Overview
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:
• the increasing recognition by professionals and their employers of the importance of continuing professional education in order to maintain their licenses, remain current on new developments, develop and improve their skills and to generally remain competitive;

•          continuing professional education requirements by governing bodies,
           including states and professional associations;


•          the plethora of new laws and regulations affecting the conduct of
           business and the relationship between employers and their employees;


•          the increased competition in today's economy for skilled employees and
           the recognition that effective training can be used to recruit and
           train employees; and


•          the development and acceptance of the Internet as a delivery channel
           for the types of products and services we offer.

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. Revenue recognition
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.
Stock-based compensation
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. Segment accounting
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.
Income taxes
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.

                                                  Three months ended March 31,
                                        2012                          2011
                                Amount       Percentage       Amount       Percentage      Change
Net revenues                 $ 3,008,195        100.0  %   $ 3,054,596        100.0  %       (1.5 )%
Cost of revenues               1,342,097         44.6  %     1,352,758         44.3  %       (0.8 )%
Gross profit                   1,666,098         55.4  %     1,701,838         55.7  %       (2.1 )%
Selling, general and
administrative                 2,051,056         68.2  %     2,112,558         69.2  %       (2.9 )%
Depreciation and
amortization                     272,219          9.0  %       257,572          8.4  %        5.7  %
Total operating expenses       2,323,275         77.2  %     2,370,130         77.6  %       (2.0 )%
Operating loss                  (657,177 )      (21.8 )%      (668,292 )      (21.9 )%       (1.7 )%
Other income (loss), net           5,585            -  %        (1,096 )          -  %     (609.6 )%
Net loss before income tax      (651,592 )      (21.7 )%      (669,388 )      (21.9 )%       (2.7 )%
Benefit from income taxes        228,353          7.6  %       240,000          7.9  %       (4.9 )%
Net loss                     $  (423,239 )      (14.1 )%   $  (429,388 )      (14.1 )%       (1.4 )%

Net revenues
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.
• Outside labor and direct production costs. Outside labor includes the cost of hiring actors and production personnel such as directors, producers and cameramen and the outsourcing of non-video technology. The cost of such outside labor, which is primarily video production and technology personnel, increased $15,000. This increase is primarily related to Webinars that we are doing in 2012. Direct production costs, which are costs related to producing videos, courses, custom projects or live instruction and includes such costs as renting equipment and locations and the use of live instructors for either teaching or developing the courses, increased $73,000. The increase is primarily attributable to our live training business as we had more seminars in the first quarter of 2012 as compared to 2011. We have expended significant sums in the first quarter of 2012 updating and introducing new courses in our live training catalogs. The variation in direct production costs are related to the type of production and other projects and do not reflect any trends in our business. As our business grows we may be required to hire additional production personnel, increasing our cost of revenues. Our course libraries are constantly requiring updates as there are always changes.

• Royalties. Royalty expense decreased in the three-months ended March 31, 2012, compared to the corresponding 2011 period by $53,000. Royalty expense varies from period to period based on sales and usage of our various products. Royalty expense is primarily driven by our accounting course catalog and our engineering product sales. Generally, royalties are paid twice per year and are calculated based on a number of factors, not all of which are available to us on a monthly, or even a quarterly basis. Accordingly, a substantial portion of our royalty expense for the quarter is estimated.

• Salaries. Overall, payroll and related costs attributable to production personnel decreased by $36,000, without capitalizing any costs during the current quarter. Almost all of the decrease is attributable to reduced personnel costs as a result of decreased business. We have also replaced some payroll with outsourced technology services.

• Other production related costs. These are other costs directly related to the production of our products or the costs related to live training such as purchases of materials, cost of venues, travel, shipping, and other. These costs were $44,000 for the first quarter of 2012 as compared to $53,000 for the first quarter of 2011. The decrease of $9,000 is primarily related to reduced shipping costs and these costs fluctuate from period to 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.
Operating loss
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.
Income taxes
For the current period, we recorded a current income tax benefit of $228,353, . . .