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 | Sonasoft Corp | OTCMKTS: SSFT | $0.24 |
| 2 | Remark Holdings Inc | NASDAQ: MARK | $4.26 |
| 3 | Sphere 3D Corp | NASDAQ: ANY | $3.48 |
| 4 | Sundial Growers Inc | NSADAQ: SNDL | $2.08 |
| 5 | American Battery Metals Corp | OTCMKTS: ABML | $3.84 |
#1 Sonasoft Corp (OTCMKTS: SSFT)
Company Info: Sonasoft Corp is an email archiving company, focuses its business on email archiving solutions and business continuity software and services. Its product includes NuGene AI, SonaVault, SonaSecure, and SonaSQL. The company’s professional services include Data Migration and Export, Master Data Management, Cloud Data Migration, Data Science Consulting (AI/ML), Data and Analytics Advisory, BI and Data Warehousing, and Data Visualization. It serves the Education, Government, Healthcare, Legal Services, and Financial Services industries.
Website: www.sonasoft.com
Last Close: $0.24
Reason for the hype: Sonasoft Corp. filed an important new patent application in a key area of AI called convolutional neural networks or CNNs; and deals with Google and Fidelity made last year.
Latest 10-k report: https://sec.report/otc/financial-report/252356
Red Flags:
- The company’s 10-k report shows that it has a net loss of $4,704,090 for the year ended December 31, 2019. The Company also reported a working capital deficit and an accumulated deficit of approximately $2.53 million and $22.56 million, respectively, as of December 31, 2019.
- Despite being a loss-making company, the company executives were paid between $144,000 and $258,000 for the year ended December 31, 2019. The company also notes the following regarding its net loss and working capital deficit and accumulated deficit – “Uncertainty regarding these matters raises substantial doubt about the Company’s ability to continue as a going concern.”
- The company executives have close family relationships. The company’s CEO and President Mike Khanna is the son of director Andy Khanna. Another employee, Neil Khanna is also the son of Andy Khanna. There are also related party transactions, pointing to the conflict of interest.
- Before the company’s acquisitions of Hotify AI, OPtimAIze, and E-Connect Software in 2019, Sonasoft was an IT asset management company that had nothing to do with AI.
- The company notes that compensation differals are likely being exercised at 50 to 100% to prevent cash burn, making it appear as a high-risk company.
- The company had lost an employment-related lawsuit recently and had to make a payment of $227,000. The court is yet to rule on the requested additional attorney’s fees in the amount of $800,000. Sonasoft also lost the malicious prosecution lawsuit filed against the former employee and had to make a payment of $171,508.08.
- Despite forming a partnership with Google almost a year ago, the company doesn’t show any significant surge in revenue. In fact, the Company reported a net loss and net cash used in operations of $ 1,118,294 and $768,730 respectively, for the quarter ended September 30, 2020
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- The monthly chart shows a resistance area.
#2 Remark Holdings (NASDAQ: MARK)
Company Info: Remark Holdings Inc delivers an integrated suite of AI solutions that enable businesses and organizations to solve problems, reduce risk and deliver positive outcomes. The company’s easy-to-install AI products are being rolled out in a range of applications within the retail, financial, public safety, and workplace arenas. The company also owns and operates digital media properties that deliver relevant content and e-commerce solutions. The group operates in one segment namely Technology & Data Intelligence segment which provides products and services to customers based upon the data collected and processed by its proprietary data intelligence software.
Website: www.remarkholdings.com
Last Close: $4.26
Reason for the hype: Hewlett Packard Enterprise named MARK a Silver Partner in the Technology Partner Program; MARK reporting Q3 sales of $2.65 million; news of Sharecare, of which MARK is a shareholder, going public in a SPAC merger with Falcon Capital Acquisition Corp; and promotions of its Remark Thermal products which claims to be able to scan 120 people in a room at once with its thermal cameras.
Latest 10-k report: https://sec.report/Document/0001368365-20-000028/
Red Flags:
- In each fiscal year since inception, the company had incurred net losses and generated negative cash flow from operations, resulting in an accumulated deficit of $346.8 million.
- The company had lost multiple litigations including MGG Litigation, Greenspun Litigation, and CBG Litigation. It also has ongoing litigations like the landlord litigation filed by the former landlord, BRE/HC Las Vegas Property Holdings.
