased considerably for our SharpSpring product since its acquisition in August 2014.

 

Cost of services increased for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 primarily due to costs to support increased revenues and incremental business from the acquisitions of GraphicMail and SharpSpring. Additionally, we have added to SharpSpring resources to support its business growth since acquiring the business in August 2014. As a percentage of revenues, cost of services were 26% and 22% of revenues for the nine months ended September 30, 2015 and 2014, respectively. This reflects a lower gross margin for our newly acquired SharpSpring product as we invest in resources to support the future growth of that product.

 

														Percent
		Nine Months Ended								Change				Change
		Sept 30,								from				from
		2015				2014				Prior Year				Prior Year
Operating Expenses:
Sales and marketing		$	4,216,254			$	776,485			$	3,439,769				443	%
Research and development			1,538,528				361,932				1,176,596				325	%
General and administrative			3,766,036				2,020,617				1,745,419				86	%
Earn out liability adjustment			2,641,397				-				2,641,397				100	%
Amortization of intangible assets			1,140,627				25,667				1,114,960				4344	%
		$	13,302,842			$	3,184,701			$	10,118,141				318	%

 

 

Sales and marketing expenses increased for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 primarily due to acquisitions of GraphicMail and SharpSpring and due to the increase in sales and marketing wages due to recent hires following the acquisitions. Additionally, we have incurred higher costs associated with marketing programs during the quarters ended June 30, 2015 and September 30, 2015, as we expand on programs to market and sell SharpSpring.

 

Research and development expenses increased for the three months ended September 30, 2015 as compared to the nine months ended September 30, 2014 primarily due to additional expenses relating to our acquisitions of SharpSpring and GraphicMail, each of which had product development groups. We have also expanded our product development group for SharpSpring following the acquisition last year.

 

General and administrative expenses increased for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 primarily due to the acquisitions of SharpSpring and GraphicMail, and the addition of new resources hired to support general business growth.

 

The acquisitions of SharpSpring and GraphicMail included liability-based contingent consideration, which is re-measured during each reporting period until ultimate settlement in April 2016. These re-measurements resulted in additional charges that are recorded on the consolidated statements of comprehensive income (loss). During the nine months ended September 30, 2015, we incurred charges of $1,929,000 related to an adjustment to the earn out liability for SharpSpring and $712,397 related to an adjustment to the earn out liability for GraphicMail.

 

Amortization of intangible assets increased for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014 due to a full quarter of the amortization of intangibles acquired as part of the SharpSpring acquisition and the amortization of intangibles from the GraphicMail acquisition, which occurred in the fourth quarter of 2014.

 

														Percent
		Nine Months Ended								Change				Change
		Sept 30,								from				from
		2015				2014				Prior Year				Prior Year
Other:
Other income (expense)		$	(130,328	)		$	(9,651	)		$	(120,677	)			1,250	%
Provision (benefit) for income tax			(1,230,777)	)			111,972				(1,342,749	)			(1,199	)%
Net income (loss)			(4,325,716	)			276,712				(4,602,428	)			(1,663	)%

 

Other income (expense) is primarily related to the impact of foreign exchange rates on the settlement and revaluation of our receivable and payable balances that are denominated in currencies other than our functional currencies.

 

Changes in our income tax expense related primarily to differences in pretax (loss) income during the nine months ended September 30, 2015 and September 30, 2014.

 

Changes in net income (loss) for the three months ended September 30, 2015 as compared to the nine months ended September 30, 2014 was due to the items described above.

 

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

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 consolidated balance sheet. In addition, we raised approximately $3.4 million (net of expenses) from a stock offering in August 2015, we raised nearly $2.0 million (net of expenses) from a stock offering to outside investors in the second quarter of 2015 and we raised approximately $10.5 million (net of expenses) during a stock offering in the first quarter of 2014.

 

Our primary sources of cash outflows include payroll and payments to vendors and third party service providers. Additionally, we acquired both SharpSpring and GraphicMail last year and will incur additional earn out payments in the future related to these acquisitions. In the past, we also had substantial income tax payments associated with our profits. With the exception of income taxes, which occur on a periodic basis, cash outflows typically occur in close proximity of expense recognition.

 

Analysis of Cash Flows

 

Net cash (used in) provided by operating activities decreased by $1,721,649 or 505%, to ($1,380,599) for the nine months ended September 30, 2015, compared to $341,050 for the nine months ended September 30, 2014. The decrease in cash provided by operating activities was attributable primarily to a reduction in net income, partially offset by changes in net working capital and other adjustments.

 

Net cash used in investing activities was $432,009 and $4,971,975 during the nine months ended September 30, 2015, and 2014, respectively. For the nine months ending September 30, 2015, this includes purchases of property and equipment consisting of acquisitions of computers, servers, furniture and other equipment, as well as capitalized development costs. For the nine months ended September 30, 2014, this includes $4,926,317 of net cash paid to acquire substantially all the assets and assume the liabilities of SharpSpring. Other investing activities include $50,788 of investments in property and equipment, and proceeds of $5,130 received from the sale of property and equipment.

 

Net cash provided by financing activities was $3,473,464 and $8,775,007 during the nine months ended September 30, 2015 and 2014, respectively. For the nine months ending September 30, 2015, this includes approximately $3.4 million of proceeds from the issuance of common stock (net of expenses). It also includes $2.0 million received from the issuance of common stock in May 2015 and the corresponding payment outflow of $2.0 million for the early settlement of the cash-based earn out liability for the SharpSpring acquisition at the same time. In addition, we receive funds associated with stock option exercises. During the nine months ended September 30, 2014, we distributed $1,806,095 in cash to our shareholders in the form of a regular quarterly dividend which was offset by excess tax benefits from share-based payment arrangements of $73,301 and proceeds of $10,507,801 received from the issuance of common stock, which is being used to fund acquisitions, for working capital and for general corporate purposes. We announced a suspension of our dividend in February 2015, and did not pay a dividend during the nine months ended September 30, 2015.

 

We had net working capital of $296,236 and $2,210,786 as of September 30, 2015 and December 31, 2014, respectively. Our decrease in net working capital as of September 30, 2015 was primarily attributable to shift of our earn-out liabilities to current liabilities as of September 30, 2015 since the payment is within one year.

 

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 September 30, 2015:

 

Remainder of 2015			$	82,376
2016				279,652
2017				140,569
2018				89,084
2019				22,618
Thereafter				—
			$	614,299

 

 

Significant Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated 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, 2014 contains a discussion of these significant accounting policies. There have been no significant changes in our significant accounting policies during the quarter ended September 30, 2015. See our Note 1 in our unaudited financial statements for the three and nine months ended September 30, 2015 as set forth herein.

 

Off-balance sheet arrangements

 

We did not have any off-balance sheet arrangements at September 30, 2015.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

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 September 30, 2015. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of September 30, 2015 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls Over Financial Reporting. We disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014 that management had 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. During the nine months ended September 30, 2015, management implemented and improved certain secondary reviews to address the issues related to gaps in segregation of duties. However, as of the nine months ended September 30, 2015, our documentation of management’s assessment of internal controls is not yet effective. We are working to improve such documentation in order to render our internal controls effective.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Not applicable.

 

Item 1A. Risk Factors.

 

Not Applicable.

 

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

 

Securities issued pursuant to our Employee Stock Plan

 

Date		Security/Value
August 2015		Stock options – right to buy 70,000 shares at $4.82 per share; 3,000 shares of common stock at $4.88 per share; 6,000 shares at $5.01 per share; 4,000 shares at $5.51 per share; 27,000 shares at $5.93 per share and 10,000 shares at $5.96 per share.

 

Item 3. Defaults Upon Senior Securities.

 

Not Applicable.

 

Item 4. Mine Safety Disclosures.

 

Not Applicable.

 

Item 5. Other Information.

 

On November 4, 2015, the Company announced its intentions to eventually discontinue the GraphicMail brand and migrate its existing GraphicMail product customers to its SharpSpring product.

 

On October 1, 2015, the Company relocated its principal executive offices to 304 West University Avenue, Gainesville, FL.

 

Effective December 1, 2015, the Company intends to change its name to SharpSpring, Inc. and change its trading ticker to SHSP.

 

 

Item 6. Exhibits.

 

INDEX TO EXHIBITS

 

SEC Reference Number		Title of Document		Location
1.1		Underwriting Agreement - Craig-Hallum Capital Group		Incorporated by reference to the Company’s Form 8-K filed 8/07/15
10.1		Employee Agreement – Richard Carlson		Incorporated by reference to the Company’s Form 8-K filed on 9/14/15
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Incorporated by reference to the Company’s Form 8-K filed on 9/14/15
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Filed herewith
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Filed herewith
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Filed herewith
101		XBRL		Filed herewith

 

 

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/ Richard A. Carlson
		Richard A. Carlson
		Chief Executive Officer and President
		(Principal Executive Officer)
		Date: November 13, 2015

 

	SMTP, INC.
	By:	/s/ Edward Lawton
		Edward Lawton
		Chief Financial Officer
		(Principal Financial Officer)
		Date: November 13, 2015