On July 21 the CEO of Windstrem Technolog (OTCMKTS:WSTI) issued a letter to the shareholders detailing some of the recent events around the company. Mr. Dan Bates reminded investors that WSTI’s manufacturing facility in India was recently inaugurated and that the company’s SolarMill was launched for sale in the U.S. Through a new customer WSTI also entered the market in Argentina and it will seek to expand its presence in Latin America.

The letter had an immediate effect on the performance of the stock pushing it upwards for four sessions in a row. Last Friday, however, the stock reversed its direction and crashed hard slashing nearly 24% of its value. It seems that during the weekend investors’ sentiment remained negative and when the market opened yesterday the ticker continued to drop. WSTI opened at $0.01775, which turned out to be its highest point for the day, and closed at $0.0148 for a loss of more than 15%.

There are several reasons that could explain the sharp drop. Let’s start with the last reported financials for the quarter ending March 31:

• $193 thousand cash
• $4.7 million total current assets
• $10.2 million total current liabilities
• 969 thousand sales
• $987 thousand net loss

It is true that not many pennystocks can generate revenues of nearly $1 million in a single quarter but unfortunately the rest of WSTI’s balance sheet is enough to offset that impressive achievement. The fact that the company has a working capital deficit of $5.5 million and an accumulated deficit of $28 million makes the picture even grimmer.

The biggest red flag, however, is the crushing dilution of the common stock. At the end of March WSTI had nearly $3.5 million in outstanding convertible debt and as a result millions of discounted shares were issued in the past four months. WSTI had to publish 3 different 8-K forms covering the conversions (here, here, and here). As a whole the outstanding shares of the company more than doubled – from 88.6 million as of March 31 to over 196.2 million as of July 24.

The next quarterly report will show exactly how much convertible debt is still outstanding but if the issuances of underpriced shares continue at the same rate WSTI’s stock may find it incredibly hard to sustain a more prolonged upwards move. That is why even if you believe in the potential of the hybrid SolarMill solution offered by WSTI you should still do a lot of your own due diligence before putting any money on the line.

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