The CreditRiskMonitor Business

CRMZ (see our website at www.crmz.com) is an Internet-based publisher of financial information, designed to save time for busy corporate credit professionals, which competes with Dun & Bradstreet, Inc. (“D&Btm”). The service publishes comprehensive commercial credit reports covering public companies worldwide and includes detailed financial statements, ratio analysis and trend reports, peer analyses, Altman Z” default scores, company background information, plus Moody’s Investors Service (“Moody’s”) and Standard & Poor’s (“S&P”) ratings. It also includes trade payment data and public filings (i.e., suits, liens, judgments and bankruptcy information) on millions of U.S. companies. The service also provides continuous news monitoring that keeps subscribers up to date on events affecting the creditworthiness of companies, including financial statement updates, SEC filings, Moody’s and S&P rating changes, credit-relevant news stories and press releases.

Beginning in 2007, the Company added an interactive service for credit managers to use in managing recommended credit line limits for their customers, in light of changes in the companies’ financial strength. This service monitors daily changes in a customized recommended credit limit for each customer and generates alert messages to subscribers as requested, so they can take immediate action when a customer’s circumstances change. Mid-year 2007, the Company added its new proprietary credit score, the “FRISK2” score, to its Fundamental Service. This new proprietary score predicts corporate default within the next 12 months, and provides clients with a fast, consistent method for identifying those companies at greatest risk of default. The FRISK2 score is updated daily, based on the latest information available to the Company, and is derived from a statistical model back-tested on 10,000 companies over a multi-year period.

The overall focus of the Company’s services is on facilitating the extension of trade credit from one business to another. The Company is not a “consumer reporting agency” as defined by the Fair Credit Reporting Act, as it is not involved in the communication of information bearing on consumer credit.

In a business-to-business transaction, for example the purchase and sale of $20,000 of merchandise, the seller usually will ship before the buyer pays – this is an extension of trade credit by the seller. The terms of trade credit could be “2%-10 days, net 30” which means the customer is entitled to a 2% deduction from the price if the customer makes payment within 10 days; but if not, the customer must make payment in full within 30 days. The seller takes a financial risk extending this credit, referred to as “trade credit risk”. The buyer may pay late, causing the seller to incur increased borrowing costs; the seller may incur extra costs in attempting to collect the $20,000; or the buyer may never pay the full $20,000. Amounts unlikely to be repaid are called “bad debt”. If buyers fail to pay, the seller can suffer substantial losses (e.g., assuming the seller averages a 10% pre-tax margin it will take about $10 of sales to offset each $1 of bad debt).

CRMZ’s service is usually purchased by a seller to review the risks of extending trade credit to its customers. CRMZ believes that, with the downsizing of corporations and the related reductions in credit departmental budgets and personnel, corporate credit professionals have to do more with less. It is notable that trade credit decisions are often made under intense time pressure. Simultaneously, the Company believes, there has been an explosive growth in the volume of data about businesses. Credit professionals are often faced with an overwhelming amount of available data concerning important customers, while the time for research and analysis is severely limited.

CRMZ’s service is the result of management’s experience in the commercial credit industry and on-going research with respect to corporate credit department information needs. This has enabled CRMZ to satisfy the credit profession’s need for a timely, efficient, low cost credit information service. CRMZ publishes and sells the following commercial credit analysis services to corporate credit managers:

