Why investors took notice
On June 20, 2018 Kraken announced a private placement investment with a company called Ocean Infinity. This announcement was interesting for three reasons:
- Ocean Infinity’s announced intention was for a 9.99% stake in Kraken at a 33% premium to the prior day’s close ($0.20/share compared to $0.15/share);
- Ocean Infinity announced a 36-month hold period for its investment. This is unusual. For perspective, the typical hold period for a private placement is four months—which means that the investor cannot unwind its position for at least 4 months from the date of the investment. Ocean Infinity has effectively stated that it will not sell any shares for at least 3 years from the date of closing the private placement—the company is clearly signaling that it is taking a long-term position;
- Ocean Infinity awarded Kraken a $3 million contract on Sept. 7, 2017. At the time of the award, Kraken’s trailing twelve-month revenue was $1.4 million, so the contract award was material. On the day of the announcement, Kraken’s stock volume traded was 7X its 20-day average daily volume, but the stock did not move up materially. At the time, it appears that only a few investors were convinced the large contract award was an indicator of future awards to come.
Stock trading above investment price
On the day the strategic investment was announced, Kraken’s stock traded 29X its 20-day average daily volume, and the stock price closed up 33% at $0.20 after touching $0.21. In the days following the news, the stock has consistently closed above the $0.20/share investment price with comparatively heavy volume. Given Ocean Infinity’s expertise in the sector as well as its recent award of a material contract to Kraken, it appears that more investors anticipate a material improvement to Kraken’s future prospects given its new relationship.
FYI: What is a Strategic Investor?
Ocean Infinity is what we would refer to as a strategic investor. Strategic investors are different from financial investors in several key aspects:
- Strategic investors have an expert level of knowledge about the market and industry in which they invest, usually because they are operators themselves;
- A strategic investor’s decision to invest in a company is not driven solely by anticipated return on the investment. For example, the strategic investor may be interested in getting exclusive access to some of the investee company’s products or patents, or may be interested in sharing a market opportunity with the investee company;
- Because strategic investors are both investors and operators, they have the ability to positively affect the investee company and its share price by various means including: