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CRMZ > SEC Filings for CRMZ > Form 10-K on 21-Mar-2014All Recent SEC Filings

Show all filings for CREDITRISKMONITOR COM INC

Form 10-K for CREDITRISKMONITOR COM INC


21-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Business Environment

The continuing uncertainty in the worldwide financial system has negatively impacted general business conditions. It is possible that a weakened economy could adversely affect our clients' need for credit information, or even their solvency, but we cannot predict whether or to what extent this will occur.

Our strategic priorities and plans for 2014 are to continue to build on the improvement initiatives underway to achieve sustainable, profitable growth. Global market conditions, however, may affect the level and timing of resources deployed in pursuit of these initiatives in 2014.

Financial Condition, Liquidity and Capital Resources

The following table presents selected financial information and statistics as of December 31, 2013 and 2012 (dollars in thousands):

                                                    2013        2012
Cash, cash equivalents and marketable securities   $ 8,047     $ 8,148
Accounts receivable, net                           $ 1,708     $ 1,776
Working capital                                    $ 2,277     $ 2,289
Cash ratio                                            1.00        1.00
Quick ratio                                           1.21        1.21
Current ratio                                         1.28        1.28

The Company has invested some of its excess cash in debt instruments of the United States Government. All highly liquid investments with an original maturity of three months or less when purchased are considered cash equivalents, while those with maturities in excess of three months when purchased are reflected as marketable securities.

As of December 31, 2013, the Company had $8.05 million in cash, cash equivalents and marketable securities, a decrease of approximately $101,000 from December 31, 2012. The reason for this decrease was that cash used for the purchase of fixed assets ($331,000) and the payment of the dividend to shareholders in November 2013 ($398,000) exceeded the cash generated by operating activities for the last 12 months ($701,000).

The Company's cash generated by operating activities significantly exceeded its net income due primarily due to non-cash expenses (e.g., depreciation, stock-based compensation and unrealized loss on marketable securities). Additionally, the main component of current liabilities at December 31, 2013 is deferred revenue of $6.69 million, which should not require significant future cash outlay other than the cost of preparation and delivery of the applicable commercial credit reports which cost much less than the deferred revenue shown. The deferred revenue is recognized as income over the subscription term, which approximates twelve months. The Company has no bank lines of credit or other currently available credit sources.

The Company believes that its existing balances of cash, cash equivalents and cash generated from operations will be sufficient to satisfy its currently anticipated cash requirements through at least the next 12 months and the foreseeable future. Moreover, the Company has been cash flow positive for 8 of the last 9 fiscal years and has no long-term debt. However, the Company's liquidity could be negatively affected if it were to make an acquisition or if it were to license products or technologies, which may necessitate the need to raise additional capital through future debt or equity financing. Additional financing may not be available at all or on terms favorable to the Company.


As described more fully in Note 8 of the Notes to Financial Statements, at December 31, 2013 the Company had certain cash obligations, which are due as follows:

                                 Less than                                      More than
                     Total         1 Year       1-3 Years       4-5 Years        5 Years

Operating leases   $ 279,696     $  173,833     $  105,353     $       510               -

Total              $ 279,696     $  173,833     $  105,353     $       510               -

Off-Balance Sheet Arrangements

The Company is not a party to any other off-balance sheet arrangements.

Results of Operations

2013 vs. 2012

                                                        Year Ended December 31,
                                                2013                               2012
                                                      % of Total                         % of Total
                                       Amount          Revenue            Amount          Revenue

Operating revenues                  $ 11,837,211           100.00 %    $ 11,062,619           100.00 %

Operating expenses:
Data and product costs                 4,438,542            37.50 %       3,731,218            33.73 %
Selling, general and                   6,611,687            55.85 %       6,206,917            56.11 %
administrative expenses
Depreciation and amortization            168,080             1.42 %         150,069             1.35 %
Total operating expenses              11,218,309            94.77 %      10,088,204            91.19 %

Income from operations                   618,902             5.23 %         974,415             8.81 %
Other income (expense), net              (38,560 )          (0.33 %)         21,945             0.20 %

Income before income taxes               580,342             4.90 %         996,360             9.01 %
Provision for income taxes              (238,529 )          (2.02 %)       (466,543 )          (4.22 %)

Net income                          $    341,813             2.88 %    $    529,817             4.79 %

Operating revenues increased approximately $774,592, or 7%, for fiscal 2013 over the prior year. This overall revenue growth resulted from an increase in Internet subscription service revenue, attributable to increased sales to new and existing subscribers, partially offset by a decrease in the Company's third-party international credit report subscription service, attributable to lower usage by subscribers.