1. An annual fixed-price service (the “Fundamental Service”) with unlimited usage and coverage of public companies, featuring multi-period spreads of financial reports and ratio analysis, as well as up-to-date financial news screened specifically for usefulness in credit evaluation. Another feature of the service is notification and delivery of this news via email, concerning only companies of interest to the subscriber. This service is supplemented with trade receivable data contributed mainly by CRMZ’s subscribers, as well as U.S. public-record filing information (i.e., suits, liens, judgments and bankruptcy information) covering millions of public and private U.S. companies. Midyear 2007, the Company added its proprietary new FRISK2 score, which saves clients time by quickly identifying which companies are at greatest risk of default. At the end of 2007, the Fundamental Service covered over 40,000 public companies worldwide, totaling approximately $38 trillion in corporate revenue. Subscribers may opt, at lower prices, for limited regional coverage: “North American Service” for coverage of just U.S., Canadian, Mexican and Caribbean companies.
2. In February 2007, the Company announced its innovative new Credit Limit Service, sold as an annual subscription. The Credit Limit Service offers subscribers the ability to calculate and monitor credit line limit recommendations. These calculations are based on a sophisticated proprietary statistical model of default risk. The calculations are based, in part, on the subscriber’s own financial situation and relationship with each subject company. The resulting credit limit recommendations are fast, consistent and objective, based on proven risk analysis techniques, and customized to the subscriber’s unique situation. This Credit Limit Service is fully integrated with the Fundamental Service, which provides analytical depth to subscribers when questions arise or more analysis is needed. It is only sold in conjunction with the Fundamental Service, for an additional fee. The fee is based, in part, on the number of subject companies evaluated during the annual subscription period, and includes monitoring.
3. Single credit reports on the over 40,000 companies covered in item (1) above. These reports are sold mainly via credit card and obtained via the Internet. Email alerts are not available with this single-report service.
4. Individual credit reports on approximately 20 million foreign public and private companies. These reports are purchased by CRMZ through affiliations with third-party suppliers and sold to CRMZ subscribers.

There is little hard data on the size of CRMZ’s market. The U.S. National Association of Credit Management has about 30,000 members, but some industry observers believe the number of U.S. credit managers and other personnel performing this function is substantially greater. In addition, there are numerous U.S. based companies that do not have a full-time credit function but still require credit information. Furthermore, a market exists outside of the U.S. for information on U.S. and foreign companies. Finally, a small fraction of the Company’s customers use the information for purposes outside of the credit function, including procurement and strategic planning/competitive analysis.

The viability and potential of CRMZ’s business is made possible by the following characteristics:

• Low price. The prices of CRMZ’s services are low compared to the subscriber’s possible loss from not getting paid and low compared to the cost of most competitive products (for example, see the Price Comparison chart on our website).
• Non-cyclical. As economic growth slows, general corporate credit risk usually increases and the credit manager’s function rises in importance and complexity. Additionally, products that allow credit managers to perform their jobs more efficiently and cost effectively, compared to competitive services, should gain market share in most business environments and especially during a downturn. In a contracting business environment, many companies face increasing price competition which should accelerate their shift to lower cost technologies and providers, such as CRMZ. CRMZ’s business and revenues therefore may continue to grow as world economic growth slows or declines. Over the last ten years the issuance of corporate “junk bonds” and other debt by public companies and public debt by private companies (LBO’s, etc.), and the development of credit instruments to hedge default and interest rate risk (i.e., credit derivatives) has increased dramatically. It is difficult to get a complete or totally accurate number of the totals, but it appears the “notional” values of these various instruments may be in the range of $25-30 trillion. To put this in perspective, in 2007 the U.S. Gross National Product (“GNP”) was approximately $14 trillion, and the market value of all U.S. public company equity was approximately $17 trillion. Thus, U.S. public companies and private companies with public debt have a looming vulnerability to business cycle contraction and the attendant market risks for interest rates and stock markets. This dramatically increases the exposure and complexity of extending commercial trade credit and puts a premium on the speed and analysis of CRMZ’s service.
• Recurring revenue stream. The recurring annual revenue stream of its subscription fee model gives the Company stability not found in a one-time sale product-based company.
• Profit multiplier. Some of the Company’s basic costs are being reduced. On a broad generic basis, the prices of computer hardware, software and telecommunications have been coming down for all buyers, including CRMZ. In addition, CRMZ has automated a significant amount of the processes used to create and deliver its service; therefore, its production costs, apart from the development cost of enhancing and upgrading the Company’s website, are relatively stable over a wide range of increasing revenue. Offsetting these cost reductions is the cost of increasing the data content of CRMZ’s services if the Company chooses to increase content and not raise its prices to cover these additional costs.
• Self financing. CRMZ’s business has no inventory, manufacturing or warehouse facilities, and payment for the subscription service is made early in the subscription cycle. Thus, the Company’s business is characterized by low capital-intensity, and yet it is a business capable of generating high margins and sufficient positive cash flow to grow the business organically with little need for external capital. In addition, the Company has approximately $4.6 million of net operating loss carryforwards which may offset future tax liability and thus positively impact cash flow. (See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Financial Condition, Liquidity and Capital Resources; and Net Operating Loss Carryforwards.)
• Management. CRMZ has in-place an experienced management team with proven talent in business credit evaluation systems and Internet development.

