NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
CreditRiskMonitor.com, Inc. (also referred to as the “Company” or “CreditRiskMonitor”) provides a totally interactive business-to-business Internet-based service designed specifically for credit and supply chain
managers. This service is sold predominantly to corporations located in the United States. In addition, the Company is a re-distributor of international credit reports in the United States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Issued and Adopted Accounting Standards
In May 2014, accounting guidance was issued that replaces most existing revenue recognition guidance under U.S. GAAP. The core principle of the new standard is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Using this principle, a
comprehensive framework was established for determining how much revenue to recognize and when it should be recognized. To be consistent with this core principle, an entity is required to apply the following five-step approach: (1) identify the
contract(s) with a customer; (2) identify each performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation; and (5) recognize revenue when or as each performance
obligation is satisfied. The Company adopted this standard as of January 1, 2018 by applying the modified retrospective
approach. Thus, reported financial information for historical comparable periods was not revised and continues to be reported under the accounting standards in effect during those historical periods. The adoption of this standard did not
have a significant impact on the Company’s financial statements because our primary source of revenue is subscription income which is recognized ratably over the subscription term.
Effective January 1, 2019, the Company adopted FASB Topic 842, Leases (“ASC 842”), which requires the recognition of the right-of-use assets and related operating
and finance lease liabilities on the balance sheet. As permitted by ASC 842, the Company elected the adoption date of January 1, 2019, which is the date of initial application. As a result, the Company’s balance sheet as of December 31, 2018 was not
restated, continues to be reported under ASC Topic 840, Leases (“ASC 840”), which did not require the recognition of operating lease liabilities on the balance sheet, and is not comparative. Under ASC 842, all
leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the statement of operations. Operating lease charges are recorded
entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating
leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no significant difference in the Company’s results of operations presented in its statement of operations for each period presented.
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
The Company adopted ASC 842 using a modified retrospective approach for all leases existing at January 1, 2019. The adoption of ASC 842 had a substantial impact on its balance sheet. The most
significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. Accordingly, upon adoption, leases that were classified as operating leases under ASC 840 were classified as operating leases
under ASC 842, and the Company recorded an adjustment of $2.59 million to operating lease right-of-use assets and the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments. As permitted under
ASC 842, the Company elected several practical expedients that permits it to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as
initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability.
The impact of the adoption of ASC 842 on the balance sheet at January 1, 2019 was:
The FASB and the Securities and Exchange Commission (“SEC”) have issued certain other accounting pronouncements as of December 31, 2019 that will become effective in subsequent periods; however, management does not
believe that any of these pronouncements would have significantly affected the Company’s financial accounting measurements or disclosures had they been in effect during the periods for which financial statements are included in this annual report, nor
does management believe those pronouncements would have a significant effect on the Company’s future financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid instruments with original maturities of three months or less, primarily consisting of investments in institutional money market
funds.
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the straight-line method over the estimated useful life of the asset. Estimated useful lives are generally as follows:
Goodwill
Goodwill and other indefinite-lived intangible assets are subject to annual impairment testing using the specific guidance and criteria described in the accounting guidance. The Company performs its goodwill impairment
testing at least annually in the fourth quarter of each year, unless circumstances dictate the need for more frequent assessment. Goodwill impairment is determined using a two-step process. The first step of the impairment test is used to identify
potential impairment by comparing the fair value of a reporting unit to the book value, including goodwill. If the fair value of a reporting unit exceeds its book value, goodwill of the reporting unit is not considered impaired and the second step of
the impairment test is not required. If the book value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the
implied fair value of the reporting unit’s goodwill with the book value of that goodwill. If the book value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that
excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The Company completed its annual goodwill impairment tests for 2019 and 2018 during the fourth quarter of each
year and determined there was no impairment of existing goodwill.
Long-Lived Assets
The Company reviews its long-lived amortizable assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with accounting
guidance. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows expected to be generated by that asset. An impairment loss is recognized for the amount by
which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2019 and 2018, management believes no impairment of long-lived assets has occurred.
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.
