Signal Bay Financials Do Not Justify its 330% Rally this Month

Signal Bay, Inc. (SGBY) filed its quarterly financial results for the period that ended on June 30^th. Signal Bay consists of three business units and it provides advisory, management and analytical testing services to the legal cannabis industry. 

Business Units  

Signal Bay Research provides industry research, business and market intelligence, and consulting services.  The division provides advisory and consulting services to cannabis companies including license application support, regulatory compliance, market forecasts, and operational insights. Signal Bay is also the home of the Cannabis Consultant Marketplace, which is a platform that allows cannabis companies to post projects and hire consultants.

Signal Bay Services provides operating services for licensed cannabis businesses. It has been engaged in Management Services Agreement with Libra Wellness Center, LLC, to operate their marijuana processing facility in North Las Vegas, Nevada. Signal Bay Services will provide the staff and operational support.

EVIO Labs is the wholly owned analytical laboratory division of Signal Bay. EVIO Labs consists of three operating companies, CR Labs, Inc., EVIO Labs Eugene, and Kenevir Research, which provide compliance testing services in accordance with the Oregon Health Authority.    

Financial Highlights 

• Signal Bay generated $116,648 in revenue during the quarter, which is a significant increase when compared to the $6,399 brought in during the same period last year. More than 71% of the revenue generated during the quarter was a direct result of the acquisition of the three labs. 
• As of June 30, 2016 the company has a total of 702 customers across the three labs.  Based on a full month of June laboratory revenues, the monthly average revenue per client is $90.33.  Signal Bay Research recognized an increase of $26,540 in consulting services provided to clients assisting with licensing and compliance services.
• The company incurred almost $290,000 in operating expense during the quarter. General and administrative expenses accounted for $242,438 of the total operating expenses.
• Signal Bay recorded a $420,000 net loss during the quarter

Liquidity Highlights 

• As of June 30^th, Signal Bay had $45,768 in cash, $61,284 in current assets, $1,141,579 in current liabilities, and a greater than $1 million working capital deficiency.
• As of June 30, 2016, its total liabilities were $2,021,644 which primarily consisted of $376,710 in derivative liability and $1,223,092 due to four shareholders,
• Management believes that the company’s cash position is insufficient to maintain its operations at the current level for the next 12 months. Any expansion may require additional capital until such expansion began generating revenue. It is anticipated that the raise of additional funds will principally be through the sales of our securities.

As of the date of this report, additional funding has been secured, however, Signal Bay will require additional funds.   

In the financial report, Signal Bay reported that a material weakness was found in its internal control over financial reporting that resulted in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

Management identified the following material weakness during its assessment of internal controls over financial reporting as of June 30, 2016:

• Independent Directors: Signal Bay intends to obtain at least 2 independent directors at its 2016 annual shareholder meeting. The cost associated to the addition is minimal and not deemed material.
• No Segregation of Duties: Ineffective controls over financial reporting: The company intends to hire additional staff members, either as employees or consultants. These additional staff members will be responsible to make sure that information required to be disclosed in its reports filed and submitted under the Exchange Act is recorded, processed, summarized and reported as required and that its staff members will have segregated responsibilities with regard to these responsibilities. It is anticipated the cost of the new staff members will be approximately $60,000 per year.
• No audit committee: After the election of the independent directors at the 2016 annual shareholder meeting, Signal Bay expects that an Audit Committee will be established. The cost associated with the addition of an audit committee is minimal and not deemed material.
• Resources: As of June 30, 2016, the company had no full-time employees with the requisite expertise in the key functional areas of finance and accounting. As a result, there is a lack of proper segregation of duties necessary to ensure that all transactions are accounted for accurately and in a timely manner.
• Written Policies & Procedures: The company needs to prepare written policies and procedures for accounting and financial reporting in order to establish a formal process to close its books monthly on an accrual basis and account for all transactions, and prepare, review and submit SEC filings in a timely manner.

No Steps Taken to Fix Weakness

As of June 30, 2016, the Company has not taken any steps to address these weaknesses in its controls even though they were identified during the year which ended on September 30, 2015.

Management plans to hire additional staff in its accounting department to be able to segregate the duties once it is in a financial position to do so. It expects that the expense will be approximately $60,000 per year which would allow the company to hire 2 new staff members.

Developments Don’t Justify Rally

After reading through this report, it is not possible to justify Signal Bay’s recent rally. The shares saw heavy weakness yesterday and SGBY is trading at $0.0172 after falling 24%. The shares are still trading above its 20, 50, and 150-day moving average but SGBY is no longer trading in overbought territory and momentum continues to trend lower.

Although SGBY has fallen 38.5% in the last two days, its shares are still up 330% in the last month and we are on the sidelines at current levels.

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Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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