Unassociated Document
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
quarterly period ended June 30, 2010
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ____________ to _____________
Commission
file number: 0-11576
HARRIS & HARRIS GROUP,
INC.
|
(Exact
Name of Registrant as Specified in Its
Charter)
|
New York
|
13-3119827
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
Incorporation
or Organization)
|
|
1450 Broadway, New York, New
York
|
10018
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
|
(212) 582-0900
|
(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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes x No ¨
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 the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
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.
Class
|
|
Outstanding at August 6,
2010
|
Common
Stock, $0.01 par value per share
|
|
30,864,899
shares
|
Harris
& Harris Group, Inc.
Form
10-Q, June 30, 2010
|
|
Page
Number
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1. Consolidated Financial Statements
|
|
1
|
|
|
|
Consolidated
Statements of Assets and Liabilities
|
|
2
|
Consolidated
Statements of Operations
|
|
3
|
Consolidated
Statements of Cash Flows
|
|
4
|
Consolidated
Statements of Changes in Net Assets
|
|
5
|
Consolidated
Schedule of Investments
|
|
6
|
Notes
to Consolidated Financial Statements
|
|
32
|
Financial
Highlights
|
|
42
|
|
|
|
Item
2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations
|
|
43
|
|
|
|
Background
and Overview
|
|
43
|
Investment
Strategy
|
|
44
|
Historical
Investments
|
|
45
|
Investment
Pace
|
|
45
|
Importance
of Availability of Liquid Capital
|
|
46
|
Involvement
with Portfolio Companies
|
|
47
|
Commercialization
of Nanotechnology by Our Portfolio Companies
|
|
47
|
Maturity
of Current Venture Capital Portfolio
|
|
50
|
Current
Business Environment
|
|
52
|
Valuation
of Investments
|
|
53
|
Investment
Objective
|
|
57
|
Results
of Operations
|
|
57
|
Financial
Condition
|
|
65
|
Liquidity
|
|
67
|
Capital
Resources
|
|
68
|
Critical
Accounting Policies
|
|
68
|
Recent
Developments – Portfolio Companies
|
|
71
|
Recent
Developments – Other
|
|
71
|
Forward-Looking
Statements
|
|
71
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
72
|
|
|
|
Item
4. Controls and Procedures
|
|
73
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
Item
1A. Risk Factors
|
|
74
|
|
|
|
Item
5. Exhibits
|
|
75
|
|
|
|
Signatures
|
|
76
|
|
|
|
Exhibit
Index
|
|
77
|
PART
I. FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
The information furnished in the
accompanying consolidated financial statements reflects all adjustments that
are, in the opinion of management, necessary for a fair statement of the results
for the interim period presented.
Harris & Harris Group, Inc.® (the
"Company," "us," "our" and "we"), is an internally managed venture capital
company that has elected to operate as a business development company ("BDC")
under the Investment Company Act of 1940 (the "1940 Act"). Certain
information and disclosures normally included in the consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America ("GAAP") have been condensed or omitted as permitted by
Regulation S-X and Regulation S-K. The accompanying consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 2009,
contained in our Annual Report on Form 10-K for the year ended December 31,
2009.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF ASSETS AND
LIABILITIES
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Investments,
in portfolio securities at value:
|
|
|
|
|
|
|
Unaffiliated
privately held companies
|
|
|
|
|
|
|
(cost:
$30,719,854 and $26,977,200, respectively)
|
|
$ |
24,677,744 |
|
|
$ |
21,656,436 |
|
Unaffiliated
publicly traded securities
|
|
|
|
|
|
|
|
|
(cost:
$0 and $298,827, respectively)
|
|
|
0 |
|
|
|
226,395 |
|
Non-controlled
affiliated privately held companies
|
|
|
|
|
|
|
|
|
(cost:
$59,493,753 and $54,864,948, respectively)
|
|
|
61,463,821 |
|
|
|
50,297,220 |
|
Controlled
affiliated privately held companies
|
|
|
|
|
|
|
|
|
(cost:
$7,871,243 and $10,248,932, respectively)
|
|
|
5,898,432 |
|
|
|
5,843,430 |
|
Total,
investments in privately held and publicly
|
|
|
|
|
|
|
|
|
traded
securities at value
|
|
|
|
|
|
|
|
|
(cost:
$98,084,850 and $92,389,907, respectively)
|
|
$ |
92,039,997 |
|
|
$ |
78,023,481 |
|
Investments,
in U.S. Treasury obligations at value
|
|
|
|
|
|
|
|
|
(cost:
$45,948,517 and $55,960,024, respectively)
|
|
|
45,930,735 |
|
|
|
55,947,581 |
|
Cash
|
|
|
2,553,490 |
|
|
|
1,611,465 |
|
Restricted
funds
|
|
|
2,000 |
|
|
|
2,000 |
|
Receivable
from portfolio company
|
|
|
0 |
|
|
|
28,247 |
|
Interest
receivable
|
|
|
4 |
|
|
|
25,832 |
|
Prepaid
expenses
|
|
|
241,485 |
|
|
|
94,129 |
|
Other
assets
|
|
|
691,725 |
|
|
|
376,366 |
|
Total
assets
|
|
$ |
141,459,436 |
|
|
$ |
136,109,101 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES & NET
ASSETS
|
|
|
|
|
|
|
|
|
|
Post
retirement plan liabilities
|
|
$ |
1,437,413 |
|
|
$ |
1,369,843 |
|
Accounts
payable and accrued liabilities
|
|
|
488,544 |
|
|
|
579,162 |
|
Deferred
rent
|
|
|
350,631 |
|
|
|
1,838 |
|
Total
liabilities
|
|
|
2,276,588 |
|
|
|
1,950,843 |
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$ |
139,182,848 |
|
|
$ |
134,158,258 |
|
|
|
|
|
|
|
|
|
|
Net
assets are comprised of:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.10 par value,
|
|
|
|
|
|
|
|
|
2,000,000
shares authorized; none issued
|
|
$ |
0 |
|
|
$ |
0 |
|
Common
stock, $0.01 par value, 45,000,000 shares authorized at
|
|
|
|
|
|
|
|
|
06/30/10
and 12/31/09; 32,693,639 issued at 06/30/10
|
|
|
|
|
|
|
|
|
and
32,688,333 issued at 12/31/09
|
|
|
326,937 |
|
|
|
326,884 |
|
Additional
paid in capital (Note 8)
|
|
|
207,162,971 |
|
|
|
205,977,117 |
|
Accumulated
net operating and realized loss
|
|
|
(58,838,894 |
) |
|
|
(54,361,343 |
) |
Accumulated
unrealized depreciation of investments
|
|
|
(6,062,635 |
) |
|
|
(14,378,869 |
) |
Treasury
stock, at cost (1,828,740 shares at 06/30/10 and 12/31/09)
|
|
|
(3,405,531 |
) |
|
|
(3,405,531 |
) |
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$ |
139,182,848 |
|
|
$ |
134,158,258 |
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
30,864,899 |
|
|
|
30,859,593 |
|
|
|
|
|
|
|
|
|
|
Net
asset value per outstanding share
|
|
$ |
4.51 |
|
|
$ |
4.35 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income
securities and bridge notes (Note 3)
|
|
$ |
123,208 |
|
|
$ |
75,084 |
|
|
$ |
196,281 |
|
|
$ |
39,185 |
|
Miscellaneous
income
|
|
|
6,000 |
|
|
|
8,750 |
|
|
|
12,000 |
|
|
|
21,088 |
|
Total
investment income
|
|
|
129,208 |
|
|
|
83,834 |
|
|
|
208,281 |
|
|
|
60,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
benefits and stock-based compensation (Note 6)
|
|
|
1,465,520 |
|
|
|
1,506,597 |
|
|
|
2,854,797 |
|
|
|
2,893,937 |
|
Administration
and operations
|
|
|
228,246 |
|
|
|
231,161 |
|
|
|
510,768 |
|
|
|
521,596 |
|
Professional
fees
|
|
|
176,866 |
|
|
|
152,291 |
|
|
|
420,235 |
|
|
|
367,541 |
|
Rent
(Note 3)
|
|
|
89,145 |
|
|
|
78,998 |
|
|
|
166,360 |
|
|
|
157,061 |
|
Directors’
fees and expenses
|
|
|
85,560 |
|
|
|
89,100 |
|
|
|
180,921 |
|
|
|
173,609 |
|
Custody
fees
|
|
|
24,000 |
|
|
|
11,080 |
|
|
|
48,000 |
|
|
|
17,942 |
|
Depreciation
|
|
|
13,820 |
|
|
|
12,878 |
|
|
|
25,789 |
|
|
|
25,737 |
|
Lease
termination costs (Note 3)
|
|
|
0 |
|
|
|
0 |
|
|
|
68,038 |
|
|
|
0 |
|
Total
expenses
|
|
|
2,083,157 |
|
|
|
2,082,105 |
|
|
|
4,274,908 |
|
|
|
4,157,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
|
(1,953,949 |
) |
|
|
(1,998,271 |
) |
|
|
(4,066,627 |
) |
|
|
(4,097,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gain (loss) from investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
companies
|
|
|
13,218 |
|
|
|
(1,511,042 |
) |
|
|
13,218 |
|
|
|
(1,514,330 |
) |
Non-Controlled
affiliated companies
|
|
|
(257,007 |
) |
|
|
0 |
|
|
|
(257,007 |
) |
|
|
0 |
|
Publicly
traded companies
|
|
|
(152,980 |
) |
|
|
0 |
|
|
|
(152,980 |
) |
|
|
0 |
|
U.S.
Treasury obligations/other
|
|
|
0 |
|
|
|
0 |
|
|
|
(11,523 |
) |
|
|
(325 |
) |
Realized
loss from investments
|
|
|
(396,769 |
) |
|
|
(1,511,042 |
) |
|
|
(408,292 |
) |
|
|
(1,514,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (Note 7)
|
|
|
0 |
|
|
|
1,729 |
|
|
|
2,632 |
|
|
|
2,109 |
|
Net
realized loss
|
|
|
(396,769 |
) |
|
|
(1,512,771 |
) |
|
|
(410,924 |
) |
|
|
(1,516,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in unrealized depreciation on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
as a result of investment sales
|
|
|
222,319 |
|
|
|
1,511,042 |
|
|
|
222,319 |
|
|
|
1,511,042 |
|
Change
on investments held
|
|
|
4,279,351 |
|
|
|
2,421,367 |
|
|
|
8,093,915 |
|
|
|
3,572,815 |
|
Net
decrease in unrealized depreciation on investments
|
|
|
4,501,670 |
|
|
|
3,932,409 |
|
|
|
8,316,234 |
|
|
|
5,083,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net assets resulting from
operations
|
|
$ |
2,150,952 |
|
|
$ |
421,367 |
|
|
$ |
3,838,683 |
|
|
$ |
(530,057 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
average basic and diluted outstanding share
|
|
$ |
0.07 |
|
|
$ |
0.02 |
|
|
$ |
0.12 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares
|
|
|
30,864,491 |
|
|
|
25,859,573 |
|
|
|
30,862,202 |
|
|
|
25,859,573 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
Net
increase (decrease) in net assets resulting from
operations
|
|
$ |
3,838,683 |
|
|
$ |
(530,057 |
) |
Adjustments
to reconcile net increase (decrease) in net assets resulting from
operations to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Net
realized and unrealized gain on investments
|
|
|
(7,907,942 |
) |
|
|
(3,569,202 |
) |
Depreciation
of fixed assets, amortization of premium or discount on U.S. government
securities, and bridge note interest
|
|
|
(142,420 |
) |
|
|
73,663 |
|
Stock-based
compensation expense
|
|
|
1,214,938 |
|
|
|
1,411,917 |
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
funds
|
|
|
0 |
|
|
|
2,586 |
|
Receivable
from portfolio company
|
|
|
28,247 |
|
|
|
0 |
|
Interest
receivable
|
|
|
26,234 |
|
|
|
4,317 |
|
Prepaid
expenses
|
|
|
(147,356 |
) |
|
|
252,454 |
|
Other
assets
|
|
|
(264,374 |
) |
|
|
3,312 |
|
Post
retirement plan liabilities
|
|
|
67,570 |
|
|
|
60,514 |
|
Accounts
payable and accrued liabilities
|
|
|
(90,618 |
) |
|
|
(210,977 |
) |
Deferred
rent
|
|
|
348,793 |
|
|
|
(3,151 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(3,028,245 |
) |
|
|
(2,504,624 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of U.S. government securities
|
|
|
(58,644,919 |
) |
|
|
(103,318,117 |
) |
Sale
of U.S. government securities
|
|
|
68,646,697 |
|
|
|
109,851,434 |
|
Investments
in affiliated portfolio companies
|
|
|
(5,469,691 |
) |
|
|
(3,052,065 |
) |
Investments
in unaffiliated portfolio companies
|
|
|
(857,473 |
) |
|
|
(399,484 |
) |
Proceeds
from conversion of bridge note
|
|
|
1,356 |
|
|
|
0 |
|
Proceeds
from sale of investments
|
|
|
407,543 |
|
|
|
3,250 |
|
Purchase
of fixed assets
|
|
|
(84,212 |
) |
|
|
(1,313 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
|
3,999,301 |
|
|
|
3,083,705 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from stock option exercises
|
|
|
19,897 |
|
|
|
0 |
|
Payment
of offering costs
|
|
|
(48,928 |
) |
|
|
0 |
|
Net
cash used in financing activities
|
|
|
(29,031 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash:
|
|
|
|
|
|
|
|
|
Cash
at beginning of the period
|
|
|
1,611,465 |
|
|
|
692,309 |
|
Cash
at end of the period.
