10QSB 1 d57421_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB |x| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2003 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to ------ ----- Commission file number 1-8601 CREDITRISKMONITOR.COM, INC. (Exact name of small business issuer as specified in its charter) Nevada 36-2972588 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 110 Jericho Turnpike, Suite 202 Floral Park, New York 11001 (Address of principal executive offices) (516) 620-5400 (Issuer's telephone number) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |x| No |_| APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes |_| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date: Common stock $.01 par value - 5,554,129 shares outstanding as of October 31, 2003. -------------------------------------------------------------------------------- Transitional Small Business Disclosure Format (check one): Yes |_| No |x| CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2003 (Unaudited) and December 31, 2002 (Audited) .................................. 2 Consolidated Statements of Operations for the Three Months Ended September 30, 2003 and 2002 (Unaudited) .................... 3 Consolidated Statements of Operations for the Nine Months Ended September 30, 2003 and 2002 (Unaudited) .......................... 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 (Unaudited) .................... 5 Condensed Notes to Consolidated Financial Statements ............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................ 9 Item 3. Controls and Procedures ...................................... 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings ............................................ 16 Item 2. Changes in Securities and Use of Proceeds .................... 16 Item 6. Exhibits and Reports on Form 8-K ............................. 16 SIGNATURES ................................................................ 18 -1- PART I. FINANCIAL INFORMATION Item 1. Financial Statements CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
Sept. 30, Dec. 31, 2003 2002 (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 585,662 $ 988,427 Accounts receivable, net of allowance 252,501 363,773 Other current assets 117,927 131,361 ------------ ------------ Total current assets 956,090 1,483,561 Property and equipment, net 98,784 161,691 Goodwill, net 1,954,460 1,954,460 Prepaid and other assets 25,071 21,429 ------------ ------------ Total assets $ 3,034,405 $ 3,621,141 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Deferred revenue $ 1,910,486 $ 1,934,732 Accounts payable 225,289 112,470 Accrued expenses 111,816 93,425 Current portion of long-term debt 94,979 81,523 Current portion of capitalized lease obligations 11,808 10,652 ------------ ------------ Total current liabilities 2,354,378 2,232,802 ------------ ------------ Long-term debt, net of current portion: Promissory note 644,244 711,115 Capitalized lease obligations 4,252 13,259 ------------ ------------ 648,496 724,374 Deferred rent payable 6,244 8,347 Deferred compensation 238,750 226,250 ------------ ------------ Total liabilities 3,247,868 3,191,773 ------------ ------------ Stockholders' equity (deficit): Common stock 55,541 54,191 Additional paid-in capital 27,219,629 27,201,171 Accumulated deficit (27,488,633) (26,825,994) ------------ ------------ Total stockholders' equity (deficit) (213,463) 429,368 ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 3,034,405 $ 3,621,141 ============ ============
See accompanying condensed notes to consolidated financial statements. -2- CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (Unaudited) 2003 2002 ---- ---- Operating revenues $ 756,999 $ 743,614 Operating expenses: Data and product costs 290,896 357,638 Selling, general and administrative expenses 620,271 380,064 Depreciation and amortization 22,195 26,569 ----------- ----------- Total operating expenses 933,362 764,271 ----------- ----------- Loss from operations (176,363) (20,657) Other income 1,010 6,197 Interest expense (20,001) (22,907) ----------- ----------- Loss before income taxes (195,354) (37,367) Provision for state and local income taxes 282 -- ----------- ----------- Net loss $ (195,636) $ (37,367) =========== =========== Net loss per share of common stock: Basic and diluted $ (0.04) $ (0.01) =========== =========== Weighted average number of common shares outstanding: Basic and diluted 5,512,879 5,419,129 =========== =========== See accompanying condensed notes to consolidated financial statements. -3- CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (Unaudited) 2003 2002 ---- ---- Operating revenues $ 2,210,493 $ 2,323,819 Operating expenses: Data and product costs 934,580 1,108,157 Selling, general and administrative expenses 1,811,675 1,278,405 Depreciation and amortization 69,469 80,077 ----------- ----------- Total operating expenses 2,815,724 2,466,639 ----------- ----------- Loss from operations (605,231) (142,820) Other income 5,428 14,815 Interest expense (61,854) (70,608) ----------- ----------- Loss before income taxes (661,657) (198,613) Provision for state and local income taxes 982 1,220 ----------- ----------- Net loss $ (662,639) $ (199,833) =========== =========== Net loss per share of common stock: Basic and diluted $ (0.12) $ (0.04) =========== =========== Weighted average number of common shares outstanding: Basic and diluted 5,450,379 5,394,129 =========== =========== See accompanying condensed notes to consolidated financial statements. -4- CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (Unaudited) 2003 2002 ---- ---- Cash flows from operating activities: Net loss $ (662,639) $ (199,833) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 69,469 80,077 Deferred compensation 12,500 18,750 Deferred rent (2,103) 63 Changes in operating assets and liabilities: Accounts receivable 111,272 331,459 Other current assets 13,434 175,859 Prepaid and other assets (3,642) 15,274 Deferred revenue (24,246) (342,342) Accounts payable 112,819 5,381 Accrued expenses 18,391 (8,998) ----------- ----------- Net cash (used in) provided by operating activities (354,745) 75,690 ----------- ----------- Cash flows from investing activities: Purchase of fixed assets (6,562) (20,111) ----------- ----------- Net cash used in investing activities (6,562) (20,111) ----------- ----------- Cash flows from financing activities: Issuance of common stock 19,800 -- Proceeds from exercise of stock options 8 8 Payments on promissory notes (53,415) (118,171) Payments on capital lease obligation (7,851) (5,497) ----------- ----------- Net cash used in financing activities (41,458) (123,660) ----------- ----------- Net decrease in cash and cash equivalents (402,765) (68,081) Cash and cash equivalents at beginning of period 988,427 1,320,696 ----------- ----------- Cash and cash equivalents at end of period $ 585,662 $ 1,252,615 =========== =========== See accompanying condensed notes to consolidated financial statements. -5- CREDITRISKMONITOR.COM, INC. AND SUBSIDIARY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Basis of Presentation The consolidated financial statements included herein have been prepared by CreditRiskMonitor.com, Inc. (the "Company" or "CRM"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company's annual report on Form 10-KSB for the year ended December 31, 2002. In the opinion of the Company, the unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the Company's financial position as of September 30, 2003 and the results of its operations and its cash flows for the nine-month periods ended September 30, 2003 and 2002. Results of operations for the nine-month periods ended September 30, 2003 and 2002 are not necessarily indicative of the results of a full year. Certain prior year amounts have been reclassified to conform with the fiscal 2003 presentation. The Company incorporated a new subsidiary during 2002, which has been inactive to date. (2) Stock-Based Compensation The Company accounts for its stock-based employee compensation plan in accordance with the provisions of APB No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under this plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", to its stock-based employee compensation plan for the periods noted: -6-
3 Months Ended 9 Months Ended September 30, September 30, ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net loss As reported $(195,636) $ (37,367) $(662,639) $(199,833) Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax benefits or effects (13,377) 12,621 (6,163) 13,644 --------- --------- --------- --------- Pro forma $(209,013) $ (24,746) $(668,802) $(186,189) ========= ========= ========= ========= Net loss per share - basic and diluted As reported $ (0.04) $ (0.01) $ (0.12) $ (0.04) Pro forma $ (0.04) $ (0.00) $ (0.12) $ (0.03)
(3) Recently Issued Accounting Standards In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 requires certain financial instruments that have both equity and liability characteristics to be classified as a liability on the balance sheet. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 clarifies the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as described in SFAS 133. SFAS No. 149 also clarifies when a derivative contains a financing component. SFAS No. 149 is generally effective for derivative instruments entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 149 became effective for CRM beginning with our third quarter, 2003. The Company holds no derivative instruments and does not engage in hedging activities. In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities". FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. The Company holds no interest in variable interest entities. