Practical Research Partners Issues Report on LOTE

Lot78 Inc. (OTC: LOTE); View Undervalued

ORLANDO, FL / ACCESSWIRE / June 1, 2017 / We initiate coverage on Lot78 Inc. (OTC PINK: LOTE) with a view of undervalued. LOTE is primarily targeting the burgeoning electric and hybrid vehicles market by providing electric car charging stations under its flagship brand, Juice Bar. So far, Juice Bar electric charging stations have been installed in 19 states and 68 cities across the US.

LOTE currently generates negligible revenues (~$8,410 in 1Q17 and $116,646 in FY16), but the prospects look bright considering the rapid expansion of the electric vehicles (EV) industry. We believe recent approval by the United States government for Juice Bar stations in federal facilities, expansion opportunities in Canada and a deal with the Santa Monica Utility District will provide catalysts to revenue. EV adoption is accelerating and will likely continue to accelerate, most likely in a non-linear fashion in our view. With a dearth of publicly traded companies to participate in the EV market, LOTE represents a unique investment opportunity; however, we caution that the risk remains high.

INVESTMENT HIGHLIGHTS

An ancillary play on burgeoning EV market: The International Energy Association (IEA) expects to see 30 million EVs on the roads by 2025 and 150 million by 2040, up from just 1.3 million as of 2015. The electric car stock reached 1.26 million in 2015, 100 times more than in 2010. New registrations of electric cars increased by 70% between 2014 and 2015, with over 550,000 vehicles being sold worldwide in 2015. Many believe these estimates to be conservative and even IEA in their recent note stated it intended to review their forecast in light of recent announcements by China and India.

China stated that it wants alternative fuel vehicles to account for at least one-fifth of a projected $35 million annual vehicle sales by 2025. India is considering even more optimistic targets with electrifying all vehicles by 2030. The changes could be significant because a growing number of countries are stepping up their policy initiatives to support EV adoption. France expects to phase out gasoline powered vehicle sales completely by 2040, while Norway is targeting to achieve the same goal by 2025.
We believe the worldwide trend towards EV presents tremendous opportunity for LOTE.

New strategic partnerships and approvals to boost growth: LOTE has signed an exclusivity agreement with sPARK Electric Vehicle Charging to market, sell and install Juice Bar Electric Vehicle Charger products in Canada. This positions the company to tap the recently announced $20 million incentives by the Province of Ontario to build electric vehicle charging stations. According to CEO David Schmid, the Canadian market is rapidly growing as government pushes for faster EV adoption.

Further, LOTE has won several other approvals and pilot projects in recent times including 1) electric vehicle charging station pilot project for a Santa Monica Utility District(SMUD), 2) US government approval for Juice Bar to be sold via General Services Administration (GSA) marketplace around the world, 3) a new pilot with Los Angeles Department of Water and Power and 4) won a new electric vehicle charging station contract at an airport parking facility.

VALUATION

Our thesis assumes that EV market will witness exponential growth and will replace the traditional internal combustion engine market over the next few decades. Though the opportunity remains very large; the industry is still nascent and we caution investors that it is a high risk bet.

Stock Details (May 26, 2017)

Key Financials

Company History

The company was incorporated in the State of Nevada on June 27, 2008 and has changed names several times. On November 12, 2012, the company became Lot78, Inc. Finally, the company very recently entered into a Letter of Intent to merge with Compound Holdings, LLC. According to the merger agreement signed with this company, the business entity will finally change its name to Compound Holdings, Inc.

INVESTMENT THESIS

LOTE is primarily targeting the burgeoning electric and hybrid vehicles market by providing electric car charging stations under its flagship brand, Juice Bar. EV adoption is accelerating and will likely to continue to accelerate, most likely in a non-linear fashion in our view, as governments around the world continue to favor electric vehicles over the traditional internal combustion vehicles.

We believe recent approval by the United States government for Juice Bar stations in federal facilities, expansion opportunities in Canada and a deal with the Santa Monica Utility District will provide catalysts to revenue.