|
|
|
2,553,490 |
|
|
|
1,271,390 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
$ |
942,025 |
|
|
$ |
579,081 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
2,632 |
|
|
$ |
2,109 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN NET
ASSETS
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
Changes
in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$ |
(4,066,627 |
) |
|
$ |
(8,761,215 |
) |
Net
realized loss on investments
|
|
|
(410,924 |
) |
|
|
(11,105,577 |
) |
Net
decrease in unrealized depreciation on investments as a result of
sales
|
|
|
222,319 |
|
|
|
11,090,579 |
|
Net
decrease in unrealized depreciation on investments held
|
|
|
8,093,915 |
|
|
|
8,627,748 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net assets resulting from
operations
|
|
|
3,838,683 |
|
|
|
(148,465 |
) |
|
|
|
|
|
|
|
|
|
Changes
in net assets from capital stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon the exercise of stock options
|
|
|
53 |
|
|
|
1,125 |
|
Issuance
of common stock on offering
|
|
|
0 |
|
|
|
48,875 |
|
Additional
paid-in capital on common stock issued and options
exercised
|
|
|
(29,084 |
) |
|
|
21,636,090 |
|
Stock-based
compensation expense
|
|
|
1,214,938 |
|
|
|
3,089,520 |
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting from capital stock
transactions
|
|
|
1,185,907 |
|
|
|
24,775,610 |
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets
|
|
|
5,024,590 |
|
|
|
24,627,145 |
|
|
|
|
|
|
|
|
|
|
Net
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
134,158,258 |
|
|
|
109,531,113 |
|
|
|
|
|
|
|
|
|
|
End
of the period
|
|
$ |
139,182,848 |
|
|
$ |
134,158,258 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 17.7% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 17.7% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioVex
Group, Inc. (4)(5)(6)(7) — Developing novel biologics for treatment of
cancer and infectious disease
|
|
|
|
|
|
|
|
|
Series
E Convertible Preferred Stock
|
|
(M)
|
|
|
2,799,552 |
|
|
$ |
1,303,577 |
|
Series
G Convertible Preferred Stock
|
|
(M)
|
|
|
5,425,574 |
|
|
|
1,139,371 |
|
Warrants
at $0.21 expiring 11/5/16
|
|
(I)
|
|
|
285,427 |
|
|
|
24,547 |
|
|
|
|
|
|
|
|
|
|
2,467,495 |
|
|
|
|
|
|
|
|
|
|
|
|
Bridgelux,
Inc. (4)(5) — Manufacturing high-power light emitting diodes (LEDs) and
arrays
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,861,504 |
|
|
|
1,759,121 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
2,130,699 |
|
|
|
2,013,511 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
999,999 |
|
|
|
944,998 |
|
Warrants
at $0.7136 expiring 12/31/14
|
|
( I
)
|
|
|
163,900 |
|
|
|
86,867 |
|
Warrants
at $1.50 expiring 8/26/14
|
|
( I
)
|
|
|
166,665 |
|
|
|
58,500 |
|
|
|
|
|
|
|
|
|
|
4,862,997 |
|
|
|
|
|
|
|
|
|
|
|
|
Cobalt
Technologies, Inc. (4)(5)(6)(8) — Developing processes for making
biobutanol through biomass fermentation
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
352,112 |
|
|
|
375,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Ensemble
Therapeutics Corporation (4)(5)(9) — Developing DNA- Programmed
ChemistryTM
for the discovery of new classes of therapeutics
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,449,275 |
|
|
|
2,000,000 |
|
Unsecured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
299,169 |
|
|
|
337,440 |
|
|
|
|
|
|
|
|
|
|
2,337,440 |
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
Imprints, Inc. (4)(5) — Manufacturing nanoimprint lithography capital
equipment
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,333,333 |
|
|
|
2,000,000 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
1,250,000 |
|
|
|
1,875,000 |
|
Warrants
at $2.00 expiring 12/31/11
|
|
( I
)
|
|
|
125,000 |
|
|
|
78,000 |
|
|
|
|
|
|
|
|
|
|
3,953,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF JUNE 30,
2010
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 17.7% of net assets at value
(Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 17.7% of net assets at value
(Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nanosys,
Inc. (4)(5) — Developing inorganic materials and devices based on
nanowires and quantum dots
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
803,428 |
|
|
$ |
1,021,835 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
1,016,950 |
|
|
|
1,382,573 |
|
|
|
|
|
|
|
|
|
|
2,404,408 |
|
|
|
|
|
|
|
|
|
|
|
|
Nantero,
Inc. (4)(5)(6) — Developing a high-density, nonvolatile, random access
memory chip, enabled by carbon nanotubes
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
345,070 |
|
|
|
1,046,908 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
207,051 |
|
|
|
628,172 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
188,315 |
|
|
|
571,329 |
|
|
|
|
|
|
|
|
|
|
2,246,409 |
|
|
|
|
|
|
|
|
|
|
|
|
NeoPhotonics
Corporation (4)(5) — Developing and manufacturing optical devices and
components
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
1,130,440 |
|
|
|
759,656 |
|
Series
1 Convertible Preferred Stock
|
|
(M)
|
|
|
1,831,256 |
|
|
|
1,230,604 |
|
Series
2 Convertible Preferred Stock
|
|
(M)
|
|
|
741,898 |
|
|
|
498,555 |
|
Series
3 Convertible Preferred Stock
|
|
(M)
|
|
|
2,750,000 |
|
|
|
1,848,000 |
|
Series
X Convertible Preferred Stock
|
|
(M)
|
|
|
8,923 |
|
|
|
1,427,680 |
|
|
|
|
|
|
|
|
|
|
5,764,495 |
|
|
|
|
|
|
|
|
|
|
|
|
Polatis,
Inc. (4)(5)(6) — Developing MEMS-based optical networking
components
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
16,438 |
|
|
|
0 |
|
Series
A-1 Convertible Preferred Stock
|
|
(M)
|
|
|
16,775 |
|
|
|
0 |
|
Series
A-2 Convertible Preferred Stock
|
|
(M)
|
|
|
71,611 |
|
|
|
0 |
|
Series
A-4 Convertible Preferred Stock
|
|
(M)
|
|
|
4,774 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
PolyRemedy,
Inc. (4)(5)(6) — Developing a platform for producing and tracking the use
of wound treatment patches
|
|
|
|
|
|
|
|
|
|
|
Series
B-1 Convertible Preferred Stock
|
|
(M)
|
|
|
287,647 |
|
|
|
0 |
|
Series
B-2 Convertible Preferred Stock
|
|
(M)
|
|
|
676,147 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
0 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF JUNE 30,
2010
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 17.7% of net assets at value
(Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 17.7% of net assets at value
(Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siluria
Technologies, Inc. (4)(5)(6) — Developing nanomaterials for manufacturing
of chemicals
|
|
|
|
|
|
|
|
|
Series
S-2 Convertible Preferred Stock
|
|
(M)
|
|
|
612,061 |
|
|
$ |
204,000 |
|
|
|
|
|
|
|
|
|
|
|
|
TetraVitae
Bioscience, Inc. (4)(5)(6)(10) — Developing methods of producing
alternative chemicals and fuels through biomass
fermentation
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
118,804 |
|
|
|
62,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost:
$30,719,854)
|
|
|
|
|
|
|
|
$ |
24,677,744 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost: $30,719,854)
|
|
|
|
|
|
|
|
$ |
24,677,744 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(11) – 44.2% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 44.2% of net
assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS
Materials, Inc. (4)(5)(6)(12) — Developing nano-structured absorbent
materials for environmental remediation and for the petroleum
industry
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
375,000 |
|
|
$ |
375,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Adesto
Technologies Corporation (4)(5)(6) — Developing
low-power, high-performance memory devices
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
6,547,619 |
|
|
|
2,420,000 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
5,952,381 |
|
|
|
2,200,000 |
|
|
|
|
|
|
|
|
|
|
4,620,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cambrios
Technologies Corporation (4)(5)(6) — Developing nanowire-enabled
electronic materials for the display industry
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,294,025 |
|
|
|
647,013 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
1,300,000 |
|
|
|
650,000 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
515,756 |
|
|
|
257,878 |
|
|
|
|
|
|
|
|
|
|
1,554,891 |
|
|
|
|
|
|
|
|
|
|
|
|
Contour
Energy Systems, Inc. (4)(5)(6)(13) — Developing batteries
using nanostructured materials
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
2,565,798 |
|
|
|
2,822,378 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
812,500 |
|
|
|
1,300,000 |
|
|
|
|
|
|
|
|
|
|
4,122,378 |
|
|
|
|
|
|
|
|
|
|
|
|
Crystal
IS, Inc. (4)(5) — Developing single-crystal aluminum nitride substrates
for light-emitting diodes
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
3,994,468 |
|
|
|
0 |
|
Warrants
at $0.78 expiring 05/05/13
|
|
( I
)
|
|
|
15,231 |
|
|
|
0 |
|
Warrants
at $0.78 expiring 05/12/13
|
|
( I
)
|
|
|
2,350 |
|
|
|
0 |
|
Warrants
at $0.78 expiring 08/08/13
|
|
( I
)
|
|
|
4,396 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
0 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(11) – 44.2% of net assets at
value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 44.2% of net
assets at value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D-Wave
Systems, Inc. (4)(5)(6)(14) — Developing high- performance quantum
computing systems
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,144,869 |
|
|
$ |
1,209,783 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
450,450 |
|
|
|
475,991 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
1,533,395 |
|
|
|
1,620,339 |
|
|
|
|
|
|
|
|
|
|
3,306,113 |
|
|
|
|
|
|
|
|
|
|
|
|
Enumeral
Technologies, Inc. (4)(5)(6) — Developing therapeutics and diagnostics
through functional assaying of single cells
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
250,000 |
|
|
|
260,411 |
|
|
|
|
|
|
|
|
|
|
|
|
Innovalight,
Inc. (4)(5)(6) — Developing silicon-based nanomaterials for use in the
solar energy industry
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
16,666,666 |
|
|
|
2,969,667 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
5,810,577 |
|
|
|
1,276,457 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
4,046,974 |
|
|
|
721,090 |
|
|
|
|
|
|
|
|
|
|
4,967,214 |
|
|
|
|
|
|
|
|
|
|
|
|
Kovio,
Inc. (4)(5) — Developing semiconductor products using printed electronics
and thin-film technologies
|
|
|
|
|
|
|
|
|
|
|
Series
A' Convertible Preferred Stock
|
|
(M)
|
|
|
2,686,225 |
|
|
|
1,343,113 |
|
|
|
|
|
|
|
|
|
|
|
|
Mersana
Therapeutics, Inc. (4)(5)(6) — Developing treatments for cancer based on
novel drug delivery polymers
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
68,451 |
|
|
|
136,902 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
866,500 |
|
|
|
1,733,000 |
|
Unsecured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
821,975 |
|
|
|
919,514 |
|
Warrants
at $2.00 expiring 10/21/10
|
|
( I
)
|
|
|
91,625 |
|
|
|
42,972 |
|
|
|
|
|
|
|
|
|
|
2,832,388 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(11) – 44.2% of net assets at
value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 44.2% of net
assets at value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metabolon,
Inc. (4)(5) — Developing service and diagnostic products through the use
of a metabolomics, or biochemical, profiling platform
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
371,739 |
|
|
$ |
1,087,870 |
|
Series
B-1 Convertible Preferred Stock
|
|
(M)
|
|
|
148,696 |
|
|
|
435,149 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
1,000,000 |
|
|
|
1,000,000 |
|
Warrants
at $1.15 expiring 3/25/15
|
|
( I
)
|
|
|
74,348 |
|
|
|
106,394 |
|
|
|
|
|
|
|
|
|
|
2,629,413 |
|
|
|
|
|
|
|
|
|
|
|
|
NanoGram
Corporation (4)(5)(15) — Developed solar power products enabled by
silicon-based nanomaterials
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
2,988,437 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
Nextreme
Thermal Solutions, Inc. (4)(5) — Developing thin-film thermoelectric
devices for cooling and energy conversion
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
17,500 |
|
|
|
437,500 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
4,870,244 |
|
|
|
663,814 |
|
|
|
|
|
|
|
|
|
|
1,101,314 |
|
|
|
|
|
|
|
|
|
|
|
|
Questech
Corporation (4)(5) — Manufacturing and marketing proprietary metal and
stone products for home decoration
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
655,454 |
|
|
|
363,121 |
|
|
|
|
|
|
|
|
|
|
|
|
SiOnyx,
Inc. (4)(5)(6) — Developing silicon-based optoelectronic products enabled
by its proprietary "Black Silicon"
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
233,499 |
|
|
|
160,367 |
|
Series
A-1 Convertible Preferred Stock
|
|
(M)
|
|
|
2,966,667 |
|
|
|
2,037,507 |
|
Series
A-2 Convertible Preferred Stock
|
|
(M)
|
|
|
4,207,537 |
|
|
|
2,889,736 |
|
Series
B-1 Convertible Preferred Stock
|
|
(M)
|
|
|
1,892,836 |
|
|
|
1,300,000 |
|
Warrants
at $0.6868 expiring 2/23/17
|
|
( I
)
|
|
|
247,350 |
|
|
|
143,463 |
|
|
|
|
|
|
|
|
|
|
6,531,073 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(11) – 44.2% of net assets at
value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 44.2% of net
assets at value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solazyme,
Inc. (4)(5)(6) — Developing algal biodiesel, industrial chemicals and
specialty ingredients using synthetic biology
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
988,204 |
|
|
$ |
8,750,744 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
495,246 |
|
|
|
4,385,502 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
651,309 |
|
|
|
5,767,471 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
169,390 |
|
|
|
1,499,991 |
|
|
|
|
|
|
|
|
|
|
20,403,708 |
|
|
|
|
|
|
|
|
|
|
|
|
Xradia,
Inc. (4)(5) — Designing, manufacturing and selling ultra-high resolution
3D x-ray microscopes and fluorescence imaging systems
|
|
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
3,121,099 |
|
|
|
7,053,684 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost:
$59,493,753)
|
|
|
|
|
|
|
|
$ |
61,463,821 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost:
$59,493,753)
|
|
|
|
|
|
|
|
$ |
61,463,821 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (2)(16) – 4.2% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 4.2% of
net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ancora
Pharmaceuticals Inc. (4)(5)(6) — Developing synthetic carbohydrates
for pharmaceutical applications
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,663,808 |
|
|
$ |
17,374 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
2,066,051 |
|
|
|
1,239,632 |
|
Secured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
1,100,000 |
|
|
|
1,126,630 |
|
|
|
|
|
|
|
|
|
|
2,383,636 |
|
|
|
|
|
|
|
|
|
|
|
|
Laser
Light Engines, Inc. (4)(5)(6) — Manufacturing solid-state light sources
for digital cinema and large-venue projection displays
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
7,499,062 |
|
|
|
1,500,000 |
|
Secured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
1,890,000 |
|
|
|
2,014,796 |
|
|
|
|
|
|
|
|
|
|
3,514,796 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Controlled Private Placement Portfolio (cost: $7,871,243)
|
|
|
|
|
|
|
|
$ |
5,898,432 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost:
$7,871,243)
|
|
|
|
|
|
|
|
$ |
5,898,432 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Private Placement Portfolio (cost: $98,084,850)
|
|
|
|
|
|
|
|
$ |
92,039,997 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities (17) – 33.0% of net assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill — due date 10/07/10
|
|
(M)
|
|
$ |
7,700,000 |
|
|
$ |
7,696,689 |
|
U.S.
Treasury Bill — due date 01/13/11
|
|
(M)
|
|
|
38,275,000 |
|
|
|
38,234,046 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government Securities (cost:
$45,948,517)
|
|
|
|
|
|
|
|
$ |
45,930,735 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $144,033,367)
|
|
|
|
|
|
|
|
$ |
137,970,732 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
Notes to
Consolidated Schedule of Investments
(1)
|
See
Footnote to Consolidated Schedule of Investments on page 28 for a
description of the Valuation
Procedures.
|
(2)
|
Investments
in unaffiliated companies consist of investments in which we own less than
five percent of the voting shares of the portfolio
company. Investments in non-controlled affiliated companies
consist of investments in which we own five percent or more, but less than
25 percent, of the voting shares of the portfolio company, or where we
hold one or more seats on the portfolio company’s Board of Directors but
do not control the company. Investments in controlled
affiliated companies consist of investments in which we own 25 percent or
more of the voting shares of the portfolio company or otherwise control
the company.
|
(3)
|
The
aggregate cost for federal income tax purposes of investments in
unaffiliated privately held companies is $30,719,854. The gross
unrealized appreciation based on the tax cost for these securities is
$1,704,447. The gross unrealized depreciation based on the tax cost for
these securities is $7,746,557.
|
(4)
|
We
are subject to legal restrictions on the sale of this
investment.
|
(5)
|
Represents
a non-income producing security. Equity investments that have
not paid dividends within the last 12 months are considered to be
non-income producing.
|
(6)
|
These
investments are development-stage companies. A
development-stage company is defined as a company that is devoting
substantially all of its efforts to establishing a new business, and
either it has not yet commenced its planned principal operations, or it
has commenced such operations but has not realized significant revenue
from them.
|
(7)
|
With
our purchase of Series E Convertible Preferred Stock of BioVex, we
received a warrant to purchase a number of shares of common stock of
BioVex as determined by dividing 624,999.99 by the price per share at
which the common stock is offered and sold to the public in connection
with the initial public offering ("IPO"). The ability to exercise
this warrant is therefore contingent on BioVex completing successfully an
IPO before the expiration date of the warrant on September 27,
2012. The exercise price of this warrant shall be 110 percent
of the IPO price.
|
(8)
|
Cobalt
Technologies, Inc., also does business as Cobalt
Biofuels.
|
(9)
|
On
June 9, 2010, Ensemble Discovery Corporation changed its name to Ensemble
Therapeutics Corporation. With our investment in a convertible
bridge note issued by Ensemble Therapeutics, we received a warrant to
purchase a number of shares of the class of stock sold in the next
financing of Ensemble Therapeutics equal to $149,539.57 divided by the
price per share of the class of stock sold in the next financing of
Ensemble Therapeutics. The ability to exercise this warrant is,
therefore, contingent on Ensemble Therapeutics completing successfully a
subsequent round of financing. This warrant shall expire and no
longer be exercisable on September 10, 2015. The cost basis of
this warrant is $89.86.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2010
(Unaudited)
|
(10)
|
With
our purchase of the Series B Convertible Preferred Stock of TetraVitae
Bioscience, Inc., we received the right to purchase, at a price of
$2.63038528 per share, a number of shares in the Series C financing equal
to the number of shares of Series B Preferred Stock purchased. The
ability to exercise this right is contingent on TetraVitae Bioscience
completing successfully a subsequent round of
financing.
|
(11)
|
The
aggregate cost for federal income tax purposes of investments in
non-controlled affiliated companies is $59,493,753. The gross
unrealized appreciation based on the tax cost for these securities is
$20,523,394. The gross unrealized depreciation based on the tax
cost for these securities is
$18,553,326.
|
(12)
|
Initial
investment was made during 2010.
|
(13)
|
On
February 28, 2008, Lifco, Inc., merged with CFX Battery,
Inc. The surviving entity was CFX Battery, Inc. On
February 24, 2010, CFX Battery, Inc., changed its name to Contour Energy
Systems, Inc.
|
(14)
|
D-Wave
Systems, Inc., is located and is doing business primarily in
Canada. We invested in D-Wave Systems, Inc., through
D-Wave USA, a Delaware company. Our investment is denominated
in Canadian dollars and is subject to foreign currency
translation. See "Note 3. Summary of Significant Accounting
Policies."
|
(15)
|
On
July 11, 2010, NanoGram was acquired for an undisclosed
amount. Holders of common stock did not receive any proceeds
from this transaction.
|
(16)
|
The
aggregate cost for federal income tax purposes of investments in
controlled affiliated companies is $7,871,243. The gross
unrealized appreciation based on the tax cost for these securities is
$0. The gross unrealized depreciation based on the tax cost for
these securities is $1,972,811.
|
(17)
|
The
aggregate cost for federal income tax purposes of our U.S. government
securities is $45,948,517. The gross unrealized appreciation on the tax
cost for these securities is $0. The gross unrealized
depreciation on the tax cost of these securities is
$17,782.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3)(4) – 16.3% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 16.1% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioVex
Group, Inc. (5)(6)(7)(8) — Developing novel biologics for treatment of
cancer and infectious disease
|
|
|
|
|
|
|
|
|
Series
E Convertible Preferred Stock
|
|
(M)
|
|
|
2,799,552 |
|
|
$ |
1,042,862 |
|
Series
G Convertible Preferred Stock
|
|
(M)
|
|
|
3,738,004 |
|
|
|
627,985 |
|
Warrants
at $0.21 expiring 11/5/16
|
|
( I
)
|
|
|
285,427 |
|
|
|
20,836 |
|
|
|
|
|
|
|
|
|
|
1,691,683 |
|
|
|
|
|
|
|
|
|
|
|
|
Cobalt
Technologies, Inc. (5)(6)(7)(9) — Developing processes for making
biobutanol through biomass fermentation
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
352,112 |
|
|
|
375,000 |
|
|
|
|
|
|
|
|
|
|
|
|
D-Wave
Systems, Inc. (5)(6)(7)(10) — Developing high- performance quantum
computing systems
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,144,869 |
|
|
|
907,612 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
450,450 |
|
|
|
357,101 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
1,533,395 |
|
|
|
1,215,622 |
|
|
|
|
|
|
|
|
|
|
2,480,335 |
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
Imprints, Inc. (5)(6) — Manufacturing nanoimprint lithography capital
equipment
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,333,333 |
|
|
|
2,999,999 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
1,250,000 |
|
|
|
2,812,500 |
|
Warrants
at $2.00 expiring 12/31/11
|
|
( I
)
|
|
|
125,000 |
|
|
|
163,625 |
|
|
|
|
|
|
|
|
|
|
5,976,124 |
|
|
|
|
|
|
|
|
|
|
|
|
Nanosys,
Inc. (5)(6) — Developing zero and one-dimensional inorganic
nanometer-scale materials and devices
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
803,428 |
|
|
|
1,185,056 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
1,016,950 |
|
|
|
1,500,001 |
|
|
|
|
|
|
|
|
|
|
2,685,057 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3)(4) – 16.3% of net assets at value
(Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 16.1% of net assets at value
(Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nantero,
Inc. (5)(6)(7) — Developing a high-density, nonvolatile, random access
memory chip, enabled by carbon nanotubes
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
345,070 |
|
|
$ |
1,046,908 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
207,051 |
|
|
|
628,172 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
188,315 |
|
|
|
571,329 |
|
|
|
|
|
|
|
|
|
|
2,246,409 |
|
|
|
|
|
|
|
|
|
|
|
|
NeoPhotonics
Corporation (5)(6)(11) — Developing and manufacturing optical devices and
components
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
1,100,013 |
|
|
|
739,209 |
|
Series
1 Convertible Preferred Stock
|
|
(M)
|
|
|
1,831,256 |
|
|
|
1,230,604 |
|
Series
2 Convertible Preferred Stock
|
|
(M)
|
|
|
741,898 |
|
|
|
498,555 |
|
Series
3 Convertible Preferred Stock
|
|
(M)
|
|
|
2,750,000 |
|
|
|
1,848,000 |
|
Series
X Convertible Preferred Stock
|
|
(M)
|
|
|
8,923 |
|
|
|
1,427,680 |
|
Warrants
at $0.15 expiring 01/26/10
|
|
( I
)
|
|
|
16,364 |
|
|
|
11,291 |
|
Warrants
at $0.15 expiring 12/05/10
|
|
( I
)
|
|
|
14,063 |
|
|
|
9,703 |
|
|
|
|
|
|
|
|
|
|
5,765,042 |
|
|
|
|
|
|
|
|
|
|
|
|
Polatis,
Inc. (5)(6)(7) — Developing MEMS-based optical networking
components
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
(M)
|
|
|
16,775 |
|
|
|
0 |
|
Series
A-2 Convertible Preferred Stock
|
|
(M)
|
|
|
71,611 |
|
|
|
0 |
|
Series
A-4 Convertible Preferred Stock
|
|
(M)
|
|
|
4,774 |
|
|
|
0 |
|
Series
A-5 Convertible Preferred Stock
|
|
(M)
|
|
|
16,438 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
PolyRemedy,
Inc. (5)(6)(7) — Developing a robotic manufacturing platform for wound
treatment patches
|
|
|
|
|
|
|
|
|
|
|
Series
B-1 Convertible Preferred Stock
|
|
(M)
|
|
|
287,647 |
|
|
|
46,933 |
|
Series
B-2 Convertible Preferred Stock
|
|
(M)
|
|
|
676,147 |
|
|
|
60,853 |
|
|
|
|
|
|
|
|
|
|
107,786 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3)(4) – 16.3% of net assets at value
(Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 16.1% of net assets at value
(Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Siluria
Technologies, Inc. (5)(6)(7) — Developing next-generation
nanomaterials
|
|
|
|
|
|
|
|
|
Series
S-2 Convertible Preferred Stock
|
|
(M)
|
|
|
612,061 |
|
|
$ |
204,000 |
|
|
|
|
|
|
|
|
|
|
|
|
TetraVitae
Bioscience, Inc. (5)(6)(7)(12) — Developing methods of producing
alternative chemicals and fuels through biomass
fermentation
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
118,804 |
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost:
$26,977,200)
|
|
|
|
|
|
|
|
$ |
21,656,436 |
|
|
|
|
|
|
|
|
|
|
|
|
Publicly
Traded Portfolio (Liquid) – 0.2% of net assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orthovita, Inc. (6)(13) —
Developing materials and devices for orthopedic medical implant
applications
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
64,500 |
|
|
|
226,395 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Publicly Traded Portfolio (cost: $298,827)
|
|
|
|
|
|
|
|
$ |
226,395 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost: $27,276,027)
|
|
|
|
|
|
|
|
$ |
21,882,831 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(14) – 37.5% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 37.5% of net
assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adesto
Technologies Corporation (5)(6)(7) — Developing
low-power, high-performance memory devices
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
6,547,619 |
|
|
$ |
2,420,000 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
5,952,381 |
|
|
|
2,200,000 |
|
|
|
|
|
|
|
|
|
|
4,620,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Bridgelux,
Inc. (5)(6) — Manufacturing high-power light emitting diodes (LEDs) and
arrays
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,861,504 |
|
|
|
1,804,914 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
2,130,699 |
|
|
|
2,065,926 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
833,333 |
|
|
|
807,999 |
|
Warrants
at $0.7136 expiring 12/31/14
|
|
( I
)
|
|
|
163,900 |
|
|
|
98,995 |
|
Warrants
at $1.50 expiring 8/26/14
|
|
( I
)
|
|
|
124,999 |
|
|
|
55,375 |
|
|
|
|
|
|
|
|
|
|
4,833,209 |
|
|
|
|
|
|
|
|
|
|
|
|
Cambrios
Technologies Corporation (5)(6)(7) — Developing nanowire-enabled
electronic materials for the display industry
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,294,025 |
|
|
|
647,013 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
1,300,000 |
|
|
|
650,000 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
515,756 |
|
|
|
257,878 |
|
|
|
|
|
|
|
|
|
|
1,554,891 |
|
|
|
|
|
|
|
|
|
|
|
|
CFX
Battery, Inc. (5)(6)(7)(15) — Developing batteries
using nanostructured materials
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
2,565,798 |
|
|
|
2,822,378 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
812,500 |
|
|
|
1,300,000 |
|
|
|
|
|
|
|
|
|
|
4,122,378 |
|
|
|
|
|
|
|
|
|
|
|
|
Crystal
IS, Inc. (5)(6) — Developing single-crystal aluminum nitride substrates
for light-emitting diodes
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
2,585,657 |
|
|
|
0 |
|
Warrants
at $0.78 expiring 05/05/13
|
|
( I
)
|
|
|
15,231 |
|
|
|
0 |
|
Warrants
at $0.78 expiring 05/12/13
|
|
( I
)
|
|
|
2,350 |
|
|
|
0 |
|
Warrants
at $0.78 expiring 08/08/13
|
|
( I
)
|
|
|
4,396 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
0 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(14) – 37.5% of net assets at
value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 37.5% of net
assets at value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ensemble
Discovery Corporation (5)(6)(16) — Developing DNA- Programmed
ChemistryTM
for the discovery of new classes of therapeutics and
bioassays
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,449,275 |
|
|
$ |
1,500,000 |
|
Unsecured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
299,169 |
|
|
|
325,506 |
|
|
|
|
|
|
|
|
|
|
1,825,506 |
|
|
|
|
|
|
|
|
|
|
|
|
Enumeral
Technologies, Inc. (5)(6)(7)(13) — Developing high-value opportunities in
immunology including therapeutic discovery, immune profiling and
personalized medicine
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
250,000 |
|
|
|
250,438 |
|
|
|
|
|
|
|
|
|
|
|
|
Innovalight,
