Lattice's (LTTC) CEO Paul Burgess on Q4 2015 Results - Earnings Call Transcript

| About: Lattice, Inc. (LTTC)

Lattice Incorporated (OTCQB:LTTC) Q4 2015 Results Earnings Conference Call April 14, 2016 2:00 PM ET

Executives

Jon Cunningham - Vice President, RedChip Companies

Paul Burgess - CEO

Joe Noto - CFO

Analysts

Richard Molinsky - Max Communications

Thomas Pfister - RedChip Companies

Harold Scattergood - Boenning & Scattergood

Mitch Ratner - T.R. Winston

Dan Boyer - Boenning & Scattergood

Operator

Good day, and welcome to the Lattice Incorporated Fiscal Year 2015 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jon Cunningham, Vice President of RedChip Companies. Please go ahead, sir.

Jon Cunningham

Thank you, Leanne. And good afternoon everyone and thanks for joining us on Lattice Incorporated’s 2015 earnings conference call. With us today are Lattice’s CEO, Paul Burgess; and Chief Financial Officer, Joe Noto.

Before I hand the call over to Paul, may I remind all listeners that on this call, management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and the uncertainties in the Company’s filings with the Securities and Exchange Commission.

In addition, any projections as to the Company’s future performance, represents management’s estimates as of today, April 14, 2016. Lattice assumes no obligation to update these projections in the future as market conditions change. To supplement that, its financial results presented in accordance with U.S. GAAP, mange will make reference to certain non-GAAP financial measures which the Company believes provides meaningful additional information to understand the Company’s operating performance. The table reconciling non-GAAP measures to the nearest GAAP equivalent may be found on our earnings press release issued early today.

And now, it’s my pleasure to turn the call over to CEO, Paul Burgess. Paul, go ahead.

Paul Burgess

Thanks, Jon, and welcome to everyone joining us on the call today. I’ll make a few opening remarks and then pass the call over to our Chief Financial Officer, Joe Noto for a more in-depth discussion of our financials.

In 2015, we continued to expand our product portfolio and expand our direct service revenue base, which is the core offering of our services. We also completed testing of two new products, our Video Arraignment solution and our Wireless Handheld Technology. As part of the new product release, we have rebranded our core technology and plan a commercial rollout of the new technologies this year. We continue to expand with our new domestic and international business strategy that focused on replicating our success in Oklahoma.

We wanted to ensure we had the most effective strategy for capturing market share amongst the small and mid-sized correction facilities. This included geographic focus, product portfolio and sales and marketing strategy to expand the Company with the goal of becoming the predominant provider of services to small and mid-sized correctional facilities in our target market.

For the past two years, the FCC has been reviewing the inmate communication service industry and specifically was looking at regulating the rates that would be charged to inmates for telephone calls. On October 22nd, the FCC passed a new order capping rates and eliminating almost all ancillary fees.

Although this order has been challenged in court, the ancillary fee cap is still in place, although the call rate has been stayed for the time being. Based on the order, we believe it will have no material impact on Lattice’s current revenue base and will open the market to a more leveled competitive land escape, creating increased opportunity for Lattice, which we begun to see in the early part of 2016.

Before I give a more detailed review of our operations and update on our new product launch and the progress we have made against some of our strategic objectives, I’ll pass the call over to Joe Noto for in-depth discussion of our financials. Joe?

Joe Noto

Thank, Paul. I will start by running down the P&L compared to prior year, starting with the revenues. The total revenue decreased 15% to approximately $7.6 million from $8.9 million. This was primarily due to we shift away from whole selling services in favor of a direct service model during 2015. The prior year period included approximately $1 million of revenue attributable to wholesale services, which terminated during our ‘14. [Ph] Excluding the effects of this termination, total baseline revenue decreased by 4% to $7.6 million from $7.9 million.

Service revenue directed facilities accounted for 66% of total revenue in the current period compared to 60% in the prior year period. After factoring out the terminated wholesale service revenue, direct service revenue increased 17.2% to approximately $5.1 million from $4.3 million in the prior year period. Call provisioning revenue as a component of total direct service revenue increased by 26%. The rate in growth in call provisioning revenues is a key operating metric of Lattice’s growth strategy. The direct call provisioning increase was mainly attributable to adding touch points for collecting prepaid deposits, either by installing key assets or integrating in with commissary systems at existing customer counts, combined with an increase in a number of customer counts chance where Lattice can provide direct telecom service provisioning to end user correctional facilities.

