Another week, another short report highlighting red flags to potential investors/traders. This time around we present to you CounterPath Corp. (CPAH). CPAH popped up in our radars last Friday due to its ludicrous 300% price increase relative to Thursday’s closing price, volume exceeding 42 million shares (seven times the number of outstanding shares) and RSI (14) breaching 94. The reason touted for the drastic increase in the company’s share price was the announcement of a partnership with Honeywell to create Smart Talk communication software. But as we will see there are others reason to be suspicious of this ticker, namely: increasing liabilities, email newsletter promotion and insiders who are more than happy to carry on lending to the company or with being compensated with shares on a very regular basis.
The company “design(s), develop(s) and sell(s) software and services that enable enterprises and telecommunication service providers to deliver Unified Communications (UC) services, including voice, video, messaging and collaboration functionality, over their Internet Protocol, or IP, based networks”. It was incorporated under the laws of the State of Nevada on April 18, 2003 and its principal executive offices are located in Vancouver, British Columbia, Canada. Since its incorporation the company has gone by a few different names: It was known as Broad Scope Enterprises, Inc until May 2004, then it went on to be known as Xten Networks, Inc. until September 2005, when it changed its name again to CounterPath Solution, Inc, and finally on October 2007 it became CounterPath Corp. and has been known as such to the present day.
A quick glance at CPAH’s quarterly financials over the last year and a half will reveal a company with enough cash to finance its losses and barely any dilution (bear in mind that the company is Canadian meaning that its fiscal year differs to that of USA companies). The number that pops up however, is total liabilities. This figure has more than doubled over the period, increasing from $5.1 million to $10.4 million. In addition, the company goes as far as acknowledging that the level indebtedness can prove detrimental to its endeavours and explains where this debt is coming from on its latest 10K filed on April 30 2019 (1).
The above makes it clear that the company might be unable to pay back its creditors and is at their mercy if this situation were to materialise. Furthermore, it explains that it owes $3 million to two entities, one which is owned by a chairman Terence Mathews and holds over 25% of the common stock (approx. 1.5 million shares), and the other which is owned by director Steven Bruk and his wife Karen Bruk and holds over 20% of the common stock (approx. 1.2 million shares).
By October 31 2019, the principal amount of the loan payable had increased to $4 million as stated in the 10Q filed on the same day (2).
Given that CPAH has averaged a quarterly loss of around $870,000 over the last three quarters, it is likely that this loan agreement is nearing its $5 million limit. So, if by any chance the loan agreement is not renegotiated and CPAH defaults on this debt, the chairman and the director would be able to recoup their investment by selling some or the entirety of their stake depending on the share price.
It is also worth noting that CPAH files form 4s with great regularity, meaning that their employees are often obtaining company common stock and stock options. For example, David Karp, CFO, currently owns 31,995 shares of common stock as well as 173, 198 deferred share units and 90,000 stock options (3). And Todd Carothers, EVP of sales and marketing, currently owns 14,615 shares of common stock as well as 68,824 deferred share units and 72,500 stock options (4). This is likely a further indication that the company is struggling and needs to rely on stock option plans and employee share purchase plans to remunerate and retain its employees.
Furthermore, as shown on an S8 form filed on January 31, 2019, Mr. Karp and Mr. Carothers registered for sale 87,622 and 71,509 respectively, indicating that current employees want to sell some of their stake in the company.This could be an indication that they don’t have much faith in the company’s future prospects.
Last but not least, Mr. Karp and Mr. Carothers are not the only ones with stock options. On October 31, 2020, there were a total of 520,295 outstanding stock options at an average exercise price of $2.29.
Undoubtedly this is easily the biggest red flag CPAH raises. On January 10, 2019, before the markets opened well known promoters such as OTCtipReporter, Buzzstocks.com, James Connelly (aka Penny Stock Prophet), HotOTC, BullRally and other, sent out premarket alerts promoting CPAH.
The disclaimer on these promotional newsletters is the same and states: “Our reports/releases are a commercial advertisement and are for general information purposes ONLY. We are engaged in the business of marketing and advertising companies for monetary compensation.” It also states: “Please be advised we have not been compensated for investor relations and media services for today’s profile’s. We do not own any shares of today’s profile’s.” It thus seems that there is a clear contradiction in the disclaimer. These promotional companies are either covering their rear ends or promoting companies free of charge. We let you be the judge.
CPAH does not look like a good investment. The combination of “pump” newsletters, ever increasing debts, insiders registering shares for sale (namely the CFO) and an drastic share price and volume increase, does not bode well at all and is eerily similar to a “P&D” set up. Stay away from this one unless you are an experienced trader.
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