Are you thinking of buying and holding penny stocks overnight?
But are worried about the potential risk of dilution and offering?
Well today I’ll be going over how you can quickly read penny stock SEC filings and balance
sheets in under 10 min with a few keywords and figure out whether this penny stock is
a buy.
We are going to use $ZYNE and $YRIV as examples in this video, these are penny stocks that’s
been really hot the last week.
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Now let’s get into it.
So to start I usually go to Nasdaq.com website to look at the filings.
Let’s do YRIV first.
So you go to the side bar and click on SEC filings.
Here you can see all the filings this penny stock company has ever filed.
I’m not interested in reading every single document.
The ones I’m looking for are the 10 K, and especially the S 3.
Form 10 K is an annual report all the public companies including the penny stocks need
to do to summary their financial performance.
So that’s usually where I would start, by looking at the latest 10 K. so we are looking
at the 10k for Yangtze river port and logistics YRIV.
So when I look at SEC filings for these hot penny stocks, there are a few things I want
to figure out.
How much short term debt do they have, if they have the cash to pay for that debt, and
stay operating, and if they need to do an offering or sell more shares any time soon
to raise more cash.
I’m not reading the filings and the financial statement completely to invest in the penny
stocks long term.
I just want quickly skiim through the filings to know the likelihood of of the stock going
higher short term, or crash overnight.
And from analyzing these numbers, I will plan out how to play this stock.
Whether it’s a long, short, swing trade, or AVOID.
Right away I want to look at whether this company is making money at all the past few
years.
So control - f key word “revenue”.
And that brings us to the results of operation in the last few years from 2016 to 2018.
So right away you can see this company hasn’t made any revenue the last three years.
It’s all blank.
Next is “operating expenses”.
Wow they’ve been losing millions the last few years.
$5 mil in 2016, 2017, and $3M is 2018.
Now lets look up “cash” and see how much funds they have in
cash reserve to operate.
Okay they only have $120k left in the bank at the end of 2018.
Omg that’s bad.
So right away after looking at cash, revenue and operating expenses you should be asking
the question, so if they’re not making any money at all and have only $120k in cash reserve,
how have they been paying all the millions of operating cost the last few years?
Next keyword is “shares outstanding”, so we can see they have over 172 Million shares
outstanding right now.
But what I’m looking for is a change in the numbers each year.
So you can see in 2016 the number increased from 2015.
Then same again in 2017.
So from 2016- to beginning of 2018 That could be how they’ve been getting the money to
stay operating.
They issuing more shares and diluting them in the open market.
Now thats just a thesis.
We can confirm whether that’s true or not on the daily chart of the stock, because the
chart doesn't lie.
We can see this penny stock made a massive run up in 2017.
Followed by a drastic drop in early 2018.
So yes this confirms that this company has a history of diluting their shares in the
open market in order to pull out more cash to pay for their operating expenses.
Which we saw earlier, is about $3.5 mil in 2018.
So next keyword I search for, is “offering”, “warrants”, “convertibles”.
I am looking to see when’s the last time they did an offering or if they have any dilution
activity coming up soon.
So i can’t find any past offerings but right here “The market price of our shares could
decline as a result of sales of substantial amounts of our shares in the public market”.
this company admits they’ve been dumping their shares to investors in the market.
Next I want to search “warrants”.
They have no outstanding warrants, that’s good.
Let’s try “convertible notes”, these are basically convertible bonds or corporate
debt this company sell to investors and funds when they try to raise money.
And you can see that this company has a history of issuing these convertibles.
Essentially, they’ve been borrowing money from investors to cover their own operating
expenses.
But those debt have to be paid when the note matures.
And you can see all the note redemption history in 2018.
Looks like most of the recent notes were redeemed at the end of 2018 at $10/ share.
That would explain this huge drop from $12 all the way to to $3 on the daily chart here.
So another sign of dilution.
So now that we know this company has never made many revenue, has a high burn rate of
millions every year, and have a history of selling shares.
We want to see how much shares this company have registered to sell.
So let’s go back to Nasdaq filings, and look at their most recent S-3.
So the most recent one is september, 2018.
That was a while ago but it’s still relevant and I’ll show you why in a little bit.
Form S-3 is a form public companies have to file when issuing new shares.
So right away we can see that YRIV registered shares to sell for up to $300 Mil in 2018.
Wow.
And on form S-3 you can look up key word “shelf”.
Shelf is a special type of offering registration that allows the company to have a 2 year window
to sell their shares.
Right here in the S-3 filing for YRIV, it says here, “By using a shelf registration
statement, we may sell securities from time to time and in one or more offerings up to
a total dollar amount of $300,000,000”
So basically this penny stock company YRIV has until 2021 to sell these $300Mil worth
of their shares.
And with their high cost of operating expense, and $0 revenue, you bet they will be.
And they can do multiple offerings too.
Now that we know all the above information, we know they will do an offering, either through
common shares or debt convertibles, the missing information is when.
And that it’s hard to find out with YRIV.
There are cases with penny stocks that it’s easier to estimate an offering date which
I will show you later in this video.
But with YRIV, they don't have any real news release.
