Warning: Top 5 Hyped Penny Stocks with Red Flags

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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 Entheon Biomedical Corp OTCMKTS: ENTBF $0.50
2 KULR Technology Group Inc OTCMKTS: KULR $2.30
3 Gazprom PAO (EDR) OTCMKTS: OGZPY $5.72
4 Ageagle Aerial Systems Inc. NYSE: UAVS $5.86
5 SOS Limited (ADR) NYSE: SOS $5.02

 

#1 Entheon Biomedical Corp (OTCMKTS: ENTBF)

Company Info: Entheon Biomedical Corp. (CSE: ENBI| FSE: 1XU1) is a biotechnology company focused on developing and commercializing a portfolio of safe and effective N,N-dimethyltryptamine based psychedelic therapeutic products (DMT Products) for the purposes of treating addiction and substance use disorders.

Website: https://entheonbiomedical.com

Last Close: $0.50

Reason for the hype: Recent acquisition of new subsidiary Halugen Life Sciences; announcement of ethics approval for an upcoming pre-clinical study to be conducted by the clinical research organization, Science in Action, an Israeli-based lab specializing in pre-clinical in vivo and in vitro R&D services; and the Launch of industry’s first Psychedelics Genetic Test Kit developed by HaluGen Life Sciences.

Latest 10-k report: https://sec.report/otc/financial-report/269081

Red Flags:

  1. The company does not have any revenue and has been reporting losses year over year. The company had reported a net loss of Canadian $157,534 for 2019, and Canadian $146,783 for 2020.
  2. Although DMT is a natural compound produced by our body and is generally considered physically safe, it also suffers from some drawbacks. Since it is a natural molecule, patenting it could be difficult, even though ENTBF has applied for 4 US patents. There is also the issue that the actual drug itself is illegal which could stifle growth with red tape and stigma. Moreover, any research which does not paint DMT in a positive light is almost certain to impact the company negatively.
  3. The company is looking to market a drug through the FDA. This requires a huge amount (in the tune of hundreds of millions of dollars) of capital for running the clinical trials. This is realistically going to result in significant share dilution for the company, as the company is not well-funded.
  4. In December 2020, the company had proceeded with a fully allocated, non-brokered private placement financing of 4,266,997 Units at a price of CDN$0.75 per Unit for gross proceeds of CDN$3,200,247.75. In April and May 2018, the Company had closed an initial public offering of 5,965,500 units at $0.20 per unit, for total gross proceeds of $1,193,100. In February 2019, the Company closed a private placement of 6,000,000 units at $0.08 per unit, for total gross proceeds of $480,000. On April 8, 2020, the Company had announced that it will extend until April 20, 2021, the expiry date of 5,965,500 common share purchase warrants issued in connection with its Initial Public Offering in April 2018.
  5. The company faces competition from the likes of ATAI (public next year), the world’s largest psychedelics company, that has a company under their umbrella, Viridia Life Sciences, for developing novel formulations of DMT. ATAI had recently raised a record-breaking $157 million.
  6. The company has been making paid promotions. As per the disclaimer, Baystreet.ca was paid one thousand eight hundred dollars for Entheon Biomedical Corp. advertising by the company.
  7. The company is not listed in major exchanges like NYSE or NASDAQ, indicating that it does not meet the rigorous standards required for listing.
  8. The bottomline is that Entheon has never been profitable, it has no products approved for commercial sale, and to date, it has not generated any revenue. As a result, Entheon’s ability to reduce its losses and reach profitability is unproven, and thus, Entheon may never achieve or sustain profitability.
  9. The daily chart shows that the stock has been on a downtrend.

#2 KULR Technology Group Inc. (OTCMKTS: KULR)

Company Info: KULR Technology Group Inc develops and commercializes high-performance thermal management technologies for electronics, batteries, and other components. The company is focused on targeting the following applications: electric vehicles and autonomous driving systems; artificial intelligence and Cloud computing; energy storage; and 5G communication technologies. Its product portfolio includes ARA Thermal Capacitor, CRUX Cathode, HYDRA Thermal Runaway Shield, LYRA ISC Trigger Cell, URSA Fiber Thermal Interface, and VEGA Internal Short Circuit.

