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CREDITRISKMONITOR COM INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

Business Environment

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

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

Financial Condition, Liquidity and Capital Resources

The following table presents selected financial information and statistics as of June 30, 2014 and December 31, 2013 (dollars in thousands):

June 30, December 31, 2014 2013 Cash, cash equivalents and marketable securities $ 8,784$ 8,047 Accounts receivable, net $ 1,305$ 1,708 Working capital $ 2,400$ 2,277 Cash ratio 1.04 1.00 Quick ratio 1.19 1.21 Current ratio 1.28 1.28



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

As of June 30, 2014, the Company had $8.78 million in cash, cash equivalents and marketable securities, an increase of approximately $737,000 from December 31, 2013. The principal component of this net increase for the last six months was the cash generated by operating activities of approximately $799,000.

Additionally, the main component of current liabilities at June 30, 2014 is deferred revenue of $6.97 million, which should not require significant future cash outlay other than the cost of preparation and delivery of the applicable commercial credit reports which cost much less than the deferred revenue shown. The deferred revenue is recognized as income over the subscription term, which approximates twelve months. The Company has no bank lines of credit or other currently available credit sources.

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

Off-Balance Sheet Arrangements

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

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Index Results of Operations 3 Months Ended June 30, 2014 2013 % of Total % of Total Operating Operating Amount Revenues Amount Revenues Operating revenues $ 2,998,010 100.00 % $ 2,933,752 100.00 % Operating expenses: Data and product costs 1,021,519 34.07 % 1,136,238 38.73 % Selling, general and administrative expenses 1,657,116 55.28 % 1,652,682 56.33 % Depreciation and amortization 57,240 1.91 % 35,117 1.20 % Total operating expenses 2,735,875 91.26 % 2,824,037 96.26 % Income from operations 262,135 8.74 % 109,715 3.74 % Other income (expense), net 13,247 0.44 % (36,069 ) (1.23 %) Income before income taxes 275,382 9.18 % 73,646 2.51 % Provision for income taxes (58,613 ) (1.96 %) (29,293 ) (1.00 %) Net income $ 216,769 7.22 % $ 44,353 1.51 %



Operating revenues increased $64,258, or 2%, for the three months ended June 30, 2014 compared to the second quarter of fiscal 2013. This overall revenue growth resulted from an increase in Internet subscription service revenue, attributable to increased sales to new and existing subscribers, partially offset by a decrease in the Company's third-party international credit report subscription service, attributable to lower usage by subscribers.

Data and product costs decreased $114,719, or 10%, for the second quarter of 2014 compared to the same period of fiscal 2013. This decrease was due to a refund of $218,845 received on sales tax paid on third party content for the 3 years ended August 2013 partially offset by higher salary and related employee benefits, including additional quality control personnel, and the higher cost of third-party content due to the purchase of additional data elements. A further refund of $61,817 was received in July 2014. Going forward, the Company believes that its third-party content purchases will not be subject to sales tax.

Selling, general and administrative expenses increased $4,434, or 0.3%, for the second quarter of fiscal 2014 compared to the same period of fiscal 2013. This increase was due to higher salary and related employee benefits, as the result of increased headcount, higher rent expense due to the leasing of additional office space and higher marketing expenses, partially offset by lower professional fees.

Depreciation and amortization increased $22,123, or 63%, for the second quarter of fiscal 2014 compared to the same period of fiscal 2013. This increase was due to the capitalization of leasehold improvements during the past 12 months associated with additional space leased at the Company's corporate headquarters as well as the purchase of computer equipment.

Other income (expense), net increased $49,316 for second quarter of fiscal 2014 compared to the same period last year. This increase was due to a smaller negative mark-to-market adjustment recorded in this year's second quarter.

Provision for income taxes increased $29,320 for the second quarter of fiscal 2014 compared to the same period of fiscal 2013. This increase was due to the Company having higher pre-tax income because of the reasons enumerated above.

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Index 6 Months Ended June 30, 2014 2013 % of Total % of Total Operating Operating Amount Revenues Amount Revenues Operating revenues $ 5,967,398 100.00 % $ 5,799,259 100.00 % Operating expenses: Data and product costs 2,322,964 38.93 % 2,172,966 37.47 % Selling, general and administrative expenses 3,403,526 57.03 % 3,387,410 58.41 % Depreciation and amortization 113,911 1.91 % 70,553 1.22 % Total operating expenses 5,840,401 97.87 % 5,630,929 97.10 % Income from operations 126,997 2.13 % 168,330 2.90 % Other income (expense), net 21,822 0.37 % (42,430 ) (0.73 %) Income before income taxes 148,819 2.50 % 125,900 2.17 % Provision for income taxes (71,241 ) (1.19 %) (49,944 ) (0.86 %) Net income $ 77,578 1.31 % $ 75,956 1.31 %



Operating revenues increased $168,139, or 3%, for the six months ended June 30, 2014 compared to the first half of fiscal 2013. This overall revenue growth is due to an increase in Internet subscription service revenue, attributable to increased sales to new and existing subscribers, partially offset by a decrease in the Company's third-party international credit report subscription service, attributable to lower usage by subscribers.

Data and product costs increased $149,998, or 7%, for the first six months of 2014 compared to the same period of fiscal 2013. This increase was due primarily to higher salary and related employee benefits, including additional quality control personnel, the higher cost associated with the outsourcing of certain data entry tasks, as more tasks have been outsourced, as well as the higher cost of third-party content due to the purchase of additional data elements, partially offset by a refund received on sales tax paid on third party content for the 3 years ended August 2013.

Selling, general and administrative expenses increased $16,116, or 0.5%, for the first six months of fiscal 2014 compared to the same period of fiscal 2013. This increase was due to higher salary and related employee benefits, as the result of increased headcount, and higher rent expense due to the leasing of additional office space, partially offset by lower professional and marketing fees.

Depreciation and amortization increased $43,358, or 61%, for the first six months of fiscal 2014 compared to the same period of fiscal 2013. This increase was due to the capitalization of leasehold improvements during the past 12 months associated with additional space leased at the Company's corporate headquarters as well as the purchase of computer equipment.

Other income (expense), net increased $64,252 for the first six months of fiscal 2014 compared to the same period last year. This increase was due to a smaller negative mark-to-market adjustment recorded in 2014.

Provision for income taxes increased $21,297 for the first six months of fiscal 2014 compared to the same period of fiscal 2013. This increase was due to the Company having higher pre-tax income because of the reasons enumerated above.

Future Operations

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

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

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

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

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

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Forward-Looking Statements

This Quarterly Report on Form 10-Q 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. The Company disclaims any intention or obligation to revise any forward-looking statement, whether as a result of new information, a future event or otherwise.


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