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Signal Bay Inc (OTCMKTS:SGBY): A Hidden Cannabis Advisory Firm

Signal Bay Inc (OTCMKTS:SGBY): A Hidden Cannabis Advisory Firm
Written by
Jarrod Wesson
Published on
March 30, 2017
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InsidrFinancial

Today, I will tell you about a hidden company that does not communicate a lot about its business, but it is considered a unique entity in its sector; the cannabis industry. We covered the company in the past in this article, written by my colleague Alex Carlson. Now, we come with some more information. Its name is Signal Bay Inc. (OTCMKTS:SGBY) ("Signal Bay"). The company operates through three subsidiaries, namely CannAlytical Research, Signal Bay Services, and Signal Bay Research, by providing "expert services, advisory services, analytical testing services, and operating services" to the medical marijuana industry.

Business segments

It is always very important to understand the business of the company when we want to invest in it. In order to do this, I encourage you to read its annual report to check the business units of the company. According to its most recent 10-K, the company has three business segments:

  • Corporate: it provides management and corporate reporting functions for the whole company.
  • Consulting: it provides consulting, licensing and compliance services to other companies operating in the cannabis industry. The brand used for this purposes is Signal Bay Research.
  • Testing services: it makes analytical testing services to other companies under the brand of the company called EVIO Labs brand. The company runs three labs; CR Labs, Inc. d/b/a EVIO Labs, Bend, EVIO Labs Eugene d/b/a Oregon Analytical Services and Smith Scientific Industries d/b/a Kenevir Research.

The company reported the following financial figures in its annual report. Please take a look:

Source

These are very interesting figures. The revenue in 2016 grew from that of 2015 in both the Testing Services and the Consulting Services. In addition, there was very significant change in the amount of assets of both segments, which may mean that the company sold or wrote down some assets in the Consulting Services business unit and acquired another company in the Testing Services segment. We will investigate further in the following part of the article.

Acquisitions - What does it mean for the firm?

As I expected, the company engaged in three acquisitions or asset purchase agreements in the period 2015-2016. Let's have a look what were that acquisitions and how the parent company paid for it. The acquisitions are the following:

  • CR Labs, Inc.: On September 17, 2015, Signal Bay Inc. acquired 80% ownership of CR Labs, Inc. and used 40,000,000 shares of common stock to pay for it. According to the annual report, the total fair value of the shares was $400,000. I can see that the total amount of assets acquired were valued $564,051, out of which $446,743 were goodwill. This amount of goodwill looks very important, it means that the CEO and the people in charge of the valuation of "CR Labs" believed that the firm acquired had great future potential. The company assumed a total amount of liabilities of $64,051.
  • Oregon Analytical Services, LLC: On May 24, 2016, the company used a purchase agreement to acquire 100% of the assets of this firm. Under this agreement, the company issued a promissory note and accepted to pay certain amount every year. We believe that the reader may prefer to read the agreement by itself:
"Under the purchase agreement, the Company issued a promissory note in the amount of $700,000 which is due and payable by May 23, 2010, the company is required to make annual payments of $100,000 if the minimum trailing revenue for EVIO Labs Eugene exceeds $700,000 annually during the term of the promissory note, the Company issued another promissory note in the amount of $72,500 in connection with the acquisition, and 200,000 shares of Preferred Series C Stock. These shares had an acquisition date fair value of $80,000. " Source
  • Smith Scientific Industries, Inc.: On June 1, 2016, the company signed a share purchase agreement to buy 80% ownership of Smith Scientific Industries, Inc. This agreement is very similar to the one executed with Oregon Analytical Services, LLC. So, we will let you just read the agreement as it was shown in the annual report:
"The Company applied the acquisition method to the business combination and valued each of the assets acquired and liabilities assumed at fair value as of the acquisition date. The cash and accounts payable were deemed to be recorded at fair value as of the acquisition date. The Company determined the fair value of property, plant and equipment to be historical book value. The preliminary allocation of the purchase price was based on estimates of the fair value of the assets and liabilities assumed. Under the purchase agreement, the Company issued a promissory note for $336,000, with required $25,000 to be paid at closing, $75,000 to be paid in two installments within 180 days, and the remaining balance in three annual installments of $58,475, and 300,000 shares of Preferred Series C Stock. These shares had an acquisition date fair value of $135,000." Source

The Insider Financial team would like to note that the company used shares to pay these transactions. Thus, they are actually diluting the shareholders. However, investors may understand that these transactions were good for the company and that they will bring future cash flows. If this is the case, shareholders may buy more shares and increase the demand for the stock, which ultimately could make the share price pick up. A very good question is whether this is actually happening right now, let's have a look at the chart of the firm:

Source

According to the chart, the investors appreciated the decisions taken by the management in the period 2015-2016, when the acquisitions and purchase agreements were made. We believe that if the company continues to acquire other businesses making the revenue line grow, the share price may increase. The market is responding very well to these business combinations, so why not continue doing them.

Type of securities issued

Investors normally understand that relevant companies with ambitious targets such as Signal Bay need money to engage in business projects. No pain no gain? Well, the company is actually using different types of securities to raise capital from investors. We may not need to be afraid, as big corporations, such as Apple or Amazon, also use different types of securities to finance their operations. Take a look, it is all written in the annual report in the note 6,7,8 and 9:

  • Series A, B, C,D Convertible Preferred Stock: Each has different conversion rates and conversion price.
  • Common Stock: There were 850,064,268 and 398,648,595 shares of common stock issued and outstanding at September 30, 2016 and 2015 respectively. It is important to monitor whether the company issues more and most importantly understands why the company needs the money for the new shares. If you don't want to check all the time the company website, we recommend you to subscribe to the website newsletter, wherein you will be able to check these changes.
  • Convertible Notes Payable (derivative liabilities): The company has different types of notes with different convertible rates. We encourage you to take a look at them, as you may prefer to buy one of these liabilities instead of buying the common stock. These securities offer a reduced exposure to the business activity of the firm and, therefore, are for investors with much more risk aversion.

Conclusion

Signal Bay is not very well known, since it brings services to other businesses instead of providing product to consumers. However, in this article, we have shown that the company is growing its assets at a high pace through acquisitions financed with share of the company. The transactions are bringing good returns to investors in the market, since the investors actually appreciate these business combinations. We believe that if the assets’ growth continues and the market keeps enjoying these tasty acquisitions, the share price may continue its uptrend. In any case, we encourage you to make a deep investment analysis of the company and to buy at your own risk. Also, and most importantly don't forget to subscribe to our newsletter where you will receive more information about this company. It is important to be always informed.The author does not own share of Signal Bay Inc. Insider Financial has not been compensated forthe report of this article.

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