You are on page 1of 22

CHAMPOUSE

GROUP

info@champouse.com

CHAMPOUSE
GROUP

The Investment Case For


CreditRiskMonitor
(CRMZ)
The Case for
(CRMZ)
CHAMPOUSE
GROUP

2015

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Disclaimer
The analyses and conclusions of Champouse Group LLC ("Champouse") contained in this presentation are
based on publicly available information. Champouse recognizes that there may be confidential information in the possession
of the companies discussed in the presentation that could lead these companies to disagree with Champouses conclusions.
This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities.
Champouse has not sought or obtained consent from any third party to use any statements or information indicated herein
as having been obtained or derived from statements made or published by third parties. Any such statements or information
should not be viewed as indicating the support of such third party for the views expressed herein. No warranty is made that
data or information, whether derived or obtained from filings made with the SEC or from any third party, are accurate.
The analyses provided may include certain statements, estimates and projections prepared with respect to, among other
things, the historical and anticipated operating performance of the companies, access to capital markets and the values of
assets and liabilities. Such statements, estimates, and projections reflect various assumptions by Champouse concerning
anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies
and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy
or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results
may vary materially from the estimates and projected results contained herein. Accordingly, no party should purchase or
sell securities on the basis of the information contained in this presentation. Champouse expressly disclaims
liability on account of any partys reliance on the information contained herein with respect to any such purchases
or sales.
Funds managed by Champouse and its aliates have invested in the equity CreditRiskMonitor Com Inc.
Champouse manages funds that are in the business of buying and selling securities and financial instruments. It
is possible that there will be developments in the future that cause Champouse to change its position regarding the
companies discussed in this presentation. Champouse may buy, sell, cover or otherwise change the form of its investment
regarding such companies for any reason. Champouse hereby disclaims any duty to provide any updates or changes to the
analyses contained here including, without limitation, the manner or type of any Champouse investment.

CONFIDENTIAL

CHAMPOUSE GROUP LLC

The best investments oer the rational expectation


of an above average return, even in the presence of
very unfavorable business conditions.
Investing with this mindset necessarily creates an
asymmetric upside, as even the slightest favorable
outcome provides, in eect, free optionality.
The following discussion presents one such example.

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Return on capital* of 260%


5-year annual EBIT growth of 39%
Zero debt
Massive barriers to entry

*Adjusted return on required capital

Contents
Overview

Key Considerations

Products & Services

Fundamental Service

Credit Limit Service

New Trade Receivable Program

Industry Dynamic

10

Competitive Landscape

11

Large Barriers to Entry: An Illustrative Example

12

CRMZs Opportunity

13

Valuation and Financial Adjustments

14

The Primary Source of CRMZs Undervaluation

14

Revenue-Expense Mismatch

16

New Product Development Costs Fully Expensed

16

Financial Comparison

19

Final Remarks

20

Valuation

21

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Overview
CreditRiskMonitor.com Inc
704 Executive Blvd Ste A
Valley Cottage, NY 10989
(845) 230-3000
(1/25/15)

Ticker
Exchange
Industry

CRMZ

Stock Price

OTCQX U.S. Premier

Shares Outstanding

Credit reporting services

Market Capitalization

$2.50
8,025,867
$20,064,668

CreditRiskMonitor (CRMZ) is one of a handful of Champouse Groups high conviction investment ideas. CRMZ is
currently undervalued due to the companys small size and very misleading financial presentation. The company
has exceptional investment merit without the need for liberal assumptions. Additionally, Champouse is of the
impression that the companys durable economics, future prospects and low-to-fair market price provides a wide
margin of safety thereby limiting downside risk.

Key Considerations
Adjusting the financial presentation is paramount to understanding the economic attractiveness of CRMZs
underlying business. As a result of conservative accounting, the company overstates operating expenses which
understates earnings. In addition, a review of the companys balance sheet reveals the presence of a very large
non-economic liability. Adjustments to these financial items (i) uncovers the normal earning power of the
companys underlying business and (ii) provides valuable insight into the companys future. (Page 17)

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Products & Services


Fundamental Service

Click for link to a


CRMZ
sample report

CRMZs Fundamental Service is an annual fixed-price service with unlimited usage and coverage of public companies. This
service features multi-period financial reports, ratio analysis and real-time financial news screened specifically for
usefulness in credit evaluation available both on CRMZs online system as well as delivered directly to customers via email.
The Fundamental Service is supplemented with trade receivable data contributed mainly by CRMZs 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).
Furthermore, the Fundamental Service features the companys proprietary credit score, the FRISK score. This
proprietary score indicates financial distress by predicting the probability of bankruptcy within the next 12 months.
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. At the end of 2013, the Fundamental Service covered over 57,000 public companies worldwide.

