My thoughts on KTE

I've been following this stock ever since Fib bought in. I'm not a holder and I am still doing research but I find it a pretty interesting play.

The "West Coast USA based investment firm" is called "Liquid Venture Partners". It is based in Los Angelas and was founded in 2014. Their domain name is www.liquidventure.com and it was first registered in June 2014. It is basically a small, newly formed, venture capitalist firm with very limited history. The important thing to know is that they don't actually invest themselves, they just offer investment services and charge a 6% commission. The actual placement/funding is done through the "National Securities Corporation" (www.nationalsecurities.com)

Here is a link showing all of the completed deals this year:
http://www.nationalsecurities.com/index.php/investment-banking-corporate-services/completed-deals

As you can see, Mears Technologies is about half way down the page.

To date, Liquid Venture Partners have only "participated" in three IPO's:

Energous (Nasdaq: WATT)
Ideal Power (Nasdaq: IPWR)
Aqua Metals (NASDAQ: AQMS)

However, it's important to note that Aqua Metals is the only one in which they acted as a sole placement agent. The other two (Ideal Power and Energous), they just acted as a co-managing underwriter, i.e. they were just providing investment coverage for the book building process for the already planned IPO.

The placement for Aqua Metals was for a total of $6 million in convertible notes, which were issued on October 2014. The Notes were to automatically convert at the time of IPO at a conversion price of between $1.52 and $2.27, depending on the offering price of the IPO. The Notes accrued an interest at an annual rate of 6%. Aqua Metals successfully IPOed on July 31st 2015 at $5, closing at $5.30, giving it a total market cap of around US $70m.

The Aqua Metals placement must be very similar to the Mears Technology placement. Although Mears Technology is a private company, we have a "ball park figure" as the ASX failed reverse take over was for 800m shares at 3 cents, giving a value of around $24m. At the time of the private placement, Aqual Metals had 5m shares outstanding. The placement was for 2.5m shares (convertible notes) and the IPO raised $30m ($5 x 6m shares). If we used the same method and work from the KTE announcement, which says the placement was for $8m then Mears Technology must have been valued at approximately USD $16m as at March 2015. Assuming that the IPO price will be double the placement, this make Mears worth $32m at IPO. The IPO would most likely raise an additional $30m, giving Mears an implied valuation of around USD $62m. However, after the dilution of both the convertible notes + the IPO shares, KTE would only have around 5% total (down from 12%, incl note conversion), which would equal about US $3.1m.

It doesn't seem like alot but the upside is that KTE is leveraged with Mear's market cap. If the IPO price were to double, KTE would triple in price!

I know Fib mentioned somewhere on HotCopper, that the minimum market cap for a NASDAQ listing company was $150m. However, upon further research the NASDAQ has three different tiers:

NASDAQ Capital Market (small cap)
NASDAQ Global Market (mid cap)
NASDAQ Global Select Market (NASDAQ-GS Large cap)

Each tier has a different listing requirement. The listing requirement for each are complicated but the capital requirement isn't $150m, as Aqua Metals successfully listed and it only had a US $70m market cap.

What's most important, is that the global market sentiment has turned recently, and that the placement was done way back in March 2015. There is now major uncertainty and investment appetite for these risky stocks are now in jeopardy. The announcement gives an indication of an IPO during 2nd quarter 2016 (April-June) but unless things significantly improve I doubt it will happen. Also, I don't think that Mears is too small for a reverse take over on the ASX, it's just that it's so much easier to flick off these types of investments on a large USA based exchange. I wouldn't be surprised to see a reverse take over at a lower valuation in 2017, as a way for the note holders to "break even".

I actually see the solar investment having more upside for KTE long term. They should really divest in Mears after the IPO, but keep the worldwide rights to the solar technology. Mears will likely require long term capital, which will only continue to dilute KTE's holding. Does anybody know weather they fixed that solar "recombination" issue, as I couldn't find an update on that anywhere?