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EX-32.2 - EXHIBIT 32.2 - CROSSROADS LIQUIDATING TRUSTa6719062ex32_2.htm
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EX-31.1 - EXHIBIT 31.1 - CROSSROADS LIQUIDATING TRUSTa6719062ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - CROSSROADS LIQUIDATING TRUSTa6719062ex32_1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTER ENDED MARCH 31, 2011.
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
COMMISSION FILE NUMBER: 0-53504
 

 
KEATING CAPITAL, INC.
(Exact name of registrant as specified in its charter)
 

   
Maryland
26-2582882
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5251 DTC Parkway, Suite 1000
Greenwood Village, CO  80111
(Address of principal executive office)
 
(720) 889-0139
(Registrant’s telephone number, including area code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No   o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
     
Large accelerated filer  ¨
 
Accelerated filer  ¨
 Non-accelerated filer  x
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x.
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of May 11, 2011 was 5,406,787.
 
 

 
TABLE OF CONTENTS
 
 
Page
 
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46
 
 

 
 
Financial Statements
Statements of Assets and Liabilities
(Unaudited)


             
   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Assets
           
Investments in portfolio company securities at fair value:
           
Non-control/non-affiliate investments:
           
Private portfolio companies
           
(Cost: $11,000,503 and $3,600,491, respectively)
  $ 11,026,894     $ 4,177,607  
Publicly-traded portfolio companies
               
(Cost: $1,000,000 and $0, respectively)
    1,628,640       -  
Total, investments in portfolio company securities at fair value
    12,655,534       4,177,607  
                 
Short-term investments at fair value
               
(Cost: $19,000,000 and $13,500,000, respectively)
    19,000,000       13,500,000  
Cash and cash equivalents
    5,527,933       4,753,299  
Prepaid expenses and other assets
    34,162       92,125  
Deferred offering costs
    244,871       333,682  
                 
Total Assets
    37,462,500       22,856,713  
                 
Liabilities
               
Base management fees payable to Investment Adviser
    142,637       90,631  
Accrued incentive fees payable to Investment Adviser
    131,006       115,423  
Administrative expenses payable to Investment Adviser
    40,781       41,348  
Reimbursable expenses payable to Investment Adviser
    1,277       3,068  
Accounts payable
    107,169       80,275  
Accrued expenses and other liabilities
    83,314       69,568  
                 
Total Liabilities
    506,184       400,313  
                 
Net Assets
  $ 36,956,316     $ 22,456,400  
                 
Components of Net Assets:
               
Common stock, $0.001 par value; 200,000,000 shares authorized;
               
4,630,094 and 2,860,299 shares issued and outstanding as of
               
March 31, 2011 and December 31, 2010, respectively
  $ 4,630     $ 2,860  
Additional paid-in capital
    41,104,701       25,378,355  
Accumulated undistributed net investment loss
    (4,361,209 )     (3,501,931 )
Accumulated distributions in excess of net realized gains on investments
    (446,837 )     -  
Net unrealized appreciation on investments
    655,031       577,116  
                 
Net Assets
  $ 36,956,316     $ 22,456,400  
                 
Common Shares Outstanding
    4,630,094       2,860,299  
                 
Net Asset Value Per Outstanding Common Share
  $ 7.98     $ 7.85  
 
The accompanying notes are an integral part of these financial statements.
 
1

 
Statements of Operations
(Unaudited) 

 
   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
 
             
Investment Income
           
Interest and dividend income:
           
Certificate of deposit and money market investments
  $ 24,091     $ 5,725  
Other income
    -       10,000  
                 
Total Investment Income
    24,091       15,725  
                 
Operating Expenses
               
Base management fees
    142,637       26,548  
Incentive fees
    15,583       -  
Administrative expenses allocated from Investment Adviser
    119,733       74,470  
Legal and professional fees
    159,168       90,891  
Directors' fees
    25,250       26,250  
Stock transfer agent fees
    56,505       46,313  
Printing and fulfillment expenses
    49,520       7,945  
Postage and delivery expenses
    47,223       7,934  
Stock issuance expenses
    54,465       3,048  
General and administrative expenses
    213,285       41,858  
                 
Total Operating Expenses
    883,369       325,257  
                 
Net Investment Loss
    (859,278 )     (309,532 )
                 
Net Change in Unrealized Appreciation on Investments
               
Non-control/non-affiliate investments
    77,915       550,000  
                 
Net Change in Unrealized Appreciation On Investments
    77,915       550,000  
                 
Net (Decrease) Increase in Net Assets Resulting From Operations
  $ (781,363 )   $ 240,468  
                 
Net (Decrease) Increase in Net Assets Resulting from Operations
               
Per Common Share
  $ (0.22 )   $ 0.33  
                 
Weighted Average Number of Common Shares Outstanding:
               
Basic and Diluted
    3,558,124       734,331  
 
The accompanying notes are an integral part of these financial statements.
 
2

 
Statements of Changes in Net Assets
(Unaudited)

   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
 
             
Changes in Net Assets from Operations
           
Net investment loss
  $ (859,278 )   $ (309,532 )
Net change in unrealized appreciation on investments
    77,915       550,000  
                 
Net (Decrease) Increase in Net Assets Resulting from Operations
    (781,363 )     240,468  
                 
Changes in Net Assets from Stockholder Distributions
               
Distributions in excess of net realized gains on investments
    (446,837 )     -  
                 
Net Decrease in Net Assets Resulting from Stockholder Distributions
    (446,837 )     -  
                 
Changes in Net Assets from Capital Stock Transactions
               
Issuance of common stock in continuous public offering (1)
    17,638,173       3,441,936  
Offering costs from issuance of common stock
    (1,710,016 )     (340,400 )
Amortization of deferred offering costs
    (200,041 )     (101,928 )
                 
Net Increase in Net Assets Resulting From Capital Stock Transactions
    15,728,116       2,999,608  
                 
Net Increase in Net Assets
    14,499,916       3,240,076  
                 
Net assets at beginning of period
    22,456,400       3,719,496  
                 
Net Assets at End of Period (2)
  $ 36,956,316     $ 6,959,572  
 
(1)
All shares were sold at a price of either $9.30 or $10.00, depending on whether or not sales commissions were waived by the dealer manager.
   
(2)
Net Assets at March 31, 2011 and 2010 include no accumulated undistributed net investment income and no accumulated undistributed net realized gains.
 
 
The accompanying notes are an integral part of these financial statements.
 
3

 
Statements of Cash Flows
(Unaudited) 

 
   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
 
             
Cash Flows From Operating Activities
           
Net (decrease) increase in net assets resulting from operations
  $ (781,363 )   $ 240,468  
Adjustments to reconcile net (decrease) increase in net assets resulting
               
from operations to net cash used in operating activities:
               
Net change in unrealized appreciation on investments
    (77,915 )     (550,000 )
Changes in operating assets and liabilities:
               
Decrease (increase) in prepaid expenses and other assets
    57,963       (34,245 )
Increase (decrease) in base management fees payable to Investment Adviser
    52,006       (2,920 )
Increase in accrued incentive fees payable to Investment Adviser
    15,583       -  
(Decrease) increase in administrative expenses payable to Investment Adviser
    (567 )     7,334  
(Decrease) in reimbursable expenses payable to Investment Adviser
    (1,791 )     (8,725 )
Increase (decrease) in accounts payable
    26,894       (1,950 )
Increase in accrued expenses and other liabilities
    13,746       16,000  
                 
Net cash used in operating activities
    (695,444 )     (334,038 )
                 
Cash Flows From Investing Activities
               
Investments in portfolio companies
    (8,400,012 )     (1,000,000 )
Purchases of short-term investments
    (69,000,000 )     (9,600,000 )
Proceeds from maturities of short-term investments
    63,500,000       9,000,000  
                 
Net cash used in investing activities
    (13,900,012 )     (1,600,000 )
                 
Cash Flows From Financing Activities
               
Gross proceeds from issuance of common stock
    17,638,173       3,441,936  
Offering costs from issuance of common stock
    (1,710,016 )     (340,400 )
Additions to deferred stock offering costs
    (111,230 )     (34,200 )
Stockholder distributions
    (446,837 )     -  
                 
Net cash provided by financing activities
    15,370,090       3,067,336  
                 
Net increase in cash and cash equivalents
    774,634       1,133,298  
                 
Cash and cash equivalents, beginning of period
    4,753,299       367,918  
                 
Cash and cash equivalents, end of period
  $ 5,527,933     $ 1,501,216  
                 
Supplemental Disclosure of Non-Cash Financing Activities
               
Amortization of deferred offering costs
  $ 200,041     $ 101,928  
 
The accompanying notes are an integral part of these financial statements.
 
4

 
Schedule of Investments
March 31, 2011
 (Unaudited) 

 
                         
% of
 
Portfolio Company / Type of Investment (1)
 
Industry
 
Shares
   
Cost
   
Fair Value
   
Net Assets
 
                             
Non-Control/Non-Affiliate Investments (1)
                       
                             
Private Portfolio Companies:
                           
Livescribe, Inc.
 
Consumer Electronics
                       
Series C Convertible Preferred Stock (3)(4)
    1,000,000       471,295       500,000       1.36 %
Series C Convertible Preferred Stock
                               
Warrants (6)
        125,000       29,205       26,891       0.07 %
                                     
Solazyme, Inc.
 
Renewable Oils
                               
Series D Convertible Preferred Stock (3)(4)
    112,927       999,991       999,991       2.72 %
                                     
MBA Polymers, Inc.
 
Recycling
                               
Series G Convertible Preferred Stock (3)(4)
    2,000,000       2,000,000       2,000,000       5.41 %
                                     
BrightSource Energy, Inc.
 
Solar Energy
                               
Series E Convertible Preferred Stock (3)(4)
    288,531       2,500,006       2,500,006       6.76 %
                                     
Harvest Power, Inc.
 
Waste Management
                               
Series B Convertible Preferred Stock (3)(5)
    580,496       2,499,999       2,499,999       6.76 %
                                     
Suniva, Inc.
 
Solar Energy
                               
Series D Convertible Preferred Stock (3)(4)
    197,942       2,500,007       2,500,007       6.76 %
                                     
Subtotal - Private Portfolio Companies
          $ 11,000,503     $ 11,026,894       29.84 %
                                     
Publicly-Traded Portfolio Companies:
                               
NeoPhotonics Corporation
 
Communications
                               
Common Stock (7)
 
Equipment
    160,000       1,000,000       1,628,640       4.41 %
                                     
Subtotal - Publicly-Traded Portfolio Companies
    $ 1,000,000     $ 1,628,640       4.41 %
                                     
Total - Investments in Portfolio Company Securities (2)
    $ 12,000,503     $ 12,655,534       34.25 %
 
The accompanying notes are an integral part of these financial statements.
 
5

 
Keating Capital, Inc.
Schedule of Investments
March 31, 2011
 (Unaudited) 

 
                       
% of
 
Portfolio Company / Type of Investment (1)
 
Industry
 
Shares
 
Cost
   
Fair Value
   
Net Assets
 
                           
Short-Term Investments
                         
Certificates of Deposit (8)
                         
Maturing on April 28, 2011
                         
Annual Percentage Yield of 0.40%
          $ 19,000,000     $ 19,000,000       51.41 %
                                 
Total - Short-Term Investments
          $ 19,000,000     $ 19,000,000       51.41 %
                                 
Total - Investments in Porfolio Company Securities and Short-Term Investments
  $ 31,000,503     $ 31,655,534       85.66 %
                                 
                           
% of
 
Reconciliation to Net Assets
                 
Amount
   
Net Assets
 
                                 
Investments in portfolio company securities and short-term investments
          $ 31,655,534       85.66 %
Cash and cash equivalents
                    5,527,933       14.96 %
Prepaid expenses and other assets
                    34,162       0.09 %
Deferred offering costs
                    244,871       0.66 %
                                 
Less: Total Liabilities
                    (506,184 )     -1.37 %
                                 
Net Assets
                  $ 36,956,316       100.00 %
                                 
                                 

(1)
Control investments are defined by the Investment Company Act of 1940, as amended (the "1940 Act"), as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.  Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned.  Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither  Control Investments nor Affiliate Investments.
   
(2)
The aggregate cost basis for federal income tax purposes of Non-Control/Non-Affiliate investments is $12,000,503.  The gross unrealized  appreciation based on the tax cost basis of these securities is $657,345.  The gross unrealized depreciation based on the tax cost basis of these securities is $2,314.
   
(3)
The shares of preferred stock represented by these investments are subject to legal restrictions on transfer pursuant to the Securities Act of 1933, as amended (the "Securities Act") and may only be sold pursuant to a registration statement under the Securities Act or an available exemption from registration thereunder.  These shares are also subject to a contractual lock-up for a period of six months following completion of an initial public offering.
   
(4)
The shares of preferred stock represented by these investments carry a non-cumulative, preferred dividend payable when and if declared by the portfolio company's board of directors.  Since no dividends have been declared or paid with respect to these investments, these investments are considered to be non-income producing.
   
(5)
The shares of preferred stock represented by this investment carry a cumulative preferred dividend, which is payable only when declared by the portfolio company's board of directors or upon a qualifying liquidation event.  Since no dividends have been declared or paid with respect to this investment, this investment is considered to be non-income producing.
   
(6)
The Warrants grant the holder the right to purchase shares of Series C convertible preferred stock at an exercise price of $0.50 per share. The Warrants have a contractual life of five years, expiring on June 30, 2015.
   
(7)
On February 2, 2011, NeoPhotonics completed an initial public offering of its common stock at a price of $11.00 per share.  Prior to the initial public offering, the Company’s Series X convertible preferred stock converted into 160,000 shares of NeoPhotonics common stock, which common shares are subject to a six-month lockup provision expiring in August 2011.
   
(8)
Fair value reflects amortized cost as of March 31, 2011.
 
 
 
The accompanying notes are an integral part of these financial statements.
 
6

 
Schedule of Investments
December 31, 2010 
(Unaudited)

 
                         
% of
 
Portfolio Company / Type of Investment (1)
 
Industry
 
Shares
   
Cost
   
Fair Value
   
Net Assets
 
                             
Non-Control/Non-Affiliate Investments (1)
                           
                             
Private Portfolio Companies:
                           
NeoPhotonics Corporation
 
Communications
                       
Series X Convertible Preferred Stock (3)(4)(7)
 
Equipment
    10,000     $ 1,000,000     $ 1,550,000       6.90 %
                                     
Livescribe, Inc.
 
Consumer Electronics
                         
Series C Convertible Preferred Stock (3)(4)
    1,000,000       471,295       500,000       2.23 %
Series C Convertible Preferred Stock
                                   
Warrants (5)
        125,000       29,205       27,616       0.12 %
                                     
Solazyme, Inc.
 
Renewable Oils
                               
Series D Convertible Preferred Stock (3)(4)
    112,927       999,991       999,991       4.45 %
                                     
MBA Polymers, Inc.
 
Recycling
                               
Series G Convertible Preferred Stock (3)(4)
    1,100,000       1,100,000       1,100,000       4.90 %
                                     
Total - Investments in Portfolio Company Securities (2)
          $ 3,600,491     $ 4,177,607       18.60 %
                                     
Short-Term Investments
                                   
Certificates of Deposit (6)
                                   
Maturing on January 6, 2011
                                   
Annual Percentage Yield of 0.45%
              $ 13,500,000     $ 13,500,000       60.12 %
                                     
Total - Short-Term Investments
              $ 13,500,000     $ 13,500,000       60.12 %
                                     
Total - Investments in Portfolio Company Securities and Short-Term Investments
    $ 17,100,491     $ 17,677,607       78.72 %
                                     
                               
% of
 
Reconciliation to Net Assets
                     
Amount
   
Net Assets
 
                                     
Investments in portfolio company securities and short-term investments
            $ 17,677,607       78.72 %
Cash and cash equivalents
                        4,753,299       21.17 %
Prepaid expenses and other assets
                        92,125       0.41 %
Deferred offering costs
                        333,682       1.48 %
                                     
Less: Total Liabilities
                        (400,313 )     -1.78 %
                                     
Net Assets
                      $ 22,456,400       100.00 %
 

 
(1)
Control investments are defined by the Investment Company Act of 1940, as amended (the "1940 Act"), as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.  Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned.  Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control Investments nor Affiliate Investments.
(2)
The aggregate cost basis for federal income tax purposes of Non-Control/Non-Affiliate investments is $3,600,491.  The gross unrealized appreciation based on the tax cost basis of these securities is $578,705.  The gross unrealized depreciation based on the tax cost basis of these securities is $1,589.
(3)
The shares of preferred stock represented by these investments are subject to legal restrictions on transfer pursuant to the Securities Act and may only be sold pursuant to a registration statement under the Securities Act or an available exemption from registration thereunder. These shares are also subject to a contractual lock-up for a period of six months following completion of an initial public offering.
(4)
The shares of preferred stock represented by these investments carry a non-cumulative, preferred dividend payable when and if declared by the portfolio company's board of directors.  Since no dividends have been declared or paid with respect to these investments, these investments are considered to be non-income producing.
(5)
The Warrants grant the holder the right to purchase shares of Series C convertible preferred stock at an exercise price of $0.50 per share. The Warrants have a contractual life of five years, expiring on June 30, 2015.
(6)
Fair value reflects amortized cost as of December 31, 2010.
(7)
On February 2, 2011, NeoPhotonics completed an initial public offering of its common stock at a price of $11.00 per share.  Prior to the initial public offering, the Company’s Series X convertible preferred stock converted into 160,000 shares of NeoPhotonics  common stock, which common shares are subject to a six-month lockup provision (see Note 8).
 