Data and product costs increased $707,324, or 19%, for fiscal 2013. This increase was primarily due to higher salary and related employee benefits, including additional quality control and programming personnel, the higher cost associated with the outsourcing of certain data entry tasks, as more tasks have been outsourced, as well as the higher cost of third-party content due to the purchase of additional data elements.


Selling, general and administrative expenses increased $404,770, or 7%, for fiscal 2013. This increase was primarily due to higher salary and related employee benefits as well as higher professional fees.

Depreciation and amortization increased $18,011, or 12%, for fiscal 2013. This increase was due to the capitalization of leasehold improvements during the 3rd quarter associated with additional space leased at the Company's corporate headquarters as well as the purchase of computer equipment.

Other income (expense), net decreased $60,505 for fiscal 2013, primarily due to the greater negative mark-to-market adjustment recorded in 2013.

Provision for income taxes decreased $228,014 due to the Company having lower pre-tax income because of the reasons enumerated.

2012 vs. 2011

                                                        Year Ended December 31,
                                                2012                               2011
                                                      % of Total                         % of Total
                                       Amount          Revenue            Amount          Revenue

Operating revenues                  $ 11,062,619           100.00 %    $ 10,154,200           100.00 %

Operating expenses:
Data and product costs                 3,731,218            33.73 %       3,310,779            32.60 %
Selling, general and                   6,206,917            56.11 %       5,468,802            53.86 %
administrative expenses
Depreciation and amortization            150,069             1.35 %         162,482             1.60 %
Total operating expenses              10,088,204            91.19 %       8,942,063            88.06 %

Income from operations                   974,415             8.81 %       1,212,137            11.94 %
Other income, net                         21,945             0.20 %          98,592             0.97 %

Income before income taxes               996,360             9.01 %       1,310,729            12.91 %
Provision for income taxes              (466,543 )          (4.22 %)       (402,140 )          (3.96 %)

Net income                          $    529,817             4.79 %    $    908,589             8.95 %

Operating revenues increased approximately $908,419, or 9%, for fiscal 2012 over the prior year. This overall revenue growth resulted from an increase in Internet subscription service revenue, attributable to increased sales to new and existing subscribers, partially offset by a decrease in the Company's third-party international credit report subscription service, attributable mainly to decreased usage as the result of a decrease in the number of subscribers to that service.

Data and product costs increased $420,439, or 13%, for fiscal 2012. This increase was primarily due to higher salary and related employee benefits, including additional quality control personnel, the higher cost associated with the outsourcing of certain data entry tasks, as more tasks have been outsourced, as well as the higher cost of third-party content due to the purchase of additional data elements.


Selling, general and administrative expenses increased $738,115, or 13%, for fiscal 2012. This increase was primarily due to higher salary and related employee benefits.

Depreciation and amortization decreased $12,413, or 8%, for fiscal 2012, due to a lower depreciable asset base reflecting the continued use of certain items that have been fully depreciated.

Other income, net decreased $76,647, or 78%, for fiscal 2012, due to the Company recording a negative mark-to-market adjustment in 2012 versus a positive mark-to-market adjustment recorded last year.

Provision for income taxes increased $64,403 as the result of higher payments made this year in connection with the filing of the Company's 2011 tax returns versus payments last year in connection with the filing of the Company's 2010 tax returns, partially offset by the lower pre-tax income because of the reasons enumerated above.

Future Operations

The Company over time intends to expand its operations by expanding the breadth and depth of its product and service offerings and introducing new and complementary products. Gross margins attributable to new business areas may be lower than those associated with the Company's existing business activities.

As a result of the evolving nature of the markets in which it competes, the Company's ability to accurately forecast its revenues, gross profits and operating expenses as a percentage of net sales is limited. The Company's current and future expense levels are based largely on its investment plans and estimates of future revenues. To a large extent these costs do not vary with revenue. Sales and operating results generally depend on the Company's ability to attract and retain customers and the volume of and timing of customer subscriptions for the Company's services, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues in relation to the Company's planned expenditures would have an immediate adverse effect on the Company's business, prospects, financial condition and results of operations. Further, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service, marketing or acquisition decisions that could have a material adverse effect on its business, prospects, financial condition and results of operations.