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method -7- of accounting for stock based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for financial statements for fiscal years and interim periods ending after December 15, 2002. SFAS No. 148 does not have a material impact on the Company's consolidated financial statements, as the adoption of this standard does not require the Company to change, and the Company does not plan to change, to the fair value based method of accounting for stock-based compensation. In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN No. 45 requires a guarantor to recognize a liability at the inception of the guarantee for the fair value of the obligation undertaken in issuing the guarantee and include more detailed disclosure with respect to guarantees. The types of contracts the Company enters into that meet the scope of this interpretation are financial and performance standby letters of credit on behalf of wholly-owned subsidiaries. FIN No. 45 is effective for guarantees issued or modified after December 31, 2002. The Company has no obligations regarding FIN No. 45. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses financial accounting and reporting for costs associated with exit or disposal activities. Under this statement such costs will be recognized when the liability is incurred, rather than at the date of commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application permitted. The adoption of the provisions of this SFAS did not have a material impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement clarifies guidance related to the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required accounting treatment of certain lease modifications. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The adoption of the provisions of SFAS No. 145 did have a material impact on the Company's consolidated financial statements. (4) Legal Proceedings As previously reported: (a) on April 20, 2001, the Company filed an action in the Supreme Court of the State of New York, Nassau County, against Samuel Fensterstock and a competitor (collectively, the "Defendants"), seeking injunctive relief, declaratory relief and monetary damages; (b) thereafter, the parties entered into a Settlement Agreement that was approved and so ordered by the Court in July 2001 pursuant to which the Defendants were restricted from engaging in certain activities; and (c) on November 27, 2001 the Company commenced contempt proceedings (the "Contempt Proceedings") against the Defendants in the same Court seeking monetary and punitive damages, legal costs and injunctive relief for violation of the Settlement Agreement and the July 2001 Court order. After extensive discovery in the Contempt Proceedings, a judicial hearing began on September 15, 2003 and is expected to conclude by year end. In February 2003, the competitor commenced an action (the "Competitor Action") in the same Court, against the Company, its President and a senior manager, seeking compensatory damages, exemplary damages and injunctive relief. The Company denied the allegations in the Competitor Action and counterclaimed against the competitor, its President and Samuel Fensterstock. The parties currently are engaged in discovery in connection with the Competitor Action and a trial date is scheduled for June 2004. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At September 30, 2003, the Company had cash, cash equivalents and other liquid assets of $586,000 compared to $988,000 at December 31, 2002. The Company's working capital deficit at September 30, 2003 was approximately $1,398,000 compared to a working capital deficit of $749,000 at December 31, 2002. This decrement was due to a $403,000 decrease in cash and cash equivalents, a $111,000 decrease in accounts receivable, a $13,000 decrease in other current assets, a $131,000 increase in accounts payable and accrued expenses and a $15,000 increase in the current portion of long-term obligations, offset in part by a $24,000 decrease in deferred revenue. The Company has no bank lines of credit or other currently available credit sources. For the nine months ended September 30, 2003, the Company reported a $403,000 decrease in cash and cash equivalents compared to a $68,000 decrease for the same period in the prior fiscal year. Almost 80% of the current year's negative cash flow is attributable to expenses incurred in connection with the litigation described in Part II, Item 1 (the "Litigation"). The expenses of the Litigation also accounted for approximately 96% and 62% of the Company's net loss for the three and nine months ended September 30, 2003, respectively. The Company expects to continue to be cash flow negative, after debt service, during the balance of 2003. To address the Company's declining cash position, the Company has commenced a private offering of shares of common stock to accredited investors (the "Offering"). Pursuant to the Offering, a minimum of 700,000 shares of common stock and a maximum of 1,700,000 shares of common stock are being offered hereby, at a purchase price of $.45 per share, or an aggregate purchase price of $315,000 if the minimum is sold and an aggregate purchase price