Signal Bay Inc (OTCMKTS:SGBY) just reported second quarter financials for 2017, and the company is trading pretty much flat on the back of the release. Regular readers will know that this is one that we have covered on quite a few occasions in the past, and one that we feel stands head and shoulders above a number of its peers in the cannabis space. The latest financials reinforce this bias. Alongside the release, we also got a conference call, during which management outlined a number of key areas from which we can expect growth going forward. Here is a look at what the numbers said and what the conference call highlighted as important near term.
So, this company is a cannabis play, as mentioned, and specifically, it is involved in quality testing. There are a few elements to its operations outside of the quality testing arena, but for us, and based on the latest conference call, for management as well, quality testing is where the real value is going to come from going forward.
It’s an Oregon-based entity and its primary markets – right now, at least – are its home state and California.
There is a large unmet need in quality control in cannabis right now. With the recreational ballots towards the end of last year essentially kick-starting a brand-new billion-dollar market, someone needs to make sure that the cannabis products being sold maintain a consistent quality, and Signal Bay, through EVIO labs and Signal Labs, two if its operational monikers, is trying to meet this freshly created demand.
The company operates as sort of a hub and spoke system. It sets up a central testing facility in a state and complements the central testing facility with a number of smaller satellite laboratories scattered around the central facility in the state in question. This allows it to operate on a large scale, and, as management outlined in the recent conference call, should form the basis of decent near-term market share in both of the above mentioned Oregon and California (we’ll look at this in more detail soon).
So, the numbers.
For the second quarter of the year, Signal Bay recorded revenues of $832,000, with the vast majority of this ($745,000) deriving from its testing facility operations. These numbers are up from $104,000 and $40,000 respectively during the same period a year earlier. Revenues also increased 125% quarter over quarter and gross margin is up 279% from first to second quarter 2017.
That’s strong growth, but as we see it, it’s far peak potential.
As mentioned, the company is currently focused on Oregon and California. Industry estimates for the Oregon market put state-wide testing revenues at $15 million. As outlined by management, the company expects to capture between 20-25% of that market this year. That’s around $3 million low-end annual revenues. California market is around 10X the size of that of Oregon (or will be once regulatory framework is in place), estimated at total annual testing revenues of $150 million. If Signal Bay can bring in just 5% of this market, it’s $7.5 million annual revenues. If this rises to 10%, and that’s realistic, we’re looking at $15 million. Combine this with the Oregon revenues and that’s between $11-18 million in annual revenues from just two states.
The company currently trades for a market capitalization of just $14 million. If it hits these estimates, and again, these are somewhat conservative given Signal Bay’s positioning and growth trends, it could be a $75-100 million company before the end of 2017.
Dilution is, as ever, a risk for a company at this end of a growing market. With that said, however, management has actively acknowledged this and this acknowledgment suggests the company will seek to minimize unnecessary issue as it expands to meet demand. In other words, expect some dilution, but it’s likely going to be far from prohibitive to a decent return on an exposure at current prices.