Turning to gross margin, gross margin as a percentage of revenue decreased to 37.7% from 40.3% prior year. Breaking out to the revenue segment, the gross margin percentage for wholesale technology revenue is comparable to the prior year, approximately 60%. And the Company expects the percentage on average to remain in 60% range.

Gross margin as a percentage of revenue for service revenue is increased to 28.8% from 25% prior year. The increase was driven by shifting to higher margin direct services and away from wholesale services.

Turning to operating loss, the Company’s loss from operation increased to $2.9 million from $1.5 million in the prior period. The increase was largely due to the reduction in wholesale service revenue and contracts which terminated in ‘14 and the decrease in wholesale technology revenue, which is a revenue stream that varies from period to period and shouldn’t be viewed as a trend.

These declines were partially offset by additional gross profit margin from the growth in direct service revenue; also factoring is increased loss with an increase in SG&A expense compared to prior year levels, as we made pre-investments in sales and marketing as we expanded geographic footprint. The current period loss includes non-cash expenses totaling approximately $749,000, which compares to non-cash of $825,000 in the prior period.

And turning towards financing activity during the fourth quarter, during Q4, Lattice received the total of $1.1 million in cash proceeds from issuance of debt and common stock, all the proceeds of which were used to repurchase outstanding convertible preferred stock, eliminating the $30 million common stock derivative overhang and greatly simplifying our capital structure.

With that, I’ll turn the call back to Paul.

Paul Burgess

Thanks, Joe. As I mentioned in my opening remarks, we continue to expand our product portfolio and rebranded our core technology in anticipation of a complete commercial rollout this year. Our new video technology completed testing in the second quarter of 2015 and we currently have it operating in three facilities.

The new technology enables arraignment hearings to be conducted remotely with HD quality video, if required. This enables a judge to arraign an inmate without having to move the inmate from correctional facility to a court house, reducing the security risk and cost of transporting inmates.

The new system enables remote visitation with friends and family, increasing the accessibility to the inmates and reducing the need for friends and family, in some cases having to travel long distance for visits. There is a secured consultation mode that provides a secure consultation between an attorney and inmate. This provides an inmate with more readily available legal assistance and reduces the need for face-to-face consultation with inmates and their attorney.

The remote visitation module is also capable of having interacting with a smartphone enabling the inmate to have a video visitation session with a commercial smartphone or tablet such as an iPhone or Android device. We also anticipate upgrading our video visitation security to include facial recognition technology that will identify the individual on the call to ensure only those people with scheduled visits -- have a visitation sessions are actually on the call.

Our new CellMate, initial product testing was completed in 2015 and we’ll be announcing the product release later this month. Although there are other tablet-based technologies being introduced to the market, Lattice has the only completely wireless handheld technology in the market that has the capability to become a fully functioning smartphone upon the inmate’s release.

While in the correctional facility, CellMate provides the inmate with the same experience as a commercially available smartphone in a completely secure environment. Capabilities of the CellMate mobile include phone and voice mail, secure access to account information, access to family connect, which is a low rate communications plan, managed commissary and phone accounts, email with keyword search, text messaging with keyword search, entertainment including music, books, and games, access to the Lattice library that provides free public domain books, educational services, broadcast, legal library and services.

Based on the initial market feedback, we believe the technology to be industry leading and provides inmates with a technology at fair price points and provides inmates and friends with access to services currently not available. In addition, the device enables facilities to provide services that ease the cost burden on their operations. We will continue to provide updates as we roll out new apps for the CellMate mobile platform.

In evaluating the Company’s strategic initiatives, the Company has performed favorably compared to industry metrics. During our evaluation, it should be noted that the Company’s focus on small and midsized domestic facilities has led to an industry leading position in technology and customer satisfaction.

Based on our findings, the Company has remained focused on our sales and marketing efforts on specific geographical sectors and product mix that will maximize our growth potential over the next three years. I would note that Lattice has been recognized by our customers as having one of the most reliable and innovative product portfolios and is known for very responsive customer service, leading to minimal downtime. Customers described our product as highly reliable and a key need for their service.

