PART I
In addition to historical information, the following discussion of the Company’s business and certain other statements in this Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements involve risks, uncertainties, and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to, those factors discussed in the sections in this Annual Report on Form 10-K entitled “The CreditRiskMonitor Business”, “The Company’s Goals”, “Marketing and Sales”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. CreditRiskMonitor.com, Inc. (the “Company” or “CreditRiskMonitor”) undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements.
Overview
CreditRiskMonitor was organized in Nevada in February 1977 and was engaged in the development and sale of nutritional food products from 1982 until October 22, 1993, when it sold substantially all of its assets, as previously reported. Effective January 19, 1999, the Company acquired the assets of the CreditRisk Monitor credit information service (“CM Service”) from Market Guide Inc. Following the closing of the CM Service purchase, the Company commenced doing business under the name “CreditRiskMonitor.com”.
The CreditRiskMonitor Business
The overall focus of the Company’s Software-as-a-Service (“SaaS”) subscription products is on facilitating the analysis of corporate financial risk, in the context of (a) the extension of trade credit from one business to another, (b) the management by businesses of important relationships with suppliers, and/or (c) the management by businesses of significant “counter-party” (i.e., buying and selling) relationships.
CreditRiskMonitor (see our website at www.creditriskmonitor.com; the contents of our website are not incorporated in, or otherwise to be regarded as part of this Annual Report on Form 10-K) sells a suite of web-based, SaaS subscription products providing access to comprehensive commercial credit reports, bankruptcy risk analytics, financial and payment information, and curated news on public and private companies worldwide. The products help corporate credit and procurement professionals stay ahead of and manage financial risk more quickly, accurately, and cost-effectively. Our subscribers, including nearly 40% of the Fortune 1000 and well over a thousand other large corporations worldwide, use the Company’s timely news alerts, research, and reports on public and private companies to make important financial risk decisions. The Company’s comprehensive commercial credit reports covering both public and private companies worldwide are published through its web-based platform and feature detailed analyses of financial statements, including ratio analyses & trend reports, and peer analyses.
In an example business-to-business (“B2B”) transaction: the purchase and sale of $20,000 of merchandise, the seller will usually ship before the buyer pays – this act is an extension of trade credit by the seller. The seller assumes a financial risk by extending this credit, commonly referred to as “trade credit” risk. The buyer may pay late, causing the seller to incur increased borrowing costs; the seller may incur extra costs in attempting to collect the $20,000; or the buyer may never pay the full $20,000. Amounts unlikely to be repaid are referred to as “bad debts.” If buyers fail to pay, the seller can suffer substantial losses (e.g., assuming the seller averages a 10% pre-tax margin, it will take about $10 of sales to offset each $1 of bad debt).
Academic research has found that, in the United States, about a quarter of corporate debt is trade credit, and the size of this trade credit is roughly three times the size of bank loans. Therefore, more U.S. companies are using trade credit to finance their operations than are using loans from the banking system. Trade credit financing is typically interest-free or even offered at a discount for expedited payment in comparison to alternative sources of working capital financing such as bank or third-party (hedge fund) loans, notes, and bonds. Moreover, many corporations that are starting to show elevated risk are unable to secure bank financing due to poor performance, poor leverage ratios, or a lack of good cash flow metrics. Finally, the need for corporations to access trade credit financing is highest in points of distress when interest expenses are most burdensome.
The Company’s newest platform, SupplyChainMonitor™, leverages its financial risk analytics expertise to create a risk management solution built specifically for procurement, supply chain, sourcing, and finance personnel involved in the supplier lifecycle, risk assessment, and ongoing risk monitoring. Users can assess counterparty risks at the aggregate and granular levels under a variety of categories including geography and industry, as well as customized, customer-specific configurations. The platform features mapping capabilities with real-time weather/natural disaster/power outage event overlays as well as customizable news notifications, reports, and charts. The Company expects the driving forces for adoption of its new SupplyChainMonitor™ product are the material shifts away from globalization, offshoring, and logistical complexity mandated to support “just-in-time” inventory models due to geopolitical and macroeconomic pressures. As businesses look to “nearshore,” “friendshore,” and relocate supply hubs away from regions with national security or concentration concerns, decision-makers will need extensive data on alternative suppliers and the financial stability of those alternatives. The Company’s basic value proposition in this regard is to help our subscribers focus on finding suppliers that are financially durable as businesses with this basic attribute have more resources to support other key initiatives such as investing in Research & Development (“R&D”); Quality Assurance/Quality Control (“QA/QC”); asset replenishment through capital expenditure in excess of depreciation; cyber security infrastructure; Environmental, Social, & Governance (“ESG”) initiatives; and/or Diversity, Equity, & Inclusion (“DEI”) initiatives.