The accompanying notes are an integral part of these financial statements.
 
7

 
Financial Highlights
(Unaudited) 

 
   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
 
             
Per Common Share Data
           
Net asset value, beginning of period (1)
  $ 7.85     $ 6.53  
                 
Net investment loss (2)
    (0.24 )     (0.42 )
Net change in unrealized appreciation on investments (2)
    0.02       0.75  
                 
Net (decrease) increase in net assets resulting from operations (3)
    (0.22 )     0.33  
                 
Stockholder distributions:
               
Distributions in excess of net realized gains on investments (2)
    (0.13 )     -  
                 
Net decrease in net assets resulting for stockholder distributions
    (0.13 )     -  
                 
Capital stock transactions:
               
Issuance of common stock in continuous public offering (4)
    1.02       1.35  
Offering costs from issuance of common stock (2)
    (0.48 )     (0.46 )
Amortization of deferred offering costs (2)
    (0.06 )     (0.14 )
                 
Net increase in net assets from capital stock transactions
    0.48       0.75  
                 
Net asset value, end of period (1)
  $ 7.98     $ 7.61  
                 
Common shares outstanding, beginning of period
    2,860,299       569,900  
Common shares outstanding, end of period
    4,630,094       914,515  
Weighted average common shares outstanding during period
    3,558,124       734,331  
Total return based on change in net asset value and stockholder distributions (5)
      16.54 %
                 
Supplemental Data and Ratios
               
Net assets, beginning of period
  $ 22,456,400     $ 3,719,496  
Net assets, end of period
  $ 36,956,316     $ 6,959,572  
Average net assets during period
  $ 29,706,358     $ 5,339,534  
Annualized ratio of operating expenses to average net assets
    11.89 %     24.37 %
Annualized ratio of net investment loss to average net assets
    -11.57 %     -23.19 %
Portfolio turnover (6)
    -       -  
 
(1)
Based on total shares outstanding at the beginning and end of the corresponding period.
(2)
Based on weighted average shares outstanding during the period.
(3)
Net decrease in net assets resulting from operations per share for the three months ended March 31, 2011 and 2010 include rounding adjustments to reconcile the change in net asset value per share for each period.
(4)
Represents the average increase in net asset value attributable to each share issued during the three months ended March 31, 2011 and 2010.
(5)
Total return for the three months ended March 31, 2011 and 2010 was calculated as the change in net asset value per share for each period, plus stockholder distributions per weighted average share paid during each period, divided by the net asset value per share at the beginning of the period.  For the three months ended March 31, 2011 and 2010, total return has not been annualized.
(6)
For the three months ended March 31, 2011 and 2010, the only investment activity subject to the calculation of portfolio turnover was an aggregate of $8,400,012 and $1,000,000, respectively, in portfolio company investments.
Since there were no sales of portfolio company investments during these periods, there was no portfolio turnover.
 
The accompanying notes are an integral part of these financial statements.
 
8

 
Notes to Financial Statements
(Unaudited)


1.
Organization
   
 
Keating Capital, Inc. (“Keating Capital” or the “Company”) was incorporated on May 9, 2008 under the laws of the State of Maryland and is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”), as of November 20, 2008. During 2010, the Company satisfied the requirements to qualify as a regulated investment company (“RIC”) and has elected to be treated as a RIC under Subchapter M of the Internal Revenue Code (the “Code”) effective for the 2010 tax year (see Federal and State Income Taxes under Note 2).
   
 
The Company invests principally in equity securities, including convertible preferred securities, and other debt securities convertible into equity securities, of primarily non-public U.S.-based companies.  Under the Company’s investment process, it typically makes a single investment, principally consisting of convertible preferred stock, convertible debt or other equity, after it is satisfied that a potential portfolio company is committed to and capable of becoming public and obtaining an exchange listing within the Company’s desired timeframes and has substantially completed certain audit and governance requirements to the Company’s satisfaction prior to the closing of the Company’s investment.
   
 
Keating Investments, LLC (“Keating Investments” or the “Investment Adviser”) serves as the Company’s external investment adviser and also provides the Company with administrative services necessary for it to operate.  In this capacity, Keating Investments is primarily responsible for the selection, evaluation, structure, valuation and administration of the Company’s investment portfolio, subject to the supervision of the Company’s Board of Directors.  Keating Investments is a registered investment adviser under the Investment Advisers Act of 1940, as amended.
   
2.
Significant Accounting Policies
   
 
Basis of Presentation
 
The interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. In the opinion of management, all adjustments, all of which were of a normal recurring nature, considered necessary for the fair presentation of financial statements for the interim period have been included. The results of operations for the current period are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2011. The interim unaudited financial statements and notes hereto should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
   
 
Consolidation
 
Under the 1940 Act rules and the regulations pursuant to Article 6 of Regulation S-X, the Company is precluded from consolidating any entity other than another investment company or an operating company that provides substantially all of its services and benefits to the Company. The Company’s financial statements include only the accounts of Keating Capital as the Company has no subsidiaries.
   
 
Reclassifications
 
For the three months ended March 31, 2011, the Company separately classified Stock Transfer Agent Fees, Printing and Fulfillment Expenses, and Postage and Delivery Expenses as individual line items in its Statement of Operations.  Stock Transfer Agent Fees were previously included as a component of Legal and Professional Fees, and Printing and Fulfillment Expenses and Postage and Delivery Expenses were previously included as components of General and Administrative Expenses in the Statement of Operations.  For comparative purposes, these line items have also been separately classified in the Company’s Statement of Operations for the three months ended March 31, 2010.
   
 
Use of Estimates
 
The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Actual results could differ from these estimates and the differences could be material.  The Company considers its significant estimates to include the fair value of investments in portfolio company securities.
 
 
9

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
Valuation of Investments
 
Investments are stated at value as defined under the 1940 Act, in accordance with the applicable regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with Accounting Standards Codification Topic 820, “Fair Value Measurement and Disclosures,” (“ASC 820”).  Value, as defined in Section 2(a)(41) of the 1940 Act, is: (i) the market price for those securities for which a market quotation is readily available, and (ii) the fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets (see Note 3).  
   
 
At March 31, 2011, the Company’s financial statements included portfolio company investments valued at $12,655,534, with a cost of $12,000,503.  The fair value of the Company’s portfolio company investments was determined in good faith by the Company’s Board of Directors and in accordance with ASC 820.  Upon sale of the Company’s portfolio company investments, the value that is ultimately realized could be different from what is currently reflected in the Company’s financial statements, and this difference could be material.
   
 
Portfolio Company Investment Classification
 
The Company classifies its portfolio company investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities. Under the 1940 Act, “Non-Control/Non-Affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments.
   
 
Cash and Cash Equivalents
 
Cash and cash equivalents are comprised of demand deposits.  Investments in certificates of deposit, which have original maturities of 90 days or less, are separately classified as short-term investments.
   
 
Deferred Offering Costs
 
Deferred offering costs are comprised of expenses directly related to the continuous public offering of the Company’s common stock that were previously deferred and which are currently being amortized and charged against the gross proceeds of the continuous public offering, as a reduction to additional paid-in capital, on a straight-line basis beginning with the closing of the first common stock issuance on January 11, 2010 and continuing through the expiration of the offering period on June 30, 2011.  Offering expenses incurred subsequent to January 11, 2010 associated with maintaining the registration of the continuous public offering (e.g., legal, accounting, printing and blue sky) are expensed as incurred, while other offering-related expenses are capitalized and subsequently amortized and charged against the gross proceeds of the continuous public offering on a straight-line basis over the remaining term of the offering (see Note 6).
   
 
Concentration of Credit Risk
 
The Company may place its cash and cash equivalents with various financial institutions and, at times, cash held in depository accounts at such institutions may exceed the Federal Deposit Insurance Corporation insured limit.
   
 
Securities Transactions
 
Securities transactions are accounted for on the date the transaction for the purchase or sale of the securities is entered into by the Company (i.e., trade date).  Securities transactions outside conventional channels, such as private transactions, are recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a sale, and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively.
   
 
Interest and Dividend Income
 
Interest income from certificates of deposit and other short-term investments is recorded on an accrual basis to the extent such amounts are expected to be collected, and accrued interest income is evaluated periodically for collectability.
   
 
The Company’s preferred equity investments may pay fixed or adjustable rate non-cumulative dividends and will generally have a “preference” over common equity in the payment of non-cumulative dividends and the liquidation of a portfolio company's assets. In order to be payable, non-cumulative distributions on such preferred equity must be declared by the portfolio company's board of directors.  Non-cumulative dividend income from preferred equity investments in portfolio companies is recorded when such dividends are declared or at the point an obligation exists for a portfolio company to make a distribution.
 
 
10

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
In certain instances, the Company’s preferred equity investments may include cumulative dividend provisions, where such cumulative dividends, whether or not declared, accrue at a specified rate from the original investment date, have a “preference” over other classes of preferred equity and common equity with respect to payment, and are payable only when declared by a portfolio company’s board of directors or upon a qualifying liquidation event.  Cumulative dividends are recorded when such dividends are declared by the portfolio company’s board of directors, or when a specified event occurs triggering an obligation to pay such dividends.  When recorded, cumulative dividends are added to the balance of the preferred equity investment and are recorded as dividend income in the statement of operations.
   
 
During the three months ended March 31, 2011 and 2010, there were no non-cumulative or cumulative dividends recorded.
   
 
Other Income
 
Other income is comprised of fees, if any, for due diligence, structuring, transaction services, consulting services and management services rendered to portfolio companies and prospective portfolio companies.  For services that are separately identifiable from the Company’s investment, income is recognized as earned, which is generally when the investment or other applicable transaction closes, or when the services are rendered if payment is not subject to the closing of an investment transaction.
   
 
During the three months ended March 31, 2010, the Company recorded $10,000 in other income representing a non-refundable due diligence fee received from a prospective portfolio company in December of 2009, which was initially recorded as deferred income and was subsequently recognized as income when the proposed investment transaction failed to close in February 2010.
   
 
Realized Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments
 
Realized gain or loss is recognized when an investment is disposed of and is computed as the difference between the Company's cost basis in the investment at the disposition date and the net proceeds received from such disposition.  Realized gains and losses on investment transactions are determined by specific identification.  Unrealized appreciation or depreciation is computed as the difference between the fair value of the investment and the cost basis of such investment.
   
 
Federal and State Income Taxes
 
During 2010, the Company satisfied the requirements to qualify as a RIC under Subchapter M of the Code and has elected to be treated as a RIC for U.S. federal income tax purposes effective for the 2010 tax year.  As a RIC, the Company generally will not have to pay corporate-level federal income taxes on any investment company taxable income (which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses) or any realized net capital gains (which is generally realized net long-term capital gains in excess of realized net short-term capital losses) that the Company distributes to its stockholders from its taxable earnings and profits. To maintain RIC tax treatment, the Company must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of its investment company taxable income. In order to avoid certain excise taxes imposed on RICs, the Company currently intends to distribute during each calendar year an amount at least equal to the sum of: (i) 98% of its ordinary income for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years.  The Company has made no provision for income taxes as of March 31, 2011 since it expects to continue to qualify as a RIC for its 2011 taxable year and did not generate any investment company taxable income or realized net capital gains during the three months ended March 31, 2011.
   
 
The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the applicable period. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The 2008, 2009 and 2010 federal tax years for the Company remain subject to examination by the Internal Revenue Service.
 
 
11

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
As of March 31, 2011 and December 31, 2010, the Company had not recorded a liability for any unrecognized tax benefits.  Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.
   
 
The aggregate cost of portfolio company securities for federal income tax purposes and portfolio company securities with unrealized appreciation and depreciation based on tax cost basis, were as follows as of March 31, 2011 and December 31, 2010:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Aggregate cost of portfolio company securities
           
for federal income tax purposes
  $ 12,000,503     $ 3,600,491  
                 
Gross unrealized appreciation of portfolio company securities
    657,345       578,705  
Gross unrealized depreciation of portfolio company securities
    (2,314 )     (1,589 )
                 
Net unrealized appreciation of portfolio company securities
  $ 655,031     $ 577,116  
 
 
Dividends and Distributions
 
Dividends and distributions to common stockholders are recorded when declared.
   
 
Net realized capital gains, if any, after reduction for any incentive fees payable to the investment adviser, are expected to be distributed at least annually.  In the event the Company retains some or all of its realized net capital gains, including amounts retained to pay incentive fees to the investment adviser, the Company will likely designate the retained amount as a deemed distribution to stockholders. In such case, among other consequences, the Company will pay corporate-level tax on the retained amount, each U.S. stockholder will be required to include its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit or refund equal to its allocable share of the corporate-level tax the Company pays on the retained realized net capital gain.
   
 
On February 11, 2011, the Company’s Board of Directors declared a special cash distribution of $446,837, or $0.13 per share outstanding on the record date.  The distribution was paid on February 17, 2011 to the Company’s stockholders of record as of February 15, 2011 (see Note 7).
   
 
Per Share Information
 
Net changes in net assets resulting from operations per common share, or basic earnings per share, are calculated using the weighted average number of common shares outstanding for the period presented. Diluted earnings per share are not presented as there are no potentially dilutive securities outstanding.
   
 
Recently Issued Accounting Pronouncements
 
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.
   
 
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (“ASU 2010-06”), Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements.  ASU 2010-06 requires reporting entities to make new disclosures about recurring and nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances and settlements, on a gross basis, in the reconciliation of Level 3 fair value measurements.  ASU 2010-06 also requires disclosure of fair value measurements by “class” instead of by “major category” as well as any changes in valuation techniques used during the reporting period.  For disclosures of Level 1 and Level 2 activity, fair value measurements by “class” and changes in valuation techniques, ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009.  The adoption of this portion of ASU 2010-06 on January 1, 2010, did not have a material impact on the Company's financial condition or results of operations.  For the reconciliation of Level 3 fair value measurements, this portion of ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2010.  The adoption of this portion of ASU 2010-06 did not have a material impact on the Company's financial condition or results of operations.
 
 
12

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
3.
Valuation of Investments
   
 
The 1940 Act requires periodic valuation of each investment in the Company’s portfolio to determine the Company’s net asset value. Under the 1940 Act, unrestricted securities with readily available market quotations are to be valued at the current market value; all other assets must be valued at fair value as determined in good faith by or under the direction of the Board of Directors.
   
 
The following is a description of the steps the Company takes each quarter to determine the value of the Company’s portfolio investments. Investments for which market quotations are readily available are recorded in the Company’s financial statements at such market quotations. With respect to investments for which market quotations are not readily available, the Company’s Board of Directors undertakes a multi-step valuation process each quarter, as described below:
 
 
The Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by Keating Investments’ senior investment professionals responsible for the portfolio investment;
     
 
A nationally recognized third-party valuation firm engaged by the Company’s Board of Directors reviews these preliminary valuations at such times as determined by the Company’s Board of Directors, provided, however, that a review will be conducted by the third-party valuation firm for each new portfolio company investment made during a calendar quarter, at such time as the valuation for a specific portfolio company is increased, and at least once every twelve months;
     
 
The Company’s Valuation Committee reviews the preliminary valuations, and the Company’s investment adviser and the nationally recognized third-party valuation firm respond and supplement the preliminary valuation to reflect any comments provided by the Valuation Committee; and
     
 
The Company’s Board of Directors discusses the valuations and determines, in good faith, the fair value of each investment in the Company’s portfolio for which market quotations are not readily available based on the input of the Company’s investment adviser, the nationally recognized third-party valuation firm, and the Company’s Valuation Committee.
 