Electric vehicle market set for exponential growth: Electric cars are beginning to compete with gasoline models on both price and performance. The most expensive part of an electric car is the battery, which can make up half the total cost, according to BNEF.

But battery prices are dropping by about 20 percent a year, and automakers have been spending billions to electrify their fleets. Volkswagen AG is targeting 25 percent of its sales to be electric by 2025. Toyota Motor Corp. plans to phase out fossil fuels altogether by 2050.

Electric cars currently make up about 1 percent of global vehicle sales, but traditional carmakers are preparing for transformation. By 2020, the avalanche really begins, with Mercedes-Benz, VW, General Motors Co. and others releasing dozens of new models. By 2020 there will be over 120 different models of EV across the spectrum.

Fig 1: Electric Car Boom – Models by style and range available by 2020

Source: Bloomberg New Energy Finance

The International Energy Association (IEA) expects to see 30 million EVs on the roads by 2025 and 150 million by 2040, up from just 1.3 million as of 2015. The electric car stock reached 1.26 million in 2015, 100 times more than in 2010. New registrations of electric cars increased by 70% between 2014 and 2015, with over 550,000 vehicles being sold worldwide in 2015. Many believe these estimates to be conservative and even IEA in their recent note stated to review their forecast in light of recent announcements by China and India.

Fig 2: EV to grow from 1.3 million in 2015 to 150 million by 2040

Source: IEA

China stated that it wants alternative fuel vehicles to account for at least one-fifth of a projected 35 million annual vehicle sales by 2025. India is considering even more optimistic targets via electrifying all vehicles by 2030. The changes could be significant because a growing number of countries are stepping up their policy initiatives to support EV adoption. France expects to phase out gasoline powered vehicle sales completely by 2040, while Norway is targeting to achieve the same goal by 2025. We believe the worldwide trend towards EV presents tremendous opportunity for LOTE.

According to forecasts by a third-party researcher, sales of EV service equipment globally will grow from approximately 0.425 million units in 2016 to 2.5 million units in 2025. The electric vehicle charging stations market is estimated to reach ~$12.6 billion by 2022, according to a forecast by a third-party research group. Major utility companies are also working to upgrade their grid infrastructure in order to prepare for mass consumption of electricity by electric vehicles.

New strategic partnerships and approvals to boost growth: LOTE has signed an exclusivity agreement with sPark (www.sparkev.ca) Electric Vehicle Charging to market, sell and install Juice Bar Electric Vehicle Charger products in Canada. This partnership will help LOTE target opportunities associated with the Province of Ontario's $20 million incentives to build electric vehicle charging stations.

sPark currently offers premium electric vehicle charging technology, in combination with customized installations and creative marketing options in order to provide a unique charging experience. sPark also provides turnkey EV Charging solutions to residential and commercial, as well as industrial clients in Canada. We believe Juice Bar Electric Vehicle Charging Stations will benefit from sPark's experienced and diversified management team.

LOTE has won its sixth electric vehicle charging station installation at airport parking facility in Seattle. Previously, the product has been installed at airport parking facilities in Hawaii, Colorado, Ohio, Connecticut and New Hampshire

Additionally, the company recently announced that it is participating with Los Angeles Water and Power (LAWPD) in an innovative pilot program, which uses light poles and the electricity in order to install electric vehicle (EV) charging stations.

According to CEO David Schmid, the pilot program if successful could be a game changer. It will provide quick and cost effective way to add to any city's EV infrastructure.

Moreover, the US Government recently approved Lot78's electric vehicle charging station could be sold through the General Services Administration (GSA) marketplace for various Federal Facilities across the globe. In our view, this opens up access to large marketplace of electric vehicles users around the world.

Lot 78, Inc.'s Juice Bar Electric Vehicle Charger was chosen as supplier for a SMUD (Santa Monica Utility District) electric vehicle charging station pilot project, slated for a term of 5 years with an option to renew for an additional 5 years. We see pilot program awards such as this one as a huge validation of company's product.