To help subscribers prioritize and monitor risk, the reports offer the Company’s proprietary FRISK® and PAYCE® scores (measures of financial distress tied to the probability of bankruptcy, powered by Artificial Intelligence including machine learning, clustering, natural language processing, and deep neural network technology), as well as the well-known Altman Z”-score, and corporate issuer ratings from key Nationally Recognized Statistical Rating Organizations (“NRSROs”). The FRISK® scoring model also features aggregate sentiment inputs based on the usage behaviors of our subscribers. The incorporation of this proprietary crowdsourced signal improved the model’s classification of risk and boosted the overall accuracy through the lowering of the false positive rate for the riskiest corporations. We believe the FRISK® score, which can predict public company bankruptcy risk with 96%1 accuracy within the next 12 months, is the only analytic featuring such inputs in the industry and is trained on our unmatched depth of proprietary usage data. CreditRiskMonitor’s crowdsourced usage behavior specifically identifies the shift in aggregate sentiment among the issuers of trade credit and therefore assists in the monitoring of the most critical situations when trade credit-based working capital liquidity can dry up. With an abundance of trade credit being utilized in the market, CreditRiskMonitor’s SaaS subscription products, featuring its 96% predictive FRISK® bankruptcy analytic for public companies and its 80%1 predictive PAYCE® bankruptcy analytic for private companies, are emerging as critical for the accurate evaluation and monitoring of counterparty bankruptcy risk for many subscribers.
1 Claim based on back testing of the model on U.S. companies and continued performance checks to validate if the score indicated “high risk” (a score less than 5) at least 3 months prior to a subject company bankruptcy filing.
CreditRiskMonitor’s reports, on either platform, include company background information, trade payment information, as well as public filings (i.e., suits, liens, judgments, and bankruptcy information) on millions of companies around the world. To keep subscribers current with changing risk conditions, the Company uses email to “push” selected information to subscribers. These emails include continuously filtered news monitoring that keeps subscribers up to date on events affecting the financial stability of companies selected by the subscribers. Subscribers also receive alerts covering such topics as FRISK® score changes, credit limit alerts, financial statement updates, U.S. Securities and Exchange Commission (“SEC”) filings, and changes in agency ratings. All news items are filtered to ensure the stories have financial relevance and materiality. On U.S. banks, reports include financial data from the Federal Financial Institutions Examination Council (“FFIEC”) call reports.
CreditRiskMonitor’s namesake SaaS product, CreditRiskMonitor®, is most often purchased to review the risks of extending trade credit by a company to its corporate customers. Within a midsized or large corporation, there is often a professional whose responsibility is managing this credit (often together with managing collections of the company’s accounts receivable). CreditRiskMonitor believes that, with the long-term downsizing of corporations and the related reductions in credit departmental budgets and personnel, corporate credit professionals must do more with less. It is also notable that trade credit decisions are often made under intense time pressure. Simultaneously, the Company believes there has been explosive growth in the volume of data about large businesses. Credit professionals are often faced with an overwhelming amount of available data concerning their most important customers, while the time for research and analysis is severely limited. CreditRiskMonitor’s products are designed to save them time, money, and effort by prioritizing their risk and helping them automatically stay up to date as conditions change.
Many of the Company’s subscribers use its SaaS subscription products, CreditRiskMonitor® and SupplyChainMonitor™, for managing the financial risk of relationships with suppliers and/or “counterparties” with whom they both buy and sell. Strategic planning is another use of the Company’s products. In the last recession and the COVID-19 pandemic, risks to the “supply chain” became a prominent focus of management concern. Companies were reminded that while the financial distress of a single important customer might jeopardize a large receivable associated with that account, the financial distress of a single important supplier can shut down an entire factory and jeopardize a company’s entire revenue stream. The Company’s revenue from existing subscribers who have added users responsible for procurement functions and new subscribers whose usage is entirely related to supply chain use cases is a growing percentage of total revenue.
Dun & Bradstreet Holdings, Inc. (“Dun & Bradstreet”), our major competitor, segments its revenue between the Finance & Risk and Sales & Marketing verticals. We believe the Finance & Risk vertical, covering the credit, supply chain, and legal/regulatory information services, can be used for market comparisons to CreditRiskMonitor. Dun & Bradstreet’s Finance & Risk vertical generated approximately $888.1 million in North America (i.e., U.S. and Canada) and $448.6 million in the rest of the world for a total of almost $1,337 million for 2023. The remainder of the market is extremely fragmented with numerous other vendors, notably including Experian plc and Equifax Inc. On that basis, we estimate that our revenue represents a little more than 1% of the Total Addressable Market (“TAM”). A review of Dun & Bradstreet’s historical performance in its Financial & Risk business (previously known as Risk Management Solutions prior to the take-private transaction in 2018) shows very limited revenue growth during the period from 2005 to 2017 and CreditRiskMonitor believes this trend reflects the unprecedented intervention in credit markets by governments and central banks around the world to artificially maintain zero-to-low interest rates. This world-spanning policy significantly reduced the number of corporate bankruptcies during this period, damaging the perception of risk within the commercial credit market and putting downward pressure on businesses that provided services and data related to the mitigation of such events. Under the recent tighter interest rate regime, the number of businesses with limited ability to cover their interest expenses with earnings is expanding and the Company expects that corporate bankruptcy rates will return to long-term average levels under mean reversion, thus supporting demand for the Company’s solutions.
CreditRiskMonitor’s annual fee SaaS subscription products represented over 99% of its fiscal 2022 and 2023 operating revenues. These products are sold to a diverse subscriber base with no single subscriber representing more than 1% of 2022 and 2023 operating revenues. Accordingly, the Company is not dependent on a single subscriber nor is the Company dependent on a few large subscribers, such that a loss of any individual subscriber would have a material adverse effect on its financial condition or results of operations.