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Products & Services


Credit Limit Service
The interactive Credit Limit Service, available since 2007, helps credit executives to manage credit line limits for
their customers. 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 customers
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.

CRMZs Credit Limit Service for public companies enables customers to:

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Products & Services


New Trade Receivable Program
CRMZs trade receivable program is a new development not available to regular users. The service is free, but only
to subscribers whom contribute their trade accounts receivable (A/R) data.

Trade receivable participants have free access to CreditRiskMonitors Payment Score

Click for link to


Payment Score

white Paper

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Industry Dynamic
CRMZ controls a niche within the broader commercial credit reporting industry that is largely dominated by Dun &
Bradstreet (D&B). This industry sells credit reports to companies interested in the credit risk of the customers
with which they do business. There are millions of companies for which credit reports may be purchased. CRMZs
area of focus is on the coverage of roughly 22,000 publicly traded companies, whereas their competitors
specialize in and focus on private company coverage, but also cover public companies.
To put the market into context, the vast majority of the revenues generated by D&Bs North American Risk
Management Solutions division in 2013 ($693.2 million) derive from the sale of private company credit reports.

CreditRiskMonitors Credit Reports


Utilize corporate financial statements to create algorithms to predict future financial distress
Systematically identify financial distress at least 12 months prior to a companys bankruptcy filing
Surpasses the accuracy of predictive abilities of D&B, Experian & Equifax reports
Evidence of CRMZs Success
> 30% of the Fortune 1000 are subscribers
Subscription retention rates are consistently above 99% from year-to-year

10

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Industry Dynamic
Competitive Landscape
The industrys incumbents enjoy dominant positions largely as a result of having free access to trade receivable
data (the the essential component of a private business credit report). Free access to large amounts of
commercial account receivable trade data is extremely valuable, highly sought after and extremely difficult to
acquire. CRMZ decided to circumvent this difficulty by first establishing itself as a provider of credit reports on
public companies because the company thought (correctly) that it could make use of publicly available data to
generate meaningful reports for the credit industry. To facilitate this process, the company carefully selected and
hired away a handful of the very best database programers and credit experts from D&B and other industry
leaders. CRMZs successful entry into this market was far from easy and took over a decade. New entrants
wanting to expedite entry must find a way to gain access to trade credit data. Unfortunately in North America,
the only way for entrants to acquire this information is to buy it from one of the three large incumbents.

11

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Industry Dynamic
Large Barriers to Entry: An Illustrative Example
The difficulty and expense of acquiring trade histories should not be overlooked. As an illustration, consider a
company that has struggled to make an entry into this industry for well over a decade. Since 1993, Cortera
(formerly e-credit), invested over $190 million in operating capital and still does not, to Champouses knowledge,
earn a profit. Cortera gained access to private business trade histories by paying Experian for access to their
trade data. Champouses research suggests that the arrangement included very large upfront costs and required
Cortera to also pay a significant percentage of their gross revenues to Experian. Unfortunately, in mid-2014,
Experian terminated this arrangement.

Cortera's Venture Capital Investments

Capital Raised
Notes:

1993-2003

2006

2008

2010

2011

1993-2011

$100m

$11m

$8m

$20m

$49.7m

$188.7m

75 employees

Still
unprofitable

Projected
revenues of
$10-20m

Name change
from e-credit to
Cortera

Nearing
profitability

12

Private stock
offering

2012 est.
employees 100

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Industry Dynamic
CRMZs Opportunity
CRMZ is in a very unique market position. Typically, small market share precludes scale advantages, however,
through extensive, deliberate automation, CRMZ successfully operates as the industrys low cost provider (80%
below D&B). While not an immediate threat to the large incumbents, Champouse Group believes that a
significant increase in CRMZ's market share is steadily (if not rapidly) approaching.
As indicated on page 9, CRMZ quietly expanded its capacity to cover private companies by gaining access trade
data from a large number of subscribers and non-subscribers. A few years ago, several Fortune 1000 companies
started offering CRMZ trade receivable data-without CRMZ even asking for it. Seeing a huge opportunity, Jerry
Flum (the companys CEO & Founder), decided to heavily invest in the development of a new trade receivable
database system. This initiative began in August 2012 and has been very well received by the companys
subscribers. Champouses research suggests that CRMZ is acquiring trade payment histories at a pace which will
allow CRMZ to begin stealing significant market share from D&B, Experian and Equifax within the next few years.
Beyond the significance of rapidly increasing market share, recognizing the development of this database is an
important component to understanding CRMZs current underlying business value. The company employs very
conservative accounting; CRMZ expenses database development costs in full as incurred, which has the
consequence of distorting normal earnings. This and other similar items are addressed in the following sections.

13

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Valuation and Financial Adjustments


Undervalued companies come in the form of either one-off or ongoing investments. One-off situations need to be
sold as price converges with estimated value. Meaning, such an investment (properly assessed) will only generate
a one-time return. CRMZ is what Champouse considers an ongoing investment. Ongoing investments are generally
ideal investment situations and consist of a purchase in businesses that are expected do quite well over a long
period of time. The investment outcome is based on the long-term, ongoing success of the businesss underlying
operation. As the company continues to do well, the valuation increases-providing the investor with long-term
returns that compound over time.

The Primary Source of CRMZs Undervaluation


A proper assessment of CRMZ requires a number of accounting adjustments. CRMZs accounting understates
earnings by more than half. Couple that with a very small market capitalization and you will almost always find a
neglected, unknown and undervalued company. Furthermore, the balance sheet largely consists of excess cash on
the asset side and a non-economic liability on the liabilities side. When you adjust for these items, CRMZs
financial showing looks very different from what you find when looking at their reported financials. For instance,
stated figures show a pre-tax return on equity of 14% and a P/E of 65x (not at all appealing). However, after
making the necessary adjustments, the company shows what Champouse calculates to be a 260% return on
required capital and a P/E of only 16x. Furthermore, over the last five years, unadjusted operating income
appears to have grown at an annual rate of only 9%, however, it actually grew at 39%.

14

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Accounting is merely a starting point, nothing more.

15

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Financial Adjustments
Adjusting the financial presentation is paramount to understanding the companys
normal earning power.
Revenue-Expense Mismatch
CRMZ provides a subscription-based service to customers who pay the full subscription amount at the time of
purchase. The standard accounting procedure is to recognize this revenue over the life of the subscription period.
In other words, for the quarter in which CRMZ sells a new subscription, the companys financial statements will
only reflect 25% of that revenue-even though the company received, and has the benefit and full use of, the
entire payment. One might argue this is of little consequence on an annual basis, however, a large amount of the
companys expenses are commissions that the company pays to its sales agents at the time of a new sale. This
results in a revenue-expense mismatch. Meaning, in any given quarter, when new subscriptions are increasing,
expenses increase faster than revenues, which distorts the companys stated operating and net income figures.

New Product Development Costs Fully Expensed


CRMZ is working to expand its product offerings by creating an entirely separate database for an entirely
different, but similar, set of customers. There are two basic ways to account for the expense of this new
database (i) expense the full cost of development as incurred or (ii) treat the development costs as an investment
(i.e., an asset on the balance sheet) and capitalize these costs over a period of time.
While it may make sense to expense the development of a product that does not and may never produce any
future revenue, this database targets a completely new set of customers and is not at all necessary to maintain
the companys current operations. This point should not be overlooked as these expenses need to be adjusted to
arrive at a calculation of normal current earnings.

16

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Financial Adjustments
Normal Current Earnings
A normal earnings figure represents the earning power of the company under normal circumstances e.g., after
adjusting for any special items-which we have already addressed. In CRMZs case, we need to eliminate database
development costs from the companys expenses because this expense could be eliminated without disrupting the
companys current underlying business. Such an adjustment will then provide a more appropriate presentation of
the companys true economic reality.
As presented in the table below, adjusted operating earnings are more than double stated operating income
reported in the company's financial statements.

