Keating Capital Reports Q3 2012 Results
Keating Capital Reports Q3 2012 Results
Pre-IPO Investor Provides Financial Update
GREENWOOD VILLAGE, Colo.--(BUSINESS WIRE)-- On October 26, 2012, Keating Capital, Inc. ("Keating" or the "Company") (NAS: KIPO) reported financial results for the third quarter ended September 30, 2012.
Management Commentary
"Keating Capital operates a private-to-public valuation arbitrage strategy, seeking to profit from the potential value increase 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. "We are pleased to report that one of our portfolio companies, LifeLock, completed an IPO on October 2, 2012. Based on our assessment of certain indicators, we believe that several of our other portfolio companies are making progress toward an IPO that is consistent with our targeted time frames and holding periods," added Mr. Keating.
Q3 2012 Portfolio Investment Activity
Dispositions
During the third quarter of 2012, we sold 160,000 shares of NeoPhotonics common stock at an average price of $5.49 per share (net of commissions and selling expenses), 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 September 30, 2012, we no longer hold any shares of NeoPhotonics.
Fully Invested Portfolio
After disposing of our NeoPhotonics investment, as of September 30, 2012, we now hold investments in 19 portfolio companies with a fair value of $64.8 million and $10.8 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. We intend to access the capital markets from time to time in the future to raise cash to fund new 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. Under this program, Keating Capital may repurchase up to $5 million of its common stock. The repurchase program does not obligate Keating to acquire any specific number of shares. At our recent Board meeting, this program was extended for an additional six-month period expiring May 8, 2013.
During the three months ended September 30, 2012, we repurchased 31,482 shares of our common stock at an average price of $7.36 per share for a total cost of $231,745. Since inception of our stock repurchase program, we have repurchased a total of 70,470 shares of our common stock at an average price of $7.22 per share for a total cost of $508,943. As a result of these repurchases, our net asset value per share increased by approximately $0.01 per share for the three and nine months ended September 30, 2012.
Results of Operations
Increase in Net Asset Value
In the third quarter, our net asset value increased from $8.12 to $8.14 per share, an increase of $0.02 per share, due primarily to:
First, a net investment loss—effectively our operating expenses (including base management fees and accrued incentive fees)—of approximately $1.1 million, or a loss of $0.12 per share.
Second, a realized loss on the sale of our entire NeoPhotonics position of approximately $121,000, or a realized loss of $0.01 per share.
Third, a net increase in unrealized appreciation on our portfolio company investments of approximately $1.3 million, or an increase of $0.14 per share.
As of September 30, 2012, we had net unrealized appreciation of approximately $3.3 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 nine of our private portfolio company investments. See discussion below regarding structural protections.
Keating Capital, Inc. | ||||||||||||||||
Change in Net Asset Value | ||||||||||||||||
(Unless otherwise indicated, per share data based on weighted average common shares outstanding during the period) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2012 | September 30, 2012 | |||||||||||||||
Amount | Per Share | Amount | Per Share | |||||||||||||
Net Asset Value, Beginning of Period (1) | $ | 75,054,131 | $ | 8.12 | $ | 76,384,715 | $ | 8.23 | ||||||||
Net Investment Loss | (1,082,515 | ) | (0.12 | ) | (3,192,803 | ) | (0.34 | ) | ||||||||
Net Realized (Loss) Gain on Investments: | ||||||||||||||||
Solazyme | - | - | 403,631 | 0.04 | ||||||||||||
NeoPhotonics | (121,428 | ) | (0.01 | ) | (121,428 | ) | (0.01 | ) | ||||||||
Net Realized (Loss) Gain on Investments: | (121,428 | ) | (0.01 | ) | 282,203 | 0.03 | ||||||||||
Net Change in Unrealized Appreciation (Depreciation) on Investments: | ||||||||||||||||
NeoPhotonics | 209,600 | 0.02 | 267,200 | 0.03 | ||||||||||||
Livescribe | (34,924 | ) | * | (45,707 | ) | * | ||||||||||
Solazyme | (356,504 | ) | (0.04 | ) | (191,062 | ) | (0.02 | ) | ||||||||