The Company has contractual agreements with its data suppliers, including leading NRSROs to redistribute their information as part of our service. We also obtain financial statements and other data from the London Stock Exchange Group. Although we report some of this “raw” data directly on our web-based platform, the critical elements of our SaaS subscription products – the FRISK® score, PAYCE® score, ratio analyses, trend reports, peer analyses, Altman Z”-scores, and monitoring alerts– are computed by the Company using its algorithms and weighting techniques, and are delivered in formats carefully designed for the way our subscribers prefer to use this information.
Further, hundreds of subscribers and non-subscribers provide us with confidential data from their accounts receivable systems that we parse, process, aggregate, and report, so subscribers can see how their counterparties are paying the invoices of other suppliers, without disclosing the specific contributors of this information (the “Trade Contributor Program”). The Trade Contributor Program’s current trade credit file is approximately $3 trillion of transaction data annually.
CreditRiskMonitor’s products are the result of management’s experience in the commercial credit industry, third-party financial risk assessment, and ongoing research concerning the information needs of corporate credit and purchasing/procurement departments. These factors have enabled CreditRiskMonitor to satisfy its subscribers’ needs for timely, efficient, and low-cost financial risk information services. CreditRiskMonitor sells the following SaaS subscription products for analyzing commercial financial risk: CreditRiskMonitor® and SupplyChainMonitor™. Additional products, summarized below, are add-ons or enhancements to these base subscription products meaning that subscribers must have an active base subscription to access them.
| (1) | The CreditRiskMonitor® product provides subscribers with unlimited usage and coverage of public and private companies, featuring multi-period spreads of financial reports and ratio analysis, credit risk scores, payment-behavior scores, trend reports, peer analyses, credit limit recommendations, as well as up-to-date financial news screened specifically for materiality in credit evaluation. Another feature of the product is the monitoring of material changes and/or news at companies of interest, customized for each subscriber and automatically delivered via email so subscribers are always up-to-date on their counterparties. This feature is supplemented with trade receivable data contributed through the Company’s Trade Contributor Program, as well as U.S. public-record filing information (i.e., suits, liens, judgments, and bankruptcy information) covering millions of public and private U.S. companies. The product is delivered via a web platform and in a highly structured way, enabling the tracking of subscriber’s usage information for over 15 years, through many financial shifts. |
Subscribers can purchase a more limited version of the CreditRiskMonitor® product with coverage of just U.S., Canadian, Mexican, and Caribbean companies (the “North American Service”) for a lower annual fee. The flagship version of the product (the “Worldwide Service”) covers all public and millions of private non-financial companies internationally.
Subscribers can purchase expanded U.S. private company coverage (the “U.S. Private Data Enhancement”) for an additional annual fee. The U.S. Private Data Enhancement provides access to third-party financial distress scores on 3 million private U.S. companies.
Subscribers to the Worldwide Service can purchase expanded international private company coverage (the “International Private Data Enhancement”) for an additional annual fee. The International Private Data Enhancement provides access to data covering over 7.7 million private businesses with financial statements including over 300,000 additional private company FRISK® scores and over 1.1 million Altman Z”-scores.
| (2) | The SupplyChainMonitor™ product provides subscribers with interactive tools to monitor and manage their company’s supply chain risks at the aggregate and granular levels. With easy-to-use filtering and built-in views, the product offers concise dashboards with drill-down capabilities to examine counterparty risk across categories including geography, industry, and financial risk level, plus subscriber-provided metadata classes such as criticality and direct/indirect. The product provides functions to easily view supplier locations on a world map, which supports real-time weather, natural disasters, and power outage event overlays. Material news, weather, and other risk alerts and monitoring can be configured as immediate or daily digest push notifications. Fully customizable company reports provide rich financial insights and charting including the industry-leading 96%-accurate FRISK® score, analyst-informed questions for at-risk counterparties, NRSROs ratings, over 40 unique financial ratios, and much more. With records on over 30 million businesses worldwide, predictive risk scores on approximately 5 million, and payment data on about 4 million businesses, the SupplyChainMonitor™ product provides actionable insights for procurement risk management. Enhanced peer analysis tools allow comparisons of up to 5 companies over time across financial ratios and risk scores, simplifying bid reviews and alternative source investigations. Macro-level risk information on 180 countries across 10 risk categories and powered by the Economist Intelligence Unit is included to assist in sourcing strategy when examining geopolitical, legal, labor, tax, and security risks. |
This platform is only offered with worldwide coverage and includes the U.S. Private Company Data Enhancement with third-party financial distress scores on 3 million private U.S. businesses. Subscribers can purchase the International Private Data Enhancement for an additional annual fee which provides the same enhanced coverage available in the CreditRiskMonitor® product.
