The allure of penny stocks lies in their potential to deliver massive gains in a short period of time.
But in exchange for that opportunity, penny stocks carry TREMENDOUS risk. They can be extremely volatile and are susceptible to “pump and dump” schemes and fraud.
How is this possible? For starters, the majority of penny stocks are traded on over-the-counter (OTC) exchanges, which are typically less transparent and less regulated than the major exchanges. In short, OTC-traded penny stocks don’t meet the rigorous standards required to trade on major exchanges like the NYSE, NASDAQ and AMEX.
As a result, they can go largely “unchecked” and their financial condition can be extremely difficult to analyze. In the penny stock space, it’s often easier to spot warning signs and red flags than it is to identify a sound investment.
With this in mind, and to give you an idea of the kind of red flags to look for when you’re considering a penny stock, we’re taking a closer look at five of today’s most hyped penny stocks. These stocks are being touted by YouTube “influencers” with far-reaching audiences, carrying the risk of a “pump and dump”…
|Sl #||Name||Ticker||Last Close|
|1||CBAK Energy Technology Inc||NASDAQ: CBAT||$2.99|
|2||Kraken Robotics Inc.||OTCMKTS: KRKNF||$0.48|
|3||Rekor Systems Inc.||NASDAQ: REKR||$4.75|
|4||Genius Brands International Inc.||NASDAQ: GNUS||$1.44|
|5||ITM Power plc||OTCMKTS: ITMPF||$3.29|
#1 CBAK Energy Technology Inc (NASDAQ: CBAT)
Company Info: CBAT is a Nevada-registered company with manufacturing and sales operations in China. This company is engaged in the research and development, manufacturing, and sales of new energy high power lithium batteries.
Last Close: $2.99
Reason for the hype: Cascading effect of the trending news about electrical vehicles (EVs) in wake of Tesla’s Battery Day last month. CBAT had also announced the product release of 32140 large-sized cylindrical tabless battery passing its technical and Pilot Plant tests.
- There have been frequent changes in the company business type as well as the company name. As per the SEC website, the company was formerly: CHINA BAK BATTERY INC (filings through 2017-01-13); and formerly: MEDINA COFFEE INC (filings through 2005-02-14).
- The company is losing money. CBAK Power reported an after-tax loss of $392,959 and $6,406,251 for the years ended December 31, 2018, and 2019. (10-k report, page F-39)
- As of December 31, 2019, CBAT’s total current assets were $28.5 million and total current liabilities were $59.0 million, resulting in a net working capital deficiency of $30.5 million. The company has been borrowing from banks, subsequently increasing its debt.
- On February 20, 2020, the company received notice from the Listing Qualifications Department of The NASDAQ Stock Market (10-k report, page 28) for lack of compliance with the NASDAQ Listing Rule 5550(a)(2). If continued, the company faces possible delisting.
- There are three ongoing lawsuits against the company. These were filed by three different companies, Shenzhen Huijie Purification System Engineering Co., Ltd; Dalian Construction Electrical Installation Engineering Co., Ltd.; and Dongguan Shanshan Battery Material Co., Ltd. In all three cases, the court ordered the freeze of certain amounts from CBAK Power’s bank deposits. (10-k report, reference page: F-19)
- Several employees of CBAK Suzhou filed arbitration with Suzhou Industrial Park Labor Disputes Arbitration Commission against CBAK Suzhou for failure to pay their salaries in time. This typically indicates a severe cash crunch.
- There is unconfirmed news that the facilities claimed by CBAT to be manufacturing facilities are just empty buildings. Also, the production of the 32140 model would not commence until mid-2021 and remains still unproven.
- Despite reporting losses, Yunfei Li, President, Chief Executive Officer was approved hikes in the salary.
- Charts indicate selling pressure as there were multiple long-wicked candles formed.
#2 Kraken Robotics Inc. (OTCMKTS: KRKNF)
Company Info: Kraken Robotics Inc. is a marine technology company dedicated to the production and sale of software-centric sensors, deep-sea batteries, and underwater robotic systems. The company is headquartered in St. John’s, NL with offices in Dartmouth, Nova Scotia; Bremen and Rostock, Germany; and Boston.
Last Close: $0.48
Reason for the Hype: In September 2020, the company signed a contract with the Danish Ministry of Defence, Acquisition, and Logistics Organization to supply mine-hunting sonar equipment to the Royal Danish Navy. The company also signed a contract to supply minehunting systems to the Polish Navy in 2H21.
Latest 10-k report: <not available>
- No 10-k reports are available for the company
- Not trading on any major exchanges due to the lack of compliance required.
- The company recently announced the closing of its previously announced “bought deal” short form prospectus offering. A total of 15,500,000 Common Shares were sold at a price of $0.67 per Common Share. KRKNF had previously closed a bought deal short form prospectus offering in 2018 December as well according to Annual A total of 15,000,000 common shares were sold at a price of $0.40 per common share for gross proceeds of $6,000,000. Such frequent stock dilution is not usually a good sign.
- As per the latest Annual Report, the company reported a net loss of $3.0 million in 2019 compared to a net loss of $2.9 million in the prior year. This is despite revenue growth of 126% ($15.1 million in 2019 compared to $6.7 million in 2018). The company has reported a net loss of $2.39 million for 2017.
