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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2012
Commission File Number 001-32300
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 8, 2012, there were 4,797,231 shares of common stock outstanding.
FORM 10-Q REPORT
March 31, 2012
TABLE OF CONTENTS
Some of the statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934. These statements relate to our plans and objectives for future operations as well as to market trends and expectations. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any expressed or implied future results, performance or achievements. The forward-looking statements included in this report are based on current expectations, plans and assumptions relating to the future operation of our business. These expectations, plans and assumptions involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our expectations, plans and assumptions underlying the forward-looking statements are reasonable, we cannot assure you that the forward-looking statements included in this report will, ultimately, prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, the fact that we have included forward-looking statements in this report should not be interpreted as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Forward-looking statements in this report include statements relating to our operating results, the development of new products, the timing of the launch of such products and the timing of any revenue to be generated from such products as well as statements regarding our plans for acquisitions. Whether or not our expectations regarding such forward-looking statements are ultimately realized depends on such factors as our ability to increase revenues, control costs, complete the development of new products in a timely manner and on budget, our ability to successfully market our products, general economic conditions, our ability to successfully identify acquisition candidates and our ability to successfully complete those acquisitions and integrate the newly acquired business into our existing operating and business platform.
Item 1. Condensed Consolidated Financial Statements
SMARTPROS LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
See Notes to Condensed Consolidated Financial Statements (Unaudited)
SMARTPROS LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of
See Notes to Condensed Consolidated Financial Statements (Unaudited)
SMARTPROS LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
See Notes to Condensed Consolidated Financial Statements (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements of SmartPros Ltd. and subsidiaries (“SmartPros” or the “Company”), including these notes, have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations promulgated by the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2011 and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2012. Results of consolidated operations for the interim periods are not necessarily indicative of a full year’s operating results. The unaudited condensed consolidated financial statements herein include the accounts of the Company and its wholly owned subsidiaries, SmartPros Legal and Ethics, Ltd. (“SLE”), Skye Multimedia Ltd. (“Skye”) and Loscalzo Associates Ltd. (“Loscalzo”). All material inter-company accounts and transactions have been eliminated.
Note 2. Description of Business and Summary of Significant Accounting Policies
Nature of Operations
The Company, a Delaware corporation, was organized in 1981 under the name Center for Video Education Inc. for the purpose of producing educational programs primarily directed to the accounting profession. SmartPros’ primary products and services include the following:
While management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s operations are considered to be aggregated in one reportable segment.
SmartPros is headquartered in Hawthorne, New York, where it maintains its corporate offices, new media lab and video production facilities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America 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 dates of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company recognizes revenue from its subscription services as earned. Subscriptions are generally billed on an annual basis, deferred at the time of billing and amortized into revenue on a monthly basis over the term of the subscription, generally one year. Engineering products are non-subscription based and revenue is recognized upon shipment or, in the case of online sales, upon receipt of payment. Revenues from other non-subscription services, such as website design, video production, consulting services, and custom projects, are recognized on a proportional performance basis where sufficient information relating to project status and other supporting documentation is available. The contracts may have different billing arrangements resulting in either unbilled or deferred revenue. The Company obtains either signed agreements or purchase orders from its non-subscription customers outlining the terms and conditions of the products or services to be provided. Otherwise, revenues are recognized after completion and/or delivery of services to the customer. Revenue from live training programs is recognized upon completion of the conference or seminar, which usually lasts one to three days. Expenses directly related to the seminars including marketing expenses are charged to expense in the quarter in which the seminar is held.
Capitalized Course Costs
Capitalized course costs include the direct cost of internally developing proprietary educational products and materials that have extended useful lives. Amortization of these capitalized course costs commences when the courses are available for sale from the Company’s catalog. The amortization period is the estimated useful lives of the courses, which are usually five years. Other course costs incurred in connection with any of the Company’s monthly subscription products or custom work is charged to expense as incurred. As a result of acquisitions, the Company is amortizing $1,113,000 of course costs over a five-year period. Included in other intangible assets at March 31, 2012 are capitalized course costs of $368,000, net of accumulated amortization of $215,000.