 
A third-party valuation firm reviewed the valuations of all three portfolio company investments made by the Company during the three months ended March 31, 2011, which valuations represented approximately 59% of the total fair value of portfolio company investments as of March 31, 2011.
 
 
 
Investment Categories and Approaches to Determining Fair Value
 
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In accordance with ASC 820, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
 
Level 1:  Observable inputs such as unadjusted quoted prices in active markets;
     
 
Level 2: Includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and
     
 
Level 3: Unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
 
13

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
The Company applies the framework for determining fair value as described above to the valuation of investments in each of the following categories:
   
 
Short-Term Investments
 
Short-term investments, which include certificates of deposit with original maturities of 90 days or less, are valued at amortized cost, which approximates fair value. The amortized cost method involves recording a security at its cost (i.e., principal amount plus any premium and less any discount) on the date of purchase and thereafter amortizing/accreting that difference between the principal amount due at maturity and cost assuming a constant yield to maturity as determined at the time of purchase.
   
 
During the three months ended March 31, 2011, the Company’s short-term investments were comprised exclusively of investments in certificates of deposit with four week maturities, which the Company typically purchases each month upon maturity of existing certificates of deposit, resulting in cumulative purchases totaling $69,000,000 and cumulative maturities totaling $63,500,000.  During the three months ended March 31, 2010 the Company’s short-term investments were comprised exclusively of investments in certificates of deposit with four week maturities, with cumulative purchases totaling $9,600,000 and cumulative sales totaling $9,000,000.
   
 
Equity Investments
 
Equity investments for which market quotations are readily available will generally be valued at the most recently available closing market prices.
   
 
The fair value of the Company’s equity investments for which market quotations are not readily available (including investments in convertible preferred stock) is determined based on various factors, including the enterprise value remaining for equity holders after the repayment of the portfolio company’s debt and other preference capital, and other pertinent factors such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, or other liquidity events. The determined equity values are generally discounted when the Company has a minority position, when there are restrictions on resale, when there are specific concerns about the receptiveness of the capital markets to a specific company at a certain time, or other factors.
   
 
Enterprise value means the entire value of the company to a potential buyer, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. There is no one methodology to determine enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Company derives a single estimate of enterprise value. To determine the enterprise value of a portfolio company, the Company analyzes the portfolio company’s historical and projected financial results and also uses industry valuation benchmarks and public market comparables.  The Company also considers other events, including private mergers and acquisitions, a purchase transaction, public offering or subsequent debt or equity sale or restructuring, and includes these events in the enterprise valuation process.  In addition, the trends of the portfolio company’s basic financial metrics from the time of the original investment until the measurement date are analyzed; material improvement of these metrics may indicate an increase in enterprise value, while material deterioration of these metrics may indicate a reduction in enterprise value.
   
 
The fair value of common and preferred stock warrants is determined by using the Black-Scholes option pricing model.
   
 
Portfolio Company Investments
 
On January 25, 2010, the Company made a $1,000,000 investment in the Series X convertible preferred stock of NeoPhotonics Corporation (“NeoPhotonics”).  NeoPhotonics is headquartered in San Jose, California and develops and manufactures photonic integrated circuit based components, modules and subsystems for use in telecommunications networks.   On February 2, 2011, NeoPhotonics completed an initial public offering of its common stock, selling 7,500,000 shares at a price of $11.00 per share.  NeoPhotonics is listed on the New York Stock Exchange under the ticker symbol NPTN.  Prior to the initial public offering, the Company’s preferred stock converted into 160,000 shares of NeoPhotonics common stock, which common shares are subject to a six-month lock-up provision expiring in August 2011.
 
 
14

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
On July 1, 2010, the Company made a $500,500 investment in the Series C convertible preferred stock and warrants of Livescribe, Inc (“Livescribe”). Livescribe is a private company headquartered in Oakland, California and is a developer and marketer of a mobile, paper-based computing platform consisting of smartpens, dot paper, smartpen applications, accessories, desktop software, an online community and development tools.   For financial reporting purposes, the Series C convertible preferred stock was assigned a cost of $471,295 and the warrants were assigned a cost of $29,205 based on the fair value of the warrants as of the initial investment date calculated using the Black-Scholes option pricing model.
   
 
On July 16, 2010, the Company made a $999,991 investment in the Series D convertible preferred stock of Solazyme, Inc. (“Solazyme”).  Solazyme is a private company headquartered in South San Francisco, California and is considered a leader in the development and commercialization of algal oil and bioproducts for the fuels and chemicals, nutrition, and skin and personal care markets.  On March 11, 2011, Solazyme filed a registration statement on Form S-1 to go public through a $100 million initial public offering of its common stock. In the event of a qualifying initial public offering, the Series D convertible preferred stock would be automatically converted into shares of Solazyme’s common stock.  The common stock issued upon conversion would be subject to a six-month lock-up period following the completion of the initial public offering.
   
 
On October 15, 2010, the Company made a $1,100,000 investment in the Series G convertible preferred stock of MBA Polymers, Inc. (“MBA Polymers”).  MBA Polymers is a private company headquartered in Richmond, California and is a global manufacturer of recycled plastics sourced from end of life durable goods, such as computers, electronics, appliances and automobiles.  On February 22, 2011, the Company made an additional $900,000 investment in MBA Polymers’ Series G convertible preferred stock.
   
 
On March 1, 2011, the Company completed a $2,500,006 investment in the Series E convertible preferred stock of BrightSource Energy, Inc. (“BrightSource”). BrightSource is a private company headquartered in Oakland, California and is a developer of utility scale solar thermal plants which generate solar energy for utility and industrial companies using its proprietary solar thermal tower technology. On April 22, 2011, BrightSource filed a registration statement on Form S-1 to go public through a $250 million initial public offering of its common stock.  In the event of a qualifying initial public offering, the Series E convertible preferred stock would be automatically converted into shares of BrightSource’s common stock.  The common stock issued upon conversion would be subject to a six-month lock-up period following the completion of the initial public offering.
   
 
On March 9, 2011, the Company made a $2,499,999 investment in Series B convertible preferred stock of Harvest Power, Inc. (“Harvest Power”).  Harvest Power is a private company headquartered in Waltham, Massachusetts that acquires, owns and operates organic waste facilities that convert organic waste, such as food scraps and yard debris, into compost, mulch and renewable energy.  Harvest Power’s recycling operations reduce the amount of organic waste that needs to be landfilled or incinerated and its existing operating facilities are located in California, Pennsylvania, and British Columbia, Canada.
   
 
On March 31, 2011, the Company made a $2,500,007 investment in the Series D convertible preferred stock of Suniva, Inc. (“Suniva”).  Suniva is a private company headquartered in Norcross, Georgia and is a manufacturer of high-efficiency solar photovoltaic cells and modules focused on delivering high-power solar energy products. 
   
 
Except for the Company’s investments in MBA Polymers (follow-on investment), BrightSource, Harvest Power and Suniva, there were no other purchases of equity investments during the three months ended March 31, 2011.   The Company’s only investment activity during the three months ended March 31, 2010 was its investment in NeoPhotonics.  There were no sales of portfolio company investments during the three months ended March 31, 2011 and 2010.
 
 
15

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
Fair Value of Investments
 
The following table categorizes the Company’s short-term investments and portfolio company investments measured at fair value based upon the lowest level of significant input used in the valuation as of March 31, 2011 and December 31, 2010:
 
                         
   
Quoted Prices In
   
Significant Other
   
Significant
       
   
Active Markets
   
Observable Inputs
   
Unobservable Inputs
   
Total
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Fair Value
 
                         
As of March 31, 2011
                       
Private Portfolio Company Securities:
                       
Preferred Stock
  $ -     $ -     $ 11,000,003     $ 11,000,003  
Preferred Stock Warrants
    -       -       26,891       26,891  
                                 
Publicly-Traded Portfolio Company Securities:
                               
Common Stock (2)
    -       -       1,628,640       1,628,640  
                                 
Short-Term Investments:
                               
Certificates of Deposit (1)
                               
(Maturing on April 28, 2011)
    -       19,000,000       -       19,000,000  
                                 
Total Investments at Fair Value
  $ -     $ 19,000,000     $ 12,655,534     $ 31,655,534  
                                 
As of December 31, 2010
                               
Private Portfolio Company Securities:
                               
Preferred Stock
  $ -     $ -     $ 4,149,991     $ 4,149,991  
Preferred Stock Warrants
    -       -       27,616       27,616  
                                 
Short-Term Investments:
                               
Certificates of Deposit (1)
                               
(Maturing on January 6, 2011)
    -       13,500,000       -       13,500,000  
                                 
Total Investments at Fair Value
  $ -     $ 13,500,000     $ 4,177,607     $ 17,677,607  
 
(1)
Fair value reflects amortized cost as of March 31, 2011 and December 31, 2010.
(2)
Though a quoted price in an active market exists for the Company's common stock investment in NeoPhotonics Corporation (publicly-traded portfolio company), such investment is subject to a six-month lock-up provision expiring in August 2011 and, as a  result, has been valued at a discount to the quoted market price and catorgized as Level 3 in the fair value hierarchy.
 
 
16

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
The following table provides a reconciliation of the changes in fair value for the Company’s portfolio company investments measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2011:
 
   
Level 3
 
Level 3
 
Level 3
     
   
Portfolio Company
 
Portfolio Company
 
Portfolio Company
     
   
Investments
 
Investments
 
Investments
     
Three months ended March 31, 2011:
 
(Common Stock)
 
(Preferred Stock)
 
(Warrants)
 
Total
                         
Fair Value at December 31, 2010
  $ -     $ 4,149,991     $ 27,616     $ 4,177,607  
                                 
New investments in Level 3 portfolio company securities at cost
    -       8,400,012       -       8,400,012  
                                 
Transfers from preferred stock to common stock within Level 3
    1,550,000       (1,550,000 )     -       -  
                                 
Total unrealized appreciation (depreciation) on Level 3 portfolio
                               
    company securities included in change in net assets
    78,640       -       (725 )     77,915  
                                 
Fair Value at March 31, 2011
  $ 1,628,640     $ 11,000,003     $ 26,891     $ 12,655,534  
                                 
Total unrealized appreciation (depreciation) on Level 3 portfolio
                               
    company securities included in change in net assets that were still held by the Company at March 31, 2011.
  $ 78,640     $ -     $ (725 )   $ 77,915  
 
 
As of December 31, 2010, the Company’s Series X convertible preferred stock investment in NeoPhotonics had a fair value of $1,550,000 as determined in good faith by the Company’s Board of Directors and was included as a component of Level 3 Portfolio Company Investments (Preferred Stock) as NeoPhotonics was a private company for which market quotations for its shares were not available as of December 31, 2010.  As a result of NeoPhotonics’ initial public offering on February 2, 2011 and the conversion of the Company’s preferred stock into common stock, such investment was reclassified from preferred stock to common stock within Level 3 of the fair value hierarchy during the three months ended March 31, 2011.  Though a quoted price in an active market exists for the Company’s common stock investment in NeoPhotonics as of March 31, 2011, such investment is subject to a six-month lock-up provision expiring in August 2011 and, as a result, has been valued at a discount to the quoted market price of $11.31 per share as of March 31, 2011 and categorized within Level 3 of the fair value hierarchy.
   
4.
Investment Portfolio
   
 
As of March 31, 2011, the Company’s investment portfolio, excluding short-term investments, consisted of common stock investments in one publicly-traded company and convertible preferred stock and warrant investments in six private companies.
   
 
As of December 31, 2010, the Company’s investment portfolio, excluding short-term investments, consisted exclusively of convertible preferred stock and warrant investments in four private companies.
 
 
17

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
The following table summarizes the composition of the Company’s investment portfolio, excluding short-term investments in certificates of deposit, at cost and fair value as of March 31, 2011 and December 31, 2010.
 
   
March 31, 2011
   
December 31, 2010
 
               
Percentage
               
Percentage
 
Investment Type
 
Cost
   
Fair Value
   
of Portfolio
   
Cost
   
Fair Value
   
of Portfolio
 
                                     
Private Portfolio Companies:
                                   
Livescribe, Inc.
  $ 500,500     $ 526,891       4.17 %   $ 500,500     $ 527,616       12.63 %
Solazyme, Inc.
    999,991       999,991       7.90 %     999,991       999,991       23.94 %
NeoPhotonics Corporation (1)
    -       -       0.00 %     1,000,000       1,550,000       37.10 %
MBA Polymers, Inc.
    2,000,000       2,000,000       15.81 %     1,100,000       1,100,000       26.33 %
BrightSource Energy, Inc.
    2,500,006       2,500,006       19.75 %     -       -       -  
Harvest Power, Inc.
    2,499,999       2,499,999       19.75 %     -       -       -  
Suniva, Inc.
    2,500,007       2,500,007       19.75 %     -       -       -  
Publicly-Traded Portfolio Companies:
                                         
NeoPhotonics Corporation (1)
    1,000,000       1,628,640       12.87 %     -       -       0.00 %
                                                 
    $ 12,000,503     $ 12,655,534       100.00 %   $ 3,600,491     $ 4,177,607       100.00 %
 
(1)
On February 2, 2011, NeoPhotonics completed an initial public offering of its common stock and is currently listed on the New York Stock Exchange under the ticker symbol NPTN.  Prior to the initial public offering, the Company held convertible preferred stock in NeoPhotonics, which converted into 160,000 shares of common stock prior to the initial public offering, which common shares are subject to a six-month lock-up provision expiring in August 2011.
 
 
The following table summarizes the composition of the Company’s investment portfolio, excluding short-term investments in certificates of deposit, at cost and fair value by industry classification as of March 31, 2011 and December 31, 2010.
 
   
March 31, 2011
   
December 31, 2010
 
               
Percentage
               
Percentage
 
Industry Classification
 
Cost
   
Fair Value
   
of Portfolio
   
Cost
   
Fair Value
   
of Portfolio
 
                                     
Solar Energy
  $ 5,000,013     $ 5,000,013       39.50 %   $ -     $ -       0.00 %
Waste Management
    2,499,999       2,499,999       19.75 %     -       -       0.00 %
Recycling
    2,000,000       2,000,000       15.81 %     1,100,000       1,100,000       26.33 %
Communications Equipment
    1,000,000       1,628,640       12.87 %     1,000,000       1,550,000       37.10 %
Renewable Oils
    999,991       999,991       7.90 %     999,991       999,991       23.94 %
Consumer Electronics
    500,500       526,891       4.17 %     500,500       527,616       12.63 %
                                                 
Total
  $ 12,000,503     $ 12,655,534       100.00 %   $ 3,600,491     $ 4,177,607       100.00 %
 
 
The following table summarizes the composition of the Company’s investment portfolio, excluding short-term investments in certificates of deposit, at cost and fair value by geographic region of the United States as of March 31, 2011 and December 31, 2010.  The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
 
   
March 31, 2011
   
December 31, 2010
 
               
Percentage
               
Percentage
 
Geographic Location
 
Cost
   
Fair Value
   
of Portfolio
   
Cost
   
Fair Value
   
of Portfolio
 
                                     
West
  $ 7,000,497     $ 7,655,528       60.50 %   $ 3,600,491     $ 4,177,607       100.00 %
Northeast
    2,499,999       2,499,999       19.75 %     -       -       -  
Southeast
    2,500,007       2,500,007       19.75 %     -       -       -  
                                                 
Total
  $ 12,000,503     $ 12,655,534       100.00 %   $ 3,600,491     $ 4,177,607       100.00 %
 
 
18

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
5.
Related Party Agreements and Transactions
   
 
Investment Advisory and Administrative Services Agreement
 
Subject to the overall supervision of the Company’s Board of Directors, the Investment Adviser manages the Company’s day-to-day operations and provides the Company with investment advisory services. Under the terms of the Investment Advisory and Administrative Services Agreement, the Investment Adviser:
 
 
Determines the composition of the Company’s investment portfolio, the nature and timing of the changes to the  investment portfolio and the manner of implementing such changes;
     
 
Determines which securities the Company will purchase, retain or sell;
     
 
Identifies, evaluates and negotiates the structure of investments the Company makes, including performing due diligence on prospective portfolio companies; and
     
 
Closes, monitors and services the investments the Company makes.
 
 
The Investment Adviser’s services under the Investment Advisory and Administrative Services Agreement are not exclusive and it is free to furnish similar services to other entities so long as its services to the Company are not impaired.
   
 
The Company pays the Investment Adviser a fee for its investment advisory services under the Investment Advisory and Administrative Services Agreement consisting of two components: (i) a base management fee, and (ii) an incentive fee.
   
