Keating Capital Reports 2012 Results
Pre-IPO Investor Provides Financial Update
"Keating Capital operates a private-to-public valuation arbitrage strategy, seeking to profit from the potential value increase that we believe typically occurs when a private company completes an IPO. Our goal is to make investments that create the potential for a 2x return on our investment once the company is publicly traded and assuming our typical investment horizon of 36 months," stated Timothy J. Keating, CEO of Keating Capital, Inc.
2012 Portfolio Activity
During 2012, we made investments totaling $26.5 million in six new private portfolio companies, approximately $0.5 million in two existing private portfolio companies (BrightSource and Livescribe), and approximately $0.5 million in Solazyme, an existing publicly traded portfolio company.
During the first and second quarter of 2012, we sold 65,000 shares of Solazyme's common stock at an average price per share of $15.06 (net of commissions and selling expenses), resulting in a realized gain of approximately $404,000, which represents a 1.7x return on our investment over the 20 to 24 months we held these shares. At December 31, 2012, we continued to own 147,927 shares of Solazyme's common stock, which were valued at Solazyme's year-end market price of $7.86 per share, compared to our average cost basis of $10.18 per share.
During the third quarter of 2012, we sold 160,000 shares of NeoPhotonics common stock at an average price of $5.49 per share, resulting in a realized loss of approximately $121,000, which represents a 0.88x return on our investment (or a 12% loss) in these shares over our weighted-average holding period of 31 months. As of December 31, 2012, we no longer own any shares of NeoPhotonics.
Fully Invested Portfolio
After disposing of our NeoPhotonics investment, as of December 31, 2012, we now hold investments in 19 portfolio companies with a fair value of $65.0 million and $8.9 million in cash and cash equivalents. We are fully invested based on our currently available funds, and it is our policy to retain approximately $10 million in cash and cash equivalents to fund our future operating expenses, although the amount we retain may vary depending on our operating expenses and the timing of our purchases and sales of portfolio company investments. We intend to access the capital markets from time to time in the future to raise cash to fund additional investments.
Stock Repurchase Program
On May 9, 2012, our Board of Directors approved a stock repurchase program for a six-month period expiring November 8, 2012, which was extended for an additional six-month period expiring May 8, 2013. Under this program, we may repurchase up to $5 million of our common stock. The repurchase program does not obligate us to acquire any specific number of our shares, but all repurchases are subject to certain restrictions on the method, timing, price and volume of stock repurchases.
During the year ended December 31, 2012, we repurchased 108,996 shares of our common stock at an average price of $7.01 per share, including commissions, with a total cost of $764,179. Our net asset value per share increased by $0.01 per share as a result of the share repurchases during the year ended December 31, 2012. The weighted average discount to net asset value per share of the shares repurchased by us during the year ended December 31, 2012 was 14%.
Results of Operations
Decrease in Net Asset Value for Fourth Quarter
In the fourth quarter of 2012, our net asset value decreased from $8.14 to $8.00 per share, a decrease of $0.14 per share. The components that typically drive the changes in our net asset value each quarter are: (i) net investment losses, effectively our operating expenses; (ii) realized gains/losses; (iii) the change in unrealized appreciation/deprecation on our investments, and (iv) cash distributions paid to stockholders. For the fourth quarter:
- We had net investment loss—effectively our operating expenses (including base management fees and accrued incentive fees)—of approximately $860,000, or a loss of $0.09 per share. Our operating expenses, excluding base management fees and accrued incentive fees, were approximately $505,000 in the fourth quarter.
- We had no realized gains or losses during the fourth quarter since we did not dispose of any portfolio company positions during the quarter.
- We had a net decrease in unrealized appreciation on our portfolio company investments of approximately $140,000, or a decrease of $0.02 per share.
- Finally, we paid a cash distribution to stockholders of $283,203, or $0.03 per share, representing our net realized gains in 2012.
Decrease in Net Asset Value for 2012
In 2012, our net asset value decreased from $8.23 to $8.00 per share, an decrease of $0.23 per share. For 2012:
- We had net investment loss—effectively our operating expenses (including base management fees and accrued incentive fees)—of approximately $4.1 million, or a loss of $0.44 per share. Our operating expenses, excluding base management fees and accrued incentive fees, were approximately $2.1 million for 2012 in line with our previous estimates.
- We had realized gains of $282,203, or $0.03 per share, consisting of our realized gains of $403,631 from our disposition of 65,000 shares of Solazyme reduced by our realized losses of $121,428 from the disposition of our entire position of 160,000 shares of NeoPhotonics.
- We had a net increase in unrealized appreciation on our portfolio company investments of approximately $1.8 million, or an increase of $0.20 per share.
- We also paid a cash distribution to stockholders of $283,203, or $0.03 per share, representing our net realized gains in 2012.
- Finally, we repurchased shares of our common stock under our stock repurchase program which resulted in an increase in our net asset value of $0.01 per share.