| (3) | The Credit Limit Service product, an add-on subscription service available on the CreditRiskMonitor® product, helps subscribers manage credit line limits for their customers, in light of changes in the customers’ financial strength. Available since 2007, this interactive product monitors daily changes in a customized recommended credit limit for each customer and generates alert messages to subscribers as requested, so they can take immediate action when a customer’s circumstances change. The Credit Limit Service is fully integrated with the CreditRiskMonitor® product, which allows subscribers to quickly engage in deep analysis when reviewing any specific credit line limit. The additional fee is based, in part, on the number of companies evaluated during the annual subscription period and includes monitoring alerts. |
| (4) | The Financial Statement Processing (“FSP”) product, an add-on subscription service available on either platform product, provides subscribers a flexible option to help ease their process in the data entry and standardization of private company financial statements, as well as provides private company FRISK® scores featuring accuracy levels in the 90%+ range1 and peer analyses to public company comparables. The FSP product is sold in blocks of 10 credits, with a single credit used for each counterparty processed during the annual subscription period. Credits expire at the end of each annual subscription period. |
| (5) | Confidential Financial Statement Tool (“CFS Tool”) product, an add-on subscription service available on either platform product, provides subscribers a flexible option to help ease their process in the standardization of private company financial statements and provides private company FRISK® scores featuring accuracy levels in the 90%+ range1 and peer analyses to public company comparables. This product is offered at a lower cost per private counterparty processed than the FSP product, as the subscriber is responsible for the data entry of the private counterparty statements via forms on the Company’s web-based platform. The additional fee is based on subscriber usage. |
| (6) | Confidential Financial Statement Portal (“CFS Portal”) product, an add-on subscription service available on either platform product, allows subscribers to invite their private company counterparties to enter or upload confidential financial statements via the Company’s secure web portal so they can be standardized and scored to provide private company FRISK® scores featuring accuracy levels in the 90%+ range1 and peer analysis to public company comparables. This product is offered at a lower cost per private counterparty processed than the FSP product, as the subscriber’s counterparty is responsible for the data entry or upload of the private counterparty statements via forms on the Company’s web-based platform. The CFS Portal product is sold in blocks of 10 credits, with a single credit used for each counterparty processed during the annual subscription period. Credits expire at the end of each annual subscription period. |
Both platform products feature the Company’s proprietary credit scores: the FRISK® score and the PAYCE® score. These proprietary scores indicate the level of financial distress, by predicting the probability of bankruptcy within the next 12 months at public and private companies, respectively. The scores provide subscribers with a fast, consistent method for identifying those companies at the greatest risk.
| (a) | The FRISK® score is updated daily, based on the latest information available to the Company, and is derived from a structural statistical model backtested using Company data and bankruptcies. Many experienced and knowledgeable credit and risk professionals use the Company’s Fundamental Service routinely to analyze the companies with whom they do business. The Company has collected anonymous usage information from its subscribers since 2003 and was able to develop an independently predictive, corporate bankruptcy risk model trained on this aggregated data. The Company’s modeling confirmed that when its subscribers are concerned with a risky company, they investigate that company more closely, in distinct behavioral patterns. When such patterns occur in the aggregate, the herd signal is predictive of increased bankruptcy risk. Essentially, when credit professionals start looking more closely as a group, there is usually a growing concern that can result in the reduction or even elimination of trade credit extension, specifically at one of the most critical financing times for a corporation. In 2016, the FRISK® score was retrained and augmented to include this proprietary, aggregate sentiment input. The resulting enhanced FRISK® score more accurately classifies the risk level of the riskiest corporations and can predict public company bankruptcy risk with 96% accuracy within 12 months. The accuracy level of the FRISK® score is monitored, at least annually, by our Quality Assurance and Data Science teams and has maintained or surpassed its benchmark 96% accuracy since 2016. Calculation of the FRISK® score involves the preparation of data from multiple sources, the use of executable software created expressly by and owned by the Company, as well as sophisticated algorithms and weighting techniques that are proprietary Company trade secrets. It appears that CreditRiskMonitor is the only company currently using crowdsourcing of subscriber activity in generating a financial risk score. In 2023, the FRISK® score covered over 350,000 public and private companies worldwide representing over $100 trillion in corporate revenue. |
| (b) | The PAYCE® score provides a highly accurate measure of financial stress when no financial statements are available for private companies. It utilizes payment data collected and processed through the Company’s Trade Contribution Program, U.S. federal tax lien data, and more to deliver an approximately 80% accurate score on over 330,000 private companies in the United States and Canada. Unlike other payment-based models that summarize past dollar-weighted payment performance for estimating bankruptcy risk, a PAYCE® score is only calculated when there is both a sufficient number of trade contributors and trade lines on a company for the analysis. The Company believes that the model covers most U.S. private companies with $5 million or more in annual revenue2. Among all reported bankruptcies, about half are classified in the two highest risk categories, which represent only 2.5% of the coverage population, at least three months before they file. |
The viability and potential of CreditRiskMonitor’s business are made possible by the following characteristics:
| • | Low price. The prices of CreditRiskMonitor’s SaaS subscription products are low as compared to a subscriber’s possible losses from not being paid by a customer or being unable to secure critical inventory/services from a supplier and are low compared to the cost of most competitive third-party financial risk analysis products. |