 
Base Management Fee
 
The base management fee (the “Base Fee”) is calculated at an annual rate of 2% of the Company’s gross assets, where gross assets include any borrowings for investment purposes.  The Company did not have any borrowings for the three months ended March 31, 2011 or 2010.  The Base Fee is payable quarterly in arrears, and is calculated based on the value of the Company’s gross assets at the end of the most recently completed calendar quarter, and adjusted for any equity capital raises or repurchases during the current calendar quarter.
   
 
The Company recorded Base Fees of $142,637 and $26,548 for the three months ended March 31, 2011 and 2010, respectively.  As of March 31, 2011 and December 31, 2010, Base Fees payable to the Investment Adviser were $142,637 and $90,631, respectively.
   
 
Incentive Fee
 
The incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory and Administrative Services Agreement, as of the termination date), and equals 20% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid incentive fees, with respect to each of the investments in the Company’s portfolio.  The Investment Adviser is not entitled to an incentive fee on investment income generated from interest or dividends on its portfolio company investments.
   
 
During the three months ended March 31, 2011 and 2010, no incentive fees were earned by or payable to the Investment Adviser in accordance with the contractual terms of the Investment Advisory and Administrative Services Agreement since the Company did not generate any realized capital gains during such periods.  However, as of March 31, 2011 and December 31, 2010, the Company had recorded accrued incentive fees payable to the Investment Adviser in the amounts of $131,006 and $115,423, respectively, with respect to $655,031 and $577,115 of net unrealized appreciation on its portfolio company investments as of March 31, 2011 and December 31, 2010.  Since the incentive fee is only payable based on realized capital gains (after reduction for realized capital losses and unrealized depreciation), this accrued incentive fee of $131,006 as of March 31, 2011 may differ from the actual incentive fee that may be paid to Keating Investments depending on whether the Company is ultimately able to dispose of its portfolio company investments and generate a net realized capital gain at least commensurate with the unrealized appreciation recorded as of March 31, 2011.
 
 
19

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
Administrative Services
 
Pursuant to the Investment Advisory and Administrative Services Agreement, the Investment Adviser furnishes the Company with office facilities, equipment, and clerical, bookkeeping and record-keeping services. The Investment Adviser also performs, or facilitates the performance of, certain administrative services, which includes being responsible for the financial records which the Company is required to maintain, and preparing reports to the Company’s stockholders and reports filed with the SEC.
   
 
In addition, the Investment Adviser assists the Company with its portfolio accounting and bookkeeping, managing portfolio collections and reporting, performing stockholder and investor relations services, determining and publishing its net asset value, overseeing the preparation and filing of its tax returns, printing and disseminating reports to its stockholders, providing support for its risk management efforts and generally overseeing the payment of its expenses and performance of administrative and professional services rendered to the Company by others.
   
 
The Company reimburses the Investment Adviser for the allocable portion of overhead and other expenses incurred by the Investment Adviser in performing its administrative obligations under the Investment Advisory and Administrative Services Agreement, including the allocable portion of compensation of the Company’s Chief Financial Officer and Chief Compliance Officer, and their respective staff.
   
 
The Company recorded allocated administrative expenses of $119,733 and $74,470 for the three months ended March 31, 2011 and 2010, respectively.  As of March 31, 2011 and December 31, 2010, allocated administrative expenses payable to the Investment Adviser were $40,781 and $41,348, respectively.
   
 
Reimbursable Expenses
 
Reimbursable expenses payable to the Investment Adviser totaling $1,277 and $3,068 in the accompanying Statement of Assets and Liabilities at March 31, 2011 and December 31, 2010, respectively, represent amounts owed to Investment Adviser for direct expenses of the Company that were paid on its behalf by the Investment Adviser.
   
 
Duration and Termination
 
The Investment Advisory and Administrative Services Agreement was initially approved by the Company’s Board of Directors and its sole stockholder on July 28, 2008.  An amended and restated version of the Investment Advisory and Administrative Services Agreement, which is presently in effect, was approved by the Company’s Board of Directors on April 17, 2009, and by its stockholders on May 14, 2009.  Unless earlier terminated as described below, the current Investment Advisory and Administrative Services Agreement will remain in effect for a period of two years from the date it was approved by the Board of Directors and will remain in effect from year to year thereafter if approved annually by (i) the vote of the Company’s Board of Directors, or by the vote of a majority of the Company’s outstanding voting securities, and (ii) the vote of a majority of the Company’s directors who are not interested persons. An affirmative vote of the holders of a majority of the Company’s outstanding voting securities is also necessary in order to make material amendments to the Investment Advisory and Administrative Services Agreement. The Company’s Board of Directors (including the independent directors) approved the renewal of the Investment Advisory and Administrative Services Agreement for an additional year at its meeting held April 12, 2011.
 
 
 
The Investment Advisory and Administrative Services Agreement automatically terminates in the event of its assignment. As required by the 1940 Act, the Investment Advisory and Administrative Services Agreement provides that the Company may terminate the agreement without penalty upon 60 days’ written notice to the Investment Adviser.  If the Investment Adviser wishes to voluntarily terminate the Investment Advisory and Administrative Services Agreement, it must give stockholders a minimum of 120 days’ notice prior to termination and must pay all expenses associated with its termination. The Investment Advisory and Administrative Services Agreement may also be terminated, without penalty, upon the vote of a majority of the Company’s outstanding voting securities.
   
 
License Agreement
 
On July 28, 2008, the Company entered into a license agreement (the “License Agreement”) with the Investment Adviser pursuant to which the Investment Adviser granted the Company a non-exclusive license to use the name “Keating.” Under the License Agreement, the Company has a right to use the Keating name and logo, for as long as the Investment Adviser or one of its affiliates remains the Company’s investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Keating” name or logo. The License Agreement will remain in effect for as long as the Investment Advisory and Administrative Services Agreement with the Investment Adviser is in effect.
 
 
20

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
6.
Capital Stock
   
 
The Company’s authorized capital stock consists of 200,000,000 shares of stock, par value $0.001 per share, all of which has initially been designated as common stock.
   
 
From August 27, 2008 through November 12, 2008, the Company sold 569,800 shares of common stock in a private offering to various qualified purchasers at $10.00 per share, resulting in gross proceeds of $5,698,000 (the “Private Offering”).  After the payment of placement agent commissions and other offering costs of $454,566, the Company received net proceeds of $5,243,434 in connection with the Private Offering.
   
 
On June 11, 2009, the Company commenced a continuous public offering pursuant to which the Company intends to sell from time-to-time up to 10 million shares of its common stock at an initial offering price of $10.00 per share, adjusted for volume discounts and commission waivers, through the period ending June 30, 2011.  During the period from June 11, 2009 through December 31, 2009, no shares of common stock were sold and no proceeds were received from the Company’s continuous public offering.
   
 
During the year ended December 31, 2010, the Company sold 2,290,399 shares of common stock at an average price of $9.96 per share, resulting in gross proceeds of $22,809,653 and net proceeds of $20,613,587, after payment of $2,196,606 in dealer manager fees and commissions.
   
 
During the three months ended March 31, 2011, the Company sold 1,769,794 shares of common stock at an average price of $9.97 per share, resulting in gross proceeds of $17,638,173 and net proceeds of $15,928,157, after payment of $1,710,016 in dealer manager fees and commissions.
   
 
The following table summarizes the sales of the Company’s common stock under its continuous public offering by month since the commencement of the offering through March 31, 2011:
 
                     
Dealer Manager
       
   
Shares
   
Average Price
   
Gross
   
Fees and
   
Net
 
Month
 
Sold (1)
   
Per Share (1)
   
Proceeds
   
Commissions
   
Proceeds
 
                               
January 2010 (first closing)
    114,695     $ 10.00     $ 1,146,500     $ 114,243     $ 1,032,257  
February 2010
    54,638       9.99       546,000       54,261       491,739  
March 2010
    175,283       9.98       1,749,436       171,896       1,577,540  
April 2010
    151,554       9.84       1,491,050       127,062       1,363,988  
June 2010
    233,277       9.98       2,327,331       227,840       2,099,491  
July 2010
    113,780       9.99       1,136,483       112,457       1,024,026  
August 2010
    203,128       9.99       2,028,643       200,493       1,828,150  
September 2010
    146,716       9.95       1,459,215       138,771       1,320,444  
October 2010
    249,310       9.96       2,482,410       238,622       2,243,788  
November 2010
    371,395       9.96       3,697,520       354,967       3,342,553  
December 2010
    476,623       9.96       4,745,065       455,454       4,289,611  
January 2011
    315,143       9.97       3,141,484       305,195       2,836,289  
February 2011
    536,034       9.94       5,328,486       504,176       4,824,310  
March 2011
    918,617       9.98       9,168,203       900,645       8,267,558  
                                         
      4,060,193     $ 9.96     $ 40,447,826     $ 3,906,082     $ 36,541,744  
 
(1)
All shares were sold at a price of either $9.30 or $10.00, depending on whether or not sales commissions were waived by the dealer manager.
 
 
21

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
 
Deferred offering costs are comprised of: (i) $501,897 of expenses directly related to the continuous public offering that were deferred prior to the first closing on January 11, 2010, and (ii) $419,821 of other offering-related expenses incurred subsequent to January 11, 2010 through March 31, 2011.  Deferred offering costs are being amortized and charged against the gross proceeds of the continuous public offering, as a reduction to additional paid-in capital, on a straight-line basis beginning with the first closing on January 11, 2010 and continuing through the expiration of the offering period on June 30, 2011.  During the year ended December 31, 2010, deferred offering costs totaling $476,806 were amortized and charged as a reduction to additional paid-in capital.  During the three months ended March 31, 2011 and 2010, deferred offering costs totaling $200,041 and $101,928, respectively, were amortized and charged as a reduction to additional paid-in capital.
 
 
 
Offering expenses incurred subsequent to January 11, 2010 associated with maintaining the registration of the continuous public offering (e.g., legal, accounting, printing and blue sky) are expensed as incurred.  During the three months ended March 31, 2011 and 2010, $54,465 and $3,048, respectively, in offering expenses associated with maintaining the registration of the continuous public offering were expensed as incurred and are classified as Stock Issuance Expenses in the accompanying Statement of Operations.
   
7.
Stockholder Distributions
   
 
On February 11, 2011, the Company’s Board of Directors declared a special cash distribution of $0.13 cents per share.  The distribution was paid on February 17, 2011 to the Company’s stockholders of record as of February 15, 2011.  As of the record date, there were 3,437,212 shares of common stock outstanding resulting in a cash distribution totaling $446,837. This special cash distribution was paid based on the unrealized appreciation previously recorded on the Company’s NeoPhotonics investment and, as such, will be initially treated as a return of capital to its stockholders.  However, in the event the Company is able to sell all or a portion of its NeoPhotonics common shares, or any of its other portfolio company investments with a holding period of at least one year at the time of sale, at a gain during 2011 after the expiration of its six-month lock-up period, all or a portion of this special distribution may be reclassified at year end as a capital gain distribution to the Company’s stockholders.
   
8.
Changes in Net Assets Per Share
   
 
The following table sets forth the computation of the basic and diluted per share net decrease in net assets resulting from operations for the three months ended March 31, 2011 and 2010:
 
   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
 
             
Numerator for (decrease) increase in net assets per share
  $ (781,363 )   $ 240,468  
                 
Denominator for basic and diluted weighted average shares
    3,558,124       734,331  
                 
Basic and diluted net (decrease) increase in net assets per share
               
resulting from operations
  $ (0.22 )   $ 0.33  
 
 
During the three months ended March 31, 2011 and 2010, the Company had no dilutive securities outstanding.
 
 
22

 
Keating Capital, Inc.
Notes to Financial Statements
(Unaudited)

 
9.
Subsequent Events
   
 
The following table summarizes the sales of the Company’s common stock under its continuous public offering from April 1, 2011 through May 10, 2011:
 
                        Dealer Manager  
 
   
     
Shares
   
Average Price
   
Gross
   
Fees and
   
Net
   
 
Month
 
Sold (1)
   
Per Share (1)
   
Proceeds
   
Commissions
   
Proceeds
   
                                   
 
April 2011
    635,986     $ 9.96     $ 6,336,732     $ 612,868     $ 5,723,864    
 
May 2011 (through closing on May 10, 2011)
    140,709       9.92       1,395,429       129,051       1,266,378    
                                             
        776,695     $ 9.96     $ 7,732,161     $ 741,919     $ 6,990,242    
                                             
 
(1)
All shares were sold at a price of either $9.30 or $10.00, depending on whether or not sales commissions were waived by the dealer manager.
 
 
 
 
 
23

 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
FORWARD-LOOKING STATEMENTS

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our prospective portfolio investments, our industry, our beliefs, and our assumptions.  The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:

 
Our future operating results;

 
Our business prospects and the prospects of our portfolio companies;

 
The impact of the investments that we expect to make;

 
The ability of our portfolio companies to achieve their objectives;

 
Our expected financings and investments;

 
The adequacy of our cash resources and working capital; and

 
The timing of cash flows, if any, from the operations of our portfolio companies.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in our annual report on Form 10-K filed with the SEC on February 28, 2011 and elsewhere in this quarterly report on Form 10-Q or incorporated by reference herein.
 
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us at the time we filed this quarterly report on Form 10-Q with the SEC, and we assume no obligation to update any such forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes and schedules thereto.

Overview

We were incorporated on May 9, 2008 under the laws of the State of Maryland, and we filed an election to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”) on November 20, 2008.  Keating Investments, LLC (“Keating Investments”) serves as our investment adviser and also provides us with the administrative services necessary for us to operate. 

Congress created business development companies in 1980 in an effort to help public capital reach smaller and growing private and public companies.   We are designed to do precisely that.  We seek to make minority, non-controlling equity investments in private businesses that are seeking growth capital and that we believe are committed to, and capable of, becoming public, which we refer to as “public ready” or “primed to become public.”

We seek to invest principally in equity securities, including convertible preferred securities, and other debt securities convertible into equity securities, of primarily non-public U.S.-based companies. Our investment objective is to maximize our portfolio’s capital appreciation while generating current income from our portfolio investments.  In accordance with our investment objective, we seek to provide capital principally to U.S.-based, private companies with an equity value of less than $250 million, which we refer to as “micro-cap companies,” and U.S.-based, private companies with an equity value of between $250 million and $1 billion, which we refer to as “small-cap companies.”  Our primary emphasis is to attempt to generate capital gains through our equity investments in micro-cap and small-cap companies, including through the conversion of the convertible preferred or convertible debt securities we may acquire in such companies.  While a portion of our investments may, at any given time, include a component of interest or dividends, we do not expect to generate significant current yield on our portfolio company investments.  To date, none of our portfolio company investments have generated, nor are they expected to generate, interest or dividend income.  We may also make investments on an opportunistic basis in U.S.-based publicly-traded companies with market capitalizations of less than $250 million, as well as foreign companies that otherwise meet our investment criteria, subject to certain limitations imposed under the 1940 Act.

Our investments will generally take the form of either “sponsored deals” or “financing participation deals.” In a sponsored deal, we are generally the lead or primary investor, and are principally responsible for setting the terms and conditions of the investment, establishing the going public process, milestones and timing, generally assisting the portfolio company in raising any additional capital from co-investors and providing going public assistance and guidance. While we may in certain circumstances make an initial seed investment in prospective portfolio companies in sponsored deals, we typically attempt to avoid the risk associated with an initial seed investment where the potential portfolio company may abandon the going public process due to its inability or unwillingness to undertake and complete the audit, governance and other requirements to become public. We also believe it is important for a potential portfolio company to demonstrate its commitment to the going public process by funding any upfront legal and audit costs. All of the investment process steps set forth below will typically be applicable in a sponsored deal.

In a financing participation deal, typically we participate in a current private offering round being self-underwritten by the potential portfolio company or distributed by placement agents. Typically, the terms of a financing participation deal, which are generally already established consistent with a financing intended to be the last financing round prior to a traditional initial public offering, or pre-IPO financing, have already been established by the issuer and/or the placement agent.  In these types of deals, we generally are dealing with existing management and principal investors with a greater level of public company experience or knowledge and an expectation to go public within our targeted time frame.

Financing participation deals arise when we have the opportunity to participate in current pre-IPO financing rounds of later stage, venture capital-backed private companies that otherwise meet our investment criteria.  In these transactions, we are able to focus our investment process on a single investment, eliminating the need for an initial investment to fund certain upfront going public costs in a prospective portfolio company.
 