As of December 31, 2012, we had net unrealized appreciation of approximately $3.2 million, which is reflected in our NAV. However, our NAV does not reflect the potential increase in unrealized appreciation based on structural protections that we currently have in eight of our private portfolio company investments. See discussion below regarding structural protections.
|Keating Capital, Inc.|
|Change in Net Asset Value|
|December 31, 2012|
|Amount||Per Share 1|
|Net Asset Value, Beginning of Period2||$||76,384,715||$||8.23|
|Net Investment Loss||(4,052,986||)||(0.44||)|
|Net Realized Gain (Loss) on Investments:|
|Net Realized Gain on Investments:||282,203||0.03|
|Net Change in Unrealized Appreciation (Depreciation) on Investments:|
|MBA Polymers, Inc.||(270,000||)||(0.03||)|
|BrightSource Energy, Inc.||(240,006||)||(0.03||)|
|Harvest Power, Inc.||1,040,001||0.11|
|Corsair Components, Inc.||(10,000||)||*|
|Tremor Video, Inc.||(150,001||)||(0.02||)|
|Glam Media, Inc.||170,001||0.02|
|Net Change in Unrealized Appreciation on Investments:||1,845,390||0.20|
|Net (Decrease) in Net Assets Resulting from Operations||(1,925,393||)||(0.21||)|
|Stockholder Distributions as Long-Term Capital Gains Distribution||(282,203||)||(0.03||)|
|Capital Stock Transactions:|
|Repurchases of Common Stock3||(764,179||)||0.01|
|Net Asset Value, End of Period2||$||73,412,940||$||8.00|
|Weighted Average Common Shares Outstanding During Period||9,198,016|
|Common Shares Outstanding At End of Period||9,174,785|
|* Per share amounts less than $0.01.|
|1Unless otherwise indicated, per share data based on weighted average common shares outstanding during the period.|
|2Per share data based on total common shares outstanding at the beginning and end of the corresponding period.|
|3For the year ended December 31, 2012, the increase in net asset value attributable to the shares repurchased was $0.01 per share.|
Of our investments in 17 private portfolio companies as of December 31, 2012, we have been provided some structural protection with respect to investments in eight of these portfolio companies. These structural protections typically include conversion rights upon an IPO which would result in our receiving shares of common stock at a discount to the IPO price upon conversion at the time of the IPO, or warrants that would result in our receiving additional shares for a nominal exercise price at the time of an IPO.
Our structurally protected appreciation on these investments as of December 31, 2012 can be summarized as follows:
- As of December 31, 2012, these eight private portfolio companies with structural protections had an aggregate cost basis of $32.0 million and a fair value of $36.0 million—representing 55% of our invested portfolio as measured by fair value.
- These eight portfolio companies have structural protections that would, in the event of an IPO, entitle us to receive shares of common stock with a weighted-average aggregate value, at the time of issuance, of 1.79x our investment cost. We refer to this multiple as our structurally protected appreciation multiple.
- As of December 31, 2012, our structurally protected appreciation on these investments would, if each of these eight portfolio companies completed an IPO, result in an increase in our unrealized appreciation of $21.2 million at the time of the IPO.
The structurally protected appreciation is calculated assuming each portfolio company completes an IPO. Further, the structurally protected appreciation is not impacted by the IPO price, since the structural protections are designed to derive such appreciation at any IPO price at the time of the IPO. The only exceptions are: (i) the structural protection provided in the Corsair common stock investment where the structurally protected appreciation of 2.0x of our investment cost begins to decline as the Corsair IPO price falls below $10.00 per share, and (ii) the structural protection provided in one of our other private portfolio companies where the structurally protected appreciation of 2.0x our investment cost begins to decline as the IPO price falls below our cost basis per share. In each of the eight portfolio company investments that have structural protections, it is possible for us to achieve an unrealized appreciation at IPO in excess of the structurally protected appreciation amount where the portfolio company's IPO price exceeds a threshold amount.
Our ability to realize the structurally protected appreciation at the time of the IPO will depend on a number of factors including each portfolio company's completion of an IPO, any adjustment to the special IPO conversion price that may be negotiated prior to or during the IPO process, the possible subsequent issuance of more senior securities that may impact the relative value of the structural protection, and fluctuations in the market price of each portfolio company's common shares until such time as the common shares received upon conversion can be disposed of following the expiration of a customary 180-day post-IPO lockup period. Accordingly, the structurally protected appreciation would not be available unless each portfolio company completes an IPO. Further, even if an IPO is completed, the structurally protected appreciation would not be realized unless the market price of each portfolio company's common shares equals or exceeds the IPO price at the time such shares are disposed of following the post-IPO lockup period.
Please refer to our annual report on Form 10-K for the year ended December 31, 2012, for additional information on, and risks related to, our structurally protected appreciation.
As of December 31, 2012, we had 9,174,785 shares of common stock issued and outstanding. There are no options, warrants, or other classes of securities issued or outstanding. Additionally, we had no debt. Other than our stock repurchase program, there were no capital stock transactions in 2012.
Portfolio Analysis and Activity
For the year ended December 31, 2012, the net increase in our unrealized appreciation totaled approximately $1.8 million. The components of this net increase were: