In addition to historical information, the following discussion of the Company’s business 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
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 services 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) is a web-based publisher of financial information, that helps corporate credit and procurement professionals stay ahead of and manage financial risk quickly, accurately and cost effectively.
Leading global companies, including more than 35% of the Fortune 1000, use CreditRiskMonitor’s timely news alerts, research and reports on public companies to make important risk decisions.
The Company publishes comprehensive commercial credit reports covering both public and private companies worldwide. The reports
feature detailed analysis of financial statements, including ratio analysis and trend reports, and peer analyses. 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 crowdsourcing and deep neural network technology, respectively), as well as the well-known Altman Z” default scores, Moody’s Investors Service (“Moody’s”), Fitch
Ratings (“Fitch”), DBRS Limited (“DBRS”) and Morningstar Credit Ratings, LLC (“Morningstar”) issuer ratings. On U.S. banks, reports include Institutional Risk Analytics (“IRA”) Counterparty Quality scores and financial data from the Federal
Financial Institutions Examination Council (“FFIEC”) Call Reports. Additionally, the reports include company background information, trade payment reports, as well as public filings (i.e., suits, liens, judgments and bankruptcy information) on
millions of U.S. companies. To keep subscribers current with changing risk conditions, the Company’s service 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 creditworthiness of companies selected by the subscribers. Subscribers also receive alerts covering such topics as FRISK® score reports, credit limit alerts, financial statement updates, U.S.
Securities and Exchange Commission (“SEC”) filings and ratings changes. All news items are filtered to assure the stories have financial relevance.
CreditRiskMonitor’s service 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 have to 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 an 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 service is designed to save them time, money and effort by prioritizing their risk and helping them automatically stay up to date as conditions
change.
In a business-to-business transaction, for example the purchase and sale of $20,000 of merchandise, the seller usually will ship
before the buyer pays – this is an extension of trade credit by the seller. The seller takes a financial risk extending this credit, 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 called “bad debt”. 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).
There is little hard data on the size of CreditRiskMonitor’s credit-risk market. The U.S. National Association of Credit Management
has more than 15,000 members, but some industry observers believe the number of U.S. credit managers and other personnel performing this function is substantially greater. In addition, there are numerous U.S. based companies that do not have a
full-time credit function but still require credit information. Furthermore, a market exists outside of the U.S. for information on U.S. and foreign companies.
Some of the Company’s subscribers use the service for managing the financial risk of relationships with suppliers and/or
“counter-parties” with whom they both buy and sell. Strategic planning is another use of the Company’s service. In the last recession, risks to the “supply chain” became prominent and a renewed 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 subscribers who have added the procurement function to their list of users, and new subscribers whose use is entirely about “supply chain”, is a small but growing percentage of total revenue.
The Dun & Bradstreet Corporation (“Dun & Bradstreet”)
, our
major competitor, has disclosed that it generated approximately $775.9 million from its Risk Management Solutions business (i.e., credit information services revenue) in the Americas (i.e., U.S., Canada and Latin America) for 2017 which we
believe serves a similar mix of business functions. The remaining 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 U.S. market.
CreditRiskMonitor’s annual fixed-price subscription service represented over 99% of its fiscal 2018 operating revenues. This annual
service is sold to a diverse customer base with no single customer representing more than 2% of 2018 operating revenues. Accordingly, the Company is not dependent on a single customer nor is the Company dependent on a few large customers, such
that a loss of any one customer would have a material adverse effect on its financial condition or results of operations.
The Company has contractual agreements with its data suppliers,
including IRA, Moody’s, Fitch, DBRS and Morningstar to redistribute their information as part of our service. We also obtain financial statement and other data from Thomson Reuters (Markets) LLC. Although we report some of this “raw” data
directly on our website, the critical elements of our service – the FRISK® score,
PAYCE
® score, ratio analysis and trend reports, peer analyses, Altman Z” default scores and
emails which “push” information to our subscribers – are computed by the Company using its own 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 data from their accounts receivable systems that we aggregate and report, so subscribers can see how these firms are paying the invoices of other firms, without disclosing the
specific contributors of this information.
CreditRiskMonitor’s service is the result of management’s experience in the commercial credit industry and on-going research with
respect to the information needs of corporate credit and purchasing/procurement departments. This has enabled CreditRiskMonitor to satisfy their need for a timely, efficient, low-cost credit information service. CreditRiskMonitor publishes and
sells the following commercial financial analysis services:
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(1)
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An annual fixed-price service (the “Fundamental Service”) with unlimited usage and coverage of public companies, featuring multi-period spreads of financial reports and
ratio analysis, as well as up-to-date financial news screened specifically for usefulness in credit evaluation. Another feature of the service is notification and delivery of this news via email, concerning only companies of interest
to the subscriber. This service is supplemented with trade receivable data contributed mainly by CreditRiskMonitor’s subscribers, 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. Made available in 2011 as a part of the Fundamental Service, the IRA Counterparty Quality (“CQ”) score is a predictor of bank failure for U.S. banks.