Inc. (5)(6)(7) — Developing solar power products enabled by silicon-based
nanomaterials
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
16,666,666 |
|
|
|
2,969,667 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
5,810,577 |
|
|
|
1,276,457 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
4,046,974 |
|
|
|
721,090 |
|
|
|
|
|
|
|
|
|
|
4,967,214 |
|
|
|
|
|
|
|
|
|
|
|
|
Kovio,
Inc. (5)(6) — Developing semiconductor products using printed electronics
and thin-film technologies
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
2,500,000 |
|
|
|
609,943 |
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
800,000 |
|
|
|
195,182 |
|
Series
E Convertible Preferred Stock
|
|
(M)
|
|
|
1,200,000 |
|
|
|
1,500,000 |
|
Warrants
at $1.25 expiring 12/31/12
|
|
( I
)
|
|
|
355,880 |
|
|
|
291,466 |
|
|
|
|
|
|
|
|
|
|
2,596,591 |
|
|
|
|
|
|
|
|
|
|
|
|
Mersana
Therapeutics, Inc. (5)(6)(7) — Developing treatments for cancer based on
novel drug delivery polymers
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
68,451 |
|
|
|
68,451 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
866,500 |
|
|
|
866,500 |
|
Unsecured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
650,000 |
|
|
|
708,165 |
|
Warrants
at $2.00 expiring 10/21/10
|
|
( I
)
|
|
|
91,625 |
|
|
|
16,218 |
|
|
|
|
|
|
|
|
|
|
1,659,334 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(14) – 37.5% of net assets at
value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 37.5% of net
assets at value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metabolon,
Inc. (5)(6) — Developing service and diagnostic products through the use
of a metabolomics, or biochemical, profiling platform
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
371,739 |
|
|
$ |
1,034,061 |
|
Series
B-1 Convertible Preferred Stock
|
|
(M)
|
|
|
148,696 |
|
|
|
413,625 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
1,000,000 |
|
|
|
1,000,000 |
|
Warrants
at $1.15 expiring 3/25/15
|
|
( I
)
|
|
|
74,348 |
|
|
|
112,092 |
|
|
|
|
|
|
|
|
|
|
2,559,778 |
|
|
|
|
|
|
|
|
|
|
|
|
NanoGram
Corporation (5)(6) — Developing solar power products enabled by
silicon-based nanomaterials
|
|
|
|
|
|
|
|
|
|
|
Series
I Convertible Preferred Stock
|
|
(M)
|
|
|
63,210 |
|
|
|
0 |
|
Series
II Convertible Preferred Stock
|
|
(M)
|
|
|
1,250,904 |
|
|
|
0 |
|
Series
III Convertible Preferred Stock
|
|
(M)
|
|
|
1,242,144 |
|
|
|
0 |
|
Series
IV Convertible Preferred Stock
|
|
(M)
|
|
|
432,179 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
Nextreme
Thermal Solutions, Inc. (5)(6) — Developing thin-film thermoelectric
devices for cooling and energy conversion
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
17,500 |
|
|
|
1,750,000 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
4,870,244 |
|
|
|
2,655,257 |
|
|
|
|
|
|
|
|
|
|
4,405,257 |
|
|
|
|
|
|
|
|
|
|
|
|
Questech
Corporation (5)(6) — Manufacturing and marketing proprietary metal and
stone decorative tiles
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
(M)
|
|
|
655,454 |
|
|
|
425,390 |
|
|
|
|
|
|
|
|
|
|
|
|
Solazyme,
Inc. (5)(6)(7) — Developing algal biodiesel, industrial chemicals and
special ingredients based on synthetic biology
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
988,204 |
|
|
|
4,978,157 |
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
495,246 |
|
|
|
2,494,841 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
651,309 |
|
|
|
3,281,021 |
|
|
|
|
|
|
|
|
|
|
10,754,019 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(14) – 37.5% of net assets at
value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 37.5% of net
assets at value (Cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xradia,
Inc. (5)(6) — Designing, manufacturing and selling ultra-high resolution
3D x-ray microscopes and fluorescence imaging systems
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred Stock
|
|
(M)
|
|
|
3,121,099 |
|
|
$ |
5,723,215 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost:
$54,864,948)
|
|
|
|
|
|
|
|
$ |
50,297,220 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost:
$54,864,948)
|
|
|
|
|
|
|
|
$ |
50,297,220 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (2)(17) – 4.40% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 4.40% of
net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ancora
Pharmaceuticals Inc. (5)(6)(7) — Developing synthetic carbohydrates
for pharmaceutical applications
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
(M)
|
|
|
1,663,808 |
|
|
$ |
17,374 |
|
Series
C Convertible Preferred Stock
|
|
(M)
|
|
|
2,066,051 |
|
|
|
1,239,632 |
|
|
|
|
|
|
|
|
|
|
1,257,006 |
|
|
|
|
|
|
|
|
|
|
|
|
Laser
Light Engines, Inc. (5)(6)(7) — Manufacturing solid-state light sources
for digital cinema and large-venue projection displays
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
7,499,062 |
|
|
|
1,000,000 |
|
Secured
Convertible Bridge Note (including interest)
|
|
(M)
|
|
$ |
1,390,000 |
|
|
|
1,434,116 |
|
|
|
|
|
|
|
|
|
|
2,434,116 |
|
|
|
|
|
|
|
|
|
|
|
|
SiOnyx,
Inc. (5)(6)(7) — Developing silicon-based optoelectronic products enabled
by its proprietary "Black Silicon"
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
(M)
|
|
|
233,499 |
|
|
|
67,843 |
|
Series
A-1 Convertible Preferred Stock
|
|
(M)
|
|
|
2,966,667 |
|
|
|
861,965 |
|
Series
A-2 Convertible Preferred Stock
|
|
(M)
|
|
|
4,207,537 |
|
|
|
1,222,500 |
|
|
|
|
|
|
|
|
|
|
2,152,308 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Controlled Private Placement Portfolio (cost: $10,248,932)
|
|
|
|
|
|
|
|
$ |
5,843,430 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost:
$10,248,932)
|
|
|
|
|
|
|
|
$ |
5,843,430 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Private Placement and Publicly Traded Portfolio (cost:
$92,389,907)
|
|
|
|
|
|
|
|
$ |
78,023,481 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2009
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities (18) – 41.7% of net assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill — due date
04/22/10
|
|
(M)
|
|
$ |
10,000,000 |
|
|
$ |
9,997,600 |
|
U.S.
Treasury Bill — due date
06/17/10
|
|
(M)
|
|
|
42,175,000 |
|
|
|
42,139,151 |
|
U.S.
Treasury Notes — due date 02/28/10, coupon
2.000%
|
|
(M)
|
|
|
3,800,000 |
|
|
|
3,810,830 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government Securities (cost:
$55,960,024)
|
|
|
|
|
|
|
|
$ |
55,947,581 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $148,349,931)
|
|
|
|
|
|
|
|
$ |
133,971,062 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2009
|
Notes to
Consolidated Schedule of Investments
(1)
|
See
Footnote to Consolidated Schedule of Investments on page 28 for a
description of the Valuation
Procedures.
|
(2)
|
Investments
in unaffiliated companies consist of investments in which we own less than
five percent of the voting shares of the portfolio company or less than
five percent of the common shares of the publicly traded company.
