WindStream Technologies - Crashed But Still Overvalued?


Rehashing Windstream History.

Missing Certifications?

A "Feel Good" Technology.

Let me start by stating the obvious. As investors, no matter long-term or day trader or anything in the middle, our job is to predict the future. Everyone who invests is putting his money into a vehicle with the hopes that its future value is greater than its present value. Our time horizons differ, but our goal is the same. Investors do our best to determine the likelihood of a future event. Some use fundamental analysis, some prefer technical analysis, and others choose to rely on hope and fantasy. As for myself, I have found that hope is not a viable investment strategy. Therefore, I have chosen to focus my efforts on special situations that are fundamentally-based and technically-driven. By combining the information that can be found in SEC filings with the timing afforded by accurate technical analysis, I am able to piece together a logical, high-probability outcome over several time horizons, both short and long. In addition to the basic number-crunching angle of fundamental analysis, I will often engage the situation from another angle; an angle that attempts to re-create the subject business from before its inception. As is often the case, my active research will yield a story that is as satisfying as the appreciation of the investment, itself. This rather unique, in-depth, all-around analysis usually ensures that the future value of the investment decision is also greater than the value that could have been achieved through investing alternatives. That is to say, the investment went out 'seeking alpha' and with careful guidance came home with said alpha. And, I think that is why we are all here, to seek guidance in our decision-making processes. We will often disagree, but that is a good thing; for disagreement yields volatility, thus completing our vicious cycle, as we attempt to accurately predict the very volatility that we create.

In ancient Rome, the Auspex would attempt to decipher various omens in order to help guide public decision. With Auspex Research, I attempt to piece together a story, using information that is readily available to those willing to dig deep enough to discover its riches, in an attempt to help guide myself, and anyone else who is willing to listen.

This is a follow-up to my previous article about WindStream (OTCPK:WSTI), so please make sure that you are familiar with it before embarking on this new journey. As I thought about the company and its need to raise additional capital to successfully execute its business plan, I came across this PR as I began to backwards. It is the PR that talks about their new relationship with the prestigious Burnham Securities who will help them with fundraising efforts. At first, I was impressed, as it does sound lucrative. I hope that they do not go the way of these guys, though, who coincidentally also had a relationship with Burnham to "assist the Company in seeking financial and strategic alternatives." As you can see, shortly thereafter they received a trading suspension from the SEC. Well, I guess a prestigious relationship doesn't always translate into success. Hopefully, WindStream fares better in this department. I bring this up only as a point that as an investor you must not let yourself become enamored of the fancy words and names that often accompany those companies who have not yet fully matured. A successful disconnect from the party can be found when you learn to brush aside the glitter in the air and instead focus on the dirt beneath their feet.

After that speed bump in my continued 'Walk Down Due Diligence Lane', I began to read about "A Global Opportunity: WindStream's 2014 Roadmap". This is an awesome document, and I suggest you put down your smart phone, stop looking at Facebook, and read this thing the next time you take a personal break. Particularly fascinating to me has been WindStream's deal with Jamaica Public Service. I mean, surely if this product is truly competitive, then where else but in the land of competition, the good 'ole US of A, should one look to sell a product? As we will see, there have been numerous opportunities right in WindStream's back yard. Why have none seem to have come to fruition? Why go to Jamaica to peddle the wares? I had questions, and luckily so did that Global Opportunity Road Map, in which the question was asked, " But why is JPS selling renewable energy products to its customers, potentially cannibalizing its own business model?" I was hanging on their every word. Why? Why? Why? One part makes the most sense to me, if I were to put myself in JPS's shoes: " JPS generates revenues on the financing of the products over time, on the sale of energy, and on the buyout ..." This is a logical explanation, because I believe that the cost of these units are well above industry average when speaking about cost as it relates to output power. You can see my thesis in this article. If I were presented with a similar proposition, then I might say to myself 'Gee, I can sell these things for thousands of dollars and they will barely power a small appliance. And, I can keep on selling my electricity to these people, too, while collecting interest if I finance it for them!' Now, the exact particulars of the contracts involving JPS, both between them and WindStream and between them and their end-users, do not seem to be public information. It would be nice if WindStream would file an 8-K that showed the actual contract with JPS so that analysts could get some concrete meaning behind words like "purchase orders" and could see more clearly through documents that use words like 'potential', 'if', and 'could' in every other paragraph. I mean, if my aunt had cajones, then she could potentially be my uncle.