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The Fundamental Service features the Company’s proprietary credit scores, the FRISK® and PAYCE® scores. These proprietary scores
indicates financial distress, by predicting the probability of bankruptcy within the next 12 months at public and private companies, respectively. The scores provide clients with a fast, consistent method for identifying those companies at
greatest risk.
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i.
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The FRISK® score is updated daily, based on the latest information available to the Company, and is derived from a structural statistical model back-tested using company
data and bankruptcies between 2003 and 2013. This period covers 9,600 unique businesses and includes 580 bankruptcies over a period that includes the Great Recession.
As of June 2016, the
FRISK®
score became even more predictive as we now factor in, when available,
anonymous, aggregate crowd-sourced usage data from our subscribers
– the
FRISK®
score can now predict public company bankruptcy risk with 96% accuracy within a 12-month period. The Company believes that some of the most experienced and knowledgeable credit and
risk professionals use its website every day to analyze the companies they do business with. When the Company’s subscribers are concerned with a risky company, they investigate that company more closely, in what we have found to be
distinct behavioral patterns. With this anonymous, aggregate behavior included, the
FRISK®
score is more sensitive and accurate,
moving a relatively small, but largely important segment of businesses from risky to riskier. Essentially, when credit professionals start looking more closely as a group, there is usually something to be seen.
Calculation of the FRISK® score involves 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 which are proprietary Company trade secrets. To its knowledge, CreditRiskMonitor is the only company currently using crowdsourcing of subscriber
activity in generating a financial risk score. The Company’s website is highly structured, enabling it to track very specific patterns of use through its sophisticated and proprietary algorithms, which means the Company has been able
to analyze click patterns for the past 10 years, through many financial shifts.
At the end of 2018, the Fundamental Service covered over 56,000 public companies
worldwide, totaling approximately $63.8 trillion in corporate revenue compared to world Gross Domestic Product (“GDP”) of $80.7 trillion. Subscribers may opt, at lower prices, for limited regional coverage, i.e., “North American
Service” for coverage of just U.S., Canadian, Mexican and Caribbean companies.
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ii.
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The PAYCE
®
score provides a highly accurate measure of financial stress when no financial statements
are available for private companies. It utilizes payment and U.S. federal tax lien data from CreditRiskMonitor’s extensive database, analyzed with sophisticated deep neural network modeling technology to deliver a 75% accurate score
on approximately 80,000 private companies.
Unlike other payment based models, a PAYCE
®
score
is only calculated when there is both a sufficient number of trade contributors (3) and trade lines (8) on a company for the analysis.
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In addition, the Company sells its Credit Limit Service on an annual subscription basis. Available since 2007, this interactive
service helps credit managers to manage credit line limits for their customers, in light of changes in the companies’ financial strength. This service 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. This Credit Limit Service is fully integrated with the Fundamental Service, which provides analytical depth to subscribers when
questions arise or more analysis is needed. It is only sold in conjunction with the Fundamental Service, for an additional fee. The fee is based, in part, on the number of companies evaluated during the annual subscription period, and includes
email monitoring alerts.
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(2)
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Financial Statement Sourcing, an add-on service, which provides customers flexible options to help ease their process in the collection, data entry and standardization of
private company financial statements.
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(3)
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Single credit reports on any of the over 56,000 companies covered in item (1) above. These reports are sold mainly via credit card and obtained via the Internet. Email
alerts are not available with this single-report service.
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(4)
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Individual credit reports on approximately 20 million foreign public and private companies. These reports are purchased by CreditRiskMonitor through an affiliation with a
third-party supplier and sold to CreditRiskMonitor subscribers.
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The viability and potential of CreditRiskMonitor’s business is made possible by the following characteristics:
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·
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Low price.
The prices of CreditRiskMonitor’s services are low compared to a
subscriber’s possible losses from not getting paid, and are low compared to the cost of most competitive credit report products.
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·
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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, compared to competitive services, should
gain market share in most business environments and especially during a 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 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 (LBO’s, etc.), and the development of credit instruments to hedge default and interest rate risk (i.e., credit derivatives) has increased dramatically. It is difficult to get a
complete or totally accurate number of the totals, but according to the Bank for International Settlements, as of June 2018 the total “notional” value of Over the Counter Credit Default Swap Derivatives was $10.3 trillion. This was
down from the peak value of $58.2 trillion at the end of 2007 and from $24.3 trillion at the end of 2013. To put this in perspective, in 2017 the world GDP was $80.7 trillion, and the market value of all worldwide domestic equity at
December 31, 2018 was approximately $73.7 trillion. Thus, publicly listed companies and private companies with public debt have a vulnerability to business cycle contraction and the attendant market risks for interest rates and stock
markets. Large over-the-counter debt and generally high market uncertainty indicate continued high risk and complexity extending commercial trade credit to many companies, and puts a premium on the speed and analytic strength of
CreditRiskMonitor’s service.
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·
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Recurring revenue stream.
