Customer-Concentration Agent

Customer concentration: Project Sentinel

Data used: CIM p.7, p.8, p.9, p.18, p.19, p.22; FS p.4; Call p.1. TTM revenue is $6.21M (CIM p.6). Mine = my arithmetic.

1. Concentration

The claim fails its own test. The CIM says "no single customer representing more than 15% of revenue" (CIM p.8). Its next section says Northgate "represents approximately 22%" (CIM p.9). A 15% ceiling on $6.21M is $931,500; Northgate exceeds it by $434,500 (mine). Management repeated the claim on the call: "nobody's over fifteen percent" (Call p.1). Accounts 6 to 10 are not listed, and the number of customers is not stated.

2. Stickiness

• Written agreements, "typically multi-year with automatic renewal terms" (CIM p.18). Term, renewal dates and termination rights are not given.
• 78% "recurring" (CIM p.7), defined as all revenue from accounts with an active inspection agreement, including repair and call-out for them (CIM p.22). So some of the 78% moves with building age and incident volume (CIM p.7).
• Churn, retention and rebid history: not stated.
• Switching cost: the inspection records sit in a 2009 system whose export is untested (CIM p.16). That is a transition risk for you, not necessarily protection for the seller.
• Change of control: the seller has not reviewed provisions that "may" be triggered by a sale (CIM p.19). Whether Northgate's agreement has one is unknown.

3. If we lost the top customer

Revenue falls from $6.21M to $4.84M, down 22.0% (mine). Profit impact cannot be read from the documents, because customer margin and fixed costs are not provided. An illustration only, assuming Northgate earns the average reported margin of 17.4% (assumption, mine): reported EBITDA of $1.08M would fall by about $238,000, to about $842,000, down 22%. Because fixed costs such as technicians and vehicles would not leave with the customer, the real loss could be larger.

4. Questions that close the gaps

1. Northgate: term, renewal date, termination and consent clauses, pricing history, who holds the relationship.
2. Full customer revenue schedule: all accounts, with the number of customers.
3. Revenue by type (fixed inspection fee vs repair vs call-out) for each of the top five.
4. Churn and rebid history for three years, including any lost account.
5. Is Northgate one entity or a group of properties under separate agreements?

This is an analytical aid and not investment, legal, tax or accounting advice. The Project Sentinel documents are synthetic test data.