Deferred revenue related to subscription services represents the portion of unearned subscription revenue amortized on a straight-line basis as earned. Deferred revenues from seminars represent paid registrations for future programs. Deferred revenue related to website design, video production, custom e-learning programs or technology services represents that portion of amounts billed by the Company, or cash collected by the Company for which services have not yet been provided or earned in accordance with the Company’s revenue recognition policy. The Cognistar Legal division, the Financial Services division and the SmartIT Information Technology division recognize revenue either immediately from the direct sale of courses on a prepaid basis or on a deferred basis as earned, from the sale of subscriptions to their various products or from custom projects.
Earnings (Loss) Per Share
Basic earnings or loss per common share is net income or loss, as the case may be, divided by the weighted average number of outstanding shares outstanding of the Company’s common stock, par value $.0001 per share (the “Common Stock”) during the period. Basic earnings or loss per share exclude any dilutive effects of options, warrants and convertible securities. Diluted earnings per common share include the dilutive effect of shares of Common Stock issuable under stock options and warrants. Diluted earnings per share are computed using the weighted average number of Common Stock and Common Stock equivalent shares outstanding during the period. For the three month periods ended March 31, 2012 and 2011, the inclusion of Common Stock equivalents would be anti-dilutive.
Note 3. Stock-Based Compensation
The Company’s 2009 Incentive Compensation Plan (the “2009 Plan”) permits the grant of options and restricted stock to employees, directors and consultants. The total number of shares currently reserved for grants under the 2009 Plan is 800,000. Restricted stock grants under the Plan may not exceed 200,000 shares in the aggregate. The number of shares available for issuance under the 2009 Plan is reduced by the sum of the number of shares (a) issued upon exercise of options granted pursuant to the Company’s 1999 Stock Option Plan (the “1999 Plan”) and (b) issuable upon exercise of outstanding options granted under the 1999 Plan. As options granted under the 1999 Plan are forfeited or terminated, the number of options available for grant under the 2009 Plan increase (but may not exceed 800,000 in the aggregate). Restricted stock grants under the 1999 Plan have no impact on the availability of restricted stock grants under the 2009 Plan.
As of March 31, 2012, 344,587 options were outstanding, of which 215,087 and 129,500 had been granted under our 1999 and 2009 Plans, respectively, and of which 242,820 are currently exercisable. In January 2012, the Company granted 15,000 options to the President of its Loscalzo division. The exercise price of the grant is $1.80 per share. These options vest one-third each year and expire ten years from date of issuance. Restricted stock grants outstanding as of March 31, 2012 totaled 54,222, none of which had vested. All of these outstanding restricted stock grants were made under the 2009 Plan. As of March 31, 2012, 272,025 shares are available under the 2009 Plan, of which 129,055 shares are available for stock grants. All stock options granted under the 2009 Plan are granted with an exercise price equal to or greater than the fair market value
of the Common Stock at the grant date. Employee and director stock options generally expire 10 years from the grant date and have various vesting periods. Restricted stock awards generally vest over a period of three to five years. Unvested shares and options are subject to forfeiture unless certain time and/or performance requirements are satisfied.
Current accounting standards permit the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes-Merton (BSM) option-pricing model, which incorporates various assumptions including volatility, expected life, interest rates and dividend yields. The expected volatility is based on the historic volatility of the Common Stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees and directors. The Company has recorded stock-based compensation expense of approximately $31,000 and $27,000 for the three-month periods ended March 31, 2012 and 2011 respectively.
The assumptions used for the three-month period ended March 31, 2012, and the resulting estimates of weighted-average fair value of options granted during those periods are as follows:
The following table represents our stock options granted, exercised and forfeited for the three months ended March 31, 2012:
Note 4. Income Taxes
The Company recognizes a deferred tax asset available from its temporary differences between net income before taxes as reported on its financial statement and net income for tax purposes, increased by net operating loss carryforwards, which begin to expire in 2023. The Company has recorded a deferred tax asset of $1,871,000 at March 31, 2012 which is partially offset by a reserve in the amount of $581,000. For the three months ended March 31, 2012, the Company recorded a current income tax benefit of $230,000 principally attributable to its net loss for the period which is expected to be utilized against taxable income generated in future quarterly periods in 2012. The Company does not have any uncertain income tax positions that would require disclosure under the Accounting Standards Codification.