Achieving greater profitability depends on the Company's ability to generate and sustain increased revenue levels. The Company believes that its success will depend in large part on its ability to (i) increase its brand awareness, (ii) provide its customers with outstanding value, thus encouraging customer renewals, and (iii) achieve sufficient sales volume to realize economies of scale. Accordingly, the Company intends to continue to increase the size of its sales force and service staff, and to invest in product development, operating infrastructure, marketing and promotion. The Company believes that these expenditures will help it to sustain the revenue growth it has experienced over the last several years. We anticipate that sales and marketing expenses will continue to increase in dollar amount and as a percentage of revenues during 2014 and future periods as the Company continues to expand its business on a worldwide basis. Further, the Company expects that product development expenses will also continue to increase in dollar amount and may increase as a percentage of revenues in 2014 and future periods because it expects to employ more development personnel on average compared to prior periods and build the infrastructure required to support the development of new and improved products and services. However, as these expenditures are discretionary in nature, the Company expects that the actual amounts incurred will be in line with its projections of future cash flows in order not to negatively impact its future liquidity and capital needs. There can be no assurance that the Company will be able to achieve these objectives within a meaningful time frame.


Critical Accounting Policies, Estimates and Judgments

The Company's financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Management continually evaluates its estimates and judgments, the most critical of which are those related to:

Revenue recognition -- CRMZ's North American and worldwide service is sold on a subscription basis pursuant to customer contracts that span varying periods of time, but are generally for a period of one year. The Company initially records amounts billed as accounts receivable and defers the related revenue until persuasive evidence of an arrangement exists, fees are fixed and determinable, and collection is reasonably assured. Revenues are recognized ratably over the related subscription period. Revenue from the Company's third-party international credit report service is recognized as information is delivered and products and services are used by customers.

Valuation of goodwill -- Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances warrant. If the carrying value of this asset exceeds its estimated fair value, the Company will record an impairment loss to write the asset down to its estimated fair value.

Income taxes -- The Company provides for deferred income taxes resulting from temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax bases. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years' tax returns. Deferred tax assets are recognized for temporary differences that will be deductible in future years' tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized.

Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") and the Securities and Exchange Commission ("SEC") have issued accounting pronouncements as of December 31, 2013 that will become effective in subsequent periods; however, management does not believe that any of those pronouncements would have significantly affected our financial accounting measurements or disclosures had they been in effect during the annual period for which financial statements are included in this annual report, nor does management believe those pronouncements would have a significant effect on our future financial position or results of operations.


Risks and Other Considerations

The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or currently deemed immaterial also may impair its business operations. If any of the risks described below actually occur, the Company's business could be impaired.

From time to time, information provided by the Company or statements made by its employees, or information provided in its filings with the SEC may contain forward-looking information. Any statements contained herein or otherwise made that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "expects", "anticipates", "plans" and similar expressions are intended to identify forward-looking statements. The Company's actual future operating results or short-term or long-term liquidity may differ materially from those projections or statements made in such forward-looking information as a result of various risks and uncertainties, including but not limited to the following in addition to those set forth elsewhere herein or in other filings made by the Company with the SEC.

Slowing Rates of Growth and Margins. In order to continue to grow its business and maintain or increase its profit margins, the Company among other things, must maintain and increase its customer base, implement and successfully execute its business and marketing strategy and its expansion into new product markets, effectively integrate acquisitions and other business combinations, continue to develop and upgrade its technology and transaction-processing systems, improve its website, provide superior customer service, respond to competitive developments and attract, retain and motivate qualified personnel. There can be no assurance that the Company will be successful in addressing such risks, and the failure to do so could have a material adverse effect on the Company's business, prospects, financial condition and results of operations.

Unpredictability of Future Revenues and Profits; Potential Fluctuations in Operating Results. The Company's ability to accurately forecast its revenues, gross profits and operating expenses as a percentage of net sales is limited. The Company's current and future expense levels are based largely on its investment plans and estimates of future revenues and to a large extent are fixed. Sales and operating results generally depend on the Company's ability to attract and retain customers and the volume of and timing of their subscriptions for the Company's services, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues in relation to the Company's planned expenditures would have an immediate adverse effect on the Company's business, prospects, financial condition and results of operations. Further, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service, marketing or acquisition decisions that could have a material adverse effect on its business, prospects, financial condition and results of operations.

Maintaining and improving profitability depends on the Company's ability to generate and sustain substantially increased revenue levels. The Company believes that its success will depend in large part on its ability to (i) extend its brand position, (ii) provide its customers with outstanding value, and (iii) achieve sufficient sales volume to realize economies of scale. Accordingly, the Company intends to continue to invest in marketing and promotion, product development and technology and operating infrastructure development. There can be no assurance that the Company will be able to achieve these objectives within a meaningful time frame.