Since the clarity provided around the FCC ruling, we have begun to see our new contracts start to be awarded in 2016. It should also be noted that Lattice’s average revenue per inmate in our target market is approximately 45% higher than the industry average and facilities that incorporate our full suite of technology services, revenue increases by an additional 30%. Identifying these key factors has positioned the Company to implement the sales and marketing strategies specifically focused on our target market that has enabled the advancement of our growth strategy over the next three years.

Since we implemented our new sales and marketing strategy, we have been awarded a number of new contracts which we’ve begun implementing. Part of our key sales strategy is to increase the direct services portion of revenue to a level that brings the Company to profitability on recurring revenue alone, based on our current business model that requires Lattice to add an additional 2,700 inmates to our current platform. Based on revenue and gross margin projections, this brings the Company to EBITDA breakeven on recurring revenue alone. Adding in our technology revenue would bring the Company to profitability. With the FCC order being implemented and our new product launch, we see ample opportunity to reach this objective in 2016. We anticipate announcing additional contracts throughout the year. As a result of the international evaluation we conducted last year, we identified partners, products, and geographical territories that are best suited to facilitate the growth of the Company.

We are currently working with key partners we have identified in a number of foreign markets and are actively pursuing new opportunities in a number of new markets. We continue to see revenues from our Canadian partnership and will be recognizing additional project revenue from the market this year.

For the past two years, the FCC has been reviewing the inmate communication service industry and specifically was looking at regulating the rates that could be charged to inmates for telephone calls. On October 22nd, the FCC passed a new order capping rates and eliminating almost ancillary fees. The order passed with the 3 to 2 vote in favor. However, there was a stay granted, delaying the implementation of the new rate cap. The stay did not include the ancillary charges and these caps will be implemented on schedule. The rate caps are as follows: $0.11 per minute for debit prepaid calls in state or federal prison; $0.14 per minute for debit prepaid calls in jails with 1,000 or more inmates; $0.16 per minute for debit prepaid calls in jails with 350 to 999 inmates; and $0.22 per minute for debit prepaid calls in jails of up to 350 inmates.

Ancillary charges would be prohibited except for the following automated payment by phone or website would be capped at $3; payment through a live agent capped at $5.95; paper bill fee capped at $2; third party financial transaction fees such as fees charged by MoneyGram and Western Union maybe pass-through but no mark up. Mandatory taxes and regulatory fees may also be pass-through but no mark up. The net effect to Lattice based on our initial analysis and similar rates in some of our existing facilities, we anticipate very little impact on revenue and gross margin. The reduced call rates will cause an increase in volume and the increased volume will enable better economies of scale for offsetting cost increases.

In addition, the new order creates a new opportunity for Lattice. Unlike other competitors in the industry, Lattice never used ancillary fees, which are now best to offset extraordinarily high commission rates. Other competitors in our industry will be bound to current contracts that require them to pay high commission rates that they will no longer be able to offset with ancillary fees. These contracts will have to be cancelled, renegotiated or continue to operate at a loss. This gives Lattice an opportunity to compete for these contracts, which would otherwise not be available on a level plain field. We believe based on our business model and new technology platform, Lattice’s is one of the best positioned companies to compete in this new environment.

With that, I will open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And we’ll go ahead and take our first question from Richard Molinsky.

Richard Molinsky

Congratulations in getting, I think this year is going to be very exacting year. And I’m just wondering with all the new territories that you’ve been announcing, what is -- you mentioned that you see growth in that area, how quickly do you think we’ll see the growth there? And with a market cap of around $5 million, $6 million for this company and you’re doing better revenues than what the market cap of this company? Has there been any insider buying, either privately or publicly by you or any insides over the last year or so?

Paul Burgess

Yes. I’d answer the last part of the question. Yes, I’ve been buying stock in the Company with some of our private placement. For the first part of the question with regard to the new territories that we’ve gone into, there is really kind of what I’ll call kind of a stall on the industry while the FCC was coming out new order. Now that they’ve come out with new order and there is a lot of clarity around, we started to see a lot more contracts being awarded. Two of the new territories that we first went into were Georgia and South Carolina. And at the last part of 2016, we saw a lot of interest, and now you’re going to start to see us announce contract awards in those areas, specifically Georgia first and then South Carolina. And those areas were very -- identified as two very large markets as far as what our target market is, and we should start seeing announcements there shortly, as we’ve been notified that we won out a number of new contracts.

