- We are unable to identify the whereabouts of around 26 million free trading shares.
- Dilution on the way. If company does not raise money it will be unable to fill purchase orders discussed in releases that may have helped fuel stock’s recent pump.
- The number of free trading shares resulting from the reverse merger transaction and post-merger financings is 4x higher than the 15 million shares assumed in Penny Stock Realist’s 6/26/2014 article.
- Post-reverse merger, the company entered into at least 14 financing transactions between May 2013 and April 2014 at prices equal to or less than $0.50 and as low as $0.05.
- SEC halt risk appears high. Promotion funded by WSTI shareholders, reminding us of the PGFY pump that led to shares being halted; numerous disclosure issues, pre and post reverse merger.
On June 26, 2014, Penny Stock Realist ("PSR") published a short thesis report on WindStream Technologies, Inc. (OTCQB:WSTI). The next day we tweeted our agreement with the report, and on Monday, June 30, 2014, we stated that we were aggressively shorting the stock.
PSR believes shares of WSTI are worth "somewhere near $0. The author's talking points included:
- A very overly bullish $900,000 financed hard mailer promotional piece is being mailed to peoples' homes.
- 15 Million Free Trading Shares that could be dumped into the promotion.
- A couple of stocks promoted by The Wall Street Revelator have been halted by the SEC.
We agree with PSR's thesis and believe shares of WSTI are headed for a dramatic fall that already seems to have been set in motion. We were perplexed that investors initially bid the stock up after PSR's report, especially after it was correctly pointed out that some stocks that had been the recipient of past pump campaigns by The Wall Street Revelator invited trading halts. While PSR provided a good summary of why it believed WSTI is just another pump and dump ("PnD"), we will discuss a few additional issues.
26 Million Free Trading Shares Unaccounted For
- 7.8 Million Shares held by Vanguard Financial Trust mysteriously disappeared from disclosures in filings. Our findings indicate they could be in the hands of a well-known stock promoter.
- We don't know who owns 18 million of the 39.7 million shares issued in the reverse merger transaction that resulted in WindStream becoming a public company
Who Is Vanguard Financial Trust And Where Did Its 7.8 Million Shares Go?
The following DEF 14c filing (Other definitive information statements) reveals that Vanguard Financial Trust owned 7.8 million shares of WSTI as of February 14, 2014.
Name and Address of Beneficial Owner
Vanguard Financial Trust
Our search of the SEC database for filings related to Vanguard Financial Trust, which revealed a filing showing that Vanguard Financial Trust came into possession of WSTI stock and warrants. The transaction took place on August 22, 2013, well after the completion of the WSTI reverse merger. A Form 3 filed on March 27, 2014 confirms this finding, showing that at one point Vanguard Financial Trust owned:
- 9.9 million WSTI common shares
- Warrants to purchase 2.8 million shares at $0.50
It looks like VFT could have participated in a WSTI financing transaction since they own warrants with a similar exercise price associated with financings that WSTI completed since mid-2013.
We called the phone number (512-358-8440) listed on one of the SEC filings of Vanguard Financial Trust ("VFT") which led us to a Texas company called The StockWire Group. To be clear, investors should not get them confused with the reputable Mutual Fund Company, The Vanguard Group. Now here is the problem. VFT is no longer listed as a beneficial owner in WSTI's 10-K filed on April 11, 2014. We calculate that VFT would have had to have sold 3.3 million shares to not be considered a 5% stakeholder in WSTI. However, according to otcmarkets.com, WSTI traded a total of 9,075 shares between August 22, 2013 and April 11, 2014. So:
- Where did these shares go?
- Who owns them?
- Are these shares being secretly sold to enrich certain players involved with WSTI?
Further research led us to Adrian James who appears to be a stock promoter. We noticed Adrian James's signature in the Form 3 filing:
/s/ Adrian James
** Signature of Reporting Person
So now, we can assume that Adrian has ties to VFT. The cover page of the Form 3 filing also included the following address:
3736 BEE CAVES RD
AUSTIN TX 78746
This address can also be linked to Stock Professor, Inc., a promotional outfit that flooded our email inbox with at least 23 penny stock paid promotions in March and February of 2013. Fourteen now trade at sub-penny levels, while the rest trade for under $0.30.