The Company expects to experience significant fluctuations in its future quarterly operating results due to a variety of factors, some of which are outside the Company's control. Factors that may adversely affect the Company's quarterly operating results include, among others, (i) the Company's ability to retain existing customers, attract new customers at a steady rate and maintain customer satisfaction, (ii) the Company's ability to maintain gross margins in its existing business and in future product lines and markets, (iii) the development of new services and products by the Company and its competitors,
(iv) price competition, (v) the level of use of the Internet and online services and increasing acceptance of the Internet and other online services for the purchase of products such as those offered by the Company, (vi) the Company's ability to upgrade and develop its systems and infrastructure, (vii) the Company's ability to attract new personnel in a timely and effective manner,
(viii) the level of traffic on the Company's website, (ix) the Company's ability to manage effectively its development of new business segments and markets, (x) the Company's ability to successfully manage the integration of operations and technology of acquisitions or other business combinations, (xi) technical difficulties, system downtime or Internet brownouts, (xii) the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business, operations and infrastructure, (xiii) governmental regulation and taxation policies, (xiv) disruptions in service by common carriers due to strikes or otherwise, (xv) risks of fire or other casualty,
(xvi) litigation costs or other unanticipated expenses, (xvii) interest rate risks and inflationary pressures, and (xviii) general economic conditions and economic conditions specific to the Internet and online commerce.

Due to the foregoing factors and the Company's limited forecasting abilities, the Company believes that period-to-period comparisons of its revenues and operating results are not necessarily meaningful and should not be relied on as an indication of future performance.

Competition. The online commerce market, particularly over the Web, is intensely competitive. The Company's current or potential competitors include (i) companies now selling or who will be selling credit analysis data, such as D&B which currently has the dominant position in the industry and the financial resources to invest much more than the Company can while withstanding substantial price competition, and (ii) a number of indirect competitors that specialize in online commerce or information or who derive a substantial portion of the revenues from online commerce, advertising or information, and who may offer competing products, and many of which possess significant brand awareness, sales volume and customer bases. The Company believes that the principal competitive factors in its market are brand recognition, selection, personalized services, convenience, price, accessibility, customer service, quality of search tools, breadth of coverage, quality of editorial and other site content and reliability and speed of delivery. Many of the Company's competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than the Company. Certain of the Company's competitors may be able to secure data from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing and devote substantially more resources to Web site and systems development than the Company. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. There can be no assurance that the Company will be able to compete successfully against current and future competitors.


The Company expects that the competition in the Internet and online commerce markets will intensify in the future. For example, as various Internet market segments obtain large, loyal customer bases, participants in those segments may seek to leverage their market power to the detriment of participants in other market segments. In addition, new technologies and the expansion of existing technologies may increase the competitive pressures on the Company. Competitive pressures created by any one of the Company's competitors, or by the Company's competitors collectively, could have a material adverse effect on the Company's business, prospects, financial condition and results of operations.

Need for Additional Financing; Risks of Default. The Company's future liquidity and capital funding requirements will depend on numerous factors, including whether or when the Company will increase its customer base and revenues, and the costs and timing of expansion of sales, control of information costs and other expenses and competition. There can be no assurance that additional capital, if needed, will be available on terms acceptable to the Company, or at all. Furthermore, debt financing, if available, will likely include restrictive covenants, including financial maintenance covenants restricting the Company's ability to incur additional indebtedness and to pay dividends. The failure of the Company to raise capital on acceptable terms when needed could have a material adverse effect on the Company.

System Development and Operation Risks. Any system interruptions that result in the unavailability of the Company's Web site would reduce the attractiveness of the Company's service offerings. The Company has experienced periodic system interruptions, which it believes will continue to occur from time to time. The Company will be required to add additional software and hardware and further develop and upgrade its existing technology and network infrastructure to accommodate increased traffic on its Web site resulting from increased sales volume. Any inability to do so may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality, or delays in reporting accurate financial information. There can be no assurance that the Company will be able to accurately project the rate or timing of increases, if any, in the use of its Web site or in a timely manner to effectively upgrade and expand its systems or to integrate smoothly any newly developed or purchased modules with its existing systems. Any inability to do so could have a material adverse effect on the Company's business, prospects, financial condition and results of operations.

The Company's web servers are located at a secure offsite location. Its back . . .

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