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In financing participation deals, we believe we are generally able to avoid the risk associated with an initial seed investment where the potential portfolio company may abandon the going public process due to its inability or unwillingness to undertake and complete the audit, governance and other requirements to become public. We also believe it is important for a potential portfolio company to demonstrate its commitment to the going public process by funding any upfront legal and audit costs.  Our belief is that potential portfolio companies which meet our investment criteria will generally be able and willing to fund these upfront going public costs or will have already substantially completed certain audit and governance requirements.  Financing participation deals, which typically do not require us to seek co-investors, are also attractive to us while our investment size is limited as we attempt to increase our capital base.  Unlike sponsored deals, certain of the investment process steps may not be applicable to financing participation deals as identified below.

In a financing participation deal, we will typically make a single investment, principally consisting of convertible debt, convertible preferred stock or other equity, after we are satisfied that a potential portfolio company is committed to and capable of becoming public and obtaining a senior exchange listing (as defined below) within our desired timeframes and has substantially completed certain audit and governance requirements to our satisfaction prior to the closing of our investment.

While we have specifically identified sponsored deals and financing participation deals, we believe there may be other types of investment opportunities which may not have the specific characteristics of a sponsored deal or financing participation deal, but which may still meet our general investment criteria and which are still relevant to our focus on micro-cap and small-cap companies capable of and committed to becoming public.  We may make investments in such portfolio companies on an opportunistic basis.  In all cases, we expect our portfolio companies will generally be able to file a registration statement with the SEC within three to twelve months after our investment and will generally be able to obtain an exchange listing within 12 to 18 months after our investment.
 
 
For a Sponsored Deal:
 
(i) If we believe that the portfolio company is able to complete a traditional IPO based primarily on its current or anticipated revenue and profitability levels measured against recent comparable IPO transactions, which we refer to herein as “IPO qualified” or an “IPO qualified company,” we expect that the portfolio company will file a registration statement under the Securities Act within approximately nine months after closing and complete the IPO and obtain a senior exchange listing within approximately 15 months after closing.  If the portfolio company fails to complete an IPO within the 15-month time frame, the portfolio company is expected to file a registration statement under the Exchange Act and become a reporting company within 18 months after closing.  The final terms of a sponsored deal will be subject to negotiation, and there is no assurance that we will be able to include terms in our sponsored deals which will require the portfolio company to undertake all or any of these actions within these time periods.
 
(ii) If we believe that the portfolio company is not IPO qualified at the time of our investment, we expect that the portfolio company will file a registration statement under the Exchange Act within three to six months after closing and obtain a junior or senior exchange listing within 15 months after closing.
 
 
For a Financing Participation Deal:
 
We expect that the portfolio company, which will typically be IPO qualified, will file a registration statement under the Securities Act within 12 months after closing and complete an IPO and obtain a senior exchange listing within 18 months after closing.
 
Following the closing of our investment, we will provide managerial assistance to the portfolio company in their completion of the going public process, as requested.

As an integral part of our investment, we intend to partner with our portfolio companies to become public companies that meet the governance and eligibility requirements for a listing on the New York Stock Exchange, Nasdaq (Global Select, Global or Capital Market) or NYSE Amex Equities, formerly known as the American Stock Exchange (collectively, “U.S. Senior Exchanges”).  We will also consider listings by foreign portfolio companies on the Toronto Stock Exchange, London Stock Exchange, Frankfurt Stock Exchange, Hong Kong Stock Exchange and other foreign exchanges that we may determine as acceptable venues (collectively, “Foreign Senior Exchanges”).  As a business development company, however, we cannot invest more than 30% of our assets in foreign investments.

We refer to the U.S. Senior Exchanges and the Foreign Senior Exchanges herein collectively as the “senior exchanges” or individually as a “senior exchange.” We intend for our portfolio companies to go public either through the filing of a registration statement under the Securities Act or the Exchange Act.   For portfolio companies that we believe are IPO qualified, we expect these companies to go public by filing a registration statement under the Securities Act and completing an IPO.  For portfolio companies that are either not IPO qualified at the time of our investment or fail to complete an IPO under the Securities Act in a timely manner, we expect these companies to go public by filing a registration statement under the Exchange Act, which makes them a non-listed publicly reporting company initially.
 
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In general, we seek to invest in micro-cap and small-cap companies that we believe will be able to file a registration statement with the SEC within approximately three to twelve months after our investment.  These registration statements may take the form of a registration statement under the Securities Act registering the primary sale of common stock of a portfolio company in an IPO, a registration statement registering the common stock of a portfolio company under the Exchange Act without a concurrent registered offering under the Securities Act, or a resale registration statement filed by a portfolio company under the Securities Act to register shares held by existing stockholders coupled with a concurrent registration of the portfolio company’s common stock under the Exchange Act.

We expect the common stock of our portfolio companies that are not IPO qualified at the time of our investment, or fail to complete an IPO in a timely manner, to typically be initially quoted on the Over-the-Counter Bulletin Board (the “OTC Bulletin Board”) or, in the case of foreign portfolio companies, the Toronto Stock Exchange Venture, the Shenzhen Stock Exchange (Chinext) or other foreign exchanges that we may determine as an acceptable initial foreign listing venue (collectively, “Foreign Junior Exchange”), following the completion of the registration process, depending upon satisfaction of the applicable listing requirements.   We refer to the OTC Bulletin Board and the Foreign Junior Exchanges herein collectively as the “junior exchanges” or individually as a “junior exchange.”    

We can provide no assurance, however, that the micro-cap and small-cap companies in which we invest will be able to successfully complete the SEC registration process, or that they will be successful in obtaining a listing on either a junior or senior exchange within the expected timeframe, if at all.  If, for any reason, a traditional IPO is unavailable due to either market conditions or an underwriter’s minimum requirements, we believe that we can provide each of our portfolio companies with an alternative and more certain solution to becoming public and obtaining an exchange listing through our investment adviser’s going public, aftermarket support and public markets expertise.

We intend to maximize our potential for capital appreciation by taking advantage of the premium we believe is generally associated with having a more liquid asset, such as a publicly traded security.  Specifically, we believe that a senior exchange listing, if obtained, will generally provide our portfolio companies with greater visibility, marketability and liquidity than they would otherwise be able to achieve without such a listing.  Since we intend to be more patient investors, we believe that our portfolio companies may have an even greater potential for capital appreciation if they are able to demonstrate sustained earnings growth and are correspondingly rewarded by the public markets with a price-to-earnings (P/E) multiple appropriately linked to earnings performance.  We can provide no assurance, however, that the micro-cap and small-cap companies in which we invest will be able to achieve such sustained earnings growth, or that the public markets will recognize such growth, if any, with an appropriate market premium.

To the extent that we receive convertible debt instruments in connection with our investments, such instruments will likely be
unsecured or subordinated debt securities. The convertible preferred stock we have received to date, and which we expect to receive in the future, in connection with our equity investments will typically be non-controlling investments, meaning we will not be in a position to control the management, operation and strategic decision-making of the companies in which we invest.

During 2010, we satisfied the requirements to qualify as a regulated investment company (“RIC”) and have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code (the “Code”) effective for our 2010 taxable year.  In order to  maintain RIC status, the size of our individual portfolio company investments will be restricted in order to comply with specified asset diversification requirements on a quarterly basis. As a result, to comply with these diversification requirements, we expect that the average size of our individual portfolio company investments will represent approximately 5% of our total assets.  Based on our total assets as of March 31, 2011 and the $50 million to $100 million in total capital that we expect to raise in our continuous public offering which concludes on June 30, 2011, we anticipate that the average size of our future portfolio company investments will range from approximately $2.5 million to $5 million. However, we may invest more than this amount in certain opportunistic situations, provided we do not invest more than 25% of the value of our total assets in any portfolio company and the value of our portfolio company investments representing more than 5% of our total assets do not in the aggregate exceed 50% of our total assets.

We expect that our capital will primarily be used by our portfolio companies to finance organic growth.  To a lesser extent, our capital may be used to finance acquisitions and recapitalizations. Our investment adviser’s investment decisions are based on an analysis of potential portfolio companies’ management teams and business operations supported by industry and competitive research, an understanding of the quality of their revenues and cash flow, variability of costs and the inherent value of their assets, including proprietary intangible assets and intellectual property.  Our investment adviser also assesses each potential portfolio company as to its appeal in the public markets, its suitability for achieving and maintaining public company status and its eligibility for a senior exchange listing.
 
 
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Our debt and equity investments in portfolio companies could be impaired to the extent such portfolio companies experience financial difficulties arising out of the current economic environment.  Our inability to locate attractive investment opportunities, or the impairment of our portfolio investments as a result of economic conditions, could have a material adverse effect on our financial condition and results of operations.

We are externally managed by Keating Investments, an investment adviser registered under the Advisers Act.  As our investment adviser, Keating Investments is responsible for managing our day-to-day operations including, without limitation, identifying, evaluating, negotiating, closing, monitoring and servicing our investments.  Keating Investments also provides us with the administrative services necessary for us to operate.
 
As a business development company, we are required to comply with certain regulatory requirements. For example, to the extent provided by the 1940 Act, we are required to invest at least 70% of our total assets in eligible portfolio companies.

Operating and Regulatory Structure
 
Our investment activities are managed by Keating Investments pursuant to an investment advisory and administrative services agreement (the “Investment Advisory and Administrative Services Agreement”).  Keating Investments was founded in 1997 and is an investment adviser registered under the Advisers Act.  The managing member and majority owner of Keating Investments is Timothy J. Keating.  Our investment adviser’s senior investment professionals are Timothy J. Keating, our President, Chief Executive Officer and Chairman of our Board of Directors, Ranjit P. Mankekar, our Chief Financial Officer, Treasurer and a member of our Board of Directors, Frederic M. Schweiger, our Chief Operating Officer, Chief Compliance Officer and Secretary, and Kyle L. Rogers, our Chief Investment Officer.  In addition, Keating Investments’ other investment professionals consist of two portfolio company originators, an investor relations director and two financial analysts.  Under our Investment Advisory and Administrative Services Agreement with Keating Investments, we have agreed to pay Keating Investments, for its investment advisory services, an annual base management fee based on our gross assets as well as an incentive fee based on our performance.

Investment Portfolio Composition and Activity

During the year ended December 31, 2010, we made four portfolio company investments in an aggregate amount of $3,600,491.   During the three months ended March 31, 2011, we made four additional portfolio company investments (one of which was a follow-on investment in an existing portfolio company) totaling $8,400,012 as follows:

 
On February 22, 2011, we made an additional $900,000 investment in the convertible preferred stock of MBA Polymers, Inc.

 
On March 1, 2011, we completed a $2,500,006 investment in the convertible preferred stock of BrightSource Energy, Inc.

 
On March 9, 2011, we completed a $2,499,999 investment in the convertible preferred stock of Harvest Power, Inc.

 
On March 31, 2011, we completed a $2,500,007 investment in the convertible preferred stock of Suniva, Inc.

A summary of each of our portfolio company investments as of March 31, 2011 is set forth below:
 
NeoPhotonics Corporation. On January 25, 2010, we completed a $1 million investment in the Series X convertible preferred stock of NeoPhotonics Corporation (“NeoPhotonics”).  Our investment in NeoPhotonics was part of a $46 million Series X preferred stock offering.  NeoPhotonics, headquartered in San Jose, California, is a developer and manufacturer of photonic integrated circuit based components, modules and subsystems for use in telecommunications networks.

NeoPhotonics completed an initial public offering on February 2, 2011 selling 7,500,000 shares of common stock at a price of $11.00 per share.  NeoPhotonics is listed on the New York Stock Exchange under the ticker symbol NPTN.  Prior to the initial public offering, our NeoPhotonics Series X preferred stock converted into 160,000 shares of NeoPhotonics common stock.  The shares of NeoPhotonics common stock we received upon conversion are subject to a six-month lock-up provision which expires in August 2011. At March 31, 2011, our common stock investment in NeoPhotonics was valued at $1,628,640, including $628,640 in unrealized appreciation based upon a fair value determination made in good faith by our Board of Directors.
 
 
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Livescribe, Inc. On July 1, 2010, we completed a $500,500 investment in the Series C convertible preferred stock and warrants of Livescribe Inc. (“Livescribe”).  Our investment in Livescribe was part of a $39 million Series C preferred stock offering.  Livescribe, a private company headquartered in Oakland, California, is a developer and marketer of a mobile, paper-based computing platform consisting of smartpens, dot paper, smartpen applications, accessories, desktop software, an online community and development tools.   Livescribe’s smartpens are currently available from consumer electronics retailers in the U.S. and in several international markets.    In the event of a qualifying initial public offering, the Series C convertible preferred stock would be automatically converted into shares of Livescribe’s common stock.  Upon conversion, the common stock we would be issued would be subject to a six-month lock-up period following the completion of the initial public offering.  We can give no assurances that Livescribe will ever complete an initial public offering, and even if completed, when it may be completed and at what price and under what terms.

For financial reporting purposes, our investment in Livescribe’s Series C convertible preferred stock was assigned a cost of $471,295 and the warrants were assigned a cost of $29,205 based on the fair value of the warrants as of the initial investment date calculated using the Black-Scholes option pricing model.  At March 31, 2011, our Series C convertible preferred stock investment in Livescribe was valued at $500,000, including $28,705 in unrealized appreciation based upon a fair value determination made in good faith by our Board of Directors.  At March 31, 2011, our Series C convertible preferred stock warrants in Livescribe were valued at $26,891, including $2,314 in unrealized depreciation based upon a fair value determination made in good faith by our Board of Directors.

Solazyme, Inc. On July 16, 2010, we completed a $999,991 investment in the Series D convertible preferred stock of Solazyme, Inc. (“Solazyme”).  Our investment in Solazyme was part of a $60 million Series D preferred stock offering.   Solazyme is a private, renewable oils and green bioproducts company based in South San Francisco, California.  Founded in 2003, Solazyme is considered a leader in the development and commercialization of algal oil and bioproducts for the fuels and chemicals, nutrition, and skin and personal care markets.  Solazyme’s unique, proprietary technology allows algae, when fed sugars and plant byproducts, to produce oil and biomaterials in industrial fermentation facilities.

On March 11, 2011, Solazyme filed a registration statement on form S-1 to go public through a $100 million initial public offering of its common stock.  In the event of a qualifying initial public offering, the Series D convertible preferred stock would be automatically converted into shares of Solazyme’s common stock.  Upon conversion, the common stock we would be issued would be subject to a six-month lock-up period following the completion of the initial public offering.  We can give no assurances that Solazyme will ever complete an initial public offering, and even if completed, when it may be completed and at what price and under what terms.  At March 31, 2011, our Series D convertible preferred stock investment in Solazyme was valued at $999,991, our original cost, based upon a fair value determination made in good faith by our Board of Directors.

MBA Polymers, Inc. On October 15, 2010, we completed a $1,100,000 investment in the Series G convertible preferred stock of MBA Polymers, Inc. (“MBA Polymers”).  Our investment in MBA Polymers was part of a $25 million Series G convertible preferred stock offering.  On February 22, 2011, we made an additional investment of $900,000 in MBA Polymers’ Series G convertible preferred stock.  Our additional investment was part of an aggregate additional Series G preferred stock offering of approximately $14.6 million.  MBA Polymers, a private company headquartered in Richmond, California, is a global manufacturer of recycled plastics sourced from end of life durable goods, such as computers, electronics, appliances and automobiles.  MBA Polymers’ patented recycling technology allows it to sort, clean, purify and process reusable plastic materials.  These recycled plastics are then sold as “drop-in” green replacements for virgin plastic to original equipment manufacturers and other customers who desire a cost-competitive and/or greener alternative to virgin plastics.  In the event of a qualifying initial public offering, the Series G convertible preferred stock would be automatically converted into shares of MBA Polymer’s common stock.  Upon conversion, the common stock we would be issued would be subject to a six-month lock-up period following the completion of the initial public offering.  We can give no assurances that MBA Polymers will ever complete an initial public offering, and even if completed, when it may be completed and at what price and under what terms.  At March 31, 2011, our Series G convertible preferred stock investment in MBA Polymers was valued at $2,000,000, our original cost, based upon a fair value determination made in good faith by our Board of Directors.

