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 | Hello Pal International Inc. | OTCMKTS: HLLPF | $1.08 |
| 2 | Nextech Ar Solutions Corp | OTCMKTS: NEXCF | $3.44 |
| 3 | Blue Apron Holdings, Inc. | NYSE: APRN | $6.25 |
| 4 | Remark Holdings Inc. | NASDAQ: MARK | $2.08 |
| 5 | Spark Networks SE | NYSE: LOV | $6.25 |
#1 Hello Pal International Inc. (HLLPF)
Company Info: Hello Pal International Inc. comprises an international team of people based in Hong Kong, China, Ukraine, and the US, and is a sister company to BrillKids Inc., creator of the multiple award-winning early childhood education program Little Reader. The Hello Pal Platform is a proprietary suite of mobile applications built on a user-friendly messaging interface that focuses on social interaction, language learning, and travel.
Website: https://www.hellopal.com/
Last Close: $1.08
Reason for the hype: The company achieving over $2 million revenue for the third consecutive month; the company’s entry into crypto-mining space by launching a new Crypto-Mining Initiative in partnership with Shanghai Yitang Data Technology; news of the acquisition of an initial 15% interest in a dedicated dogecoin and litecoin mining facility; and launch of its marketing operating in the Middle East market for its live-streaming products.
Latest 10-k report: https://sec.report/otc/financial-report/258060
Red Flags:
- The company’s revenue was up in 2020. However, its net loss also surged higher. The increase in revenue does not appear to stop the increasing loss. The net loss for the years ended February 28, 2019 and 2018 were $2,721,158 and $2,293,933 respectively.
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- HLLPF recently completed its fully subscribed private placement financing of 5,000,000 units at $0.40 per Unit for gross proceeds of $2,000,000. This could be dilutive to current holders.
- The company’s market cap is nearly $100 million despite bringing in only around $5 million a year. The company’s 900% growth appears to be unsustainable in the long-term.
- Despite posting losses, during the year ended February 28, 2019, compensation paid to key management included management fees of $99,351 to the Interim CEO. For a company that does not have much revenue, and is losing money, this is not an encouraging sign.
- The company has a history of paid promotions, paying nearly thirty thousand dollars for Hello Pal advertising, which shows that the coverage on the stock may not have been done objectively.
- The charts show that there is a supply area nearby.
#2 Nextech Ar Solutions Corp (OTCMKTS: NEXCF)
Company Info: NexTech AR Solutions Corp is engaged in the augmented reality (AR) industry. The company has a two-pronged strategy for rapid growth including growth through acquisitions and growth of its AR SaaS platform called ARitize. It acquired a video conferencing virtual events platform called InfernoAR which is experiencing a surge in demand.
Website: www.nextechar.com
Last Close: $3.44
Reason for the hype: The launch of Nextech’s Ad Network; and the signing of a renewal agreement with Polycom valued at $470,000 initially.
Latest 10-k report: https://sec.report/otc/financial-report/242503
Red Flags:
- The company is not listed in major exchanges, signifying that it does not meet the rigorous standards required for listing.
- The company is a loss-making company. It had a net loss of $5,297,134 for seven months ended December 31, 2019, compared to the net loss of $4,667,549 posted for the year ended May 31, 2019.
- On February 10, 2020, Hindenburg Research had published a report entitled “NexTech AR: Relentless Stock Promotion, Sketchy Related Party Transactions and a Vaporware Product—Price Target: $0,”
- The report alleged, among other things, that Nextech had “virtually no credible business prospects and appears to be focused almost entirely on promoting its stock and insider self-dealing”. The report noted that the company was engaging at least 8 promotional outlets, pumping out 112 press releases over the year.
- The report stated that many of the customers – including ones featured by the company in its glowing press releases – were either entirely unaware they had a relationship with the company or had never actually implemented the product.
- The report also alleged sketchy related-party transactions taking place at the company – like NexTech’s CEO and COO acquiring the vacuum cleaner website into a newly-formed private entity, then almost immediately flipping the entity to the public company, likely pocketing millions at the expense of shareholders for simply stepping in the middle.
- The company lacks an independent board of directors, has no patents, has no independent auditors performed till now, and no annual meetings.
- The charts show that the stock would be bullish only if it crosses above the near-term resistance area.
#3 Blue Apron Holdings, Inc. (NYSE: APRN)
Company Info: Blue Apron Holdings Inc is a United States-based company involved in discovering new recipes, ingredients, and cooking techniques to prepare meals that are sent along with fresh, seasonal ingredients, directly to customers. The company offers its customers two flexible plans, 2‑Serving Plan and 4-Serving Plan. Its recipes are accompanied by printed and digital content, including how-to-cook instructions and the stories of its suppliers and specialty ingredients. The company also sells wine, cooking tools, utensils, and pantry items.
Website: www.blueapron.com
Last Close: $6.25
Reason for the hype: Independent Director, Elizabeth Huebner buying US$101k worth of the stock; announcement of financial results for the quarter and full year ended December 31, 2020, with Q4 operating results exceeding guidance.
Latest 10-k report: https://sec.report/Document/0001558370-21-001484/
Red Flags:
- The company has been a loss-making company and has experienced net losses each year since its inception. In the years ended December 31, 2020, 2019, and 2018, the company had incurred net losses of $46.2 million, $61.1 million, and $122.1 million, respectively.