Richard Molinsky

What services are they most excited about, if you go from like one to like three or four, like when you go approach a state or prison and you show them all different services and products you have, what are they like most impressed with? [Multiple speakers] I’m just curious.

Paul Burgess

Yes. What we’re starting to see is lot more activity around and we see a lot more growth coming over the next two to three years; there is a lot of the video based technology as well as our wireless handheld device. I think what you’re going to see touch on first is the video technology, specifically things such as the video visitation, arraignment; those types of services. They’ve already started to touch on, there’s definitely a lot of interest in that area. With the handheld device, there’s a lot of lot of interest but it’s fairly new. So, I think you’ll start to see that take rate come a little later but right now we’re seeing a swell of demand around the new video products that we’ve launched.

Operator

And we’ll go ahead and take our next question from Thomas Pfister with RedChip Companies. Sir, your line is open.

Thomas Pfister

So, my first question here, I just wanted to touch again on the FCC decision with regards to maybe some of the other companies in the industry potentially having to renegotiate contracts. How many of those companies maybe do you foresee doing this, given that some of the insularly fees now are -- they are not able to collect on any more but some of the other fees that were supposed to be renegotiated or at least held for the time being.

Paul Burgess

It has more to do with how those contracts were structured. So, the way some of the contracts were structured is what they do is they’d say we’ll pay you a very large portion of the call revenue. So, they weren’t really -- they were actually operating the call revenue at a loss where they were making the money was on the ancillary fees. So, they’d still be stuck having to pay the high percentage of the call rates, which we never really got involved in that. We never really charged the high ancillary fees to recover what we were doing as far as revenue sharing on the call rate side. So, from that perspective, it didn’t really, even though the call rates got stayed, it didn’t really help solve the issue for them because the ancillary fee cap is still in place. And that was probably the -- had the most piece of what the FCC was putting in place because that’s where the high cost for the call was really been generated on the ancillary fees.

Thomas Pfister

Okay, great, thanks for the color there. My next question, I’d say I think you indicated earlier in the call that during this year you have the full rollout of your new commercial solution on. Can you just maybe give some color on kind of generally when you expect that to happen?

Paul Burgess

Yes. You’re going to see an announcement this month on the CellMate technology, even though we’ve been talking about it with correctional facilities; we’ve talked about rolling it out in amongst the investment community as well. But this will be our first public announcement of the -- fully public announcement of the commercial rollout of the technology. We actually went and did an installation in Florida, did some testing, we actually did some video shoots of the product that we’ll be launching later this year as far as our marketing program on the new CellMate product. And you’re going to see additional announcements on the video visitation as we implement new technology module on that as well, later in the year. But first announce that you’ll see will be on CellMate and that will be this month.

Thomas Pfister

Okay, great. And then just my last question here, you’ve had a number of announcements here so far in 2016 relating to net visit installations. So, given what looks to be a pretty big uptick in volume there, should that receive maybe like a margin impact there on your statements here in the first quarter, anything of that nature?

Paul Burgess

Yes, you’ll see an uptick in Q1 and Q2 with those installations and then you’ll probably even start to see a bigger ground [ph] follow amongst the video products later in this year. We’re just going to see a lot of demand for it and what they’re looking for is a fully integrated voice video system, and with CellMate that just adds to -- adds another revenue stream to that as well. So, even though the revenue you’re seeing now on a recurring basis is based just on to telephony. So, as we add these other products, we are going to be adding another revenue streams on top of what we currently have. So that’s where you are going to start to see the ground as well.

Thomas Pfister

Okay, great. Thanks for the color there, guys, and I really appreciate it. And it’s just great to see the growth. It looks like 2016 is going to be an exciting year for Lattice.

Operator

And we’ll go ahead and take our next question from Harold Scattergood with Boenning & Scattergood.

Harold Scattergood

Paul, I have series of questions. Number one, could you, as Joe, go back over the direct call figures that he was discussing in his prepared remarks? I don’t think that unless they are part of the filing, I don’t think that they were incorporated in the press release.