The Company’s Goals

• Growth in U.S. market share. Faced with a dominant U.S. competitor, D&B, as well as other several larger competitors, the Company’s primary goal is to gain market share. The Company believes that many potential customers are unaware of its service, while others are aware of but have not evaluated its service.
• International penetration. Foreign companies doing business in the U.S. may have the same need as domestic companies for CRMZ’s credit analysis of U.S. companies. Internationally, the Internet provides a mechanism for rapid and inexpensive marketing and distribution of CRMZ’s service.
• Broaden the services supplied. Revenue per subscriber should increase over time as the Company adds functionality and content, which for example it did in 2007 with the introduction of its Credit Limit Service and also with an increase in coverage of non-U.S. companies. Also, revenue per client should increase over time as the Company sells additional passwords to existing clients.
• Lowest cost provider. CRMZ’s sourcing, analysis and preparation of data into a usable form is highly automated. CRMZ delivers all of its information to customers via the Internet and there is continuous automation between the sourcing of data and delivery of a company credit report to a subscriber. Because of this automation, CRMZ’s production costs are relatively stable over a wide range of increasing revenue. Management believes CRMZ’s cost structure is one of the lowest in its industry.
• High margins and return on investment. The Company foresees declining unit costs in some important expense areas, such as computer and communication costs, which should increase net profits from its subscription income stream. The Company believes that the advent of Internet delivery of telephone calls will further reduce the cost per phone call over the next several years, and computer costs per transaction should also continue to decline. The Company has lower sales expenses for customer renewals than for new sales, and the Company expects that its renewal revenue will grow to be a larger share of total revenue each year. All these naturally occurring unit cost reductions will be in addition to the cost reductions achieved through servicing more accounts over the Company’s in-place fixed costs.

Marketing and Sales

To gain market share for the Company’s service, it will continue to use the Internet (at our website www.crmz.com) as the primary mechanism for demonstrating and distributing its service. To inform potential subscribers about its service, CRMZ uses a combination of telephone sales, Internet demonstration, direct mail, trade show representation and speaking engagements before credit groups and associations.

Value Proposition

The Company’s fundamental value proposition is that it creates and sells high quality commercial credit reports that save busy credit managers time, at a cost significantly below that of reports from the leading provider (price comparison as of January 30, 2008). Because D&B has the largest share of the commercial credit market, their flagship product, the Business Information Report (“BIR”), is the standard by which that market measures both quality and price. The Company’s research shows that its customers overwhelmingly agree that CreditRiskMonitor saves them time, helps them to make better credit decisions, and represents a significant value for the price paid compared to competitive services.

The operational strategy CRMZ follows to deliver on its value proposition is straightforward. CRMZ became (and remains) one of the industry’s lowest cost producers of high quality commercial credit information by continuously collecting data from a wide variety of sources and employing sophisticated proprietary computer algorithms to process that data into an extensive database of valuable reports on companies. Highly automated operations add to reliability and consistency, while limiting costs. The Company employs a small number of analysts who selectively review data at critical points in its process to further enhance the quality of its products and their relevance to credit professionals.