of $765,000 if the maximum is sold. The Offering is for a period of forty-five (45) days from October 24, 2003 and may be extended for up to an additional sixty (60) days in the Company's sole discretion, provided there has been a closing as to a minimum of $315,000 of common stock on or before December 8, 2003. The Company has reserved the right to increase the maximum number of shares to be sold in the Offering. The Offering is being made by the Company and no commissions will be paid for common shares sold. The Company has been advised by Flum Partners, the majority shareholder of the Company, that it intends to purchase not less than the minimum of $315,000 of common stock on the terms set forth in the Offering. The Company believes that upon conclusion of the hearing in the Contempt Proceedings (see Part II, Item 1), which began on September 15, 2003, the negative cash flow impact of its legal fees is likely to be substantially eliminated or at least materially reduced, as discussed further below. There can be no assurance that these expected results will be achieved within the anticipated periods, if at all. Should the obligation to pay significant legal fees continue through 2003 and into 2004, after giving effect to the proceeds of the Offering the Company believes it will have sufficient resources to meet its working capital and capital expenditure needs, including debt service, for at least the next 12 months. The Company is unable to predict the outcome of the Contempt Proceedings. It believes, however, that upon conclusion of the hearing, its legal fees, which -9- have impacted materially its net losses and cash flow, will be substantially eliminated or reduced in the following circumstances: (a) its legal fees will be substantially eliminated if the Company either loses in the Contempt Proceedings or if the Company wins and the Defendants do not appeal; and (b) its legal fees will be materially reduced if the Company wins in the Contempt Proceedings and one or both Defendants appeal; in the event of an appeal, it is expected that the appellant(s) will be required to post a bond that, in whole or in part, will secure any damages which may be awarded by the court. The Company further believes that if it is successful in the Contempt Proceedings, the Company may become entitled to a substantial award of actual and/or punitive damages as well as its court costs and legal fees. In addition, if the Defendants no longer are permitted to engage in anti-competitive activities, the Company's ability to retain and/or obtain customers would be materially improved. There can be no assurance that any of the above results will be achieved within the anticipated periods, if at all, or that any damage award will be collectible in whole or in part. If the Company's obligation to pay legal fees should continue materially unabated in 2004, the resulting costs could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. With regard to the Competitor Action described in Part II, Item 1, the Company believes that (a) the competitor's claims are without merit, (b) in any event, the Company's counterclaims should reduce or eliminate the effect of any recovery the competitor may obtain, and (c) even if the competitor pursues the Competitor Action after the conclusion of the hearing in the Contempt Proceedings, the Company's ongoing legal fees should nevertheless be materially reduced. There can be no assurance that any of the above results will be achieved. If the Company should be unsuccessful in defending the Competitor Action, the resulting liability and/or costs could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. OFF-BALANCE SHEET ARRANGEMENTS The Company is not a party to any off-balance sheet arrangements. -10- RESULTS OF OPERATIONS
3 Months Ended September 30, 2003 2002 ---- ---- % of Total % of Total Amount Income Amount Income ------ ------ ------ ------ Operating revenues $ 756,999 100.00% $ 743,614 100.00% Operating expenses: Data and product costs 290,896 38.43% 357,638 48.09% Selling, general & administrative 620,271 81.94% 380,064 51.11% Depreciation and amortization 22,195 2.93% 26,569 3.57% ---------- -------- ---------- ------- Total operating expenses 933,362 123.30% 764,271 102.78% ---------- -------- ---------- ------- Loss from operations (176,363) -23.30% (20,657) -2.78% Other income 1,010 0.13% 6,197 0.83% Interest expense (20,001) -2.64% (22,907) -3.08% ---------- -------- ---------- ------- Loss before income taxes (195,354) -25.81% (37,367) -5.03% Income taxes 282 0.04% -- --% ---------- -------- ---------- ------- Net loss $ (195,636) -25.84% $ (37,367) -5.03% ========== ======== ========== =======