BrightSource Energy, Inc. On March 1, 2011, we completed a $2,500,006 investment in the Series E convertible preferred stock of BrightSource Energy, Inc. (“BrightSource”), which BrightSource included as part of its February 28, 2011 closing.  Our investment in BrightSource was part of a $202 million Series E preferred stock offering.  BrightSource, headquartered in Oakland, California, is a developer of utility scale solar thermal plants which generate solar energy for utility and industrial companies using its proprietary solar thermal tower technology.  This technology allows BrightSource to employ a low-impact environmental design that mounts mirrors on individual poles placed directly into the ground, so that the solar field can be built around the natural contours of the land and avoid areas of sensitive vegetation.  Competing solar technologies generally require extensive land grading and concrete pads.  BrightSource’s technology also uses an air-cooling system to convert steam back into water in a closed-loop cycle and, in the process, conserve desert water.  On April 22, 2011, BrightSource filed a registration statement on Form S-1 to go public through a $250 million initial public offering of its common stock.  In the event of a qualifying initial public offering, the Series E convertible preferred stock would be automatically converted into shares of BrightSource’s common stock.  Upon conversion, the common stock we would be issued would be subject to a six-month lock-up period following the completion of the initial public offering.  We can give no assurances that BrightSource will ever complete an initial public offering, and even if completed, when it may be completed and at what price and under what terms.  At March 31, 2011, our Series E convertible preferred stock investment in BrightSource was valued at $2,500,006, our original cost, based upon a fair value determination made in good faith by our Board of Directors.
 
 
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Harvest Power, Inc. On March 9, 2011, we completed a $2,499,999 investment in Series B convertible preferred stock of Harvest Power, Inc. (“Harvest Power”).  Our investment in Harvest Power was part of a $51.7 million Series B preferred stock offering.   Founded in 2008 and headquartered in Waltham, Massachusetts, Harvest Power acquires, owns and operates organic waste facilities that convert organic waste, such as food scraps and yard debris, into compost, mulch and renewable energy.  Harvest Power’s recycling operations reduce the amount of organic waste that needs to be landfilled or incinerated.  Its existing operating facilities are located in California, Pennsylvania, and British Columbia, Canada. Harvest Power enters into multi-year contracts with municipalities and waste haulers who pay a tipping fee to Harvest Power to accept organic waste at its facilities.  In the event of a qualifying initial public offering, the Series B convertible preferred stock would be automatically converted into shares of Harvest Power’s common stock.  Upon conversion, the common stock we would be issued would be subject to a six-month lock-up period following the completion of the initial public offering.  We can give no assurances that Harvest Power will ever complete an initial public offering, and even if completed, when it may be completed and at what price and under what terms. At March 31, 2011, our Series B convertible preferred stock investment in Harvest Power was valued at $2,499,999, our original cost, based upon a fair value determination made in good faith by our Board of Directors.

Suniva, Inc. On March 31, 2011, we completed a $2,500,007 investment in the Series D convertible preferred stock of Suniva, Inc. (“Suniva”).  A total of $94.4 million has been raised in the Series D financing round through the date of our investment.  Founded in 2007 and headquartered in Norcross, Georgia, Suniva is a manufacturer of high-efficiency solar photovoltaic cells and modules focused on delivering high-power solar energy products. At its headquarters in Norcross, Georgia, Suniva has 170 megawatts of solar cell production capacity and a state-of-the-art research and development facility.   In the event of a qualifying initial public offering, the Series D convertible preferred stock would be automatically converted into shares of Suniva’s common stock.  Upon conversion, the common stock we would be issued would be subject to a six-month lock-up period following the completion of the initial public offering.  We can give no assurances that Suniva will ever complete an initial public offering, and even if completed, when it may be completed and at what price and under what terms.  At March 31, 2011, our Series D convertible preferred stock investment in Suniva was valued at $2,500,007, our original cost, based upon a fair value determination made in good faith by our Board of Directors.

The following table summarizes the composition of our investment portfolio, excluding short-term investments in certificates of deposit, at cost and fair value as of March 31, 2011 and December 31, 2010.
 
   
March 31, 2011
   
December 31, 2010
 
               
Percentage
               
Percentage
 
Investment Type
 
Cost
   
Fair Value
   
of Portfolio
   
Cost
   
Fair Value
   
of Portfolio
 
                                     
Private Portfolio Companies:
                                   
Livescribe, Inc.
  $ 500,500     $ 526,891       4.17 %   $ 500,500     $ 527,616       12.63 %
Solazyme, Inc.
    999,991       999,991       7.90 %     999,991       999,991       23.94 %
NeoPhotonics Corporation (1)
    -       -       0.00 %     1,000,000       1,550,000       37.10 %
MBA Polymers, Inc.
    2,000,000       2,000,000       15.81 %     1,100,000       1,100,000       26.33 %
BrightSource Energy, Inc.
    2,500,006       2,500,006       19.75 %     -       -       -  
Harvest Power, Inc.
    2,499,999       2,499,999       19.75 %     -       -       -  
Suniva, Inc.
    2,500,007       2,500,007       19.75 %     -       -       -  
Publicly-Traded Portfolio Companies:
                                               
NeoPhotonics Corporation (1)
    1,000,000       1,628,640       12.87 %     -       -       0.00 %
                                                 
Total
  $ 12,000,503     $ 12,655,534       100.00 %   $ 3,600,491     $ 4,177,607       100.00 %
 
(1)
On February 2, 2011, NeoPhotonics completed an initial public offering of its common stock and is currently listed on the New York Stock Exchange under the ticker symbol NPTN.  Prior to the initial public offering, the Company held convertible preferred stock in NeoPhotonics, which converted into 160,000 shares of common stock prior to the initial public offering, which common shares are subject to a six-month lock-up provision expiring in August 2011.
 
 
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The following table summarizes the composition of our investment portfolio, excluding short-term investments in certificates of deposit, at cost and fair value by industry classification as of March 31, 2011 and December 31, 2010.
 
   
March 31, 2011
   
December 31, 2010
 
               
Percentage
               
Percentage
 
Industry Classification
 
Cost
   
Fair Value
   
of Portfolio
   
Cost
   
Fair Value
   
of Portfolio
 
                                     
Solar Energy
  $ 5,000,013     $ 5,000,013       39.50 %   $ -     $ -       0.00 %
Waste Management
    2,499,999       2,499,999       19.75 %     -       -       0.00 %
Recycling
    2,000,000       2,000,000       15.81 %     1,100,000       1,100,000       26.33 %
Communications Equipment
    1,000,000       1,628,640       12.87 %     1,000,000       1,550,000       37.10 %
Renewable Oils
    999,991       999,991       7.90 %     999,991       999,991       23.94 %
Consumer Electronics
    500,500       526,891       4.17 %     500,500       527,616       12.63 %
                                                 
Total
  $ 12,000,503     $ 12,655,534       100.00 %   $ 3,600,491     $ 4,177,607       100.00 %
 
    The following table summarizes the composition of our investment portfolio, excluding short-term investments in certificates of deposit, at cost and fair value by geographic region of the United States as of March 31, 2011 and December 31, 2010.  The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
 
   
March 31, 2011
   
December 31, 2010
 
               
Percentage
               
Percentage
 
Geographic Location
 
Cost
   
Fair Value
   
of Portfolio
   
Cost
   
Fair Value
   
of Portfolio
 
                                     
West
  $ 7,000,497     $ 7,655,528       60.50 %   $ 3,600,491     $ 4,177,607       100.00 %
Northeast
    2,499,999       2,499,999       19.75 %     -       -       -  
Southeast
    2,500,007       2,500,007       19.75 %     -       -       -  
                                                 
    $ 12,000,503     $ 12,655,534       100.00 %   $ 3,600,491     $ 4,177,607       100.00 %
                                                 
 
We currently anticipate completing five to ten investments per year until all of the proceeds of our continuous public offering have been invested. The consummation of each investment will depend upon satisfactory completion of our due diligence investigation of the prospective portfolio company, our confirmation and acceptance of the investment terms, structure and financial covenants, the execution and delivery of final binding agreements in form mutually satisfactory to the parties, the absence of any material adverse change and the receipt of any necessary consents.  We can provide no assurance that we will be able to meet our anticipated pace of investment.

We anticipate that it may take up to 12 to 24 months after the conclusion of our continuous public offering to invest substantially all of the proceeds from our continuous public offering in our targeted investments.  Until we are able to invest such net proceeds in suitable investments, we will invest in temporary investments, such as cash, cash equivalents, certificates of deposit, U.S. government securities and other high-quality debt investments that mature in one year or less, which we expect will earn only nominal yields.  Since we do not expect to generate significant interest or dividend income on our portfolio company investments, our ability to make distributions in our initial years of operation will be based on our ability to invest our capital in suitable portfolio companies in a timely manner and to sell our interests in these portfolio companies at a gain after they become public.   

Results of Operations

The principal measure of our financial performance is the net increase (decrease) in our net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) on investments and net unrealized appreciation (depreciation) on investments.  Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses.  Net realized gain (loss), if any, is the difference between the net proceeds of sales of portfolio company securities and their stated cost.  Net unrealized appreciation (depreciation) from investments is the net change in the fair value of our investment portfolio.

Set forth below are the results of operations for the three months ended March 31, 2011 and 2010.

Investment Income.   We have generated, and expect to continue to generate, limited investment income from the temporary investment of the net proceeds from our continuous public offering in high-quality debt investments that mature in one year or less.

For the three months ended March 31, 2011 and 2010, we earned interest income from certificates of deposit and money market investments of $24,091 and $5,725, respectively.
 
 
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We seek to invest principally in equity securities, including convertible preferred securities, and other debt securities convertible into equity securities, of primarily non-public U.S.-based micro-cap and small-cap companies. Our convertible debt investments, which we expect will usually be associated with our sponsored deals, will be primarily unsecured and subordinated loans that provide for a fixed interest rate that will typically provide us with current interest income. However, it is possible that interest on these debt investments will be deferred until maturity or conversion or may be paid in shares of the issuer’s common stock.  We intend to set interest rates based on prevailing market rates at the time of our investment for comparable types of investments.  Typically, these loans will have maturities not to exceed 18 months, which coincides with the maximum period we believe is required to complete the process to go public and obtain an exchange listing.  To date, we have not made any convertible debt investments in portfolio companies.

Our convertible preferred equity investments may pay fixed or adjustable rate dividends to us and will generally have a “preference” over common equity in the payment of dividends and the liquidation of a portfolio company's assets. This preference means that a portfolio company must pay dividends on preferred equity before paying any dividends on its common equity. However, in order to be payable, dividends on such preferred equity must be declared by the portfolio company's board of directors. In the event dividends on our preferred stock investments are non-cumulative, which is typically the case, if the board of directors of our portfolio companies does not declare a preferred dividend for a specific period, we will not be entitled to a preferred dividend for such period.  We do not expect the board of directors of our portfolio companies to declare preferred dividends since these companies typically prefer to retain profits, if any, in their business.  Accordingly, we do not expect to generate dividend income on our preferred stock investments. Cumulative dividend payments on preferred equity means dividends will accumulate even if not declared by the board of directors or otherwise made payable. In such a case, all accumulated dividends must typically be paid before any dividend on the common equity can be paid. However, there is no assurance that any dividends will be paid by a portfolio company even in the case of cumulative preferred dividends and, in most cases, the payment of any accumulated preferred dividends is likely to be deferred until conversion and, if paid, may be paid in shares of the issuer’s preferred or common stock.

Non-cumulative dividends from preferred equity investments in portfolio companies are recorded when such dividends are declared or at the point an obligation exists for a portfolio company to make a distribution.  Cumulative dividends are recorded when such dividends are declared by the portfolio company’s board of directors, or when a specified event occurs triggering an obligation to pay such dividends.  When recorded, cumulative dividends are added to the balance of the preferred equity investment and are recorded as dividend income in the statement of operations.

No non-cumulative or cumulative dividend income from portfolio company investments was recorded during the three months ended March 31, 2011 and 2010.

Our primary source of investment income will be generated from net capital gains realized on the disposition of our portfolio company investments, which typically will occur after the portfolio company completes an IPO and any contractual lock-up period has expired.

 From time to time, we may also generate other investment income comprised of fees for due diligence, structuring, transaction services, consulting services and management services rendered to portfolio companies and prospective portfolio companies, which services are separately identifiable from our investments.  For the three months ended March 31, 2011 and 2010, $0 and $10,000, respectively, of other investment income was recorded.  The $10,000 of other income recorded during the three months ended March 31, 2010 represents a non-refundable due diligence fee received from a prospective portfolio company in December 2009, which was initially recorded as deferred income and was subsequently recognized as income when the proposed investment transaction failed to close in February 2010.

Expenses.  Our primary operating expenses include the payment of: (i) investment advisory fees to our investment adviser, Keating Investments, (ii) our allocable portion of overhead and other expenses incurred by Keating Investments, as our administrator, in performing its administrative obligations under the Investment Advisory and Administrative Services Agreement, and (iii) other operating expenses as detailed below. Our investment advisory fee compensates our investment adviser for its work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. See “Business – Investment Advisory and Administrative Services Agreement.”  We bear all other expenses of our operations and transactions, including, without limitation:

 
Costs of calculating our net asset value, including the cost of any third-party valuation services;

 
Costs of effecting sales and repurchases of shares of our common stock and other securities;

 
Fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments;

 
Costs related to organization and offerings;
 
 
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Transfer agent and custodial fees;

 
Fees and expenses associated with marketing efforts;

 
Federal and state registration fees;

 
Any stock exchange listing fees;

 
Applicable federal, state and local taxes;

 
Independent directors’ fees and expenses;

 
Brokerage commissions;

 
Costs of proxy statements, stockholders’ reports and notices;

 
Fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;

 
Direct costs such as printing, mailing, and long distance telephone;

 
Fees and expenses associated with independent audits and outside legal costs;

 
Costs associated with our reporting and compliance obligations under the 1940 Act, Sarbanes-Oxley Act, and applicable federal and state securities laws; and

 
All other expenses incurred by either Keating Investments or us in connection with administering our business, including payments under the Investment Advisory and Administrative Services Agreement that will be based upon our allocable portion of overhead and other expenses incurred by Keating Investments in performing its obligations under the Investment Advisory and Administrative Services Agreement, including our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer, and their respective staff.

Operating expenses for the three months ended March 31, 2011 and 2010 were $883,369 and $325,257, respectively.  During the year ended December 31, 2010 and continuing through the three months ended March 31, 2011, we have continued to increase our efforts to enhance the distribution infrastructure for our continuous public offering and to prepare for the expected listing of our shares on the Nasdaq Capital Market by the end of 2011.  During the year ended December 31, 2010 and continuing through the three months ended March 31, 2011, we have also continued to increase our marketing efforts for a wider distribution of our shares including participation in conferences, special programs and private meetings.  We continue to manage, coordinate and administer these outreach activities and we expect the expenses associated with these activities to decline upon conclusion of our continuous public offering on June 30, 2011.
 
We are also focused on continuing to build and enhance our stockholder communications, investor relations and brand marketing programs as we prepare for the expected listing of our shares on the Nasdaq Capital Market by the end of 2011.  We believe it is important to develop these programs now as they will be the foundation of our aftermarket support initiatives once our shares become eligible for trading.  While some of these expenses may be one-time in nature, the majority of these expenses will continue as we attempt to develop interest in the Company and an active trading market for our shares.
 
 
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A summary of the items comprising the increase in operating expenses of $558,112 for the three months ended March 31, 2011, compared to the three months ended March 31, 2010, is set forth below:
 
   
Three Months Ended
       
   
March 31,
   
March 31,
   
Increase /
 
   
2011
   
2010
   
(Decrease)
 
Operating Expenses
                 
Base management fees
  $ 142,637     $ 26,548     $ 116,089  
Accrued incentive fees
    15,583       -       15,583  
Administrative expenses allocated from Investment Adviser
    119,733       74,470       45,263  
Legal and professional fees
    159,168       90,891       68,277  
Directors' fees
    25,250       26,250       (1,000 )
Stock transfer agent fees
    56,505       46,313       10,192  
Printing and fulfillment expenses
    49,520       7,945       41,575  
Postage and delivery expenses
    47,223       7,934       39,289  
Stock issuance expenses
    54,465       3,048       51,417  
General and administrative expenses
    213,285       41,858       171,427  
                         
Total Operating Expenses
  $ 883,369     $ 325,257     $ 558,112  
                         
 
 
The increase of $116,089 in base management fees for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was the result of an increase in total assets on which the base management fee is calculated.  The increase in our total assets was primarily the result of net proceeds received from the sale of common stock in our continuous public offering.

 
The increase of $45,263 in administrative expenses allocated from our investment adviser for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was primarily the result of: (i) the allocation to us of additional expenses associated with the management, coordination and administration of outreach activities designed to widen distribution of our shares in our continuous public offering, which expenses are expected to decline in conjunction with the conclusion of our continuous public offering on June 30, 2011, and (ii) the allocation to us of additional expenses associated with the management and implementation of our stockholder communications, investor relations and brand marketing initiatives which did not formally commence until the second quarter of 2010.