Paul Burgess

The direct call revenue, which is the core of our revenue was approximately a little over 5 million this year and that included all the direct provisioning. So that’s just the recurring revenue that we provide directly to the facilities. And what you are going to start to see amongst that current revenue base is that as we add other services, the existing base, revenue base will grow and plus when we add new facilities, that will add on to at as well. So, in the future when we talk about the future growth of that revenue base, it’s not only expanding by adding new facilities, it’s also expanding the amount of revenue that we get per inmate, and that’s because we’re adding things like the video piece to it; when we add CellMate, that’s another revenue piece to it. So, those just add on to what we currently own. Our only reporting and only where we have is the telephony piece; in 2016, you’re going to start to see other revenue streams added to that.

Harold Scattergood

Is there a base figure per institution that you charge now for your services, Paul or is everything à la carte, so to speak.

Paul Burgess

No, it’s really à la carte. And what you start to see is that we’re generating probably in the area of about $800 per bed per facility. So, each facility for example has 100 beds then we would be generating about $80,000 a year from that facility. However, what we’re starting to see is that revenue per bed start to increase as we add other technologies and other services on top of that.

Harold Scattergood

All right. So, how many beds are you servicing now?

Paul Burgess

Servicing now approximately we have about 6,700; we should be adding close to 2,500 to 3,000 over the next year. So, we’re looking to trying to double that figure over the next year.

Harold Scattergood

And your terminology is beds not inmate, but I suppose they are interchangeable, right?

Paul Burgess

Yes. Because what tends to happen is that actually the internal metrics are used as what’s called average daily population. So, you may have a prison that has 1,000 beds and they may drop one month to 800; they may go up to 900. But just as a rule of thumb, we use how many beds the facility can house because they usually operate very close to 100%. But there is a trend obviously.

Harold Scattergood

And video arraignment offering that you have where you have an installation at the court house or wherever the judge is, who pays for that; does the facility pay for that or does the local government or the local jurisdictional people pay for that, the police station or whoever?

Paul Burgess

Both. So, in another words…

Harold Scattergood

Is that a separate line then for the arraignment between the facility and whoever the judge is?

Paul Burgess

Yes, it is the secure dedicated line between the court house and the correctional facility. In another words, the inmate will be in the correctional facility, so this would be put in a room within the correctional facility, so they won’t have to move outside of the correctional facility where he has the camera and there is a video, so he can see and hear the judge and vice versa and the judge will be in the court house. So, we can do the arraignment and everything remotely.

Harold Scattergood

Okay.

Paul Burgess

And that reduces things like transportation cost and obviously security risk.

Harold Scattergood

With respect to CellMate, are all the offerings that you are showing now on let’s say for a phone or voicemail text, the comments are in phone messaging and entertainment, are they all available now, maybe they’re not subscribed for it but is the technology or is that -- is the full menu now ready to go?

Paul Burgess

We’ve tested it internally; we won’t make it all commercially available; we’ll do that incrementally throughout the year, as we test it.

Harold Scattergood

Okay. When do you think -- will everything be -- when will all the offerings be out and available?

Paul Burgess

We’re planning having that all out this year.

Harold Scattergood

Okay, well, by the end of the year then I guess.

Paul Burgess

Yes. But you are going to see an increment, so we’ll still be selling and implementing. And there are things for example like the specific content where we’ve got to negotiate specific contracts for that. So, as part of technology, it’s available as far as getting the service and getting it economically viable for us. That’s what we’re in the midst of negotiating.

Harold Scattergood

Okay. So, if an inmate has a subscription to iPhones or something like that, will he be able to or she’d be able to bring their offering over on to your system or they have to start fresh?

Paul Burgess

No, it’ll work the other way around. So, once they are released, they will be able to take whatever purchased outside but when they’re incarcerated, they can’t bring anything from the outside.

Harold Scattergood

Is Dragster part of the suite of offerings that -- or is that something different?

Paul Burgess

Yes, it’s just something that a lot of facilities were requesting referring to electronic cigarettes. So, we with one of our partners have been supplying them to the facilities as requested but it’s not a core revenue stream for us but it is value added services that some of our facilities wanting to see.

Operator

And we’ll go ahead and take our next question from Mitch Ratner with T.R. Winston.

Mitch Ratner

I have a quick question for you. You mentioned something about 2,700 inmates. Was that the number that brings you to breakeven; is that what you’re mentioning?