Operating revenues increased 2% for the three months ended September 30, 2003 compared to the same period of fiscal 2002. This increase was due to an increase in the number of subscribers to the Company's Internet subscription service offset in part by a decrease in subscription revenue from the Company's third-party international credit reports. Data and product costs decreased 19% for the third quarter of 2003 compared to the same period of fiscal 2002. This decrease was primarily due to lower salary and related employee benefits, resulting from a decrease in headcount, and the lower cost of acquiring data for the Company's domestic service, due to a change in data providers, offset in part by higher professional fees paid to outside consultants. Selling, general and administrative expenses increased 63% for the third quarter of fiscal 2003 compared to the same period of fiscal 2002. This increase was primarily due to higher legal fees incurred in connection with the Litigation as well as higher salary and related employee benefit costs, due to an increase in the Company's sales force during the past 12 months. Depreciation and amortization decreased 16% for the third quarter of fiscal 2003 compared to the same period of fiscal 2002. This decrease is due to a lower depreciable asset base as certain items have been fully depreciated but are still in use. Other income decreased 84% for the third quarter of fiscal 2003 compared to the same period last year. This decrease was due to the Company having less funds invested in interest bearing accounts as well as lower interest rates paid on these investments during the current quarter compared to the same period last year. Interest expense decreased 13% for the third quarter of fiscal 2003 compared to the same period of fiscal 2002. This decrease was due to a lower outstanding promissory note balance. The Company incurred a net loss of $196,000 and $37,000 for the three months ended September 30, 2003 and 2002, respectively. The expenses of the Litigation accounted for approximately 96% of the Company's net loss for the three months ended September 30, 2003. -11-
9 Months Ended September 30, 2003 2002 ---- ---- % of Total % of Total Amount Income Amount Income ------ ------ ------ ------ Operating revenues $ 2,210,493 100.00% $ 2,323,819 100.00% Operating expenses: Data and product costs 934,580 42.28% 1,108,157 47.69% Selling, general & administrative 1,811,675 81.96% 1,278,405 55.01% Depreciation and amortization 69,469 3.14% 80,077 3.45% ----------- ------- ----------- -------- Total operating expenses 2,815,724 127.38% 2,466,639 106.15% ----------- ------- ----------- -------- Loss from operations (605,231) -27.38% (142,820) -6.15% Other income 5,428 0.25% 14,815 0.64% Interest expense (61,854) -2.80% (70,608) -3.04% ----------- ------- ----------- -------- Loss before income taxes (661,657) -29.93% (198,613) -8.55% Income taxes 982 0.04% 1,220 0.05% ----------- ------- ----------- -------- Net loss $ (662,639) -29.98% $ (199,833) -8.60% =========== ======= =========== ========
Operating revenues decreased 5% for the nine months ended September 30, 2003 compared to the same period of fiscal 2002. This decrease was primarily due to a decrease in subscription revenue from the Company's third-party international credit reports offset in part by higher revenues generated from an increase in the number of subscribers to the Company's Internet subscription service. Data and product costs decreased 16% for the first nine months of 2003 compared to the same period of fiscal 2002. This decrease was primarily due to the lower cost of acquiring third-party international credit reports, as the result of lower sales volume, and lower salary and related employee benefits, resulting from a decrease in headcount, offset in part by the higher cost of acquiring data for the Company's domestic service due to additional content. Selling, general and administrative expenses increased 42% for the first nine months of fiscal 2003 compared to the same period of fiscal 2002. This increase was primarily due to higher legal fees incurred in connection with the Litigation as well as higher salary and related employee benefit costs, due to an increase in the Company's sales force during the past 12 months, offset by a reduction in marketing expenses. Depreciation and amortization decreased 13% for the first nine months of fiscal 2003 compared to the same period of fiscal 2002. This decrease is due to a lower depreciable asset base as certain items have been fully depreciated but are still in use. Other income decreased 63% for nine months ended September 30, 2003 compared to the same period last year. This decrease was due to the Company having less funds invested in interest bearing accounts as well as lower interest rates paid on these investments during the 2003 period compared to the same period last year. Interest expense decreased 12% for the first nine months of fiscal 2003 compared to the same period of fiscal 2002. This decrease was due to a lower outstanding promissory note balance. The Company incurred a net loss of $663,000 and $200,000 for the nine months ended September 30, 2003 and 2002, respectively. The expenses of the Litigation accounted for approximately 62% of the Company's net loss for the nine months ended