At any rate, if you want to get an idea of what these contraptions would look like in the real world, then put down that document, pick up your smart phone again, and go to The Facebook. Scroll down to April 25th. Not a big deal, just funny to see that the design of the big SolarMill actually allows the top panels to provide shade for a portion of the bottom solar panels. Go on down to the April 4th entries. Don't those artist renderings look attractive?

Aesthetics seem to be only one of the many benefits that the SolarMill can bring to an end-user. To get a better idea, you can check out one of the promo videos put together by JPS. To be fair, that video was embedded into this guy's product review. As you can see, he confirms my previous thoughts about the cost vs output when he says "What is the cost per watt for a 1.5 kW system which would meet my kWh demand?

Based on my research it works out to US$4.00 per Watt. When compared to pure solar this price is almost 100% more expensive.

So if the math and the calculations holds, and the fact that most residential communities do not experience any wind day or night for the majority of the year. Why would anyone be inclined in purchasing such a hybrid product from JPS eStore over that of a pure solar PV system?

It appears to me that though it is a great approach for JPS to enter the renewable energy space. Such a product is a niche market product and frankly way too expensive and impractical for most residential zones."

Wow. Pretty enlightening. With one of my many questions seemingly answered, I sought the answer to one of my previous questions put forth by Captain Obvious, "Why not sell these things in your back yard, the USA?" Honestly, I have no idea why they haven't. But, this website has some darned interesting information about one of the possibilities!

" The product literature states the Solar Mill has a 5-year warrantee and is guaranteed for 20 years. However, no National Research Testing Laboratory (NRTL) listings are mentioned in the literature - meaning the product was NOT researched, tested and approved to any international safety standard (called listings) and hence could NEVER be sold in the United States, Europe or Canada.

Listed products are important because they will not break down, cause a fire or otherwise be a safety hazard in your presence. When buying a listed product a consumer is assured the product was inspected, tested and deemed safe to enter the market. World safety leading laboratories UL, CSA, ETL or TUV are the four recognized safety testing laboratories with the authority to list products for use.

In fact JPS demands ALL electrical products interacting with the utility grid to be listed. But, the Solar Mill is not - why?

JPS demands that all electrical devices must also be inspected, tested and approved by the Jamaica Standard Bureau (a Jamaican based NRTL). ALL solar inverters and panels MUST be approved by JSB to be installed but, the Solar Mill could not be found on their approved list either."

Well, sounds as though that question, "But why is JPS selling renewable energy products to its customers, potentially cannibalizing its own business model?" might have a few different answers than the ones outlined in the Global Opportunity document! I guess we will just have to stay tuned to the reporters in Jamaica.

Are these products really not tested to a United States (or some first-world) safety standard? I think this will be something that must be revisited at a later date, as it is a much bigger potential problem that will require much more research. Stay tuned for that one.

However, the mention of testing is a good segue into another possible discrepancy. Again taking from the WindStream 2014 Roadmap, "In the second quarter of this year, a SolarMill pilot will be installed at the U.S. National Guard facility in Sea Girt, New Jersey. Discussions with other military bases are ongoing." Please note that WindStream put the extra "be" in there. They forgot to spell check, I think.