MBA Polymers, Inc. | (120,000 | ) | (0.01 | ) | 120,000 | 0.01 | ||||||||||
BrightSource Energy, Inc. | (370,000 | ) | (0.05 | ) | (680,006 | ) | (0.08 | ) | ||||||||
Harvest Power, Inc. | 40,000 | * | 1,040,001 | 0.11 | ||||||||||||
Suniva, Inc. | (160,000 | ) | (0.02 | ) | (1,150,007 | ) | (0.12 | ) | ||||||||
Xtime, Inc. | 693,838 | 0.08 | 1,433,722 | 0.15 | ||||||||||||
Corsair Components, Inc. | - | - | (10,000 | ) | * | |||||||||||
Metabolon, Inc. | 280,000 | 0.03 | 280,000 | 0.03 | ||||||||||||
Kabam, Inc. | (30,000 | ) | * | (258,860 | ) | (0.03 | ) | |||||||||
Tremor Video, Inc. | (80,001 | ) | (0.01 | ) | (80,001 | ) | (0.01 | ) | ||||||||
TrueCar, Inc. | (309,996 | ) | (0.03 | ) | (309,996 | ) | (0.03 | ) | ||||||||
Agylix Corporation | (230,000 | ) | (0.02 | ) | (230,000 | ) | (0.02 | ) | ||||||||
LifeLock, Inc. | 1,800,000 | 0.19 | 1,800,000 | 0.19 | ||||||||||||
Net Change in Unrealized Appreciation on Investments: | 1,332,013 | 0.14 | 1,985,284 | 0.21 | ||||||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | 128,070 | 0.01 | (925,316 | ) | (0.10 | ) | ||||||||||
Capital Stock Transactions: | ||||||||||||||||
Repurchases of Common Stock (2) | (231,745 | ) | 0.01 | (508,943 | ) | 0.01 | ||||||||||
Net Asset Value, End of Period (1) | $ | 74,950,456 | $ | 8.14 | $ | 74,950,456 | $ | 8.14 | ||||||||
Weighted Average Common Shares Outstanding During Period | 9,237,502 | 9,265,626 | ||||||||||||||
Common Shares Outstanding At End of Period | 9,213,311 | 9,213,311 | ||||||||||||||
* Per share amounts less than $0.01. | ||||||||||||||||
(1) Per share data based on total common shares outstanding at the beginning and end of the corresponding period. | ||||||||||||||||
(2) For the three and nine months ended September 30, 2012, the increase in net asset value attributable to the shares repurchased was $0.01 per share. | ||||||||||||||||
Structural Protections
Of our investments in 18 private portfolio companies as of September 30, 2012, we have been provided some structural protection with respect to investments in nine of these portfolio companies (excluding BrightSource, but including LifeLock). 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.
As of September 30, 2012, our structurally protected appreciation on these investments would, if each of these nine portfolio companies completed an IPO, result in an increase in our unrealized appreciation of $23.6 million at the time of the IPO.
Portfolio Companies with Structurally Protected Appreciation at IPO (1) | Number of Portfolio Companies | Weighted-Average Structurally Protected Appreciation Multiple at IPO | Cost of Investment as of September 30, 2012 (in millions) | Fair Value of Investment as of September 30, 2012 (in millions) | Potential Increase in Unrealized Appreciation Based on Structural Protections at IPO as of September 30, 2012 (in millions) | ||||||||
Equal to or greater than 1.5x but less than 2.0x (2) | 4 | 1.56x | $ | 19.0 | $ | 20.7 | $ | 9.0 | |||||
Equal to 2.0x | 5 | 2.00x | $ | 18.0 | $ | 21.4 | $ | 14.6 | |||||
Total | 9 | 1.78x | $ | 37.0 | $ | 42.1 | $ | 23.6 | |||||
(1) Excludes our structural protection in BrightSource, which had a structurally protected appreciation multiple at IPO of 1.25x our investment cost, that was eliminated when the Series E preferred stock we held was automatically converted into common stock as part of BrightSource's Series 1 convertible preferred stock financing which closed on October 24, 2012. | |||||||||||||
(2) Includes LifeLock which had a structurally protected appreciation multiple of 1.7x our investment cost and completed its IPO on October 2, 2012. Our investments in three remaining portfolio companies in this category provide for an increase in the structurally protected appreciation multiple up to 2x our investment cost if the portfolio company fails to complete an IPO within certain time frames. The above table reflects the structurally protected appreciation multiple in effect as of September 30, 2012 for these three portfolio companies. | |||||||||||||
Four of these portfolio companies (with an aggregate cost of $19.0 million and an aggregate fair value of $20.7 million as of September 30, 2012) 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 1.56x our investment cost. We refer to this multiple as our structurally protected appreciation multiple.
