Lattice Incorporated

November 17, 2015

Market Data

Fiscal Year December 31
Industry Technology
Market Cap $2.2M
Price/Earning (ttm) N/A
Price/Book (mrq) N/A
Price/Sales (ttm) 0.3x
Insider Ownership 15.6%
Shares Outstanding 64.0M
Float 51.4M
Avg. Volume (3 mo.) 24,552
As of November 17, 2015

Income Statement Snapshot

Revenue (TTM) $8.2M
Gross Profit (TTM) $3.3M
Gross Margin (TTM) 40.1%
Net Loss (TTM) ($3.1M)

Balance Sheet Snapshot

Cash (MRQ) $0.09M
Debt (MRQ) $2.8M
Poised for Strong Growth as Geographic and Product Line Expansions Unfold; FCC Announcement Provides Further Opportunity

3Q15 revenue decreased 6% YoY; Direct call provisioning revenue increased 27% YoY. LTTC’s 3Q15 revenue decreased 6% YoY to $1.9 million, with the primary reason for the decrease coming from a 37% decline in technology product revenues. Technology product revenue tends to be lumpy from quarter to quarter, but it will enhance both revenue and gross margins in the quarters in which greater amounts of technology sales occur. Recurring revenues accounted for 68% of revenue in 3Q15, as compared to 50% of revenue in 2Q15; this total is likely to fluctuate depending on the amount of wholesale technology systems sold in each quarter, but in general we believe that recurring revenue will make up an increasing percentage of revenue over time. The average revenue per inmate remained at over $800 in 3Q15, as compared to the industry average of $515 per inmate. This represents an over 50% increase compared to the industry average, and is indicative of the strong customer service and technology provided by LTTC relative to its competitors. Gross margins decreased to 32% in 3Q15, down from 42% in 3Q14 and 48% in 2Q15. The increase in gross margins is tied to the decrease in wholesale technology sales in 3Q15. We expect gross margins to be in the low to mid 40% range in future quarters, as technology revenue should be higher in most quarters. 3Q15 net loss, adjusted for derivative income, was $(1.0 million), an increase as compared to a net loss of $(0.6 million) in 3Q14.

The FCC has announced that it is capping call rates and eliminating ancillary fees; this provides a strong opportunity for LTTC to gain market share.On October 22, the FCC announced that it will cap call rates and eliminate ancillary fees. Small to mid-size prison facilities will have their rates capped at 16 cents per minute (350-999 inmates), or at 22 cents per minute (<350 inmates). It is likely that under these new regulations, competitors will either have to renegotiate their contract, walk away from the contract, or operate at a loss for a period of time. Many competitors have said that the new regulations will reduce their profits/cause them to operate at a loss, and will likely lead to lower quality service. LTTC has never used ancillary rates, and much of its revenue comes from streams unconnected to telephone calls. The Company has prepared a strategy to obtain market share following these new regulations, as many small and mid-size facilities will likely be looking for new providers. We believe that these new regulations could lead to a significant increase in revenue for LTTC within the next few quarters.

Oklahoma expansion strategy to be implemented in eight other states. Over the past few years, LTTC has established a market leading position in the Oklahoma small and mid-size correction facilities market, obtaining over 50% market share (35 out of 69 facilities in the target market). LTTC is taking the expertise that it learned from operating in the Oklahoma market and implementing it in other states. The majority of the states that LTTC is entering have larger correction facility markets than Oklahoma, and ultimately many of these states could generate larger amounts of revenue than Oklahoma within a few years. LTTC has obtained certification to operate in five of these states, and sales and marketing have begun in all five states. We anticipate new markets beginning to generate meaningful sales growth for Lattice within the next few quarters, and the volume of sales could accelerate if the Company completes its proposed $4 million financing. We believe that if LTTC executes upon its U.S. growth initiatives, the Company could generate revenue multiple times larger than its current revenue within the next few years.

LTTC has stated that it needs approximately 2,700 more inmates to reach EBITDA breakeven, considering only recurring revenue from direct services. With the changing landscape and the Company’s more aggressive sales and marketing strategy, this figure could be achievable over the short-term.

Technological development continues; LTTC’s new CellMate Mobile platform is expected to be fully launched this year. The Company’s CellMate platform will give inmates a wireless communications device that includes the latest communications and media tools to keep in contact with friends and family, along with a variety of self-improvement tools designed to improve inmate morale, ultimately providing value to both the inmate and the correctional facility.

Additionally, due to the wide variety of tools offered by the CellMate platform, LTTC can offer these services while a correctional facility still has a phone contract with a competitor, allowing them to ramp revenue more quickly and beginning relationships with new correctional facilities that could lead to full services contracts in the future. Most states have contracts that range from one to five years in length, and CellMate allows LTTC to begin relationships prior to contract expiration. Further, with many contracts likely being renegotiated with lower commission rates and no ancillary fees, the robust revenue sharing attributes of the CellMate platform will likely make this solution more attractive to prison facilities.

Maintaining price target of $0.24, based on projected FY16E revenue of $13.5 million, an EV/Sales multiple of 1.5x, and year-end 2016 shares outstanding of 74.0 million.

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Auditor: Rosenberg Rich Baker Berman & Company
Legal Counsel: Loeb and Loeb LLC
Transfer Agent: Continental Stock Transfer & Trust Company

Company Information

Company Website

Company Contact Info:
Lattice, Inc.
7150 N. Park Drive, Suite 500
Pennsauken, NJ 08109
(856) 910-1166
Investor Contact Info:
RedChip Companies, Inc.
1017 Maitland Center Commons Blvd.
Maitland, FL 32751
(407) 644-4256



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