- The company has significant operations in China and is directed affected by any country-wide slowdown in business due to anniversary celebrations in China, the U.S.-China trade war, and extended project testing and customizations on MARK’s larger projects.
- MARK’s major revenue is from its AI business, which is a highly competitive field. SenseTime, Face++, Google, GoGoVan, WeLab, and others are some of the company’s competitors with similar, if not superior products. The company’s business in AI solutions market space also has competitors like PricewaterhouseCoopers, Hewlett Packard, Baidu, and others.
- The company has high cash burn and its operations have historically used more cash than they have provided. Net cash used in operating activities was $12.6 million during the year ended December 31, 2019. Yet, as of December 31, 2019, the company’s cash and cash equivalents balance was $0.3 million, and the company had a negative working capital balance of $30.9 million. This is in spite of the company signing an effective equity line of credit for up to $30 million with a Wall Street firm called Aspire Capital.
- The executive compensation for CEO was nearly $12 million, and for the interim CFO was more than $1million in 2018, including option awards. This is a high compensation, especially for a company reporting continued losses.
- The weekly chart is shown below.
#3 Sphere 3D Corp (NASDAQ: ANY)
Company Info: Sphere 3D Corp delivers virtualization technology and data management solutions. It operates in one segment which is Providing data management, and desktop and application virtualization solutions for small and medium businesses and distributed enterprises. The company’s portfolio of brands includes SnapCLOUD, SnapServer, SnapSync, HVE, and V3. It derives revenue primarily from solutions for standalone storage and integrated hyper-converged storage; professional services; and warranty and customer services. The company has a business presence in the geographical regions of the Americas, APAC, and EMEA, of which prime revenue is derived from the Americas.
Website: www.sphere3d.com
Last Close: $3.48
Reason for the hype: Acquisition of water technology and service company Rainmaker Holland BV
Latest 10-k report: https://sec.report/Document/0001591956-20-000005/
Red Flags:
- The company’s revenue decreased to $5.6 million during 2019 compared to $9.0 million during 2018.
- Sphere 3D Corp has recurring losses from operations and a net working capital deficiency. The company states in the 10-k report that it has been financing its operations through proceeds from private sales of equity securities and with borrowings under the company’s line of credit. As of December 31, 2019, the company had a working capital deficit of $4.7 million.
- In January 2018, Mr. Vito Lupis filed a statement of claim alleging breach of contracts, deceit and negligence against Mr. Giovanni J. Morelli, a former officer of the Company, and vicarious liability against the Company, in connection with stock purchase agreements and other related agreements. This was later settled in March 2019 by paying certain considerations to Mr. Lupis. This payment was included in the general and administrative expenses of company.
- Despite reporting a net loss of $4,281,000 for year ended December 31, 2019, the company’s executive compensation for CEO in 2019 was $237,827 while the president took in $203,351.
- The company had received notice from the Listing Qualifications Department of The NASDAQ Stock Market for lack of compliance with the NASDAQ Listing Rule 5550(b)(1) and faced the risk of delisting.
- With the acquisition of Rainmaker, Sphere 3D’s business model is poised to undergo a significant change to focus on Water-as-a-Service. For this, ANY is expected to liquidate ~$4M legacy revenue businesses, minority investments, & IP portfolio.
- The company’s shareholders have been substantially diluted in the past year, with total shares outstanding growing by 109.3%.
- The weekly chart shows a resistance area.
#4 Sundial Growers Inc. (NASDAQ: SNDL)
Company Info: Sundial Growers Inc. is engaged in producing and marketing cannabis for the adult-use market. Some of its products are Lemon Riot, Daydream, Zen Berry, Twilight, Tropical Bliss, Pillow Talk, Citrus Punch, and others. The company’s primary focus is on producing and distributing inhalable products and brands (flower, pre-rolls, and vapes). It operates in two segments: Cannabis segment and Ornamental Flowers segment. Its Cannabis segment derives the majority of revenue.
Website: www.sundialcannabis.com
Last Close: $2.08
Reason for the hype: Democrats, who favor legalizing cannabis, gaining control in Washington; was among the stocks that were swept up in the recent Reddit rally frenzy; and the company paying down debt and building cash position for entry into the US market.