Paul Burgess

Yes. If we get all our product offerings out there and we add an additional 2,700 inmates, the annualized recurring should bring us to EBITDA breakeven. Now, we anticipate being able to bring in more technology sales above and beyond that. And that’s what will push us into profitability. But yes, that’s our internal target and that will be approximately 50% growth rate based on the recurring amount of inmates. But we had expected revenue to exceed that because we’re adding more product mix in there.

Mitch Ratner

I got you, okay. Very interesting, all right. Good work there, Paul; looking forward to 2016.

Operator

And we’ll take our next question from Clay Underwood, [ph] Private Investor.

UnidentifiedAnalyst

I want to first of all thank the other participants for excellent questions, which they did answer some of my questions already, which is great. First question is with the average number of inmates per facility that you all serve now and how many facilities in total are you operating in?

Paul Burgess

That kind of changes as it goes. Right now it’s approximately 175. But what you -- what we tend to focus on is kind of a peak amount. We try and focus on 600 beds and below. So, when you go into a new market, typically what happens Clay as you get some of the smaller facilities first like the 50, 100-bed facilities and then that starts to create a bit of a ground, then you start to get the larger one. So that average in a market will be low at the start and then start to increase. But in our mature market like Oklahoma for example, it’s about 175 per facility.

Unidentified Analyst

How many facilities do you currently serve?

Paul Burgess

It’s approximately 50 and growing.

Unidentified Analyst

That’s fantastic. So, to get this 2,700, do you need to get to breakeven point, not going to be very long, may be two quarters something like that?

Paul Burgess

If you look at it, there is a demonstrating timing in the contract and implementation. So, since there was kind of a low in the industry last year, we’re starting to see the build-up of contracts being renegotiated with us. Once we sign them, then there is -- you have to get the facilities up and operational and that’s usually a 30 to 90-day period. But based on the current pipeline we have, we should defiantly see us hit that number this year unless we see something in the market that was unforeseen. But based on what we currently have in front of us, we are pretty confident.

Unidentified Analyst

Well, that leads to a next question about how much capital expense do you need to have for each facility, when you first on the paper work to the time that you start generating revenues?

Paul Burgess

Yes, most of -- because our system really operates it’s cloud based. So, all you are really looking at is at internet connectivity back to the facility making sure that they have bandwidth to facilitate the service, there isn’t a lot of technology implementation right on site. The bigger cost is going and doing site surveys, testing everything, turning, so it’s more of the manpower intensive and doing the training and making sure that the facilities are properly ordered from whether it’s AT&T, Verizon, whoever it maybe and test it. So, the average cost per facility is anywhere from $5,000 to $10,000 but we spend that out over the likely contract which is usually three to five years.

Unidentified Analyst

That’s fairly low investment per location, I think that’s fantastic.

Paul Burgess

Yes, it is fairly low.

Unidentified Analyst

Right, to another question, I realize that you have hired some -- probably four sales people and I wondered how are they doing, are they done with their training? I mean they always have ongoing training, but their initial training, in other words, are they hitting the ground running or are they still going through some training?

Paul Burgess

You mean, as far as our sales force?

Unidentified Analyst

Right.

Paul Burgess

Yes, we are actually continuing to hire but the new markets we opened, the reps, we have folks that are doing very well. We started to see -- we have some contracts announcements coming in from Georgia here, probably within the next couple of weeks. So, we are starting to see -- seeing they hit the ground running that would be a stretch. There was a lot of training involved; so, we are starting to see that bear fruit now.

Unidentified Analyst

Okay. Well that’s fantastic. Really the final question I have is that you got a very large product breadth, I mean CellMate and video conferencing and the list goes on down to the smoke the cigarette. Can you talk a little bit about margins on those, give me general ideas, which ones are more profitable, which ones are coming on line that are rally going to boost your percentage of profit going forward? And which ones are on the low end; do you think you’re facing anything else or just trying to enhance it, so it’s more profitable?

Paul Burgess

Yes. What you tend to see is divide it into a few categories. So, for example, things such as the video and video arraignment that’s going to be key to these correctional facilities; they like the fee they needed and fee reduces their cost. So, we should continue to see strong margin and margin growth in that area. Telephony is kind effects; it’s very much a commodity when you talk about a pearly just a straight telephone call. So that’s probably going to be one of your lowest margin pieces.