Website: www.kulrtechnology.com

Last Close: $2.30

Reason for the hype: New of the development of a proprietary solution, in partnership with NASA, on 3D printing a passive propagation resistant (PPR) and internal short circuit (ISC) augmented battery that even works in space; news that the company provided thermal management design services to a global Tier-1 manufacturer of aerospace and defense technology to improve thermal subsystems needed for increased performance of hypersonic weapons; and announcement of being the official battery safety provider for electric SUV racing team Andretti United Extreme E.

Latest 10-k report: https://sec.report/Document/0001104659-21-038941/

Red Flags:

  1. KULR has been a loss-making company. The company had reported a net loss of $2,850,096 and $1,979,753, respectively for years ended December 31, 2020, and 2019.
  2. During the year ended December 31, 2020, the Company raised aggregate gross proceeds of approximately $8.0 million, $1.5 million, and $3.9 million in connection with the sale of common stock and warrants in a public offering, the sale of common stock issued pursuant to a Standby Equity Distribution Agreement, and the issuances of notes payable, respectively. Yet, the company’s cash and working capital were approximately $8.9 million and $6.2 million, respectively as of December 31, 2020. Issue of common stock dilutes the book value of the common stock.
  3. The company is not listed in major exchanges like NYSE or NASDAQ, indicating that it does not meet the rigorous standards required for listing.
  4. KULR was formed in 2015 and KTC was formed in 2013. The Company, as a whole, has limited operating history. The company has not yet demonstrated sales of products at a level capable of covering its fixed expenses. Many of the Company’s products represent new products that have not yet been fully tested in commercial product settings and for which manufacturing operations have not yet been fully scaled. Because there is no demonstrated history of large-scale commercial success for the company’s products, it is possible that such commercial success may never happen.
  5. Despite bring a loss-making company, the compensation paid during 2020 was $356,895 for its executives.
  6. The company has a long and complex sales cycle and has not demonstrated the ability to operate successfully in this environment.
  7. The charts show that the stock would be bullish only if it starts trading above a certain level.

#3 Gazprom PAO (EDR) (OTCMKTS: OGZPY)

Company Info: Gazprom PJSC is a Russian-based integrated oil and gas company in which the Russian government is a majority shareholder. Much of the business lies within the production, transportation, and distribution of natural gas. The company is a major gas supplier to European countries, with substantial gas pipelines throughout Western Russia and into Europe. While its oil segment is a smaller portion of revenue, the company is still integrated in the production, processing, and refinement of crude oil and refined products. Across both segments, the company produces its oil and gas from fields distributed across Russia, with end markets consisting mostly of Europe and Russia.

Website: www.gazprom.com

Last Close: $5.72

Reason for the hype: Favorable supply/demand dynamics in both Europe and China; Gazprom PAO delivering its first carbon-neutral shipment of LNG to Europe; and news that the company is looking to diversify with additional exports to China via another pipeline.

Latest 10-k report: https://www.gazprom.com/f/posts/72/802627/gazprom-annual-report-2019-en.pdf

Red Flags:

  1. Gazprom was not profitable for the previous three quarters combined, driven by the warm winter, expiring transit contract with Ukraine; and lockdowns curbing demand and crushing energy prices.
  2. The Russian government holds the majority stake in the company. It is possible that Gazprom would not be working in the best interest of their common shareholder and will prefer their main shareholder, Russia.
  3. The company has significant geopolitical risk. Gazprom has been actively misused by the Russian state as a geopolitical tool in furtherance of its foreign policy goals in the near abroad (Georgia, Moldova, Armenia, Turkmenistan, Belarus, and Ukraine), as well as in wider Europe.
  4. The construction of the natural gas pipeline Nord Stream 2, an underwater twin pipeline that links Germany to Russia, has been delayed for more than a year. The pipeline’s completion is increasingly at risk after the U.S. imposed sanctions on involved companies and threatened further steps. In late January 2021, the European parliament called for a halt to Nord Stream 2 after the arrest of Russian opposition leader Alexei Navalny. German environmental group Deutsche Umwelthilfe (DUH) has also requested a court-issued suspension of the permit. Further delays in the completion of the pipeline could impact the profit potential of the company and result in an $11 Billion investment left for scrap.
  5. There is also a risk that transit countries would demand more money from Gazprom for their pipelines, making it not as competitive as it would otherwise be.
  6. According to rumors, the US government could make Russian ADR’s illegal to own. If the US forbids trading of Gazprom stocks and bonds by US citizens and firms, the stock price could drop significantly.
  7. Gazprom has had many corruption scandals in the past. There have been accusations of bribery and corruption. Since 2012, EU regulators have investigated Gazprom related to “suspected anti-competitive behaviour, including over-charging customers and blocking rival suppliers”. The Swiss Federal Prosecutor’s office is also investigating a case of fraud, falsification of documents, money laundering, and bribery in connection with one former and one current Gazprom manager.
  8. Lithuania’s competition authority has fined Gazprom $48 million (€37.5 million) for preventing competition in the country.
  9. The charts show that the stock would be bullish only if it starts trading above a certain level.

#4 Ageagle Aerial Systems Inc. (NYSE: UAVS)

Company Info: AgEagle Aerial Systems Inc is a provider of drone imagery data analytics for the precision and sustainable agriculture markets. It designs, produces, distributes, and supports technologically- advanced small unmanned aerial systems (UAVs) that it offers for sale commercially to the precision agriculture industry. The company derives revenue from product sales and subscription sales, of which a majority of the revenue is derived from the product sales.

Website:  www.ageagle.com

Last Close: $5.86

Reason for the hype: company announcing a significant increase in revenue to approximately $1.3 million; and agricultural- and commercial-drone markets entering an explosive growth phase

Latest 10-k report: https://sec.report/Document/0001575705-21-000158/

Red Flags:

  1. AgEagle is currently facing a class action lawsuit alleging that the Company made materially false and/or misleading statements and/or failed to disclose that: (1) AgEagle did not have a partnership with Amazon and in fact never had any relationship with Amazon; (2) rather than correct the public’s understanding about a partnership with Amazon, the company was actively contributing to the rumor that AgEagle had a partnership with Amazon
  2. Bonitas Research had recently released a report accusing AgEagle of falsely fueling the rumors pertaining to the Amazon partnership as part of a “pump & dump” scheme. Indeed, the UAVS stock had skyrocketed on fake Amazon partnership rumors from $0.39 to $16 while insider ownership declined from 44% to 0.5%.
  3. The divesting of stock options by insiders, most notably the CFO, during the peaks of the 52-weeks high indicates a lack of alignment of the management with the firm’s objectives.
  4. The company has significant competition from the likes of AeroVironment Inc. (AVAV) and FLIR Systems Inc. (FLIR). In fact, compared to its competitors, UAVS drones fall short on various features which are critical to the drones and especially drone delivery – such as endurance and payload capacity. UAVS also does not possess unique/cutting edge manufacturing processes, unlike its peer companies.
  5. The company had a net loss was $4,932,450 in 2020. This represents a $2,409,756 increase over the company’s net loss of $2,522,694 in 2019. Despite the losses, the company’s general and administrative expenses totaled $2,732,274 in 2020 compared to $1,850,225 in 2019, an increase of 48%. The increase was attributed to recruiting fees associated with the search for new CEO, costs for public relations services, payments to directors as compensation fees, additional payroll and bonus payments associated with new hires and existing employees, stock compensation expenses, and added annual shareholder meeting costs. Such high employee compensation is a red flag.
  6. The company does not have a full time CTO as per the list of directors and executive officers included in the company’s annual report.
  7. As per the 10-k report, nearly 90.8% revenue in 2019 and 93.7% revenue in 2020 was contributed by an undisclosed ‘Customer A’. Revenues of a firm concentrated on a single customer are always a huge risk.
  8. The company has been involved in lawsuits and legal proceedings, including Lopez v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01810 (C.D. Cal.); Madrid v. AgEagle Aerial Systems, Inc., et al., Case No. 2:21-cv-01991 (C.D. Cal.); and Nostrand and Rickerson v. Mooney et al. (Defendants) and AgEagle Aerial Systems, Inc. (Nominal Defendant), Case No. 3:21-cv-00130 (D. Nev.)
  9. The charts show that the stock would be bullish only if it starts trading above a certain level.