|Company pumped by Adrian, aka Stock Professor||Symbol||Close as of 6/30/2014|
|Sunrise Holdings Ltd||(SUIP)||0.0450|
|SUSPECT DETECTION SY||(OTCPK:SDSS)||0.0064|
|Latteno Food Corp.||(OTCPK:LATF)||0.0043|
|Creative Edge Nutrition Inc.||(OTCPK:FITX)||0.0537|
|Ranger Gold Corp.||(OTCPK:RNGC)||0.0043|
|CYIOS Corporation, Inc.||(OTCPK:CYIO)||0.0081|
|BUYER GROUP INTL INC.||(OTCPK:BYRG)||0.0002|
|Enhance Skin Products Inc.||(OTCPK:EHSK)||0.0150|
|TruLan Resources Inc.||(OTCPK:TRLR)||0.0013|
|Network CN Inc.||(OTCPK:NWCN)||0.1200|
|AirTrona International Inc.||(OTCPK:ARTR) (Pumped as CCRY)||0.0004|
|Force Minerals Corp.||(OTCPK:FORC)||0.0078|
|PayMeOn Inc.||(OTCQB:PAYM) (Pumped as MMAX)||0.3101|
|ALASKA PAC ENGY||(OTCPK:ASKE)||0.0002|
|Champion Industries, Inc.||(OTCQB:CHMP)||0.2900|
|PacWest Equities Inc.||(OTC:PWEI)||0.0003|
|Primco Management Inc.||(OTCPK:PMCM)||0.0022|
A simple Google search led us to a July 25, 2012 article at Promotionalstocksecrets.com, which mentions Adrian James in which the author discusses the details surrounding a promotional campaign that Adrian was associated with:
"This is very significant. Adrian James Owens 4 stock promotion companies. He owns Interactive Investors, Inc, Stock Professor Inc, Chicago Financial Times, and Street Wire Research Group Inc."
"Through his stock promotion companies, Adrian James was compensated 1.5 million dollars and five hundred thousand shares to run a pump and dump on Pershing Gold Corp then known as sage brush gold back in October of 2011."
We think regulators will want to take a closer look at Adrian James and the "disappearing" 7.8 million shares related to Vanguard Financial Trust, especially given the fact that The Wall Street Revelator disclaimer included in PSR's Seeking Alpha article states that "unaffiliated shareholders" of WSTI financed the promotional campaign. This is very similar to the scenario in our May 6, 2014 article about a Pingify Intl (PINK:OTC:PGFY) pump campaign that was being financed by shareholders. PGFY's CFO resigned and shares of PGFY were eventually halted. The CFO postulated that individuals that participated in recent financings were behind the pump campaign.
We are beginning to surmise that the WSTI pump campaign may have been financed by undisclosed shareholders who provided capital to the company through some of the 14 financing transactions that took place since mid-2013.
Who Owns The Shares Issued In The Reverse Merger Transaction: Undisclosed 18 Million Shares
WSTI's previous name as a shell company was Windaus Global Technology. Windaus Global Technology became an alternative energy player when it completed a reverse merger transaction on May 22, 2013 with WindStream Technologies. Part of the consideration given to WindStream Technologies included 39,665,899 shares of the shell. However, we can't account for all these shares. The second column in the following table in WSTI's 2013 10-K shows the percent ownership of common stock by directors and shareholders who own 5% or more of the shares. Dan Bates, Travis Cambell and John Owen were all involved in WindStream, pre-reverse merger.
Name and Address of Beneficial Owner(1)
Dan Bates, CEO
Ryan Keating, CFO
Travis Cambell, COO
All executive officers and directors as a group
Blue Sky Projects LLC
It looks like SEC documents describe Dan Bates as the founder of WindStream.
"WindStream was originally established in 2008 as a California "C" corporation by Daniel Bates"
However, LinkedIn refers to John Owen as co-founder of WindStream, but is no longer part of the company (2009 to 2010).
SEC filings do not discuss his past involvement in the WindStream story, even though he owns 4.2 million shares of WSTI. Travis Cambell has been COO of WindStream since 2011, but owns no common shares. We are assuming that Blue Sky Projects llc shares are legacy shares since one of the previous shell names before the Windaus Global Technology shell was BlueStar Entertainment Technologies, Inc. So Dan Bates and John Owen received a combined 21.5 million of the 39,665,899 shares issued in the reverse merger transaction. That leaves roughly 18 million shares unaccounted for that could be in the hands of several shareholders that may be "secretly" benefiting from the pump. Whatever the case, at WSTI's intraday trading high of $2.25 on June 27, 2014 around $80 million of wealth was created for individuals that appear to be or have been involved in WindStream, yet 2013 revenues were just shy of $1 million.