The other low margin pieces when we actually do collections of cash or put money an inmate’s account, so that’s kind of lower margin stuff for us; it’s very technology intensive. So that’s a area that we are really looking to outsource, just because there is no real growth for us in that area and we want to focus on our core supporting technology. Telephony, even though it’s a commodity and is a lower margin, it’s defiantly a requirement, so you have to have it as part of your service. But if I had to phase out one piece, I would say the money collection or money transmittal piece what we call trust accounting team; we won’t phase it out, we’ll probably just outsource it to someone who frankly does it much better than we do.

Unidentified Analyst

That’s a great plan. Any thoughts of outsourcing the telecom part, still be able to get some revenue out of it?

Paul Burgess

No, because the telecom part also comes with a lot of security and investigating tool sets that are proprietary to the Company. So, in this industry, you really have to have your own proprietary technology in that area, which we have. So, outsourcing that piece isn’t something we would initially look at.

Unidentified Analyst

I promise you, this would be my last question. On the -- really the reason I doubled my shareholder -- the number of shares that I hold in Lattice is that when CellMate came out, I got very excited about that because I know how much my wife and I spend on phone. We have two older daughters who have phone, we have phones. I mean I work in a facility where everybody is carrying these phones and I am hearing they spend any fortune on these phones. I wanted to know what’s the initial investment on those phones is and what’s the recovery on the investment, how long it would take?

Paul Burgess

We actually -- the original design and everything actually has been in place for a few years now when it came from the original contract actually came from a project we’re working on, in Canada. So, it was actually funded by a third-party for us to develop the technology for them.

Unidentified Analyst

Okay.

Paul Burgess

But as far as what we saw was the demographic of people in prison tends to be fairly -- yes, tends to be between 18 and 30. And I think, if you look at anyone sub-30, their preferred form of communication is texting, it’s not talking to people anymore. And that’s what we want to make sure we incorporate it as a technology that was very similar to the smartphone experience that you and I may have out on the street that so when come in there, it’s technology that they’re familiar, we’re familiar how to use, familiar how to communicate. The challenge was how do you put that in a secure environment and that’s really where the core of the development was over the last couple of years.

Unidentified Analyst

That’s great. Paul, I appreciate all the questions and also the follow-ups on email. I do appreciate it.

Unidentified Company Representative

Alright. Thank you, Clay.

Unidentified Analyst

Good luck.

Paul Burgess

Thank you.

Operator

[Operator Instructions] We’ll go ahead and take our next question from Bill Lee, [ph] Private Investor.

Unidentified Analyst

Couple of questions or my quarterly question is what’s happening with the DOT, [ph] anything at all as far as the money that they owe you?

Paul Burgess

Yes. I mean they went through an audit that finished last year. And as far as collection, I don’t have a timeframe for that, but they want through audit, rates were approved, now you deal through a contracting office and we don’t have any more clarity on that unfortunately.

Unidentified Analyst

I mean it’s almost year and half or two years, is it?

Paul Burgess

Yes. I can’t really explain how the federal government operates, but…

Unidentified Analyst

I mean you still have -- are you still confident you get some money out of it?

Paul Burgess

Yes, I mean they owe us. So, we’re expecting to get money out of it, it’s just the timing issue with us. So, we’re not banking on it, but they still owe to us.

Unidentified Analyst

Okay. Second question, I know last year, we had talked a couple of times and it was your hope to get on the NASDAQ at some point and after Bulletin Board. The only way to see that happening is join reverse split. Have you had any discussion regarding that or discussion regarding getting on the NASDAQ?

Paul Burgess

Well, we’ve had a couple of bankers coming and talk to us about the process for doing that. I think our priority is like I said, the industry kind of put in a bit of a law last year with the FCC order pending coming out. I mean actually a lot of companies in our industry were having trouble getting valuation, because they had no idea what the revenue was going to look like post FCC order.

Now that we’ve got some clarity around that, I think the industry is starting to open up; it’s becoming a little more competitive. So, our goal for this year is to get that product out there launched, specifically the video and the CellMate platform that should allow us to pull the ground as well of business and of potential growth for the Company. And with that, I think we’ll revisit what our strategies are going to be for public listing side of things.

Unidentified Analyst

Okay. Anybody approached to you as far as a merger or buyout?

Paul Burgess

There is always discussions in our industry and I’ll leave it that.