- APRN’s shareholders have been diluted in the past year.
- The company has a history of frequent CEO, management, and board changes.
- Many of the analysts who are giving a bullish rating for the stock are actually underwriters.
- The Company was subject to a consolidated putative class action lawsuit in the U.S. District Court for the Eastern District of New York alleging federal securities law violations in connection with the Company’s IPO. The Company entered into a stipulation and agreement of settlement to resolve the class action litigation by doing payment of $13.3 million.
- The Company and its directors were named as defendants in a shareholder derivative action – Jeffrey Peters v. Matthew B. Salzberg. In addition, the Company has been subject to multiple ongoing lawsuits.
- Despite being a loss-making company, the Company’s Chief Operating Officer and Chief Financial Officers have an annual base salary of $465,000 and an equity award having a target value of $600,000, in addition to a discretionary bonus on an annual basis with a target of 75% of annual base salary.
- The company was notified by the NYSE that it was not in compliance with the NYSE’s continued listing standards. Although the compliance was regained later, any further failure to remain in compliance with the NYSE’s continued listing standards, and any subsequent failure to timely resume compliance with the NYSE’s continued listing standards within the applicable cure period, could result in delisting of the company from the NYSE.
- The weekly chart shows that the stock is currently in a downtrend.
#4 Remark Holdings Inc. (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: $2.08
Reason for the hype: Potential upcoming IPO by privately held Sharecare; rumors that Wynn Casinos would be adopting Remark AI Thermal Imaging solution – the touch-free thermal scanning technology.
Latest 10-k report: https://sec.report/Document/0001368365-20-000028/
Red Flags:
- According to the company’s latest annual report, during the year ended December 31, 2019, and 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 recently lost the Greenspun Litigation and the Nevada court had entered a judgment against the company in the total amount of $1,050,000.
- The company had to repay in full all outstanding obligations for the notice served by MGG Investment Group (MGG Litigation) alleging a claim for breach of contract under the Financing Agreement.
- The company is also currently negotiating a settlement with its former landlord, BRE/HC Las Vegas Property Holdings, L.L.C. for the complaint filed against the breaching of the office lease.
- As per the company’s latest filing, the company has entered into a Material Definitive Agreement. “On February 10, 2021, Remark Holdings, Inc. into a senior secured promissory note with certain of our subsidiaries as guarantors and Jefferson Remark Funding LLC , pursuant to which the Lender extended credit to us consisting of a one-year term loan in the principal amount of $5.0 million. The Note bears interest at 15% per annum, which shall be payable on the last business day of each calendar quarter commencing on March 31, 2021. The entire principal balance, as well as any unpaid accrued interest thereon, is due and payable in full on February 10, 2022.”
- As of December 31, 2019, MARK’s cash and cash equivalents balance was $0.3 million and the company had a negative working capital balance of $30.9 million.
- As of December 31, 2019, the company was a party to the Financing Agreement, pursuant to which the Lenders extended credit to the Borrowers in the aggregate amount of $12.0 million of principal and accrued interest outstanding as of December 31, 2019. Additionally, as of December 31, 2019, the Loan bore interest at three-month LIBOR plus 11% per annum, payable monthly, and had a maturity date of May 15, 2020.
- The company was unable to fulfill the covenant requiring to maintain a minimum of $1.0 million in unrestricted cash in designated bank accounts, constituting events of default under the Financing Agreement. The company also has multiple payment obligations – for the acquisition of Vegas.com, Purchase Agreement with Aspire Capital etc.
- The chart shows that the stock is currently forming an IH&S pattern and would bullish only if it breaks out of that pattern.
#5 Spark Networks SE (NYSE: LOV)
Company Info: Spark Networks SE operates a global online dating site. Its focus is on catering to professionals and educated singles with serious relationship intentions in North America and other international markets. The group reports two reportable segments North America and International and operates a portfolio of premium brands including Zoosk, EliteSingles, Jdate, Christian Mingle, eDarling, JSwipe, SilverSingles, and AttractiveWorld dating sites in approximately 29 countries and 15 languages.
Website: www.spark.net
Last Close: $6.25
Reason for the hype: The company announcing financial guidance for the current fiscal year; presence in 6 hedge funds’ portfolios
Latest 10-k report: (Form 20-F) https://sec.report/Document/0001628280-20-009341/
Red Flags:
- The Company has a relatively high level of debt. Typically, debt shouldn’t exceed 40% of your equity, which in Spark Networks’ case is 60%. A higher level of debt requires more stringent capital management which increases the risk around investing in the loss-making company.
- LOV seems to be a loss-making company, with Net loss of €15,174 thousand, €3,880, and €7,046 for Years Ended December 31, 2019, 2018, and 2017 respectively.
- Spark Networks is currently involved in certain legal proceedings, like Elite Connexion vs. Spark Networks Services GmbH alleging that Spark GmbH bid on search engine terms which violated an agreement between the parties; as well as several ongoing national cases which affect trademarks within Germany, Finland, Sweden, the United Kingdom, Poland, and Benelux.
- Spark Networks has reportedly failed in its attempt to convince a Californian federal judge that it should be immune from a class action lawsuit filed by a group of Zoosk users in response to a massive data breach in 2020.
- The monthly chart shows the formation of a high-tailed candle.
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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