CRMZ employs several different selling strategies to deliver this value to different customer segments:

• Credit professionals need to save time, when analyzing their most important customers, and the CRMZ service provides this critical benefit. CRMZ believes that its reports and monitoring of public companies, having aggregate revenues of approximately $37 billion, are superior in this way to what is offered by D&B. The CRMZ service provides financial information in greater depth and better analytical efficiency. It also includes timely email alerts enabling credit professionals to easily stay on top of financial developments at their customers, without the clutter of non-financial news prevalent at other news services. Finally, the Moody’s and S&P ratings, and the Altman Z” and proprietary FRISK2 scores offered by the service enable further efficiency by focusing attention on only those companies showing financial weakness.
• The Company’s customers typically have contracts with D&B. Traditionally, D&B sells them prepaid units and/or reports (“units”) on an annual basis, which they can then use to buy D&B products throughout the year. The price of each unit depends on the number of units being purchased upfront, with the resulting price of a domestic U.S. BIR generally ranging between $40 and $60. If a customer has unused units at the end of the year, D&B may allow it to carry a percentage of them forward, if the customer renews for another year for at least the same number of units as the previous year. All other unused units may be forfeited. For these customers, CRMZ’s simple unlimited usage fixed price annual subscription represents an opportunity to save money by reducing the customer’s D&B usage. The best practice that CRMZ recommends to its subscription customers is to always search CRMZ’s database first (which does not incur any incremental expense to them) and to save their expensive D&B units for decisions concerning those privately-held businesses where CRMZ may have little or no information. According to the Company’s research, the great majority of customers report saving money as a result of using the CRMZ service. In 2005, the Company became aware that D&B had also begun selling some part of its service on a “fixed-price” basis, and in 2006 D&B expanded this practice under the trade name “DNBi”. It appears that these contracts offer a fixed price for usage of D&B information within a wide range of amounts, the upper end of which is a multiple of the customer’s current usage. D&B attempts to maintain or increase its total annual charges to each DNBi customer, and these charges are generally many times more than comparable CRMZ fees. At the same time, D&B attempts to bind its customers to multi-year agreements, so as to blunt the customer’s ability to reduce its D&B costs over several years. The Company cannot predict the effectiveness of D&B’s strategy much less whether D&B will find this DNBi pricing is even sustainable over multiple years, while attempting to continuously increase its revenues. To date, the tactic has not significantly diminished the Company’s ability to win new customers.
• The Company estimates that only a small percentage of all credit-related business transactions are currently supported by objective third party credit information. This is not surprising, given the high cost of commercial credit reports from D&B and other vendors. CRMZ breaks that model by eliminating the incremental cost of a credit report. CRMZ’s fixed price, unlimited usage annual subscription enables customers to employ up to date, objective credit information in many more transactions than was economically feasible before. Customers can make better credit decisions with no increase in costs.
• It is expected that compliance with the Sarbanes-Oxley Act of 2002 will require companies to adopt more systematic processes to review trade credit and accounts receivable risks. In-depth and frequent review of risks concentrated in the largest customer companies, many of which are public companies covered by CRMZ, is a common practice that the Company expects to become even more prevalent.
• For low-volume customers, CRMZ sells single commercial credit reports for a flat price of $49.95 per report, using credit card transactions via the Internet. Although D&B also sells single reports on the Internet, they impose a complicated pricing schedule, in which the price of a specific company report depends on both the customer’s home country and the home country of the company about which they are inquiring. This pricing schedule includes more than 30 different price points for the D&B Business Information Report alone, ranging from $80 to $570 for this flagship report. This competitor’s approach is apparently designed to protect its legacy revenue streams from the pre-Internet era, when charging large cross-border premiums could be justified to some extent by the increased production costs of producing and delivering reports across boundaries. In contrast, CRMZ was designed from the ground up to be a worldwide provider of commercial credit reports over the Internet, and is not similarly constrained by legacy systems. Consequently, CRMZ’s value advantage is even more apparent when customers compare the costs of cross-border report purchases.