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
Revenue Recognition
Beginning in 2018, we account for revenue from contracts with customers in accordance with ASU 2014‑09, “Revenue from Contracts with
Customers” and a series of related accounting standard updates (Topic 606). The core principle of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Using this principle, a comprehensive framework was established for determining how much revenue to recognize
and when it should be recognized. To be consistent with this core principle, an entity is required to apply the following five-step approach: (1) identify the contract(s) with a customer; (2) identify each performance obligation in the contract; (3)
determine the transaction price; (4) allocate the transaction price to each performance obligation; and (5) recognize revenue when or as each performance obligation is satisfied. CreditRiskMonitor’s 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. Revenue is 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.
Lease Accounting
For all leases, at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease
liability represents the present value of the remaining lease payments under the lease. Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments and payments for optional renewal
periods where it is reasonably certain the renewal period will be exercised. Lease expense for operating leases consists of the lease payments plus any initial direct costs, and is recognized on a straight-line basis over the lease term.
The Company’s operating lease right-of-use asset and operating lease liability represents the lease for the office space used to conduct its business.
Net Income (Loss) Per Share
Net income (loss) per share is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted net income per share is calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period. The difference between basic and diluted net income per share is solely attributable to stock options. The Company uses the treasury stock method to calculate the impact of outstanding stock options (see Note 8).
Fair Value of Financial Instruments
The Company calculates the fair value of financial instruments and includes this additional information in the notes to the financial statements when the fair value is different than the book value of those financial
instruments. The Company believes the recorded value of cash and cash equivalents, accounts receivable, and accounts payable and other liabilities approximates fair value because of the short maturity of these financial instruments.
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
Segment Information
An operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating decision maker (the “CODM”) to make decisions about resources to be allocated to the
segment and assess its performance. Operating segments may be aggregated only to a limited extent. The Company’s CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by disaggregated
information about revenues for purposes of making operating decisions and assessing financial performance. Accordingly, the Company has determined that it has a single operating and reportable segment. In addition, the Company has no foreign operations
or any assets in foreign locations.
Stock-Based Compensation
The Company recognizes the grant-date fair value of all stock-based awards on a straight-line basis over their respective requisite service periods (generally equal to an award’s vesting period). The
Company records deferred tax assets for awards that will result in deductions on its tax returns, based upon the amount of compensation cost recognized and the statutory tax rate in the jurisdiction in which it will receive a deduction.
See Note 5 for more information regarding the Company’s stock compensation plans.
Fair Value Measurements
The Company records its financial instruments at fair value in accordance with accounting guidance. The determination of fair value assumes that the transaction to sell an asset or transfer a liability occurs in the
principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The fair value hierarchy is broken down into three levels based on the source
of inputs as follows: (a) Level 1 – valuations based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; (b) Level 2 – valuations based on quoted prices in
markets that are not active, or financial instruments for which all significant inputs are observable, either directly or indirectly; and (c) Level 3 – valuations based on prices or valuation techniques that require inputs that are both significant
to the fair value measurement and unobservable; thus, reflecting assumptions about the market participants.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk principally consist of cash, cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents in
bank deposit and other accounts, the balances of which, at times, may exceed federally insured limits. Exposure to credit risk is reduced by placing such deposits in high credit quality financial institutions.
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
The Company closely monitors the extension of credit to its customers. The Company’s accounts receivable balance is net of an allowance for doubtful accounts. The Company does not require collateral or other security to
support credit sales, but provides an allowance for doubtful accounts based on historical experience and specifically identified risks. Accounts receivable are charged off against the allowance for doubtful accounts when management determines that
recovery is unlikely and the Company ceases collection efforts. The Company does not believe that significant credit risk existed at December 31, 2019 nor 2018.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The noncurrent portion of unexpired subscription revenue was reclassified to noncurrent liabilities, which had no effect on
previously reported net loss or total stockholders’ equity.
NOTE 3 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following as of December 31:
NOTE 4 - INCOME TAXES
The Company’s income tax expense (benefit) consisted of the following:
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
The actual tax expense (benefit) for 2019 and 2018 differs from the “expected” tax expense for those years (computed by applying the applicable United States federal corporate tax rate to income before income taxes) as follows:
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets/(liabilities) at December 31, 2019 and 2018 are as follows:
NOTE 5 - COMMON STOCK AND STOCK OPTIONS
Common Stock
At December 31, 2019, 456,870 shares of the Company’s authorized common stock were reserved for issuance upon exercise of outstanding options under its stock option plan.