The Cat Is Out of the Bag
WSTI is beginning to remind us of Pingify Intl. The stock pumped from $0.30 to a high of $1.74 over two days due to a $6.5 million promotional campaign. Shortly after the pump began, we published a Seeking Alpha article highlighting that the CFO resigned, essentially warning investors by citing his displeasure that the promotional campaign had occurred and that the hype contained in the promotion was inaccurate. Investors that choose not to take the CFO seriously were soon caught in a halt that lasted two weeks. The stock now trades under $0.10. That is why investors may want to know that WSTI issued an 8-K at 2.58 PM during last Friday's trading session acknowledging the existence of The Wall Street Revelator pump campaign, denying having any participation in the campaign and that the information in the mailer should not be relied upon:
"Windstream Technologies, Inc., a Wyoming corporation (the "Company"), has been made aware of certain promotion materials that were distributed by the an entity named "The Wall Street Revelator" which makes various statements about the Company, its operations, customers, valuation and stock. The Company had no role in preparing or disseminating such materials, did not pay for them, was unaware that these materials had been prepared and did not consent to, or participate in, such preparation or dissemination. Any celebrity or other endorsements, quotes, photographs, and the like used or depicted in such materials were also prepared and disseminated without the Company's knowledge, consent, direction or participation. As of the date hereof, the Company has not been contacted by any party to confirm, refute or comment in any way on these materials. The Company also cannot give any assurances that the aforementioned materials are the only such materials distributed by third parties. Because the Company did not participate in the preparation of such materials, and was not consulted by the preparer or distributor of these materials, these materials should not be relied upon and, instead, any interested parties should review the Company's filings with the Securities and Exchange Commission on SEC.gov, including our Annual report on Form 10-K, visit our website at windstream-inc.com, or contact the Company directly for information about the Company, including, without limitation, our operations, financial condition and securities."
The financing frenzy that WSTI has been on since completing the reverse merger transaction is also cause for our team to be concerned, especially since we know that the promotion is being financed by some shareholders. At the very least, management's acknowledgement basically means that investors who bought WSTI on the overly bullish content in "The Wall Street Revelator" mailer could likely consider selling the stock if/when they realize their purchases were based on incorrect information.
Motivations for Pump - Dilution Train Has Left the Station
- Need to raise capital
- 61 million free trading shares appear to be in the hands of insiders and financiers
- Consulting shares
- Shares issued to Board of Directors
It Appears that WSTI is in Dire Need For Capital Putting it on the Course for Massive Dilution
If investors don't want to believe that WSTI is just another P&D using bits of legitimacy to build investor false confidence then know this - Management has been raising significant amounts of dilutive capital at stock prices primarily equal to or under $0.50 and is currently on the hunt to raise additional funds. WSTI may be using its new "relationships" and alleged "purchase orders" to attract capital that we are guessing it needs to execute these relationships and purchase orders. Unfortunately, casual investors would probably not gain a clear sense that the company needs to raise capital to fill its "order book" without reading WSTI's SEC filings. Nothing portrays this reality clearer than the following excerpts from the company's quarterly report ended March 31, 2014:
"The ability of the Company to continue its operations is dependent on Management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company's existence."
"The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future if it does not receive the anticipated additional funding."
More verbiage from the 10-Q highlights this inevitability (page F-15)
On April 1, 2014, the Company entered into an agreement with an investment banking firm which will provide advisory services in the area of corporate development, corporate finance and/or capital placement transactions. The agreement will expire twenty four months from the date the agreement is signed or the mutual written agreement of the Company and the investment banker
In the event of a successful transaction, the investment banking firm will earn fees based on a percentage of the aggregate consideration for an equity transaction as follows:
- 5% for Aggregate Consideration of less than USD $10,000,000, plus
- 4% For Aggregate Consideration between USD $10,000,000 and USD $25,000,000, plus
- 3% For Aggregate Consideration between USD $25,000,001 and USD $50,000,000, plus
- 2% For Aggregate Consideration between USD $50,000,001 and USD $75,000,000, plus
- 1% For Aggregate Consideration above USD $75,000,001.
Just raising $10 million would result in 20 million new shares if an equity financing transaction was completed at $0.50.
WST Insiders And Financiers Have Much To Benefit From A Pump- 61 million free trading shares created post reverse merger
Given the amount of shares created from the reverse merger transaction and post-merger financing transactions, we have taken management's following position with a grain of salt:
"The Company had no role in preparing or disseminating such materials, did not pay for them, was unaware that these materials had been prepared and did not consent to, or participate in, such preparation or dissemination."
We believe that the amount of free trading shares that has or can be created from the reverse merger transaction provides an ideal environment for a pump campaign.
The reverse merger transaction that created WSTI resulted in a post reverse merger free trading share count of 63.67 million with the possibility of being as high as 107 million. Post-reverse merger, the company entered into at least 14 financing transactions between May 2013 and April 2014 at prices ranging from $0.05 to $0.50 (except one which was completed at $0.80) that have added 13.353 million shares to the capital structure. Another three convertible note financings with exercise prices of $0.25 could bring in 4.4 million more shares. Furthermore, most of these transactions included the issuance of warrants with exercise prices no higher than $0.50, which could add around 12 million shares. See summary of financing transactions here.