The recurring annual revenue stream of its subscription
fee model gives the Company stability not found in a one-time sale product-based company.
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·
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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 service; therefore, its production costs, apart from the development cost of enhancing and upgrading the Company’s website, 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 services if the Company chooses to increase content and not raise its prices to cover these additional costs.
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·
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Self-financing.
CreditRiskMonitor’s business has no inventory, manufacturing or
warehouse facilities, and payment for the subscription service is made early in the subscription cycle. Thus, the Company’s business is characterized by low capital-intensity, and yet it is a business capable of generating high
margins and sufficient positive cash flow to grow the business organically with little need for external capital.
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·
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Management.
CreditRiskMonitor has in-place an experienced management team with
proven talent in business credit evaluation systems and Internet development.
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The Company’s Goals
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·
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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 customers are unaware of its service, while many others who are aware of
CreditRiskMonitor have not evaluated its service.
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·
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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 credit analysis of U.S. and foreign companies. Internationally, the Internet provides a mechanism for rapid and inexpensive marketing and
distribution of CreditRiskMonitor’s service.
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·
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Broaden the services supplied
. Revenue per subscriber may increase over time as
the Company adds functionality and content. Also, revenue per client should increase over time as the Company sells additional passwords to existing clients.
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·
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Lowest cost provider.
CreditRiskMonitor’s sourcing, analysis and preparation of
data into a usable form is highly automated. CreditRiskMonitor delivers all of its information to customers 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.
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·
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High margins and return on investment.
The Company foresees declining unit costs
in some important expense areas, such as computer and communication costs, which should increase net profits from its subscription income stream. The Company has lower sales expenses for customer renewals than for new sales, and the
Company expects that its renewal revenue will continue to grow to be a larger share of total revenue each year. All these naturally occurring unit cost reductions will be in addition to the cost reductions achieved through servicing
more accounts over the Company’s in-place fixed costs.
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Marketing and Sales
To gain market share for the Company’s service, it will continue to use the Internet (at our website www.creditriskmonitor.com) as the
primary mechanism for demonstrating and distributing its service. To inform potential subscribers about its service, CreditRiskMonitor uses a combination of telephone sales, Internet demonstration, and inbound and outbound marketing, including but
not limited to digital strategies, media/PR outreach, trade show representation and speaking engagements before credit groups and associations.
Value Proposition
The Company’s fundamental
value proposition
is that it
creates and sells high quality commercial credit reports that help busy risk professionals stay ahead of financial risk quickly, easily and accurately, at a cost significantly below that of reports from the leading provider (price comparison as
of January 22, 2019). Because Dun & Bradstreet has the largest share of the commercial credit market, their flagship product, DNBi, is the standard by which that market measures both quality and price. The Company’s research shows that its
customers overwhelmingly agree that CreditRiskMonitor saves them time, helps them to make better credit decisions, and represents a significant value for the price paid compared to competitive services.
The
operational strategy
CreditRiskMonitor follows to
deliver on its value proposition is straightforward. CreditRiskMonitor became (and remains) one of the industry’s lowest cost producers of high quality commercial credit information by continuously collecting data from a wide variety of sources
and employing sophisticated proprietary computer algorithms to process that data into an extensive database of valuable reports on companies. Highly automated operations add to reliability and consistency, while limiting costs. The Company
employs a small number of analysts who selectively review data at critical points in its process to further enhance the quality of its products and their relevance to credit professionals.
CreditRiskMonitor employs several different
selling strategies
to deliver this value to different customer segments:
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·
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Credit professionals need to save time, when analyzing their most important customers and suppliers, and the CreditRiskMonitor service provides this critical benefit.
CreditRiskMonitor believes that its reports and monitoring of public companies, having aggregate revenues of approximately $63.8 trillion (compared to world GDP of $80.7 trillion in 2017), and private companies, are superior in this
way to competitive products or services in that the CreditRiskMonitor service provides public and private company financial information in greater depth and better analytical efficiency. It also includes timely email alerts enabling
credit professionals to easily stay on top of financial developments at their customers, without the clutter of non-financial news prevalent at other news services. Finally, the proprietary FRISK® and PAYCE®
scores, ratings
from Moody’s, Fitch, DBRS and Morningstar, Counterparty Quality scores from IRA, the Altman Z” scores and the trade payment reports delivered by the Company’s service enable further efficiency by focusing each subscriber’s attention
on only those companies showing financial weakness. The accuracy of our proprietary FRISK® score, powered by the crowd-sourced usage data from our subscribers, has proved to be a unique selling point.
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·
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For low-volume customers, CreditRiskMonitor sells single commercial credit reports for a flat price of $49.95 per report, using credit card transactions via the Internet.
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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 rapid 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 a number of 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 could, 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; 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 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 and 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 March 4, 2019, the Company had 91 full-time and 5 part-time 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. The Company has no other retirement, pension, profit sharing or similar program in effect for its employees. The Company adopted a stock option plan in 2009 that cover its employees.
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,
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.