Note 5. Stockholders’ Equity
As of March 31, 2012, the Company had approximately $562,000 available under its November 2011 stock buy-back program for the purchase of additional shares of its common stock. The buy-back program expires in November 2012.
Note 6. Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued an amendment to Topic 350-Intangibles-Goodwill and Other. This amendment is intended to simplify how entities test goodwill for impairment. The amendment permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. This amendment is effective for years beginning after December 15, 2011
and the Company believes that the amendment does not have any material impact on its financial statements.
Note 7. Subsequent Events
On May 8, 2012, the Company's board of directors declared a dividend of $.0125 per common share payable on July 6, 2012 to shareholders of record as of June 15, 2012.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. Some of the statements in this discussion and elsewhere in this report constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. See “Forward-Looking Statements” following the Table of Contents of this report. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.
The terms “we,” “our,” “us,” or any derivative thereof, as used in this report refer to SmartPros Ltd., a Delaware corporation, its subsidiaries and its predecessors.
We provide learning solutions for accounting/finance, legal, insurance, securities and engineering professionals – five large vertical markets with mandatory continuing education requirements – as well as for banking and information technology professionals. We also provide corporate governance, ethics and compliance training for the general corporate market. We offer off-the-shelf courses and custom-designed programs with delivery methods suited to the specific needs of our clients. Through Loscalzo Associates Ltd. (“Loscalzo”), one of our wholly-owned subsidiaries, and our Executive Enterprise Institute (“EEI”) product line within our Accounting division, we are a leading provider of live training to accountants and financial professionals. These courses are delivered through various state CPA societies, accounting firms, corporations or through seminars, Webinars and conferences that they conduct. Our customers include professional firms of all sizes, and a large number of businesses.
We measure our operations using both financial and other metrics. The financial metrics include revenues, gross margins, operating expenses and income from continuing operations. Other key metrics include (i) revenues by sales source, (ii) online sales, (iii) cash flows and (iv) EBITDA.
Some of the most significant trends affecting our business are the following:
Over the last five years, our annual net revenues grew from $12.5 million to a high of $19.3 million in 2009 and dropped to $17 million in 2011. We believe the decline in revenues from 2009 to 2010 was primarily due to general economic conditions. We believe that the overall growth in net revenues through 2009 was due in large part to the acquisitions of companies, assets and product lines that we completed between 2006 and 2009. We continue to believe that our growth will be through acquisitions, the development of new products and the re-packaging and cross selling of our existing libraries to the various verticals we serve.
While our subscription-based revenue in general has not fluctuated much from quarter to quarter or year to year, we have experienced a decline in revenue from live training programs and from custom-designed projects, which has adversely impacted our operating results. We believe that this trend is primarily due to current economic conditions, competition and
consolidations in various industries. However, we believe that our subscription based products provide a cost-effective means for many companies to provide continuing education for their employees. We are constantly seeking both new markets and new ways to market our products. As we expand our product offerings and the content of our various libraries, we are able to offer more products to the same consumer through cross-selling. We also recognize that we will most likely need to invest more money in our sales infrastructure and outbound marketing budgets to drive net revenue.
Business acquisitions or strategic asset purchases are our preferred strategy to increase the breadth and depth of our current product offerings. Unless there are other compelling reasons, we will only consider acquisitions that we believe will be accretive within the first year of ownership. Ultimately, however, our goal is to maximize shareholder value rather than short-term profits. The size of the acquisitions will be determined, in part, by the amount of capital available to us and the liquidity and price of our stock. We may use debt to enhance or augment our ability to consummate larger transactions. We cannot assure that we will be able to identify appropriate acquisition opportunities or negotiate reasonable terms or that any acquired business or assets will deliver the shareholder value that we anticipated at the outset.