Fully Diluted Share Calculation Summary
- 24,000,000 legacy shares held by shareholders of the shell that WindStream merged into after taking into consideration the cancellation of 535,520,000 legacy shares owned by the sole director of the shell, Juan Martinez.
- 39,665,899 shares immediately issued to the company, WindStream Technologies that merged into the shell.
- 13,605,000 shares to be issued to the company, WindStream Technologies that merged into the shell, from options for which conversion terms were not provided.
- 29.7 million shares from financing transactions
Summing the above figures shows that WSTI's potential fully diluted shares count is around 107 million. According to WSTI's Q1 2014 filing, it had 84,972,578 shares outstanding, meaning that 60.97 million shares have been created since the completion of the reverse merger transaction (84.97 million minus 24 million post-reverse merger shares).
Pre-reverse merger it appears that 3.86 million shares were issued for services in connection with a previous reverse merger transaction that was later cancelled:
Prior to the Original Share Exchange, Opco entered into a consulting agreement with 9595 Wilshire Group Inc. for financial advisory and merger and acquisition consulting services, including making introductions to a public vehicle for the share exchange transaction, and making introductions to potential merger and acquisition targets. In exchange for such services, the consultant was issued approximately 3.86 million shares of common stock prior to the Closing Date. The amount of such shares was determined by Opco. The Company honored Opco's obligation under the agreement to issue shares, but the consulting agreement is no longer in effect and has no continuing payment obligations.
Shares issued to board of directors
On 5/6/2014, the company filed an 8-K detailing the compensation terms of two individuals elected to its board of directors on 5/2/2014, which includes options to buy 50,000 shares at $0.40 per share.
"On May 2, 2014, the Board of Directors (the "Board") of the Company elected Channing Dawson and David Lowenstein as members of the Board to fill existing vacancies. The new directors will receive cash compensation in the amount of $2,500 per quarter, together with reimbursement of reasonable expenses. The new directors will also receive an option to purchase up to 50,000 shares of common stock of the Company at $0.40 per share."
So on day one these two individuals theoretically could immediately pocket $50 thousand (stock closed at $1.40 on May 2, 2014).
WSTI May Already Be On The SEC's Radar
One thing we notice with P&Ds is lack of or incomplete disclosure. This looks to be the case with WSTI. The following non-reliance verbiage is at times to be expected when dealing with P&D scenarios where the existence of "phantom" shares can often be an issue:
"Management is continuing to assess the Company's internal control over financial reporting and its disclosure controls and procedures, and expects to report material weakness in its internal control over financial reporting through the present time, due to its failure to properly account for the debt and equity transactions. Management will fully report its conclusion on internal control over financial reporting and disclosure controls and procedures upon completion of the restatement process."
The SEC sends letters regarding disclosure that investors can review by observing "upload" filings on a company's SEC page. The SEC has been sending WSTI (pre and post-reverse merger) letters asking for clarity on disclosures. There have been two relevant SEC "upload" letters after WSTI's reverse merger:
- September 16, 2013 - SEC requested answers to 26 questions
- October 28, 2013 - SEC requested answers to 11 questions
We believe that regulators will want to probe deeper into the promotional campaign that WSTI management claims it had nothing to do with. Furthermore, WSTI claims to have inked contracts or to be in product test mode with well-known enterprises. Of course, as is often the case with P&Ds, most of these customers seem to be located in emerging markets. We think regulators will be intrigued by the following developments:
"ACC Limited, the largest cement manufacturer in India, has successfully piloted the SolarMill® technology and is now in the negotiation phase for large-scale deployment.
WindStream Technologies, Inc. announced today that it has signed several new distribution agreements, expanding its reach into new territories around the world. These new distributors include Meytek Group in Turkey, a large installer of solar systems, Key City Trading from the Netherlands, B.E.S.T. Ltd. in New Zealand, Suka Wind & Solar Ltd. in Ghana, one of the country's largest solar installers, Senan Liberia, Inc. in Liberia, Africa Energy Limited in Kenya and Viza Networks Limited in Tanzania.
WindStream Technologies, Inc. and Jamaica's National Utility company, Jamaica Public Service Co. ("JPS"), have expanded their relationship with the execution of a new $8,100,000 purchase order (PO) to coincide with the PO for $14,500,000, signed earlier this year, which will provide additional products and services offered by WindStream Technologies to customers of JPS.
WindStream Technologies, India established July 2013 - Multiple MW projects being negotiated India - BBNL - government project to bring internet connectivity to rural India. 250,000 WIFI hotspots being deployed."
Given that WSTI needs to raise capital to execute its business plan, we think management is exaggerating its position by putting the cart before the horse.
When all is said and done the capital structure of WSTI combined with its minimal revenues leads us to believe that it's just another pump and dump destined to approach penny levels.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.