September 30, 2003. -12- CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS The Company's consolidated financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these consolidated financial statements require 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Management continually evaluates its estimates and judgments, the most critical of which are those related to: Revenue recognition -- CRM's domestic and international service is sold on a subscription basis pursuant to customer contracts that span varying periods of time, but are generally for a period of one year. The Company initially records accounts receivable and defers the related revenue when persuasive evidence of an arrangement exists, fees are fixed or determinable, and collection is reasonably assured. Revenues are recognized ratably over the related subscription period. Revenue from the Company's third-party international credit reporting service is recognized as information is delivered and products and services are used by customers. Valuation of goodwill -- Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances warrant. If the carrying value of this asset exceeds its estimated fair value, the Company will record an impairment loss to write the asset down to its estimated fair value. Income taxes -- The Company provides for deferred income taxes resulting from temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax bases. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years' tax returns. Deferred tax assets are recognized for temporary differences that will be deductible in future years' tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. FUTURE OPERATIONS The Company, over time, intends to expand its operations by expanding the breadth and depth of its product and service offerings and the introduction of new or complementary products. For example, in the second quarter of 2003 the Company introduced its new international service. Gross margins attributable to new business areas may be lower than those associated with the Company's existing business activities. As a result of the Company's limited operating history and the emerging nature of the market in which it competes, the Company's ability to accurately forecast its revenues, gross profits and operating expenses as a percentage of net sales is limited. The Company's current and future expense levels are based largely on its investment plans and estimates of future revenues and to a large extent are fixed. Sales and operating results -13- generally depend on the Company's ability to attract and retain customers and the volume of and timing of their subscriptions for the Company's services, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues in relation to the Company's planned expenditures would have an immediate adverse effect on the Company's business, prospects, financial condition and results of operations. Further, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service, marketing or acquisition decisions that could have a material adverse effect on its business, prospects, financial condition and results of operations. Achieving profitability depends on the Company's ability to generate and sustain substantially increased revenue levels. The Company believes that its success will depend in large part on its ability to (i) extend its brand position, (ii) provide its customers with outstanding value, and (iii) achieve sufficient sales volume to realize economies of scale. Accordingly, the Company intends to continue to invest in marketing and promotion, product development and technology and operating infrastructure development. There can be no assurance that the Company will be able to achieve these objectives within a meaningful time frame. The Company expects to experience significant fluctuations in its future quarterly operating results due to a variety of factors, many of which are outside the Company's control. Factors that may adversely affect the Company's quarterly operating results include, among others, (i) the Company's ability to retain existing customers, attract new customers at a steady rate and maintain customer satisfaction, (ii) the Company's ability to maintain gross margins in its existing business and in future product lines and markets, (iii) the development of new services and products by the Company and its competitors, (iv) price competition, (v) the level of use of the Internet and online services and increasing acceptance of the Internet and other online services for the purchase of products such as those offered by the Company, (vi) the Company's ability to upgrade and develop its systems and infrastructure, (vii) the Company's ability to attract new personnel in a timely and effective manner, (viii) the level of traffic on the Company's Web site, (ix) the Company's ability to manage effectively its development of new business segments and markets, (x) the Company's ability to successfully manage the integration of operations and technology of