Five of these portfolio companies (with an aggregate cost of $18.0 million and a fair value of $21.4 million as of September 30, 2012) have a structurally protected appreciation multiple of 2.0x our investment cost upon an 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 nine 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 quarterly report on Form 10-Q for the quarter ended September 30, 2012, for additional information on our structurally protected appreciation.
Capitalization
As of September 30, 2012, we had 9,213,311 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 or distributions paid to stockholders in the third quarter of 2012.
Portfolio Analysis and Activity
For the quarter ended September 30, 2012, the net increase in our unrealized appreciation totaled approximately $1.3 million. The components of this net increase were:
September 30, 2012 | June 30, 2012 | |||||||||||||||||||||||||||
Change In | ||||||||||||||||||||||||||||
Change In | Unrealized | |||||||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | Appreciation | |||||||||||||||||||||||||
Appreciation | Appreciation | Appreciation | (Depreciation) | |||||||||||||||||||||||||
Portfolio Company | Cost | Value | (Depreciation) | Cost | Value | (Depreciation) | (Depreciation) | Per Share | ||||||||||||||||||||
Private Portfolio Companies: | ||||||||||||||||||||||||||||
Livescribe, Inc. | $ | 606,187 | $ | 163,923 | $ | (442,264 | ) | $ | 587,752 | $ | 180,412 | $ | (407,340 | ) | $ | (34,924 | ) | * | ||||||||||
MBA Polymers, Inc. | 2,000,000 | 2,120,000 | 120,000 | 2,000,000 | 2,240,000 | 240,000 | (120,000 | ) | (0.01 | ) | ||||||||||||||||||
BrightSource Energy, Inc. | 2,500,006 | 1,820,000 | (680,006 | ) | 2,500,006 | 2,190,000 | (310,006 | ) | (370,000 | ) | (0.05 | ) | ||||||||||||||||
Harvest Power, Inc. | 2,499,999 | 3,540,000 | 1,040,001 | 2,499,999 | 3,500,000 | 1,000,001 | 40,000 | * | ||||||||||||||||||||
Suniva, Inc. | 2,500,007 | 1,350,000 | (1,150,007 | ) | 2,500,007 | 1,510,000 | (990,007 | ) | (160,000 | ) | (0.02 | ) | ||||||||||||||||
Xtime, Inc. | 3,000,000 | 4,442,878 | 1,442,878 | 3,000,000 | 3,749,040 | 749,040 | 693,838 | 0.08 | ||||||||||||||||||||
Metabolon, Inc. | 4,000,000 | 4,280,000 | 280,000 | 4,000,000 | 4,000,000 | - | 280,000 | 0.03 | ||||||||||||||||||||
Kabam, Inc. | 1,328,860 | 1,070,000 | (258,860 | ) | 1,328,860 | 1,100,000 | (228,860 | ) | (30,000 | ) | * | |||||||||||||||||
Tremor Video, Inc. | 4,000,001 | 3,920,000 | (80,001 | ) | 4,000,001 | 4,000,001 | - | (80,001 | ) | (0.01 | ) | |||||||||||||||||
TrueCar, Inc. | 2,999,996 | 2,690,000 | (309,996 | ) | 2,999,996 | 2,999,996 | - | (309,996 | ) | |||||||||||||||||||