2 Based on data published by the North American Industry Classification System (“NAICS”) Association on the number of U.S. businesses with annual sales ranges greater than or equal to $5 million and the number of U.S. public companies it follows
| • | Non-cyclical. As economic growth slows, general corporate credit risk usually increases, and the credit manager’s function rises in importance and complexity. Additionally, products that allow credit managers to perform their jobs more efficiently and cost-effectively, as compared to competitive services, should gain market share in most business environments, but especially during an economic downturn. In a contracting business environment, many companies face increasing price competition, which should accelerate their shift to lower-cost technologies and providers, such as CreditRiskMonitor. CreditRiskMonitor’s business and recurring revenues have continued to grow as world economic growth slowed or declined. Over the last ten years the issuance of corporate “junk bonds” and other debt by public companies and public debt by private companies (LBOs, etc.), and the development of credit instruments to hedge default and interest rate risk (i.e., credit derivatives) has increased dramatically. Thus, public companies and private companies with public debt are vulnerable to business cycle contraction and the attendant market risks for interest rates and stock markets. Large over-the-counter debt and generally high uncertainty in the market imply continued high risk and complexity in extending commercial trade credit to many companies, which in turn puts a premium on the speed and analytical strength of CreditRiskMonitor’s products. |
| • | Recurring revenue stream. The recurring annual revenue stream of its SaaS subscription fee model gives the Company stability not found in a traditional, non-subscription company. |
| • | Profit multiplier. Some of the Company’s basic costs are being reduced. On a broad generic basis, the prices of computer hardware, software, and telecommunications have been coming down for all buyers, including CreditRiskMonitor. In addition, CreditRiskMonitor has automated a significant amount of the processes used to create and deliver its SaaS subscription products; therefore, its production costs, apart from development costs (enhancing and upgrading the Company’s web platforms as well as new product generation), are relatively stable over a wide range of increasing revenue. Offsetting these cost reductions is the cost of increasing the data content of CreditRiskMonitor’s SaaS subscription products if the Company chooses to increase content and not raise its prices to cover these additional costs. |
| • | Self-financing. CreditRiskMonitor’s business has no inventory, manufacturing, or warehouse facilities. Payments for its products are received early in the subscription period with nearly all subscribers paying annual fees without termination for convenience rights as opposed to monthly or quarterly contracts. Thus, the Company’s business has a low capital intensity and can generate high margins providing sufficient positive cash flow to grow the business organically with little need for external capital. |
| • | Management. CreditRiskMonitor has an experienced management team with proven talent in business credit evaluation systems and SaaS web development. The Company’s senior management team has an average tenure of over 15 years. |
The Company’s Goals
| • | Growth in U.S. market share. Faced with a dominant U.S. competitor, Dun & Bradstreet, as well as several other larger competitors, the Company’s primary goal is to gain market share. The Company believes that many potential subscribers are unaware of its SaaS subscription products, while many others who are aware of CreditRiskMonitor have not evaluated its suite of products. |
| • | International penetration. Foreign companies doing business within the U.S. or other foreign countries may have the same need as domestic companies for CreditRiskMonitor’s financial analysis of U.S. and foreign companies. Internationally, the Internet provides a mechanism for rapid and inexpensive marketing and distribution of CreditRiskMonitor’s SaaS subscription products. |
| • | Broaden the services supplied. Revenue per subscriber may increase over time as the Company adds functionality, content, and new products. Also, revenue per subscriber should increase over time as the Company sells additional seat licenses (upsell) and products (cross-sell) to existing subscribers. The Company’s SupplyChainMonitor™ product is a clear example of this goal as it is offered at a higher price point with additional functionality and content. |
| • | Lowest cost provider. CreditRiskMonitor’s sourcing, analysis, and preparation of data into a usable form are highly automated. CreditRiskMonitor delivers all of its information to subscribers via the Internet and there is automation between the sourcing of data and delivery of a company credit report to a subscriber. Because of this automation, CreditRiskMonitor’s production costs are relatively stable over a wide range of increasing revenue. Management believes CreditRiskMonitor’s cost structure is one of the lowest in its industry while maintaining a higher customer service level for subscribers. |
| • | High margins and return on investment. The Company, despite inflationary factors, foresees declining costs per subscriber in some important expense areas, such as computer hardware and communication costs, which should increase net profits from its SaaS subscription products as it adds subscribers. However, new subscribers carry higher acquisition and servicing costs relative to existing ones, so some of these gains will be offset. The Company expects that its renewal revenue will continue to represent a larger share of total revenue each year and, by carrying a lower cost basis, will contribute to higher overall margins over time. The Company’s preferred calculation for return on investment is Return on Tangible Net Worth as it focuses on hard assets. Given the Company’s lack of debt and limited intangible assets, its Tangible Net Worth normally represents most of its Total Stockholders’ Equity and generates a fair rate of return based on pre-tax income. |
Marketing and Sales
To gain market share for the Company’s products, it will continue to use the Internet (at our website www.creditriskmonitor.com) as the primary mechanism for demonstrating and distributing its suite of products. To inform potential subscribers about its products, CreditRiskMonitor uses a combination of telephone sales, Internet demonstration, and inbound and outbound marketing, including but not limited to digital strategies, social media, media/PR outreach, trade show representation, and speaking engagements before credit and procurement groups and associations.