acquisitions or other business combinations, (xi) technical difficulties, system downtime or Internet brownouts, (xii) the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business, operations and infrastructure, (xiii) governmental regulation and taxation policies, (xiv) disruptions in service by common carriers due to strikes or otherwise, (xv) risks of fire or other casualty, (xvi) continued litigation costs or other unanticipated expenses, and (xvii) general economic conditions and economic conditions specific to the Internet and online commerce. Due to the foregoing factors and the Company's limited forecasting abilities, the Company believes that period-to-period comparisons of its revenues and operating results are not necessarily meaningful and should not be relied on as an indication of future performance. -14- FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-QSB may contain forward-looking statements, including statements regarding future prospects, industry trends, competitive conditions and litigation issues. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "expects", "anticipates", "plans" or words of similar meaning are intended to identify forward-looking statements. This notice is intended to take advantage of the "safe harbor" provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. These forward-looking statements involve a number of risks and uncertainties. Among others, factors that could cause actual results to differ materially from the Company's beliefs or expectations are those listed under "Results of Operations" and other factors referenced herein or from time to time as "risk factors" or otherwise in the Company's Registration Statements or Securities and Exchange Commission reports. Item 3. Controls and Procedures The Company's principal executive officer and principal financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) have concluded that, based on such evaluation, the Company's disclosure controls and procedures were adequate and effective as of the end of the period covered by this quarterly report on Form 10-QSB. There were no changes in the Company's internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. -15- PART II. OTHER INFORMATION Item 1. Legal Proceedings As previously reported: (a) on April 20, 2001, the Company filed an action in the Supreme Court of the State of New York, Nassau County, against Samuel Fensterstock and a competitor (collectively, the "Defendants"), seeking injunctive relief, declaratory relief and monetary damages; (b) thereafter, the parties entered into a Settlement Agreement that was approved and so ordered by the Court in July 2001 pursuant to which the Defendants were restricted from engaging in certain activities; and (c) on November 27, 2001 the Company commenced contempt proceedings (the "Contempt Proceedings") against the Defendants in the same Court seeking monetary and punitive damages, legal costs and injunctive relief for violation of the Settlement Agreement and the July 2001 Court order. After extensive discovery in the Contempt Proceedings, a judicial hearing began on September 15, 2003 and is expected to conclude by year end. In February 2003, the competitor commenced an action (the "Competitor Action") in the same Court, against the Company, its President and a senior manager, seeking compensatory damages, exemplary damages and injunctive relief. The Company denied the allegations in the Competitor Action and counterclaimed against the competitor, its President and Samuel Fensterstock. The parties currently are engaged in discovery in connection with the Competitor Action and a trial date is scheduled for June 2004. See Part I, Item 2 for further information regarding the Contempt Proceedings and the Competitor Action. Item 2. Changes in Securities and Use of Proceeds On August 21, 2003, the Company sold 75,000 shares of its common stock to Jerome S. Flum, its Chairman and Chief Executive Officer, for a cash purchase price of $8.25 ($0.00011 per share) upon his exercise of an Incentive Stock Option. On April 1, 2002, the Company sold a like number of shares to Mr. Flum, for the same price, upon his exercise of a like Option. Mr. Flum is an "accredited investor", as such term is defined in Section 501 of Regulation D under the Securities Act of 1933, as amended (the "Act"), and no other stock options have been exercised under the Company's stock option plans during the past three years. Accordingly, the Company believes that the sales to Mr. Flum are exempt from registration under the Act pursuant to Section 4(2) thereof. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of the Chief Executive Officer. 31.2 Certification of the Chief Financial Officer. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -16- (b) Reports on Form 8-K None. -17- SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CREDITRISKMONITOR.COM, INC. (REGISTRANT) Date: November 14, 2003 By: /s/ Lawrence Fensterstock Lawrence Fensterstock Chief Financial Officer -18-