Unidentified Analyst

I mean it sounds like your plan is coming aligned pretty well and may be come to fruition in 2016. So, I would assume some company maybe in Canada would look at either buying you or emerging?

Paul Burgess

Yes, I think with our product mix, once we start to get a good ground flow on that, I think a lot of activity will pick up on that side. The other side of that equation is that with the SEC order, there is a lot of smaller companies who have contracts and providing services and may not want to be in the business any longer. So there maybe opportunities on that side as well, but what continue to evaluate that as we move forward.

Unidentified Analyst

Okay. That’s it. Thanks for your time.

Paul Burgess

Alright. Thanks Bill.

Operator

And we’ll take our next question from Harold Scattergood with Boenning & Scattergood.

Harold Scattergood

Follow-up, Paul, with the CellMate offering, can you discuss how you’re going to charge that to the inmates; will that be a base cost plus or a total package or what you’re thinking there?

Paul Burgess

The CellMate will sell to an inmate for $75, which costs us anywhere from 40 to 50 to manufacture one and then you’ll see the recurring revenue stream from voice, texting, music downloads, et cetera come from the platform. So, the other piece we’re looking at is something may be much shorter term; they may be less than 30 days. So, we’re also looking at renting units to inmates but we haven’t come up with a model for that, we’re just going to be testing that all probably in Q2, Q3 as far as the rental model goes.

Operator

And we’ll take our next question from Dan Boyer with Boenning & Scattergood.

Dan Boyer

Run me through the process of your sales effort, specifically in Georgia or an indentified market. How you go in, who you talk to and who you have to wine and dine and interest in your product and whatever; can you do that please?

Paul Burgess

Yes. As far as when we go into a new territory who you’re primarily dealing with is really two groups of people. You’re dealing with the sheriff and the sheriff in any given state is responsible for three things. He’s responsible for law enforcement, courts and correctional facilities. So, the first step is dealing with the sheriff and then the second is the jail administrator, so they’re responsible for actually operating the jails and prisons. So, what we tend to typically do when we go into a new market is we approach the sheriff’s association, so we sell to the whole sheriff’s association and the key for us is to make sure that our first contract is with someone who’s very influential over the sheriff’s association for that state. Once we do that then we’re able to build a bit of a groundswell of recommendation for that state. So, it really starts to focus on the sheriff’s association and those that are key within the sheriff’s association in any given state.

Dan Boyer

Okay. And have you been able to get any benefit from testimonials from Oklahoma and whatever as far as presentation to new markets.

Paul Burgess

Yes, we have. Although I would categorize it as best, those testimonials are better when they come from within the state. That’s why we tend to focus on the sheriff’s association because once you’re in there then your name and your sponsorship is around the sheriff’s association and that’s worked best for us, although we have testimonials from other states that tend to be more effective when they’re from within the same state. So, a good example also has to do with Florida which is a neighboring state which was in one of our target markets but because we were marketing in Georgia, started to get some good representation there, some of the facilities in the northern border area of Florida have signed up but that’s not the county being one for example and that came from a marketing effort more in Georgia than Florida. But it tends to focus on the sheriff’s association.

Dan Boyer

Final question, Paul. You have hired some sales people, ideally -- well, let me ask you this. Can they handle the level of interest that you would like to create or ideally -- how many additional sales people would you like to bring on in the next year.

Paul Burgess

Four, four probably within the next 12 to 18 months is what we’re looking at and that’s really based on the territories that we’re going after with the next two being Georgia and South Carolina, where you have representation there, we’re looking at expanding that and there’re a couple of other states that we’re looking to hire reps in and then we’ll need to expand on that probably in the latter part of 2016-2017. So, we’ll probably add two more territories this year and then at the latter part of this year, early next year, we’ll add another two.

Dan Boyer

Paul, thank you very much.

Paul Burgess

Alright, thank you.

Operator

And it appears there are no further questions at this time. Paul, I’d like to turn the conference back over to you for any additional or closing remarks.

Paul Burgess

Alright, thank you operator. On behalf of Lattice, I want to thank everyone for their interest and participation on the call. If you have any interest in visiting the Company, let myself or Jon Cunningham from RedChip know and we’ll make sure it gets arranged. Again, thank you for joining us on the call. We look forward to speaking with you again in the near future. Operator?

Operator

And that does conclude today’s conference. Thank you for your participation. You may now disconnect.

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