 
The increase of $68,277 in legal and professional fees for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was primarily the result of: (i) an increase in audit and audit related expenses associated with the audit of our December 31, 2010 financial statements in comparison to the audit of our December 31, 2009 financial statements, and (ii) an increase in fees paid to a third-party valuation firm engaged to review preliminary portfolio company investment valuations prepared by the senior investment professionals of our investment adviser.

 
The increase of $41,575 in printing and fulfillment expenses for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was the result of: (i) an increase in the printing and production volume of periodic reports to our increasing stockholder base as required by state securities laws, (ii) an increase in the printing and production volume of other marketing and informational materials used in our investment origination activities, and (iii) an increase in fulfillment expenses related to inventory management and assembly of investor and broker-dealer kits and other marketing materials associated with our continuous public offering, which expenses are expected to decline following the conclusion of our continuous public offering on June 30, 2011.

 
The increase of $39,289 in postage and delivery expenses for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was primarily the result of an increase in the volume of kits and other marketing materials mailed to investors and broker-dealers in conjunction with our continuous public offering, which expenses are expected to decline following conclusion of our continuous public offering on June 30, 2011.

 
The increase of $51,417 in stock issuance expenses for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was the result of expensing stock issuance costs associated with maintaining the registration of our continuous public offering (e.g., legal, accounting, printing and blue sky expenses), which expenses had, prior to the first closing under our continuous public offering, been capitalized as deferred offering costs and which are amortized as a reduction to paid-in capital ratably over the remaining term of the offering.
 
 
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The increase of $171,427 in general and administrative expenses for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was primarily the result of an increase in travel and travel-related expenses, directly related to our outreach activities designed to widen distribution of our shares in our continuous public offering, which expenses are expected to decline following conclusion of our continuous public offering on June 30, 2011.

Net Investment Loss.  For the years three months ended March 31, 2011 and 2010, our net investment loss totaled $859,278 and $309,532, respectively.

The increase of $549,746 in net investment loss for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 is primarily attributable to an increase in operating expenses resulting from: (i) an increase in base management fees and administrative expenses allocated from our investment adviser, (ii) an increase in professional fees including audit fees and fees paid to a third-party valuation firm, (iii) an increase in printing and fulfillment expenses and postage and delivery expenses, all of which are primarily associated with our continuous public offering, which expenses are expected to decline following the conclusion of our continuous public offering on June 30, 2011, (iv) stock issuance expenses associated with maintaining the registration of our continuous public offering (e.g., legal, accounting, printing and blue sky), and (v) an increase in general and administrative expenses as discussed above.  

Net Change in Unrealized Appreciation on Investments.  For the three months ended March 31, 2011 and 2010, the net change in unrealized appreciation on investments totaled $77,915 and $550,000 respectively.

The net change in unrealized appreciation on investments for the three months ended March 31, 2011 was the result of: (i) $78,640 in unrealized appreciation on our common stock investment in NeoPhotonics, and (ii) $725 in unrealized depreciation on our convertible preferred stock warrant investment in Livescribe.  The net change in unrealized appreciation on investments for the three months ended March 31, 2010 was the result of $550,000 in unrealized appreciation on our preferred stock investment (which was converted into common stock in February 2011) in NeoPhotonics.  Upon sale of any of our portfolio company investments, the value that is ultimately realized could be different from the aggregate fair value currently reflected in our financial statements, and this difference could be material.

Net Decrease in Net Assets Resulting From Operations.  For the three months ended March 31, 2011, the net decrease in our net assets resulting from operations was $781,363, or $0.22 per weighted average outstanding common share, which includes $77,915 in net unrealized appreciation on investments recorded during such period.

For the three months ended March 31, 2010, the net increase in our net assets resulting from operations was $240,468, or $0.33 per weighted average outstanding common share, which includes $550,000 in net unrealized appreciation on investments recorded during such period.
 
Financial Condition, Liquidity and Capital Resources

In our initial private placement which was completed on November 12, 2008, we sold 569,800 shares of common stock at a price per share of $10.00, resulting in gross proceeds of $5,698,000 and net proceeds of $5,243,434 after payment of $454,566 in placement agent commissions and other offering costs.

On June 11, 2009, we commenced our continuous public offering pursuant to which we intend to sell from time-to-time up to 10 million shares of our common stock at an initial offering price of $10.00 per share, adjusted for volume discounts and commission waivers.  Our continuous public offering will conclude on June 30, 2011, after which we expect to list our shares on the Nasdaq Capital Market by the end of 2011.

During the year ended December 31, 2010, we sold 2,290,399 shares of common stock in our continuous public offering at an average price of approximately $9.96 per share, resulting in gross proceeds of $22,809,653 and net proceeds of $20,613,587, after payment of $2,196,066 in dealer manager fees and commissions.

During 2011 through May 10, 2011, we sold an additional 2,546,489 shares of common stock in our continuous public offering at an average price of approximately $9.96 per share, resulting in gross proceeds of $25,370,334 and net proceeds of $22,918,399, after payment of $2,451,935 in dealer manager fees and commissions.
 
 
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The following table summarizes the sales of our common stock under our continuous public offering by month since the offering commenced on June 11, 2009:
 
                     
Dealer Manager
   
 
 
   
Shares
   
Average Price
   
Gross
   
Fees and
   
Net
 
Month
 
Sold (1)
   
Per Share (1)
   
Proceeds
   
Commissions
   
Proceeds
 
                               
January 2010 (first closing)
    114,695     $ 10.00     $ 1,146,500     $ 114,243     $ 1,032,257  
February 2010
    54,638       9.99       546,000       54,261       491,739  
March 2010
    175,283       9.98       1,749,436       171,896       1,577,540  
April 2010
    151,554       9.84       1,491,050       127,062       1,363,988  
June 2010
    233,277       9.98       2,327,331       227,840       2,099,491  
July 2010
    113,780       9.99       1,136,483       112,457       1,024,026  
August 2010
    203,128       9.99       2,028,643       200,493       1,828,150  
September 2010
    146,716       9.95       1,459,215       138,771       1,320,444  
October 2010
    249,310       9.96       2,482,410       238,622       2,243,788  
November 2010
    371,395       9.96       3,697,520       354,967       3,342,553  
December 2010
    476,623       9.96       4,745,065       455,454       4,289,611  
January 2011
    315,143       9.97       3,141,484       305,195       2,836,289  
February 2011
    536,034       9.94       5,328,486       504,176       4,824,310  
March 2011
    918,617       9.98       9,168,203       900,645       8,267,558  
April 2011
    635,986       9.96       6,336,732       612,868       5,723,864  
May 2011 (through closing on May 10, 2011)
    140,709       9.92       1,395,429       129,051       1,266,378  
                                         
      4,836,888     $ 9.96     $ 48,179,987     $ 4,648,001     $ 43,531,986  
                                         
 
(1)
All shares were sold at a price of either $9.30 or $10.00, depending on whether or not sales commissions were waived by the dealer manager.
 
 
 
Since inception of the continuous public offering and through the most recent closing on May 10, 2011, we have sold 4,836,888 shares of common stock at an average offering price of approximately $9.96 per share, resulting in gross proceeds of $48,179,987 and net proceeds of $43,531,986, after payment of $4,648,001 of dealer manager fees and commissions.  We expect to raise between $50 million and $100 million in gross proceeds prior to the conclusion of our continuous public offering on June 30, 2011.  However, there can be no assurance that we will be able to sell all of the shares we are presently offering.

We plan to invest the net proceeds from our continuous public offering in portfolio companies in accordance with our investment objective and strategy.  We anticipate that it may take up to 12 to 24 months after conclusion of the continuous public offering to invest substantially all of the proceeds from the continuous public offering in accordance with our investment objective and strategy and depending on the availability of appropriate investment opportunities. We cannot assure you we will achieve our targeted investment pace.

We anticipate making five to ten investments per year depending upon the amount of capital we have available for investment and on the availability of appropriate investment opportunities consistent with our investment objective and market conditions.

Prior to investing in debt and equity securities of portfolio companies, we will invest the net proceeds from our continuous public offering primarily in cash, cash equivalents, certificates of deposit, U.S. government securities and other high-quality investments that mature in one year or less from the date of investment, which we expect will earn only nominal yields.  Since we do not expect to generate significant interest or dividend income on our portfolio company investments, our ability to make distributions in our initial years of operation will be based on our ability to invest our capital in suitable portfolio companies in a timely manner and to sell our interests in these portfolio companies at a gain after they become public.  
 
We currently generate cash primarily from the net proceeds of our continuous public offering and our primary use of funds is  investments in portfolio companies, cash distributions to holders of our common stock, and the payment of operating expenses.  We do not expect that our interest and dividend income from portfolio company investments will be significant and, as a result, we do not expect to generate net ordinary income. To date, none of our portfolio company investments have generated, nor are they expected to generate, interest or dividend income. Our primary source of investment income and possible distributions will be from net capital gains realized from the sale of our portfolio company investments.
 
 
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As of March 31, 2011, we had cash resources of $24,527,933 (including cash, cash equivalents and certificates of deposit) and no indebtedness, other than accounts payable and accrued expenses incurred in the ordinary course of business, of $190,483, management fees, administrative expenses and reimbursable expenses payable to Keating Investments of $184,695, and incentives fees of $131,006 payable to Keating Investments based on the unrealized appreciation of our portfolio company investments.

As of December 31, 2010, we had cash resources of $18,253,299 (including cash, cash equivalents and certificates of deposit) and no indebtedness, other than accounts payable and accrued expenses incurred in the ordinary course of business, of $149,843, management fees, administrative expenses and reimbursable expenses payable to Keating Investments of $135,047, and incentives fees of $115,423 payable to Keating Investments based on the unrealized appreciation of our portfolio company investments.

As of March 31, 2011, our cash resources included $19,000,000 of certificates of deposit with original maturities of four weeks (maturing on April 28, 2011), which have been classified as Short-term Investments in the Statement of Assets and Liabilities and valued at amortized cost as of March 31, 2011.  The remainder of our cash resources of $5,527,933 as of March 31, 2011 was held in depository accounts at Steele Street Bank & Trust, who serves as our custodian.  

As of December 31, 2010, our cash resources included $13,500,000 of certificates of deposit with original maturities of four weeks (maturing on January 6, 2011), which have been classified as Short-term Investments in the Statement of Assets and Liabilities and valued at amortized cost as of December 31, 2010.  The remainder of our cash resources of $4,753,299 as of December 31, 2010 was held in depository accounts at Steele Street Bank & Trust, who serves as our custodian.  

As of March 31, 2011, we had net assets of $36,956,316 and, based on 4,630,094 shares of common stock outstanding, a net asset value per common share of $7.98.

As of December 31, 2010, we had net assets of $22,456,400 and, based on 2,860,299 shares of common stock outstanding, a net asset value per common share of $7.85.

Distribution Policy
 
All distributions will be paid at the discretion of our Board of Directors and will depend on our net ordinary income and realized net capital gains, our financial condition, maintenance of our RIC status, compliance with applicable business development company regulations and such other factors as our Board of Directors may deem relevant from time to time. Distributions may also be paid during the year that exceed our net ordinary income and realized net capital gains and thus would constitute a return of capital; however, we will not make any distributions representing a return of capital which would result in a total return of capital in excess of 10% of our total offering proceeds (i.e., the total gross proceeds received from the sale of our common stock).  We cannot assure that we will pay distributions to our stockholders in the future.

Distributions to stockholders will be payable only when and as declared by our Board of Directors and will be paid out of assets legally available for distribution. On February 11, 2011, our Board of Directors declared a special cash distribution of $0.13 cents per share.  The distribution was paid on February 17, 2011 to our stockholders of record as of February 15, 2011.  As of the record date, there were 3,437,212 shares of common stock outstanding resulting in a cash distribution totaling $446,837. This special cash distribution was based on the unrealized appreciation we had recorded on our NeoPhotonics investment and, as such, will be initially treated as a return of capital to our stockholders.  However, in the event we are able to sell all or a portion of our NeoPhotonics common shares at a gain during 2011 after the expiration of our six-month lock-up period, all or a portion of this special distribution may be reclassified at year end as a capital gain distribution to our stockholders.  We provide no assurance that we will be able to sell all or any portion of our NeoPhotonics common shares during 2011 and, even if such shares are sold, there is no assurance that we will be able to realize a gain on such sale.

While we paid a $0.13 per share cash distribution to our stockholders on February 17, 2011 based on the unrealized appreciation we had recorded on our NeoPhotonics investment, we may not be able to pay any future distributions unless we are able to generate net capital gains realized from the sale of our portfolio company investments.  We cannot assure you that we will achieve investment results that will allow us to pay any dividends or distributions or to make a targeted level of cash distributions or year-to-year increases in cash distributions.

We may use amounts from our net ordinary income, our realized net capital gains from the sale of our assets, and our offering proceeds to fund distribution payments to stockholders. Offering proceeds means the total gross proceeds received from the sale of our common stock (which includes the cost portion of the proceeds we receive from the sale of our assets). We do not anticipate generating net ordinary income and, as such, we do not expect that distribution payments will be paid from net ordinary income.  Distribution payments will likely be paid from our realized net capital gains (if any) from the sale of our assets or, in the event we have not realized any net capital gains, from our offering proceeds.  Any distributions paid from our offering proceeds will represent a return of capital to our stockholders.  Our distributions may exceed our net ordinary income and realized net capital gains and thus represent a return of capital, particularly during the period before we have substantially invested the net proceeds from this offering or realized any net capital gains from the disposition of our portfolio company investments.  We can give no assurance as to when we will begin to realize any net capital gains from the sale of our assets, if ever.  Distributions that represent a return of capital may lower your tax basis in our shares, or may be treated as a gain from the sale of such shares to the extent that such distributions exceed the basis in such shares, and reduce the amount of funds we have for investment in targeted assets. Distributions representing a return of capital will not reduce the number of shares of common stock that you own in us.  We will not make any distributions representing a return of capital which would result in a total return of capital in excess of 10% of our total offering proceeds (i.e., the total gross proceeds received from the sale of our common stock).
 
 
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Our primary emphasis is to attempt to generate capital gains from the sale of our investments in micro-cap and small-cap companies.  While a portion of our investments may, at any given time, include a component of interest or dividends, we do not expect to generate significant current yield on our portfolio company investments.  To date, none of our portfolio company investments have generated, nor are they expected to generate, interest or dividend income.  Additionally, any investment income we may receive in the form of interest and dividends from our portfolio company investments prior to conversion is not likely to exceed our operating expenses, in which case we do not expect to generate net ordinary income which would be available for distribution to our stockholders.  We do not expect that our interest and dividend income from portfolio company investments would be sufficient to generate net ordinary income.  However, if we are able to generate net ordinary income, we intend to distribute such net ordinary income to stockholders.

Because we do not expect to generate net ordinary income, we expect that our primary source of distributions will be from net capital gains realized from the sale of our portfolio company investments.  Distributions from realized net capital gains (i.e., net realized long-term capital gains in excess of net realized short-term capital losses) will typically be declared and paid at least annually.

The timing of any capital gains generated from the appreciation and sale of portfolio companies cannot be predicted, and we do not expect to generate capital gains on a level or uniform basis from quarter to quarter.  Distributions from realized net capital gains will typically be declared and paid at least annually. However, we may declare and pay periodic distributions which, in the aggregate, would be an estimate of the total net capital gains expected to be realized throughout the year.  During the pendency of this offering, we may also declare and pay periodic distributions in an amount reflecting all or a portion of any net unrealized appreciation on investments recorded on our books which, depending on the timing and amount of actual realization, may represent a return of capital.

We may have substantial fluctuations in our distribution payments to stockholders, since we expect to have an average holding period for our portfolio company investments of one to three years and we may not generate any realized net capital gains during our initial years of operations.  Our ability to pay distributions in our initial years of operation will be based on our ability to invest our capital in suitable portfolio companies in a timely manner, and we can give no assurance as to when we will begin to realize any gains from the sale of our portfolio company investments, if ever.

We have satisfied the requirements to qualify as a RIC and have elected to be treated as a RIC under Subchapter M of the Code effective for our 2010 taxable year.  We also intend to qualify annually thereafter as a RIC. To maintain our qualification for RIC tax treatment, we must, among other things, distribute at least 90% of our investment company taxable income.  In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years.

In the event we have realized net capital gains, we currently intend to distribute the amount of the realized net capital gain, reduced by any incentive fees payable to Keating Investments, to our stockholders at least annually.  However, we may in the future decide to retain some or all of our realized net capital gains.  In the event we retain some or all of our realized net capital gains, including amounts retained to pay incentive fees to our investment adviser, we will likely designate the retained amount as a deemed distribution to stockholders.  In such case, among other consequences, we will pay corporate-level tax on the retained amount, each U.S. stockholder will be required to include its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit or refund equal to its allocable share of the corporate-level tax we pay on the retained realized net capital gain.  See “Material U.S. Federal Income Tax Considerations.”