In 2011, we announced the formal launch of our new SmartPros eCampus (eCampus) Learning Management System, a robust platform and toolset for managing and deploying corporate training and accredited continuing education programs in multiple formats. This product will help drive opportunities with both existing and new clients. It can also be licensed as a stand-alone-offering to companies of all sizes who are looking for a cost-effective cloud based LMS. In addition, we are developing technology so that our content may be used on iPads, tablets and other similar devices.
There are many risks involved with acquisitions, some of which are discussed in Item 1 of Part 1 under the caption “Certain Risk Factors That May Affect Our Growth and Profitability” of our annual report on Form 10-K for the fiscal year ended December 31, 2011. These risks include seasonality of revenues, integrating the acquired business into our existing operations and corporate structure, retaining key employees and minimizing disruptions to our existing business.
Our common stock trades on the NASDAQ Capital Market under the symbol “SPRO.”
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared according to accounting principles generally accepted in the United States. In preparing these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We evaluate these estimates on an ongoing basis. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We consider the following accounting policies to be the most important to the portrayal of our financial condition.
A large portion of our revenue is in the form of subscription fees for our monthly accounting update programs or access to our library of accounting, financial services training and legal courses. Other sources of revenue include direct sales of programs or courses on a non-subscription basis or from various forms of live training, fees for Web site design, software development, video production, course design and development and ongoing maintenance fees from our client’s use of eCampus or our Smartpros' Professional Education Center (“PEC”), our proprietary learning management systems. Subscriptions are billed on an annual basis, payable in advance and deferred at the time of billing. Sales made over the Internet are by credit card only. Renewals are usually sent out 60 days before the subscription period ends. Larger transactions are usually dealt with by contract, the financial terms of which depend on the services being provided. Contracts for development and production services typically provide for a significant upfront payment and a series of payments based on deliverables specifically identified in the contract.
Revenue from subscription services are recognized as earned, deferred at the time of billing or payment and amortized into revenue on a monthly basis over the term of the subscription. Engineering products are non-subscription based and revenue is recognized upon shipment of the product or, in the case of online sales, payment. Revenue from non-subscription services provided to customers, such as Web site design, video production, consulting services and custom projects is generally recognized on a proportional performance basis where sufficient information relating to project status and other supporting documentation is available. The contracts may have different billing arrangements resulting in either unbilled or deferred revenue. We obtain either a signed agreement or purchase order from our non-subscription customers outlining the terms and conditions of the sale or service to be provided. Otherwise, these services are recognized as revenue after completion and delivery to the customer. Duplication and related services are generally recognized upon shipment or, if later, when our obligations are complete and realization of receivable amounts is assured.
Revenue from live training is recognized when the seminar or conference is completed. These are usually one to three day events.
Impairment of long-lived assets
We review long-lived assets and certain intangible assets at least annually or when events or circumstances indicate that the carrying amounts may not be recovered.
Compensation costs are recognized in the financial statements for stock options or grants awarded to employees and directors. Options and warrants granted to non-employees are recorded as an expense at the date of grant based on the then estimated fair value of the stock-based instrument granted.
All of our operations constitute a single segment, that of educational services. Revenues from non-educational services, such as video production are not a material part of our operating income.
We account for deferred tax assets available principally from our fixed and intangible assets and our net operating loss carryforwards in accordance with the Accounting Standards Codification. We make significant estimates and assumptions in calculating our current period income tax liability and deferred tax assets. The most significant of these are estimates regarding future period earnings. Our net deferred tax asset is estimated by management using a five-year taxable income projection.
Results of Operations
Our operating results for the first quarter of 2012 as compared to the first quarter of 2011 were relatively flat, with very insignificant changes in revenues, expenses and net income. Net revenues from our core subscription products have remained consistent while net revenues from custom work continue to decline, a result of, we believe, the lingering effects of the recession and competitive factors. In addition, an industry-wide slow-down in live-training attendance has adversely affected some areas of our live training business. To address these market conditions, we continue to seek new business and cut expenses and staff when appropriate.
Comparison of three months ended March 31, 2012 and 2011
We recorded a $46,000, or 2%, decrease in net revenues in the 2012 period compared to the 2011 period. Due to the significant cuts we made in direct expenses during 2011 our gross profit margin remained relatively constant at 55%. However, due to lower revenues, our gross profit decreased $36,000, from $1.70 million in the 2011 period to $1.67 million in the 2012 period. Operating results for the 2012 period were impacted by an increase in revenues from our accounting division and our financial services division, offset by declines in revenues from consulting and custom projects. In addition, general and administrative expenses were approximately $62,000 lower in the 2012 period as compared to the 2011 period. We believe these fluctuations in revenues from period to period are not indicative of any long-term expectations as we are still feeling the effects of the general economic climate. We believe that demand for custom work trails the general economy as it takes longer for our customers and potential customers to make decisions on these projects because of budgetary constraints and other issues that impact these decisions. Custom work is non-repetitive and subject to market conditions and can vary from quarter to quarter. We also recognized a modest increase in our live training divisions from new business. The live training business primarily recognizes its revenues in the second through fourth quarters of the year.
Online revenues, which previously were primarily derived from the sales of accounting/finance products, continue to be an important factor to our net revenues. Many of our other products, including our Cognistar Legal library, our Financial Campus courses and our technology training products, are also delivered online and also are significant generators of net revenues. Approximately 50% of our current period net revenues were derived from online products.
The following table compares our statement of operations data for the three-months ended March 31, 2012 and 2011. The trends suggested by this table may not be indicative of future operating results, which will depend on various factors including the relative mix of products sold (accounting/finance, law, engineering, financial services, sales training – product, technology or compliance and ethics) and the method of sale (video or online) as well as the timing of custom project work, which can vary from quarter to quarter. In addition, our operating results in future periods may also be affected by acquisitions.
The decrease in net revenues reflected above was primarily due to: (i) a $130,000 decrease in net revenues from our Skye subsidiary; (ii) a $23,000 decrease in net revenues from our Engineering division; and (iii) a $23,000 decrease in net revenues from our SmartPros Legal and Ethics subsidiary. These decreases were offset, in part, by (i) a $43,000 increase in revenues from our Accounting/Finance division; (ii) $78,000 increase in net revenues from our Financial Services division and (iii) an $8,000 increase in net revenues from our other divisions. Under our long-standing policy, revenue is credited to the originating department regardless of the type of service that is performed. For example, a contract to convert videotapes to digital format is credited to the Accounting/Finance division if that is where the sale originated, even if the project has nothing to do with accounting.
In the first quarter of 2012, net revenues from the Accounting/Finance division were $2.15 million, or 71% of net revenues, compared to $2.1 million, or 69% of net revenues, in the comparable 2011 period. Net revenues from subscription-based products and direct sales of course material on a non-subscription basis were relatively flat at approximately $1.9 million. Net revenues from other projects in our Accounting/Finance division that are not subscription based were relatively constant from 2011 to 2012, while live-training revenue increased by $26,000 in the 2012 period from the 2011 period. Non-subscription-based revenues fluctuate from period to period and are not indicative of any trends. In the 2012 period, net revenues from online sales of accounting products increased by approximately $83,000 in the 2012 period as compared to the 2011 period, increasing from $903,000 to $986,000, a 9% increase. This also represents 33% of total revenue in the current quarter. Net revenues from our Loscalzo live training subsidiary increased $45,000 in the 2012 period compared to the 2011 period primarily due to new business Our EEI live training division generated $15,000 in revenue in the 2012 period as compared to $34,000 in 2011 period. EEI's live training business is seasonal and its revenues are primarily earned in the second and fourth calendar quarters. EEI has introduced new products and services to its clients such as Continuing Professional Education (CPE) administration.
For the three-months ended March 31, 2012, Skye generated net revenues of $140,000 compared to $270,000 in the first quarter of 2011. Skye’s income is derived primarily from designing custom training projects and, as such, varies from quarter to quarter. We believe the decrease in Skye’s net revenue is not indicative of any long-term trends as business organizations are continuing to study these types of products and their cost effectiveness. As economic conditions improve we are seeing more requests for proposals. Skye is currently working on the introduction of new products and continues to market its iReflect product developed in a joint venture.
Our Financial Services Training division generated $437,000 of net revenues in the quarter ended March 31, 2012. For the quarter ended March 31, 2011, this division generated $359,000 of net revenues. The increase is due primarily from custom work, and offset by reduced subscription-based revenues. However, this division has approximately $160,000 in deferred revenue primarily from uncompleted custom work that it anticipates completing in 2012.
For the quarter ended March 31, 2012, SLE had net revenues of $109,000 compared to net revenues of $132,000 for the comparable 2011 quarter. For the 2012 period, $37,000 of SLE’s net revenues was generated by the Working Values Ethics and Compliance division, and $72,000 was generated by the Cognistar Legal division, as compared to $51,000 and $81,000, respectively, in the 2011 period. Net revenues generated by the Working Values Ethics and Compliance division are derived
primarily from custom consulting work and can fluctuate from period to period based on a number of factors. The Cognistar Legal division derives its revenue primarily from prepaid usage and direct sales of its courses.
Our Engineering division generated $120,000 of net revenues in the first quarter of 2012 compared to $143,000 in the first quarter of 2011. The decrease is primarily a result of timing differences in the placement of orders from customers, the timing of the licensing exams and the need to rewrite some of our courses. Sales of our engineering products are not subscription based.
Net revenues generated by our other divisions, which consist of video production and duplication and information technology in the first quarter of 2012 were $56,000. In comparison, these divisions recorded $48,000 of net revenue for the first quarter of 2011.
Cost of revenues
Cost of revenues includes: (i) production costs – i.e., the salaries, benefits and other costs related to personnel, whether our employees or independent contractors, who are used directly in production, including producing our educational programs and/or upgrading our technology; (ii) royalties paid to third parties; (iii) the cost of materials, such as DVD’s and packaging supplies; (iv) costs related to live training; and (v) shipping and other costs. There are many different types of expenses that are characterized as production costs and many of them vary from period to period depending on many factors. Generally, subscription based products have higher profit margins than non-subscription based products and online sales have higher profit margins than sales involving physically delivery of DVD’s and written materials.
Our gross profit margins for the three-months ended March 31, 2012 and 2011 remained relatively flat at 55.4% and 55.7%, respectively. We made substantial reductions in overhead in 2010 and 2011. In addition, we have reduced the amount of outsourcing for some of our technology projects. We also devote a significant amount of internal and external resources to develop new products and to re-tool existing products and technology. The cost of software modifications and updates get charged to expense as incurred.
Cost of revenues decreased by approximately $11,000 in the 2012 period compared to the 2011 period.
Selling, general and administrative expenses
Selling, general and administrative expenses include corporate overhead, such as compensation and benefits for administrative, sales and marketing and finance personnel, rent, insurance, professional fees, travel and entertainment and office expenses. Selling, general and administrative expenses for the 2012 period decreased by approximately $62,000, or
3.0%, compared to the 2011 period. This decrease is primarily attributable to reduced payroll and related costs.
Compensation expense in the 2012 period decreased by $43,000 compared to the 2011 period. We had 48 and 55 full-time general and administrative employees at March 31, 2012 and 2011, respectively. The decrease in costs is from savings in management salaries from our Loscalzo subsidiary and the reduced headcount. In addition, compensation expense includes stock based compensation expense of $31,000 for the 2012 period and $27,000 for the 2011 period, an increase of approximately $4,000.
Our other selling, general and administrative costs, exclusive of compensation costs, increased by $18,000. We make every effort to control our costs, and we can only anticipate that some selling, general and administrative expenses, such as web-bandwidth, insurance, travel and other costs may increase.
Depreciation and amortization
Depreciation and amortization expense increased by approximately $15,000 in the first quarter of 2012 compared to the first quarter of 2011 primarily from the amortization from capitalized costs relating to internally-developed assets. We expect our depreciation and amortization expense on our fixed and intangible assets to be greater in the current year as we amortize our newly completed LMS. In addition, we capitalize internal costs for the development of new courses and other technology, as incurred. We continually replace and add to our computer and other equipment as it ages and as additional equipment is needed to accommodate growth.
For the three-months ended March 31, 2012, the operating loss was approximately $657,000 compared to an operating loss of approximately $668,000 in the corresponding 2011 period, primarily a result of reduced general and administrative expenses.