Preferred Stock
The Company’s Articles of Incorporation provide that the Board of Directors has the authority, without further action by the holders of the outstanding common stock, to issue up to five million shares of preferred stock
from time to time in one or more series. The Board of Directors shall fix the consideration to be paid, but not less than par value thereof, and to fix the terms of any such series, including dividend rights, dividend rates, conversion or exchange
rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price and the liquidation preference of such series. As of December 31, 2019, the Company does not have any preferred stock outstanding.
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
Stock Options
As of December 31, 2019, the Company has one stock option plan: the 2009 Long-Term Incentive Plan (“2009 Plan”).
The 2009 Plan authorizes the grant of incentive stock options, non-qualified stock options, SARs, restricted stock, bonus stock, and performance shares to employees, consultants, and non-employee directors of the
Company. The exercise price of each option shall not be less than the fair market value of the common stock at the date of grant. The total number of the Company’s shares that may be awarded under this plan is 1,300,000 shares of common stock. At
December 31, 2019, there were options outstanding for 456,870 shares of common stock under the 2009 Plan and as of this date the 2009 Plan has expired and no additional options can be granted.
Options expire on the date determined, but not more than ten years from the date of grant. All of the options granted under the 2009 Plan may be exercised after four years in installments upon the attainment of specified
length of service, unless otherwise determined by the Compensation Committee as set forth in the Award Agreement. In the event of a change in control (as defined), the options will vest in full at the time of such change in control.
Transactions with respect to the Company’s stock option plan for the years ended December 31, 2019 and 2018 are as follows:
The following table summarizes the stock-based compensation expense for stock options that was recorded in the Company’s results of operations for the years ended December 31:
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model that uses the weighted average assumptions noted in the following table. Expected volatilities are based on
historical volatility of our stock through the date of grant. The Company uses the simplified method to estimate the options’ expected term. The risk-free interest rate used is based on the U.S. Treasury constant maturities at the time of grant having
a term that approximates the expected life of the option.
No options were granted during the year ended December 31, 2018. The fair value of options granted during the year ended December 31, 2019 was $125,832. The fair value of options at date of grant was estimated using the
Black-Scholes model with the following assumptions:
The Company issues new shares upon the exercise of options.
The following table summarizes information about the Company’s stock options outstanding at December 31, 2019:
The aggregate intrinsic value represents the total pre-tax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $1.57 and $1.90 as of December 31, 2019 and 2018,
respectively, which would have been received by the option holders had those option holders exercised their options as of that date. The aggregate intrinsic value of options outstanding as of December 31, 2019 and 2018 was $23,046 and $12,120,
respectively.
As of December 31, 2019, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plan but not yet recognized was $284,344. This cost will be amortized on a
straight-line basis over a weighted average term of 4.91 years and will be adjusted for subsequent changes in estimated forfeitures.
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
NOTE 7 – OPERATING LEASE
The following table reconciles the undiscounted cash flows for the Company’s operating lease at December 31, 2019 to the operating lease liability recorded on the balance sheet:
CREDITRISKMONITOR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the weighted average number of common shares outstanding and the
dilutive effect of outstanding stock options:
For fiscal 2019, the computation of diluted net income per share excludes the effects of the assumed exercise of 369,455 options, since their inclusion would be anti-dilutive as their exercise prices were above market
value. All outstanding stock options were excluded from the computation of diluted loss per share for the year ended December 31, 2018 as they were anti-dilutive.
NOTE 9 - RELATED PARTY TRANSACTION
On October 24, 2019, the Company’s Board of Directors appointed Michael Flum to serve as Senior Vice President and Chief Operating Officer effective immediately. Mr. Flum had served as Vice President of Operations &
Alternative Data since June 4, 2018. Mr. Flum is the son of Jerome Flum, the Company’s Chief Executive Officer and Chairman of the Board of Directors, and the brother of Joshua Flum, a director of the Company.