Reported Income Statement Items


(Thousands of U.S. Dollars)
Opera0ng3revenues
Data3and3product3costs
Opera0ng3income

TTM

Y2013

Y2012

Y2011

Y2010

12,075

11,837

11,062

10,154

9,343

4,679

4,438

3,731

3,310

2,429

514

618

974

1,212

1,676

TTM

Y2013

Y2012

Y2011

Y2010

1,993

1,882

1,795

1,708

1,676

Adjusted Pre-tax Earnings


(Adjusted)(opera.ng(income

17

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Financial Adjustments
Required Operating Capital

Reported Balance Sheet Items (Thousands of U.S. Dollars)


Q53(2014

Q52(2014

Q51(2014

Q54(2013

Q53(2013

8,947

8,784

7,982

8,047

8,653

1,764

1,304

1,570

1,707

1,062

33Other3current3assets

738

776

454

581

583

3333Total3current3assets

11,451

10,866

10,007

10,336

10,298

ASSETS
Current3assets:

Cash3equivalents3and3marketable3securi0es
33Receivables

Property3and3equipment,3net
Goodwill

343

367

415

422

384

1,954

1,954

1,954

1,954

1,954

34

40

50

23

34

13,782

13,227

12,428

12,736

12,672

6,517

Prepaid3and3other3assets
3333Total3assets

LIABILITIES3AND3STOCKHOLDERS3EQUITY
Current3liabili0es:

33Deferred3revenues

7,204

6,972

7,042

6,692

33Accounts3payable

148

75

59

86

76

33Accrued3expenses

1,531

1,417

744

1,280

1,154

3333Total3current3liabili0es

8,883

8,465

7,846

8,058

7,748

705

725

793

636

591

9,592

9,195

8,644

8,700

8,345

4,190

4,032

3,783

4,036

4,326

Q53(2014
4,190

Q52(2014
4,032

Q51(2014
3,783

Q54(2013
4,036

Q53(2013
4,326

493

266

890

727

237

Deferred3taxes3on3income
Other3liabili0es
3333Total3liabili0es

3333Total3stockholders'3equity

Required Operating Capital (Thousands of U.S. Dollars)


Stated3equity
Required3opera0ng3capital

18

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Financial Comparison

As Reported

Adjusted*

Operating income (last 12 mo.)

$514,000

1,993,150

Required (equity) capital

$4,190,186

$492,668

Return on equity (pre-tax)

14%

260%

Operating income growth (5-year)

9%

39%

P/E (pre-tax)

65x

16x

*Champouse estimates

19

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Final Remarks

As long as CRMZ continues to increase its subscriber base by roughly 10% per year,
Champouse Group is of the impression that the purchase of CRMZ at a price of $3.00/sh
should generate investors a return in excess of 20% annually, over a three-to-five-year
period.
The purchase of CRMZ should not and does not turn on the expectation of gaining significant future market share.
CRMZ is a wonderful business that earns extremely high returns on required capital without the use of debt.
CRMZs operating costs are largely fixed. As revenues increase, CRMZs earnings will increase also, but at a more
rapid rate due to increasing margins. Moreover, the cost to acquire a new customer does not require the company
to fully reinvest earnings. Meaning, the company will have an increasing amount of cash with which to repurchase
stock, pay a dividend, use for advertising, etc. In the longer term, the cash balance should become substantial
and sensible allocation of this capital will add significantly to the companys value.
In addition to acquiring a great underlying business at a reasonable price, an investment in CRMZ also offers the
added bonus of free optionality in the event the companys trade receivable program ultimately leads to a more
rapid increase in market share. To put this into context, were CRMZ to take 5% market share in North
America, the value of company would reasonably exceed $500 million.

20

CONFIDENTIAL

CHAMPOUSE GROUP LLC

Valuation

Minimum

(Assumes declining market share)

$20 million

Fair

$45 million

Liberal

$100 million

(Assumes 5% market share within 10 yrs)

* Valuations do not assume the sensible investment of excess cash


** Amounts in U.S. Dollars

21

CHAMPOUSE GROUP LLC

4 Logan Circle NW #3, Washington, D.C. 20005 | (202) 649-0330 | info@champouse.com