FINANCIAL AND FUTURE OUTLOOK

Revenue/Drivers

LOTE is focused on the expanding electric vehicles market by setting up electric charging stations. In 1Q17, LOTE acquired ~20% stake in Garage Juice Bar (which sells and markets Juice Bar electric vehicle charging stations). LOTE expects to acquire the remaining stake by the end of 2017. LOTE entered into an agreement with sPark, a Canadian firm, to market and sell Juice bar EV stations in Canada. Similarly, various other pilot projects, contract wins and government approvals will continue to drive revenue growth for the company. The company revenues stood at ~$8,410 in 1Q17.

Recent Results/ Outlook

In 2016 as well as 1Q17, LOTE registered negligible revenues. With the acquisition of Garage Juice Bar to be completed in 2017, we expect significant ramp in revenue going forward. The recent tie-up with sPark in Canada and contract win at a parking facility will provide fillip to its revenue. Based on the recent announcement by the Province of Ontario, the government intends to give $20 million to private companies to develop a network of electric vehicle charging stations.

LOTE has had a history of diluting equity to raise money to fund its business activities. We expect more dilution going forward which will primarily be used for general corporate expenses and marketing of Juice Bar EV.

VALUATION

Due to the early stage of the EV market, valuations are still very difficult to determine, in particular due to a lack of revenue and data on the number of users using company's services and the fact that a large amount of projects are still in pilot stages. However, a number of trends have been emerging, with entire ecosystem of automobiles moving towards adoption of cleaner energy, most likely electric vehicles. The electric vehicle charging station services market is expected to be a multi-billion-dollar industry with projections of ~$12.6 billion in revenues by 2022, compared to a market size of ~$2.6 billion in 2016.

Assuming a market share for LOTE in the range of 0.5%-1% by the end of 2018, LOTE could generate revenue growth. The company's closest peer, Car Charging Group (OTC: CCGI) trades at ~4.7x LTM sales. Assuming a 20% discount to the multiple, we value LOTE at 3.7x FY18 sales of $33 million (mid-point of the range discussed above). We assume no dent and cash as per the 1Q17 filing.

Competition

LOTE's peer group is comprised of companies involved in the providing of electric vehicle charging station services. Some of the listed peers include Car Charging Group (CCGI), AeroVironment Inc. (AVAV), Delphi Automotive Plc (DLPH) and Tesla Motors Inc. (TSLA). Some of the unlisted players include ChargePoint Inc., Pod Point Ltd. and SemaConnect Inc.

Equity Dilution

We see continued access to funding as a key risk for LOTE. The company has limited resources at the end of 1Q17. So far, LOTE has issued ~163.5 million shares and looks forward to raising further capital.

OTC/Penny Stock

As a stock listed in the OTC markets, LOTE shares are subject to higher price volatility and lower liquidity relative to stocks traded on a major exchange.

Competition

LOTE operates in a highly competitive industry. We expect the company to face significant competitive forces from the existing competitors as well as new entrants.

Regulatory Risk

The growth of the EV industry is contingent upon favorable regulatory policies and various rebates announced by the governments around the world. Any adverse regulation, could slow down the EV market and materially impact LOTE's growth prospects.

MANAGEMENT TEAM

Mr. David Schmid, Chief Executive Officer

Mr. David Schmid joined LOTE as its Chief Executive Officer in March 2017. Prior to this, he was working with Connecticut-based Propark America and led its transformation from a small regional parking management company to a leading national parking management firm and parking real estate acquisition company. Mr. Schmid held several key positions within Propark America including Chief Financial Officer, Chief Investment Officer and Chief Operating Officer. As COO, Mr. Schmid was responsible for daily operations of over 400 locations in 45 cities in 14 states. This responsibility encompassed 1,200 employees and generated over $100 million-dollars in cash flow with $1.2 billion dollars in parking assets.

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