Value Proposition
The Company’s fundamental value proposition is that it creates and sells high-quality, industry-leading commercial financial risk reports featuring analytics with the highest accuracy levels in the market that help busy risk professionals stay ahead of financial risk quickly, easily, and precisely, at a competitive cost to those from the leading provider. Because Dun & Bradstreet has the largest share of the commercial credit market, their flagship product, DNBi, is the standard by which the market measures both quality and price. The Company’s research shows that its subscribers overwhelmingly agree that CreditRiskMonitor’s products save them time, help them to make better credit decisions, and represent a significant value for the price paid compared to its competitors.
CreditRiskMonitor’s operational strategy is to deliver on its value proposition by continuing to be one of the industry’s lowest-cost producers of high-quality, accurate business financial information by continuously collecting data from a wide variety of sources and employing sophisticated, proprietary, algorithms to process that data into an extensive database of valuable reports on companies. Highly automated operations add to the reliability and consistency of these reports while limiting costs. The Company employs a small number of analysts who selectively review data at critical points in its processes to further enhance the quality of its products and their relevance to credit professionals.
Risks Related to Information Systems Security
The Company’s information systems, and those of its third-party service providers and vendors, are vulnerable to an increasing threat of continually evolving cybersecurity risks. These risks may take the form of malware, computer viruses, cyber threats, extortion, employee error, malfeasance, system errors, or other types of risks, and may occur from inside or outside of our organization. Cybersecurity risk is increasingly difficult to identify and quantify and cannot be fully mitigated because of the rapidly evolving nature of the threats, targets, and consequences. Additionally, unauthorized parties may attempt to gain access to these systems or our information through fraud or other means of deceiving our third-party service providers, employees, or vendors. The Company’s operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology (“IT”) systems, and software against damage from several threats. The Company has entered into agreements with third parties for hardware, software, telecommunications, and other services in connection with its operations. The Company’s operations depend on the timely maintenance, upgrade, and replacement of networks, equipment, IT systems, and software. However, if the Company is unable or delayed in maintaining, upgrading, or replacing its IT systems and software, the risk of a cybersecurity incident could materially increase. Any of these and other events could result in information system failures, delays, and/or increases in capital expenses. The failure of information systems or a component of information systems may, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations.
In addition, targeted attacks on the Company’s systems (or on systems of third parties that it relies on), failure or non-availability of a key IT system, or a breach of security measures designed to protect its IT systems could result in disruptions to its operations through delays or the corruption and destructions of its data, property damage, loss of confidential information or financial or reputational risks. As the threat landscape is ever-changing, the Company must make continuous mitigation efforts, including risk-prioritized controls to protect against known and emerging threats; tools to provide automated monitoring and alerting; frequent employee training; and backup and recovery systems to restore systems and return to normal operations. However, there can be no assurance that the Company’s ability to monitor for or mitigate cybersecurity risks will be fully effective, and the Company may fail to identify cybersecurity breaches or discover them in a timely way.
Any significant compromise or breach of the Company’s data security, whether external or internal, or misuse of its data, could result in significant costs, lost sales, fines, and lawsuits, as well as damage to its reputation. In addition, as the regulatory environment related to information security, data collection, data use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
Employees
As of February 1, 2024, the Company had approximately 99 employees. None of the Company’s employees are covered by a collective bargaining agreement. The Company believes its relations with its employees to be satisfactory and has suffered no interruption in operations.
The Company established a 401(k) Plan covering all employees effective January 1, 2000 that provides for discretionary Company contributions. Employees are eligible to participate in the 401(k) plan if they are over the age of 21 and after completing one month of service with the company after their hire date. The Company has no other retirement, pension, profit sharing, or similar program in effect for its employees. The Company adopted a long-term incentive plan in 2020 that covers its employees, replacing its former 2009 Plan.
Available Information
Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are available free of charge on its website (www.creditriskmonitor.com) as soon as reasonably practicable after the Company electronically files the material with or furnishes it to the SEC. Printed copies of these documents may be requested, free of charge, by contacting the Corporate Secretary, CreditRiskMonitor.com, Inc., 704 Executive Boulevard, Suite A, Valley Cottage, NY 10989. Additionally, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Information on the Company’s website or linked to its website is not incorporated by reference into this Annual Report.
Risk Management and Strategy
The Company has processes for assessing, identifying, and managing material risks from cybersecurity threats. These cybersecurity processes are integrated into the Company’s overall compliance, risk management, and oversight procedures as overseen by the Company’s board of directors, primarily through its audit committee. These processes also include overseeing and identifying risks from cybersecurity threats associated with the use of third-party service providers. The Company’s process allows us to assess, identify and manage information security and cybersecurity threats through risk assessment and prevention measures to facilitate communication, training, awareness, incident response, and disclosure procedures as required by the SEC.
The Company may review SOC1 or SOC2 reports of certain third-party providers before engagement and has established monitoring procedures in its effort to mitigate risks related to data breaches or other security incidents originating from third parties. The Company engaged a third-party consulting firm to evaluate and test the Company’s risk management systems and to assess and prevent potential cybersecurity incidents as appropriate on an annual basis. The Company has engaged a third party to provide cyber security and awareness training to our employees to help mitigate the risk of threats posed by bad actor requesting information. The Company deploys technical safeguards that are designed to protect information systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, redundant data storage and retention methods, anti-malware functionality, security information event management, automated update/patch-management and access controls which are evaluated and improved through vulnerability and exposure assessments and cybersecurity threat intelligence. With the help of our third-party vendors, the Company has implemented several layers of physical security, digital security, and data backup.