We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
 
 
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We have adopted a dividend reinvestment plan that provides for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors authorizes, and we declare, a cash distribution, then our stockholders who have not opted out of our dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.  However, until our shares are listed on the Nasdaq Capital Market, our Board of Directors may determine that any distribution we may declare will not be available for reinvestment under the dividend reinvestment plan.  Once our common stock becomes listed on the Nasdaq Capital Market, which we expect will occur by the end of 2011, all stockholders participating in the dividend reinvestment plan will have any cash distributions that may be paid in the future automatically reinvested in our common shares. See “Dividend Reinvestment Plan.” If you hold shares in the name of a broker or financial intermediary, you should contact the broker or financial intermediary regarding your election to receive distributions in cash.

Contractual Obligations
 
We have entered into a contract under which we have material future commitments, the Investment Advisory and Administrative Services Agreement, pursuant to which Keating Investments has agreed to serve as our investment adviser and to furnish us with certain administrative services necessary to conduct our day-to-day operations. This agreement is terminable by either party upon proper notice. We pay Keating Investments a fee for its investment advisory services under the Investment Advisory and Administrative Services Agreement consisting of two components; (i) a base management fee, and (ii) an incentive fee. We also reimburse Keating Investments for our allocable portion of overhead and other administrative expenses incurred by it in performing its administrative obligations under the Investment Advisory and Administrative Services Agreement, including an allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer, and their respective staff.  

If the Investment Advisory and Administrative Services Agreement is terminated, our costs under a new agreement that we may enter into may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under the Investment Advisory and Administrative Services Agreement. Any new Investment Advisory and Administrative Services Agreement would also be subject to approval by our stockholders.

The Investment Advisory and Administrative Services Agreement was initially approved by our Board of Directors and our sole stockholder on July 28, 2008.  An amended and restated version of the Investment Advisory and Administrative Services Agreement, which is presently in effect, was approved by our Board of Directors on April 17, 2009, and by our stockholders on May 14, 2009.  Unless earlier terminated as described below, our current Investment Advisory and Administrative Services Agreement will remain in effect for a period of two years from the date it was approved by the Board of Directors and will remain in effect from year to year thereafter if approved annually by (i) the vote of our Board of Directors, or by the vote of a majority of our outstanding voting securities, and (ii) the vote of a majority of our directors who are not interested persons. An affirmative vote of the holders of a majority of our outstanding voting securities is also necessary in order to make material amendments to the Investment Advisory and Administrative Services Agreement. Our Board of Directors (including the independent directors) approved the renewal of our Investment Advisory and Administrative Services Agreement for an additional year at its meeting held April 12, 2011.

 Off-Balance Sheet Arrangements
 
As of March 31, 2011, we have no off-balance sheet arrangements.

 Related Parties

We have a number of business relationships with affiliated or related parties.  We have entered into the Investment Advisory and Administrative Services Agreement with Keating Investments.  Timothy J. Keating, our President, Chief Executive Officer and Chairman of the Board of Directors, is the managing member and majority owner of Keating Investments.   Ranjit P. Mankekar, our Chief Financial Officer, Treasurer and a member of our Board of Directors, is also an executive officer of Keating Investments.  Frederic M. Schweiger our Chief Operating Officer, Chief Compliance Officer and Secretary, is also an executive officer and member of Keating Investments.  Kyle L. Rogers, our Chief Investment Officer, is also an executive officer and member of Keating Investments. We have also entered into a license agreement with Keating Investments, pursuant to which Keating Investments has granted us a non-exclusive license to use the name “Keating.” In addition, pursuant to the terms of the Investment Advisory and Administrative Services Agreement, Keating Investments provides us with certain administrative services necessary to conduct our day-to-day operations.
 
 
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Our investment adviser’s senior investment professionals, Messrs. Keating, Mankekar, Schweiger and Rogers, and the additional administrative personnel currently retained by Keating Investments, are expected to devote a majority of their business time to our operations. Currently, these senior investment professionals do not serve as principals of other investment funds affiliated with Keating Investments; however, they may do so in the future. If they do, persons and entities may in the future manage investment funds with investment objectives similar to ours. In addition, our current executive officers and directors, serve or may serve as officers, directors or principals of entities that operate in the same or related line of business as we do, including investment funds managed by our affiliates. Accordingly, we may not be given the opportunity to participate in certain investments made by investment funds managed by advisers affiliated with Keating Investments. In the event that Keating Investments or its affiliates provide investment advisory services to other entities, we expect that our management and our independent directors will attempt to resolve any conflicts in a fair and equitable manner taking into account factors that would include the investment objective, amount of assets under management and available for investment in new portfolio companies, portfolio composition and return expectations of us and any other entity, and other factors deemed appropriate.  However, in the event such conflicts do arise in the future, Keating Investments intends to allocate investment opportunities in a fair and equitable manner consistent with our investment objective and strategies so that we are not disadvantaged in relation to any other affiliate or client of Keating Investments.

We rely on Keating Investments to manage our day-to-day activities and to implement our investment strategy. Keating Investments may in the future provide similar investment advisory services to other entities in addition to us.   As a result of these activities, Keating Investments, its employees and certain of its affiliates will have conflicts of interest in allocating their management time, services, and functions among us and any other business ventures in which they or any of their key personnel, as applicable, may become involved. In such case, Keating Investments and its employees may devote only as much of their time to our business as Keating Investments and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time.  This could result in actions that are more favorable to other affiliated entities than to us. In the event that Keating Investments provides investment advisory services to other entities, we intend to have our independent directors review our investment adviser’s performance periodically, but not less than annually, to assure that Keating Investments is fulfilling its obligations to us under the Investment Advisory and Administrative Services Agreement, that any conflicts are handled in a fair and equitable manner and that Keating Investments has sufficient personnel to discharge fully its responsibilities to all activities in which they are involved.

As a business development company, we may be limited in our ability to invest in any portfolio company in which any fund or other client managed by Keating Investments, or any of its affiliates has an investment. We may also be limited in our ability to co-invest in a portfolio company with Keating Investments or one or more of its affiliates. Subject to obtaining exemptive relief from the SEC, we intend to co-invest with any such investment entity to the extent permitted by the 1940 Act, or the rules and regulations thereunder.
 
 In addition, we have adopted a formal Code of Ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the fiduciary obligations imposed by both the 1940 Act and applicable state corporate law. Finally, we pay Keating Investments our allocable portion of overhead and other expenses incurred by Keating Investments in performing its administrative obligations under the Investment Advisory and Administrative Services Agreement, which creates conflicts of interest that our Board of Directors must monitor.

Information concerning related party transactions is included in the financial statements and related notes, appearing elsewhere in this quarterly report on Form 10-Q.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.
 
Valuation of portfolio investments. The most significant estimate inherent in the preparation of our financial statements is the valuation of our portfolio investments and the related amounts of unrealized appreciation and depreciation.  As of March 31, 2011 and December 31, 2010, 34.25% and 18.60%, respectively, of our net assets represented investments in portfolio companies valued at fair value.  Value, as defined in Section 2(a)(41) of the 1940 Act, is: (i) the market price for those securities for which a market quotation is readily available, and (ii) for all other securities and assets, fair value is as determined in good faith by our Board of Directors.

Accounting Standards Codification Topic 820, “Fair Value Measurement and Disclosures,” (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In accordance with ASC 820, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
 
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Level 1: Observable inputs such as unadjusted quoted prices in active markets;

 
Level 2: Includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and

 
Level 3: Unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
As of March 31, 2011, all of our investments in portfolio companies were deemed to be Level 3 assets.

Determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. We are required to specifically value each individual investment on a quarterly basis.
 
The fair value of our equity investments for which market quotations are not readily available is determined based on various factors, including the enterprise value remaining for equity holders after the repayment of the portfolio company’s debt and other preference capital, and other pertinent factors such as recent offers to purchase a portfolio company, recent transactions involving the purchase or sale of the portfolio company’s equity securities, or other liquidity events. The determined equity values are generally discounted when we have a minority position, restrictions on resale, specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other factors.  Equity investments for which market quotations are readily available are generally valued at the most recently available closing market price.

Enterprise value means the entire value of the company to a potential buyer, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. There is no one methodology to determine enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which we derive a single estimate of enterprise value. To determine the enterprise value of a portfolio company, we analyze its historical and projected financial results and also use industry valuation benchmarks and public market comparables.  We also consider other events, including private mergers and acquisitions, a purchase transaction, public offering or subsequent debt or equity sale or restructuring, and include these events in the enterprise valuation process.  In addition, the trends of the portfolio company’s basic financial metrics from the time of the original investment until the measurement date are analyzed; material improvement of these metrics may indicate an increase in enterprise value, while material deterioration of these metrics may indicate a reduction in enterprise value.
 
The following is a description of the steps we take each quarter to determine the value of our portfolio investments. Investments for which market quotations are readily available are recorded in our financial statements at such market quotations. With respect to investments for which market quotations are not readily available, our Board of Directors undertakes a multi-step valuation process each quarter, as described below:

 
Our quarterly valuation process begins with each portfolio company or investment being initially valued by Keating Investments’ senior investment professionals responsible for the portfolio investment;

 
A nationally recognized third-party valuation firm engaged by our Board of Directors reviews these preliminary valuations at such times as determined by the Company’s Board of Directors, provided, however, that a review will be conducted by the third-party valuation firm for each new portfolio company investment made during a calendar quarter, at such time as the valuation for a specific portfolio company is increased, and at least once every twelve months;

 
Our Valuation Committee reviews the preliminary valuations, and our investment adviser and the nationally recognized third-party valuation firm respond and supplement the preliminary valuation to reflect any comments provided by the Valuation Committee; and

 
Our Board of Directors discusses the valuations and determines, in good faith, the fair value of each investment in our portfolio for which market quotations are not readily available based on the input of our investment adviser, the nationally recognized third-party valuation firm, and our Valuation Committee.

Determination of fair values involves subjective judgments and estimates. Accordingly, this critical accounting policy expresses the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
 
 
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Deferred Offering Costs. Deferred offering costs are comprised of expenses directly related to our continuous public offering that were previously deferred and which are currently being amortized and charged against the gross proceeds of the continuous public offering, as a reduction to additional paid-in capital, on a straight-line basis beginning with the closing of the first common stock issuance on January 11, 2010 and continuing through the expiration of the offering period on June 30, 2011.  Offering expenses incurred subsequent to January 11, 2010 associated with maintaining the registration of our continuous public offering (e.g., legal, accounting, printing and blue sky) are expensed as incurred while other offering-related expenses are capitalized and subsequently amortized and charged against the gross proceeds of the continuous public offering on a straight-line basis over the remaining term of the offering.

Federal Income Taxes.  We have satisfied the requirements to qualify as a RIC and have elected to be treated as a RIC under Subchapter M of the Code effective for our 2010 tax year.  In future years, if we do not meet the criteria to qualify as a RIC, we will be taxed as a regular corporation under Subchapter C of the Code. We intend to operate so as to continue to qualify to be taxed as a RIC and, as such, to not be subject to federal income tax on the portion of our net ordinary income and realized net capital gains distributed to stockholders. To qualify for RIC tax treatment, we are required to annually distribute at least 90% of our investment company taxable income.

 Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

Recent Developments

The following table summarizes the sales of our common stock under our continuous public offering from April 1, 2011 through May 10, 2011:
 
 
                     
Dealer Manager
   
 
 
   
Shares
   
Average Price
   
Gross
   
Fees and
   
Net
 
Month
 
Sold (1)
   
Per Share (1)
   
Proceeds
   
Commissions
   
Proceeds
 
                               
April 2011
    635,986     $ 9.96     $ 6,336,732     $ 612,868     $ 5,723,864  
May 2011 (through closing on May 10, 2011)
    140,709       9.92       1,395,429       129,051       1,266,378  
                                         
      776,695     $ 9.96     $ 7,732,161     $ 741,919     $ 6,990,242  
                                         
 
(1)
All shares were sold at a price of either $9.30 or $10.00, depending on whether or not sales commissions were waived by the dealer manager.
 
 
Quantitative and Qualitative Disclosures about Market Risk.
 
Our business activities contain elements of risk.  We consider the primary types of market risk attributable to us to be valuation risk and interest rate risk.

Valuation Risk.  Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which market quotations are readily available and (ii) fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets.  (See Note 3, Valuation of Investments, included in “Item 1. Financial Statements.”)

Because there is initially no public market for the debt or equity securities of the private companies in which we invest, the valuation of these investments is estimated in good faith by our Board of Directors, in accordance with our valuation procedures.  In the absence of a readily ascertainable market value, the estimated value of our portfolio of debt and equity securities may differ significantly from the value that would be placed on the portfolio if a ready market for the debt and equity securities existed.  Changes in valuation of these debt and equity securities are recorded in our Statement of Operations as “Net change in unrealized appreciation (depreciation) on investments.”  Changes in valuation of any of our investments in privately held companies from one period to another may be volatile.

Interest Rate Risk.  As a significant portion of the net proceeds from our continuous public offering have been invested in short-term investments, primarily certificates of deposit, pending subsequent investment in suitable portfolio companies in accordance with our investment objective, we have market risk exposure relating to fluctuations in interest rates.
 
 
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As of March 31, 2011, $19,000,000 was invested in certificates of deposit with original maturities of four weeks (maturing on April 28, 2011) at an effective annualized interest rate of approximately 0.40%. Assuming no other changes to our holdings as of March 31, 2011, a one percentage point change in the underlying interest rate payable on our certificate of deposit investments as of March 31, 2011 would not have a material effect on the amount of interest income earned from our certificate of deposit investments for the following 90-day period.
 
We have not engaged in any hedging activities since our inception and we do not expect to engage in any hedging activities with respect to the market risks to which we are exposed.

Controls and Procedures.

As of March 31, 2011 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management has not identified any change in our internal control over financial reporting that occurred during the first quarter of 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Risk Factors.

There have been no material changes during the three months ended March 31, 2011 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010.

Unregistered Sales of Equity Securities and Use of Proceeds.

We did not engage in any unregistered sales of equity securities during the three months ended March 31, 2011.
 
Defaults upon Senior Securities.

Not applicable.
 
Reserved
 

Other Information.

Not applicable.

Exhibits.

3.1
Amended and Restated Articles of Incorporation (Incorporated by reference to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-2 (File No. 333-157217), filed on April 21, 2010)
   
3.2
Articles of Amendment to Amended and Restated Articles of Incorporation (Incorporated by reference to Post-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-157217), filed on May 27, 2010)
   
3.3
Amended and Restated Bylaws (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on April 23, 2009)
   
3.4
Amendment to Bylaws dated August 5, 2010 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on August 9, 2010)
   
3.5
Amendment to Bylaws dated October 22, 2010 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on October 26, 2010)
   
3.6
Form of Amended and Restated Dividend Reinvestment Plan (Incorporated by reference to Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2  (File No. 333-157217), filed on May 21, 2010)
   
4.1
Form of Share Certificate (Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 0-53504), filed on March 9, 2009)
   
10.1
Form of Amended and Restated Investment Advisory and Administrative Services Agreement (Incorporated by reference to Amendment No. 1 to the Registrant’s Registration Statement on Form N-2 (File No. 333-157217), filed on May 1, 2009)
   
10.2
License Agreement between the Company and Keating Investments, LLC (Incorporated by reference to the Registrant’s Registration Statement on Form 10 (File No. 0-53504), filed on November 20, 2008)
   
10.3
Form of Indemnification Agreement for Directors (Incorporated by reference to Amendment No. 2 to the Registrant’s Registration Statement on Form N-2 (File No. 333-157217), filed on June 5, 2009)
 
 
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10.4
Custody Agreement between the Company and Steele Street Bank & Trust (Incorporated by reference to the Registrant’s Registration Statement on Form 10 (File No. 0-53504), filed on November 20, 2008)
   
11
Computation of Per Share Earnings (included in the notes to the unaudited financial statements contained in this report)
   
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
   
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
   
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
   
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
   
*
Filed herewith.
 
 
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Date: May 12, 2011
     
KEATING CAPITAL, INC.
       
       
By:
 
/s/ Timothy J. Keating
           
President and Chief Executive Officer
(Principal Executive Officer)
             
       
By:
 
/s/ Ranjit P. Mankekar
           
Ranjit P. Mankekar
Chief Financial Officer and Treasurer
(Principal Accounting and Financial Officer)
 
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