- Despite reporting increasing losses YoY, the Company recorded share‐based compensation totaling $1,370,745 for 2019 (2018 ‐ $342,600) due to the grant of stock options to employees, officers, and directors during the year.
- Charts indicate a strong resistance area is formed. The high-volume candles couldn’t cross above this level.
#3 Rekor Systems Inc. (NASDAQ: REKR)
Company Info: The company provides real-time roadway intelligence through AI-driven decisions. Rekor is primarily in the field of vehicle identification and management systems driven by leading-edge advances in artificial intelligence (AI)
Last Close: $4.75
Reason for the Hype: The news about Mastercard teaming up with Rekor Systems to enable touchless economy, a partnership with Mesa Technologies for School Bus Safety Arm solutions, and the release of the Rekor Go mobile app for commercial users.
Latest 10-k report: https://sec.report/Document/0001654954-20-003502/
- The company reported a net loss of ($14,412,000) in 2019, a steep increase from the 2018 loss of ($5,709,000), as per the 10-k report.
- REKR had increased the base salary of CEO and CFO in 2019 despite reporting significant losses.
- The company has ongoing disputes – Vigilant Solutions, LLC, has filed a complaint about patent infringement, while Plate Capture Solutions, Inc. has made a complaint against the Company’s wholly-owned subsidiary, OpenALPR for defamation, fraud, and intentional interference with existing and future business relationships. REKR has also been named as a party to various other lawsuits, claims, and other legal and regulatory proceedings.
- The company still has significant debt even though it had recently completed a debt retirement of ~$4.9M.
- Charts indicate a breakdown from a support level, which is usually a bearish sign.
#4 Genius Brands International Inc. (NASDAQ: GNUS)
Company Info: Genius Brands International Inc is a kids media company. It is engaged in developing, producing, marketing, and licensing branded children’s entertainment properties and consumer products for media and retail distribution. Its portfolio features programming for toddlers to tweens.
Last Close: $1.44
Reason for the Hype: The company announced its first television manufacturer deal finalized with Samsung for the launch of its Kartoon Channel.
Latest 10-k report: https://sec.report/Document/0001683168-20-001032/
- The company has a history of operating losses. GNUS has incurred net losses in each fiscal quarter since its inception. For the year ended December 31, 2019, the company generated net revenues of $5,907,899 and incurred a net loss of $11,481,245, while for 2018, the company generated net revenue of $993,452 and incurred a net loss of $9,003,901.
- The company’s latest 10-k report shows that it has negative working capital of $3,650,136, compared to a working capital of $971,663 as of December 31, 2018. This can hinder the company from acquiring what it needs to expand.
- As per the 10-k report, the company had received a notification letter from The Nasdaq Stock Market for lack of compliance with the NASDAQ Listing Rule 5550(a)(2). If continued, the company faces possible delisting.
- In the 10-k report, the company reported that there was an increase in salaries and wages. This is despite the increase in losses YoY.
- The company’s revenue is concentrated on a few customers. In 2019, two customers accounted for 65% of the company’s revenue from the delivery of Llama Llama Season 2 to Netflix and the delivery of Rainbow Rangers Season 1 to Nick Jr. In 2018, one customer accounted for 20% of the company’s revenue. The lack of diversification is quite risky.
- Executive Compensation (Executive Officer and Director Compensation) is not listed in the 10-k.
- Charts indicate a spike in the price, which was not sustained. This points to selling pressure.
#5 ITM Power plc (OTCMKTS: ITMPF)
Company Info: ITM Power manufactures integrated hydrogen energy solutions to enhance the utilization of renewable energy that would otherwise be wasted. ITM Power Plc is based in the UK and designs and manufactures products that generate hydrogen gas, based on Proton Exchange Membrane (PEM) technology.
Last Close: $3.29
Reason for the Hype: As part of a new partnership with Scottish Power, chemicals giant Linde’s BOC arm, and ITM, was launched to create clusters of green hydrogen refueling stations, starting with a first based around a 10MW electrolyser near Glasgow. Italian natural gas utility company Snam SpA has announced a partnership with ITM Power Plc mentioning up to 100 MW of green hydrogen projects.
Latest 10-k report: <not available>
- There is no 10-report available.
- The stock is not listed in major exchanges.
- According to the company’s Annual reports for 2020 and 2019, the company has been posting increasing losses every year. The company reported losses of (29,561,000) in 2020, (9,451,000) in 2019, and (6,116,000) in 2018. The company also reported decreasing cash flow YoY.
- Consolidated revenue was down 60% to £7m from £17.6m in FY2019. This is slated to continue due to the issue with grant funding from the EU post-Brexit. The company was highly reliant on government-funded capital projects.
- The business continues to be in a cash consumption phase, as it seeks to accelerate and build capacity ahead of anticipated demand. This would adversely impact the working capital necessary for the company.
- Charts indicate that a resistance area has been formed. The stock was not able to cross above this area.
As you can see, there are quite a few red flags in these hyped penny stocks. We would advise investor caution before entering into such high-risk ventures. Remember to think before you trade!
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