Governance
Board of Directors -- The audit committee of the Company’s board of directors, with the input of management, oversees the Company’s internal controls, including internal controls designed to assess, identify, and manage material risks from cybersecurity threats. The audit committee and the board of directors are informed of material risks from cybersecurity threats by the Company’s Chief Executive Officer, Chief Financial Officer, or the Senior Vice President of Information Technology.
Management -- Under the oversight of the audit committee of the Company’s board of directors, the Senior Vice President of Information Technology, with over 20 years of experience in this field, is primarily responsible for the assessment and management of material cybersecurity risks and establishing and maintaining adequate and effective internal controls covering cybersecurity matters. The Company’s Chief Financial Officer and Senior Vice President of Information Technology, are responsible for overseeing the establishment and effectiveness of controls and other procedures, including controls and procedures related to the public disclosure of material cybersecurity matters. See “Item 1. Risks Related to Information Systems Security - As the threat landscape is ever-changing, the Company must make continuous mitigation efforts, including risk-prioritized controls to protect against known and emerging threats; tools to provide automated monitoring and alerting; frequent employee training; and backup and recovery systems to restore systems and return to normal operations. However, there can be no assurance that the Company’s ability to monitor for or mitigate cybersecurity risks will be fully effective, and the Company may fail to identify cybersecurity breaches or discover them in a timely way.”
The Company does not own any real property. The Company’s principal office is located in approximately 16,900 square feet of leased space in an industrial warehouse complex located in Valley Cottage, New York. The lease expires on July 31, 2025 and provides for an aggregate total monthly cost of approximately $21,600, subject to annual increases, plus an allocated portion of real estate taxes and insurance.
ITEM 3.
| LEGAL PROCEEDINGS. |
The Company, at various times, may be involved in legal proceedings arising from the ordinary course of business. The Company records a liability when it believes it has enough information to assess the probability that a loss will be incurred and the amount of loss or range of loss can be reasonably estimated. Neither the Company nor its property is a party to or the subject of a pending legal proceeding.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
The Company’s Common Stock is traded on the OTC Markets OTCQX U.S. under the symbol “CRMZ”. The following table sets forth the high and low closing bid quotations reported on the OTCQX for each calendar quarter of 2022 and 2023. These quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| | | High Bid | | | Low Bid | |
| | | | | | | |
| 2022 | | | | | | |
| First Quarter | | $ | 2.56 | | | $ | 1.72 | |
| Second Quarter | | $ | 2.55 | | | $ | 2.05 | |
| Third Quarter | | $ | 2.31 | | | $ | 1.94 | |
| Fourth Quarter | | $ | 2.41 | | | $ | 1.99 | |
| | | | | | | | | |
| 2023 | | | | | | | | |
| First Quarter | | $ | 3.10 | | | $ | 2.35 | |
| Second Quarter | | $ | 2.89 | | | $ | 2.49 | |
| Third Quarter | | $ | 2.72 | | | $ | 2.40 | |
| Fourth Quarter | | $ | 2.67 | | | $ | 2.30 | |
On March 1, 2024, there were approximately 147 registered holders of the Company’s Common Stock based on information provided by our transfer agent. This number does not reflect the number of individuals or institutional investors holding stock in nominee name through banks, brokerage firms, and others.
In fiscal 2023 and 2022, the Company did not declare a cash dividend.
The Company did not repurchase any of its common stock during the year ending 2023.
| 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 subscribers’ 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 2024 are to continue to build on the improvement initiatives underway to enhance our value proposition to subscribers while continuing to achieve sustainable, profitable growth.
Financial Condition, Liquidity and Capital Resources
The following table presents selected financial information and statistics as of December 31, 2023 and 2022 (dollars in thousands):
| | | 2023 | | | 2022 | |
| Cash and cash equivalents | | $ | 11,005 | | | $ | 9,867 | |
| Held-to-maturity securities | | $ | 3,495 | | | $ | 4,028 | |
| Accounts receivable, net | | $ | 3,941 | | | $ | 3,500 | |
| Working capital | | $ | 6,499 | | | $ | 5,416 | |
| Cash ratio | | | 0.86 | | | | 0.78 | |
| Quick ratio | | | 1.45 | | | | 1.38 | |
| Current ratio | | | 1.51 | | | | 1.43 | |
The Company has invested some of its excess cash in cash equivalents, held-to-maturity debt securities, and marketable securities. 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, or held-to-maturity securities.
As of December 31, 2023, the Company had $11 million in cash and cash equivalents, an increase of approximately $1.14 million from December 31, 2022. This increase was primarily the result of cash provided by operating activities of approximately $1.4 million and cash used in investing activities of approximately $0.3 million.