If they were a biotech company you could predict from their upcoming trial dates etc. but this
is a Chinese shipping company.
So the best we could do is to look at their daily charts with technical analysis.
So on the daily chart we can see the clearest major resistance is $3.
That’s what this penny stock has room to.
They haven’t even announced any PR yet.
I can’t see anything major on yahoo finance.
Now if I were the company.
I would try to release more PR and pump the shares up as high as I could and then issue
the offering there after a 400% gain from 70 cents.
Get the most bang for your buck right?
Just dump your shares to the open market and dilute your investors.
I’m not saying to buy and hold to $3.
I personally would not hold this overnight knowing they could issue an offering any time
they want.
But if I were trading this penny stock intraday, I would see if it could break above previous
high of $1.90.
After that it would have room to $3.
And if I want to scale in short, $3 would be the key level I would look at for more
dilution.
But definitely no overnights for me personally.
But this is NOT an advice, just my opinion.
Next stock I want to look at is ZYNE.
This is a penny stock that’s been breaking out the past few days.
I have not traded it but after looking at their SEC filing and financial statements
etc I actually really like it for a long continuation, and I’m about to tell you why.
So let’s repeat the same simple process we just did with YRIV.
We’ll go back to Nasdaq.com and search up ZYNE.
We can see all the fillings for this company.
We’ll start with 10-K. Search for the key word “Revenue”.
Now we can see they are not making any money just like YRIV. but the key difference between
the two penny stocks is that, ZYNE is a bio tech company.
Typical biotech companies do not generate revenue consistently.
They keep on raising funding from investors to fund the drugs in their pipeline.
They go into research, trials, FDA filing, FDA approval process.
Therefore these biotech companies can be burning through investors’ money for years before
they make any profit.
But these companies are most likely still going to have access for more cash because
investors and funds are betting on them getting the drug approved many years down the road
and finally churn out big profit.
So that’s something to keep in mind.
The revenue figure for biotech companies are worth looking at.
But what matters more is whether the company has enough cash to cover their operating cost.
So on the balance sheet we can see here we can see they have operating expense of about
$40 million in 2018.
Now let’s see if they have the cash to cover that cost.
So next you want to search up key word “cash” to look at their cash reserve.
So you can see they have about $59.7 million.
So that will cover the operating expenses.
But just in case on ZYNE, let’s double check the keyword “offering”.
So you can see ZYNE’s offering history.
And you can see in Jan to March this year, they’ve already completed their offering
and raised an additional 18.7 million dollars to fund their research.
That was just last month, so that’s a positive.
If the last offering on a biotech penny stock was a while ago, and they have a high burn
rate and are low on cash reserve and only have $120k like YRIV, then that could be a
serious warning sign that they may do an offering soon to keep the lights on.
We saw that exact example just in my last video reading the SEC filing for AVEO.
The company didnt have cash to cover their operating expense, they have a drug coming
up they need to put into trial soon, and they haven’t done an offering since last summer.
And they’ve been pumping out PR to prop the share prices up since two weeks ago.
So they did an offering.
Feel free to check out that video for a more detailed breakdown on AVEO and OPTT.
But in this case I think we are fine on ZYNE.
Whats even better is that down here they say they have no debt.
So this is where i can be confident, that this penny stock company raised the money
to actually fund their research and trials on their drugs, as opposed to raising the
money to pay back debt obligations like YRIV.
Now after reading SEC filings and scanning for recent news and drug trials, let’s look
at the daily chart for ZYNE.
Gorgeous daily chart, Increasing volume, uptrend on daily, breaking out room to run till $12,
it’s also in a hot sector and now has cash and catalyst.
If you’ve seen my video on my beginner swing trading strategy, you’ll see how this penny
stock is prime for a multi day breakout.
If it dips and holds the $8 level, this stock will be on my watch for day trading and swing
trading for sure.
So this is how you do a quick penny stock SEC filing analysis quickly with keywords.
In summary the keywords you are looking for are “revenue”, “cash”, “operating
expense”, “offering”, “convertibles”, “warrants”, “shares outstanding”,
“shelf”, “atm offering”, which stands for at the market offering.
And you’ll be looking for those key words in Form 10 k and S 3.
Again, the goal of this search is not for long term investment, it’s to find out if
this company has cash to cover their expense and debt short term, and if they don’t,
do they have any outstanding shares, warrants or convertibles registered for an offering
that they can be sold at any given time.
Play around with those keywords, it takes some practice, but after trying it out a couple
of times you will be able to skim through these filing keywords in under 10 min.
I made this reading the SEC filing video after receiving so many requests from my last video.
I really took me a long time to compile the research on the stocks and explain the process
in the simplest way possible for you guys.
So please make sure to give me a like on this video, subscribe, and let me know down in
the comments below if you found this useful.
if you have any questions or if you have a faster way of reading the SEC filings, feel
free to let me know as well.
Im always looking for feedback and hearing other traders’ process and streamline my
own research.
And feel free to check out my other videos on the channel for beginner day trading and
swing trading strategies if you’re interested.
This is the humbled trader, thank you guys for watching and I ll see you next time!