Question

Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.

A major reason for Cermco’s success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco’s CRM because of its superior features.

Annual revenues for Cermco’s three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.

Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco’s CRM product continues to enjoy the highest industry ratings and a loyal customer base.

Cermco’s balance sheets for the most recent three years follow:

CERMCO Balance Sheet December 31
		20X5	20X4	20X3
Assets
Current assets
	Cash and cash equivalents	$390	$1,386	$2,603
	Short-term investments	—	—	—
	Net receivables	720	664	1,225
	Inventory	—	—	—
	Other current assets	412	469	892
Total current assets		$1,522	$2,519	$4,720
Long-term investments		1,215	—	—
Property, plant, and equipment		76	258	454
Goodwill		545	1,757	2,194
Intangible assets		999	1,844	3,644
Accumulated amortization		—	—	—
Other assets		—	—	—
Deferred long-term asset charges		—	—	—
Total assets		$4,357	$6,378	$11,012
Liabilities
Current liabilities
	Accounts payable	$469	$1,174	$1,436
	Short/Current long-term debt	—	—	600
	Other current liabilities	1,227	1,358	1,496
Total current liabilities		$1,696	$2,532	$3,532
Long-term debt		—	—	—
Other liabilities		—	—	—
Deferred long-term liability charges		—	—	—
Minority Interest		—	—	—
Negative goodwill		—	—	—
Total liabilities		1,696	2,532	3,532
Stockholders' equity
Misc. stock option warrants		—	—	—
Redeemable preferred stock		—	—	—
Preferred stock		3,014	3,211	2,333
Common stock		16	16	13
Retained earnings		–25,513	–23,814	–19,165
Treasury stock		—	—	—
Capital surplus		25,168	25,564	25,862
Other stockholders’ equity		–24	–1,131	–1,563
Total stockholders’ equity		$2,661	$3,846	$7,480

Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.