Other income/expense, net
Other income and expense items consist of interest earned on deposits and the net loss from our iReflect joint venture. We have no debt other than trade payables and accrued liabilities. For both the first quarters of 2012 and 2011 we had de minimis net other income. The loss from our 50% interest in the iReflect joint venture was $375 in the current period compared to $3,875 in the 2011 period.
For the current period, we recorded a current income tax benefit of $228,353, after recording $1,647 for state income taxes as compared to a current provision for income taxes in the 2011 period of $240,000.
For the three-months ended March 31, 2012 and 2011, we recorded a net loss of approximately $423,000 and $429,000, respectively, or $0.09 per share, basic and diluted for both periods.
Liquidity and Capital Resources
At March 31, 2012, we had no long-term debt.
Our working capital as of March 31, 2012 was approximately $2.5 million compared to $2.8 million at December 31, 2011. Our current ratio at March 31, 2012 and December 31, 2011 was 1.47 to 1 and 1.48 to 1, respectively. The current ratio is derived by dividing current assets by current liabilities and is a measure used by lending sources to assess our ability to repay short-term liabilities. The largest component of our current liabilities is deferred revenue, which was $4.7 million at March 31, 2012 and $4.6 million at December 31, 2011.
At March 31, 2012, we had cash and cash equivalents of approximately $5.92 million. For the three-months ended March 31, 2012, we reported a net decrease in cash and cash equivalents of approximately $357,000 that includes approximately $207,000 of cash used in operating activities, approximately $90,000 of cash used in investing activities and approximately $61,000 used in financing activities. The primary components of our operating cash flows are net income or loss adjusted for non-cash expenses, such as depreciation and amortization stock-based compensation and deferred and current income taxes, and the changes in our operating assets and liabilities, such as accounts receivable, accounts payable and deferred revenues.
At March 31, 2012, we had approximately $1.21 million in receivables and $543,000 in payables and accrued expenses, as compared to $1.87 million of receivables and $1.05 million in payables at December 31, 2011.
On May 8, 2012, the board of directors declared a dividend of $.0125 per common share payable on July 6, 2012 to shareholders of record as of June 15, 2012.
In November 2011, the Company's board of directors voted to extend its stock buy back program through November 8, 2012, and replenished the funds reserved to purchase shares of our common stock on the NASDAQ Capital Market to $750,000. As of March 31, 2012, approximately $562,000 was available for the purchase of common stock.
For the 2012 period, net cash used in investing activities was approximately $90,000, which included capital expenditures of approximately $88,000, consisting primarily of computer equipment and software purchases, and $2,000 for course development, as compared to approximately $246,000 expended in the first quarter of 2011. We anticipate that our capital expenditures will be substantially lower in 2012 as compared to 2011, as we have completed capitalizing the cost of our new LMS. We continually upgrade our technology hardware and, as such, we anticipate additional capital expenditures relating to equipment purchases over the next 12 months.
Cash used in financing activities reflects dividends paid on January 5, 2012 to shareholders of record as of December 14, 2011 of approximately $61,000.
We believe that our current cash balances together with cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months.
In the future, we may issue additional debt or equity securities to satisfy our cash needs. Any debt incurred may be secured or unsecured, bear interest at a fixed or variable rate and may contain other terms and conditions that we deem are reasonable under the circumstances existing at the time. Any sales of equity securities may be at or below current market prices. We cannot assure you that we will be successful in generating sufficient capital to adequately fund our needs.
Item 3. Quantitative and Qualitative Risk Disclosures About Market Risk
As a smaller reporting company we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There were no changes in our internal controls over financial
reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
We are not a party to any material legal proceeding not in the ordinary course of business at this time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
Company Purchases of its Equity Securities
On November 8, 2011, the Company's board of directors voted to extend the stock buy back program through November 8, 2012, and replenished the funds reserved to purchase shares of our common stock on the NASDAQ Capital Market to $750,000. During the three month period ended March 31, 2012, no shares were purchased. As of March 31, 2012, $562,443 was available for repurchase under the program.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
(1) Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference to such filing.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.