#5 SOS Limited (ADR) (NYSE: SOS)

Company Info: SOS is an emerging blockchain-based and big data-driven marketing solution provider

Website: https://www.sosyun.com

Last Close: $5.02

Reason for the hype: The news that the company’s subsidiary entered into a non-binding letter of intent (LOI) to acquire the majority of the equity interests of each of three US-based power plants for its planned crypto-mining operations in North America; and the company recently raised $125 million via a share and warrant offering to buy cryptocurrency mining rigs and fund the construction of a new facility in Hejiang County, Luzhou, Sichuan.

Latest 10-k report: (20-F): https://sec.report/Document/0001564590-20-029350/

Red Flags:

  1. The company is a loss-making company. SOS had reported a net loss of US$ 36.6 million, US$ 66.5 million, and US$ 9.9 million in 2017, 2018, and 2019, respectively.
  2. Wolf Haldenstein Adler Freeman & Herz LLP had recently announced that a securities class action lawsuit has been filed in the United States District Court for the District of New Jersey against SOS Limited for misrepresenting the true nature, location, and/or existence of at least one of the principal executive offices listed in its SEC filings; alleging that HY and FXK were either undisclosed related parties and/or entities fabricated by the Company; and alleging that the Company had misrepresented the type and/or existence of the mining rigs that it claimed to have purchased and as a result, the Company’s public statements were materially false and misleading at all relevant times.
  3. The company had made several pivots since its start back in 2001. The initial focus was on being a provider of credit analytics. This resulted in the creation of a lending marketplace. When the Company went public in April 2017, it was known as “China Rapid Finance Limited” and claimed to focus on a peer-to-peer, micro-lending business. The Company later changed its name to “SOS Limited” in July 2020 and sold its peer-to-peer, micro-lending business in August 2020, rebranding itself into an emergency services business. In January 2021, the Company again shifted its business focus, this time to cryptocurrency mining.
  4. According to a report from the Hindenburg Research, the analysts visited SOS’s headquarters, and it was apparently a hotel. They also found that the company allegedly did a copy-and-paste of the images and press releases from rivals. One of the allegations made by Culper Research is that SOS has not actually purchased the cryptocurrency mining rigs that it said it did, as the entity from which SOS purportedly bought the mining rigs appeared to be a fake shell company.
  5. A complaint, filed by Bragar Eagel & Squire, P.C. on March 30, 2021, alleges that throughout the Class Period SOS Limited (defendants) made materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, defendants made false and/or misleading statements and/or failed to disclose that: (i) SOS had misrepresented the true nature, location, and/or existence of at least one of the principal executive offices listed in its SEC filings; (ii) HY and FXK were either undisclosed related parties and/or entities fabricated by the Company; (iii) the Company had misrepresented the type and/or existence of the mining rigs that it claimed to have purchased; and (iv) as a result, the Company’s public statements were materially false and misleading at all relevant times.
  6. It is rumored that the intermediate surge in the stock price was attributed to the activities of Reddit users, and particularly r/WallStreetBets participants.
  7. The charts show that the stock would be bullish only if it starts trading above a resistance 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