Doesn't this sound like a first-time installation? A "SolarMill pilot" would mean that the word 'pilot' is being used in its adjective form, which means "done as an experiment or test". This is interesting, because I think that there was already a pilot program at Sea Girt and subsequent orders to follow. I am getting this from this video interview with WindStream's CEO, Dan Bates. Go forward to the 32:58 mark (we will rewind later) and while you listen be sure to note the date on the bottom of that slide, May 21, 2012. I am picking up this from the audio: "In Sea Girt, New Jersey we were able to put up a single unit for analysis ... to make sure it performed as advertised ... they have subsequently gone ahead and ordered a whole bunch more for the barracks in Sea Girt, New Jersey."

So, what happened to all those units that they ordered? Why is there another pilot program scheduled in Sea Girt, New Jersey in 2014? I will have to keep looking for answers as this is an open-ended thread. On the surface, though, I have to think that in the long run this will be just another unfulfilling bullet point in a forgotten corporate document. You can go listen to the rest of the presentation, as it has some good information. Pay particular attention to the part at 25:30, which shows the power curve to which I referenced in my last article. Also, at 26:02, I think that there is a telling line where he says "when you have turbines spinning, it makes people feel good." To me, that is kind of a subliminal admission that wind power is not really all that relevant, but is possibly more of a visual representation of one's intent on doing something good. That is a wonderful feeling to have, but in the real world, feeling good will most likely not translate into long-lasting profits; Again, reinforcing my original thesis that the wind component of the SolarMill does not offer any competitive advantage over existing products.

One last part of the interview is of particular importance to me, as an investor who is trying to establish a historical pattern on which I can base the probability of a future outcome for my potential investment. Listen to the interviewer at 33:55. He talks about how he has seen the sales pipeline, and "it's as long as my arm." To further drive that point home, simply read this article from the Plain Dealer Sun on May 30, 2012. It states that "Windstream Technologies has a problem many companies only dream of. The Buckeye Street plant is sold out of inventory." Again, referencing my previous article, what happened to all of those sales and how do you go from a sales pipeline as long as someone's arm and being sold out of inventory to laying off all of your employees just a few months later? Why did those sales never translate into meaningful revenues on any income statement that was filed with the SEC after the merger? To me, this is a pattern that I have seen many times in the penny-stock world. Pie in the sky aspirations, but nothing ever comes of it, for whatever reason. These companies come and go with each passing day, and we usually have no idea what was really going on behind closed doors.

However, I think that the information in my articles have laid out a high probability case against the real-world, long-term viability of the company in its current state. How can a man with limited resources come to compete in such a sector with companies like GE and against teams of physicists with resources to the moon and back who have been testing and re-engineering potential products since before Mr. Bates was spending his days producing music? Are they really selling these things in 3rd world countries to skirt certification requirements? If I am to allocate capital based on the probability of a future outcome based on historical information, then how much capital do you think should be deployed here given that the market is placing roughly a $70,000,000 valuation on this company?

We can revisit this technology until we are blue in the face. You can watch these things spin on a beach all day long. You can read about these installations and puzzle until your puzzler is sore as to why nothing meaningful seems to have come from any of them. In the end, I think that you will find in your hearts that people like Christopher Stahl, President of Lake Effect Energy Corporation, might be onto something when they make raw comments like he did: "When Federal Monies Become Available............Look at the garbage that hits the market place! ... When public tax dollars are spent on equipment without the proper certified testing or data from a set time frame.......We have been duped and fleeced." Or how about Brent Summerville of the Small Wind Certification Council. Read this article and mull over his thoughts. Are people like that correct in their initial skepticism? Are they glaring evidence that everything else that I have written is leading to the same conclusion: that this product has a low probability of success, and therefore the current valuation is most likely extremely high? I think so.

In closing, I have put this story together as a guide. It is not an absolute, as none of us have a crystal ball. It is merely an interpretation of the data before me, intended to be used to measure the likelihood of a future outcome. And as such, it will undoubtedly have more chapters to come. So, take this information and continue to watch this story as it plays out in the public markets. Only time will tell how accurate the story was.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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.

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