Latest 10-k report: (Form 20-F) https://sec.report/Document/0001564590-20-014358/
Red Flags:
- Sundial’s market cap is currently above $3 billion, which is a huge multiple to pay for a company with less than $60 million in revenue.
- The company has been selling its stock and converting debt to equity at an alarming pace. This has the potential to severely dilute existing shareholders over time. For instance, the 509 million outstanding shares in September 2020 have now increased 209% to 1.56 billion outstanding shares, following multiple rounds of share issuances and debt-to-equity conversions.
- The company is transitioning from a wholesale-focused business model to one that caters to the retail side of the cannabis industry. It would take time before this transition pays off. As of now, losses remain substantial and revenue has fallen during this business transformation.
- Since its inception, the company is yet to generate an annual profit. Sundial reported a net loss of $271.6 million and $56.5 million for the fiscal years ended December 31, 2019 and 2018, respectively. This is in spite of reporting $75,860,000 in revenue for Year ended December 31, 2019. Posting increasing losses year over year is not a good sign.
- Despite being a loss-making company, the company’s management received very high compensation for 2019. This included $7,758,629 for former CEO, $1,697,523 for CFO, $6,357,635 for former executive chairman, $1,956,438 for president and COO, and $1,512,302 for chief marketing and product officer.
- The Company and its current and former officers and directors and underwriters of IPO were named as defendants in several putative shareholder class action lawsuits filed between September 9, 2019 and November 1, 2019. The company has also received threats of litigation from certain holders of its Senior Convertible Notes.
- The company was previously sued because it failed to disclose it had product returned to it because it contained mold and bits of rubber gloves.
- The company’s Olds facility site was issued three compliance orders for the grow facility by the Alberta Ministry of Labour and Immigration since January 2018.
- Sundial’s management was restructured recently, with Company’s Chief Executive Officer and president resigning and Chief Operating Officer also leaving the company. These changes are speculated to be made due to the mistrust in the management.
- The company has a lot of competitors in the cannabis segment, and some of the competitors even have better products than sundial.
- The daily chart shows that the stock had recently formed a dark cloud cover candlestick pattern.
#5 American Battery Metals Corp (OTCMKTS: ABML)
Company Info: American Battery Metals Corporation is an American-owned, advanced extraction and battery recycling technology company with extensive mineral resources in Nevada. The company is focused on its lithium-ion battery recycling and resource production projects in Nevada, with the goal of becoming a substantial domestic supplier of battery metals to the rapidly growing electric vehicle and battery storage markets.
Website: www.batterymetals.com
Last Close: $3.84
Reason for the hype: ABML making strong moves in the electric vehicle space; and the company benefiting from policies of the new presidential administration as it is considered a clean energy play.
Latest 10-k report: https://sec.report/Document/0001078782-20-000720/
Red Flags:
- The Company incurred a net loss of $13,318,408 for the nine months ended June 30, 2020, compared to a net loss of $12,625,204 for the twelve months ended September 30, 2019. In addition to operating expenses, the Company incurred interest and accretion expense of $4,391,184 during the nine months ended June 30, 2020, compared to $2,491,621 for the twelve months ended September 30, 2019. As of June 30, 2020, the Company’s working capital deficit was $4,727,912.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- Despite the lack of revenue and increasing losses, the executives were paid more than $4 million as compensation (which included Salary, Bonus, and Stock Awards) for the years 2019 and 2020.
- The company’s CEO, Douglas D. Cole was charged with securities fraud in 2014. Board member Doug Maclellan has also been sued for securities. In addition to questionable ethics, they have very little experience with mining, or battery technology.
- The company is soon to be re-named American Battery Technology Company (ABTC). This would be the third name change in just two years, as AMBL was earlier known as LithiumOre Corp, a wholly-owned subsidiary of Oroplata Resources Inc.
- There were speculations that potential investors checked the company’s registered address on yahoo and found it to be a Post Office box at Incline Village.
- So far, the company has a limited operating history, has no patents, no revenue, and no pilot plant yet.
- The company has an ongoing legal proceeding against former CEO, Craig Alford
- The weekly chart shows that the stock is trading near a supply 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!
Happy Trading!
— Trades of the Day Research Team
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