The main component of current liabilities at December 31, 2023 was unexpired subscription revenue of $10.27 million, which should not require significant future cash outlay, as this is annual reoccurring revenue, other than the cost of preparation and delivery of the applicable commercial credit reports, which cost much less than the unexpired subscription revenue shown. Unexpired subscription revenue is recognized as income over the subscription term, which approximates 12 months. The Company has no debt, and expects to meet the current and long term lease obligations for office space using operating cash flows. The Company maintains an adequate cash balance to meet the Company’s material cash requirements.
The Company has no bank lines of credit or other currently available credit sources.
Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements.
Results of Operations
2023 vs. 2022
| | | Year Ended December 31, | |
| | | 2023 | | | 2022 | |
| | | Amount | | | % of Total Revenue | | | Amount | | | % of Total Revenue | |
| | | | | | | | | | | | | |
| Operating revenues | | $ | 18,931,931 | | | | 100 | % | | $ | 17,979,317 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
Data and product costs
| | | 7,833,037 | | | | 41 | % | | | 6,984,729 | | | | 39 | % |
| Selling, general and administrative expenses | | | 9,223,033 | | | | 49 | % | | | 9,040,767 | | | | 50 | % |
| Depreciation and amortization | | | 383,765 | | | | 2 | % | | | 382,342 | | | | 2 | % |
| Total operating expenses | | | 17,439,835 | | | | 92 | % | | | 16,407,838 | | | | 91 | % |
| | | | | | | | | | | | | | | | | |
| Income from operations | | | 1,492,096 | | | | 8 | % | | | 1,571,479 | | | | 9 | % |
| Other income, net | | | 715,330 | | | | 4 | % | | | 180,762 | | | | 1 | % |
| | | | | | | | | | | | | | | | | |
| Income before income taxes | | | 2,207,426 | | | | 12 | % | | | 1,752,241 | | | | 10 | % |
| Provision for income taxes | | | (512,373 | ) | | | (3 | %) | | | (392,003 | ) | | | (2 | %) |
| Net income | | $ | 1,695,053 | | | | 9 | % | | $ | 1,360,238 | | | | 8 | % |
Operating revenues increased approximately $952 thousand, or 5%, for fiscal 2023 over the prior year. This overall revenue growth resulted from an increase in SaaS subscription product revenue, attributable to increased sales to new and existing subscribers, as well as related price increases for subscriptions.
Data and product costs increased approximately $848 thousand, or 12%, for fiscal 2023 compared to fiscal 2022. This increase was due primarily to (1) additional data subscriptions for new service offerings including the SupplyChainMonitor™ product, (2) higher salary and related employee benefits due to pay raises to staff, and (3) higher costs of third-party content, due to price increases instituted by some of the Company’s major suppliers.
Selling, general and administrative expenses increased approximately $182 thousand, or 2%, for fiscal 2023 compared to fiscal 2022. This increase was due to more commissions being paid out in 2023 due to sales of newer product offerings, higher salary expenses, higher marketing expenses from exhibiting at trade shows, and sales enablement software.
Other income increased approximately $535 thousand for fiscal 2023 compared to fiscal 2022. This increase was due to higher return received on the Company’s money market funds and held-to-maturity holdings compared to fiscal 2022.
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.
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 subscribers as well as the volume and timing of the subscriptions for the Company’s products, 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 subscribers with outstanding value, thus encouraging 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 as well as 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 into 2024 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 into 2024 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 some of 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.
The Company expects to experience 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 subscribers, attract new subscribers 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 Company’s ability to obtain products and services from its vendors, including information suppliers, on commercially reasonable terms, (vi) the Company’s ability to upgrade and develop its systems and infrastructure, and adapt to technological change, (vii) the Company’s ability to attract and retain personnel in a timely and effective manner, (viii) the Company’s ability to manage effectively its development of new business segments and markets, (ix) the Company’s ability to successfully manage the integration of operations and technology of acquisitions or other business combinations, (x) technical difficulties, system downtime, cybersecurity breaches, or Internet brownouts, (xi) the amount and timing of operating costs and capital expenditures relating the Company’s business, operations and infrastructure, (xii) governmental regulation and taxation policies, (xiii) disruptions in service by common carriers due to strikes or otherwise, (xiv) risks of fire or other casualty, (xv) litigation costs or other unanticipated expenses, (xvi) interest rate risks and inflationary pressures, and (xvii) general economic conditions and economic conditions specific to the Internet and online commerce.
Due to the foregoing factors, 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.
Critical Accounting Policies, Estimates and Judgments
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). 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:
Valuation of goodwill -- Goodwill requires critical accounting estimates in the evaluation of the Company’s assets which are subject to depreciation and valuation judgments. In addition, the Company uses the publicly traded stock price to estimate fair value, which is subject to market fluctuations and change. See the information in Note 2 to the financial statements under the caption “Goodwill” for accounting policies related to the calculation of goodwill.
Income taxes -- The calculation of income taxes requires critical accounting estimates in budgeting expenses, estimating sales figures, and forecasting staffing and technology needs for the upcoming year, all of which are constantly subject to change as the year progresses. See the information in Note 2 to the financial statements under the caption “Income Taxes” for accounting policies related to the calculation of income taxes.
Recently Issued Accounting Standards
The information set forth under Note 2 to the financial statements under the caption “Recently Issued Accounting Standards” is incorporated herein by reference.