Investments in non-controlled affiliated companies consist of investments
in which we own five percent or more, but less than 25 percent, of the
voting shares of the portfolio company, or where we hold one or more seats
on the portfolio company’s Board of Directors but do not control the
company. Investments in controlled affiliated companies consist of
investments in which we own 25 percent or more of the voting shares of the
portfolio company or otherwise control the
company.
|
(3)
|
The
aggregate cost for federal income tax purposes of investments in
unaffiliated privately held companies is $26,977,200. The gross
unrealized appreciation based on the tax cost for these securities is
$2,338,205. The gross unrealized depreciation based on the tax cost for
these securities is $7,658,969.
|
(4)
|
The
aggregate cost for federal income tax purposes of investments in
unaffiliated publicly traded companies is $298,827. The gross
unrealized appreciation based on the tax cost for these securities is
$0. The gross unrealized depreciation based on the tax cost for
these securities is $72,432.
|
(5)
|
Legal
restrictions on sale of investment.
|
(6)
|
Represents
a non-income producing security. Equity investments that have not
paid dividends within the last 12 months are considered to be non-income
producing.
|
(7)
|
These
investments are development-stage companies. A development-stage
company is defined as a company that is devoting substantially all of its
efforts to establishing a new business, and either it has not yet
commenced its planned principal operations, or it has commenced such
operations but has not realized significant revenue from
them.
|
(8)
|
With
our purchase of Series E Convertible Preferred Stock of BioVex, we
received a warrant to purchase a number of shares of common stock of
BioVex as determined by dividing 624,999.99 by the price per share at
which the common stock is offered and sold to the public in connection
with the IPO. The ability to exercise this warrant is therefore
contingent on BioVex completing successfully an IPO before the expiration
date of the warrant on September 27, 2012. The exercise price of
this warrant shall be 110 percent of the IPO
price.
|
(9)
|
Cobalt
Technologies, Inc., does business as Cobalt
Biofuels.
|
(10)
|
D-Wave
Systems, Inc., is located and is doing business primarily in Canada.
We invested in D-Wave Systems, Inc., through D-Wave USA, a Delaware
company. Our investment is denominated in Canadian dollars and is
subject to foreign currency translation. See "Note 3. Summary of
Significant Accounting Policies."
|
(11)
|
We
exercised NeoPhotonics Corporation warrants in January and February
2010.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2009
|
(12)
|
With
our purchase of the Series B Convertible Preferred Stock of TetraVitae
Bioscience, Inc., we received the right to purchase, at a price of
$2.63038528 per share, a number of shares in the Series C financing equal
to the number of shares of Series B Preferred Stock purchased. The
ability to exercise this right is contingent on TetraVitae Bioscience
completing successfully a subsequent round of
financing.
|
(13)
|
Initial
investment was made during 2009.
|
(14)
|
The
aggregate cost for federal income tax purposes of investments in
non-controlled affiliated companies is $54,864,948. The gross
unrealized appreciation based on the tax cost for these securities is
$10,648,525. The gross unrealized depreciation based on the tax cost
for these securities is
$15,216,253.
|
(15)
|
On
February 28, 2008, Lifco, Inc., merged with CFX Battery, Inc. The
surviving entity is CFX Battery,
Inc.
|
(16)
|
With
our investment in a convertible bridge note issued by Ensemble Discovery,
we received a warrant to purchase a number of shares of the class of stock
sold in the next financing of Ensemble Discovery equal to $149,539.57
divided by the price per share of the class of stock sold in the next
financing of Ensemble Discovery. The ability to exercise this
warrant is, therefore, contingent on Ensemble Discovery completing
successfully a subsequent round of financing. This warrant shall
expire and no longer be exercisable on September 10, 2015. The cost
basis of this warrant is $89.86.
|
(17)
|
The
aggregate cost for federal income tax purposes of investments in
controlled affiliated companies is $10,248,932. The gross unrealized
appreciation based on the tax cost for these securities is $0. The
gross unrealized depreciation based on the tax cost for these securities
is $4,405,502.
|
(18)
|
The
aggregate cost for federal income tax purposes of our U.S. government
securities is $55,960,024. The gross unrealized appreciation on the tax
cost for these securities is $0. The gross unrealized depreciation on the tax cost of these
securities is $12,443.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
FOOTNOTE
TO CONSOLIDATED SCHEDULE OF
INVESTMENTS
|
VALUATION
PROCEDURES
I.
|
Determination
of Net Asset Value
|
The 1940 Act requires periodic
valuation of each investment in the portfolio of the Company to determine its
net asset value ("NAV"). 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 Board of Directors is responsible
for (1) determining overall valuation guidelines and (2) ensuring that the
investments of the Company are valued within the prescribed
guidelines.
The Valuation Committee, comprised of
all of the independent Board members, is responsible for determining the
valuation of the Company’s assets within the guidelines established by the Board
of Directors. The Valuation Committee receives information and
recommendations from management.
The values assigned to these
investments are based on available information and do not necessarily represent
amounts that might ultimately be realized when that investment is sold, as such
amounts depend on future circumstances and cannot reasonably be determined until
the individual investments are actually liquidated or become readily
marketable.
II.
|
Approaches
to Determining Fair Value
|
Accounting principles generally
accepted in the United States of America ("GAAP") define 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 effect, GAAP applies fair value terminology to all valuations
whereas the 1940 Act applies market value terminology to readily marketable
assets and fair value terminology to other assets.
The main
approaches to measuring fair value utilized are the market approach and the
income approach.
|
·
|
Market
Approach: The market approach uses prices and other relevant
information generated by market transactions involving identical or
comparable assets or liabilities. For example, the market approach often
uses market multiples derived from a set of comparables. Multiples might
lie in ranges with a different multiple for each comparable. The selection
of where within the range each appropriate multiple falls requires
judgment considering factors specific to the measurement (qualitative and
quantitative).
|
|
·
|
Income
Approach: The income approach uses valuation techniques to convert
future amounts (for example, cash flows or earnings) to a single present
value amount (discounted). The measurement is based on the value indicated
by current market expectations about those future amounts. Those valuation
techniques include present value techniques; option-pricing models, such
as the Black-Scholes-Merton formula (a closed-form model) and a binomial
model (a lattice model), which incorporate present value techniques; and
the multi-period excess earnings method, which is used to measure the fair
value of certain assets.
|
GAAP
classifies the inputs used to measure fair value by these approaches into the
following hierarchy:
|
·
|
Level 1:
Unadjusted quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level 2: Quoted
prices in active markets for similar assets or liabilities, or quoted
prices for identical or similar assets or liabilities in markets that are
not active, or inputs other than quoted prices that are observable for the
asset or liability.
|
|
·
|
Level 3:
Unobservable inputs for the asset or
liability.
|
Financial assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement and are not necessarily an indication
of risks associated with the investment.
III.
|
Investment
Categories
|
The Company’s investments can be
classified into five broad categories for valuation purposes:
|
·
|
Equity-related
securities;
|
|
·
|
Long-term
fixed-income securities;
|
|
·
|
Short-term
fixed-income securities;
|
|
·
|
Investments
in intellectual property, patents, research and development in technology
or product development;
and
|
The Company applies the methods for
determining fair value discussed above to the valuation of investments in each
of these five broad categories as follows:
|
A.
|
EQUITY-RELATED
SECURITIES
|
Equity-related
securities, including warrants, are fair valued using the market or income
approaches. The following factors may be considered when the market
approach is used to fair value these types of securities:
|
§
|
Readily
available public market quotations;
|
|
§
|
The
cost of the Company’s investment;
|
|
§
|
Transactions
in a company's securities or unconditional firm offers by responsible
parties as a factor in determining
valuation;
|
|
§
|
The
financial condition and operating results of the
company;
|
|
§
|
The
company's progress towards
milestones.
|
|
§
|
The
long-term potential of the business and technology of the
company;
|
|
§
|
The
values of similar securities issued by companies in similar
businesses;
|
|
§
|
Multiples
to revenue, net income or EBITDA that similar securities issued by
companies in similar businesses
receive;
|
|
§
|
The
proportion of the company's securities we own and the nature of any rights
to require the company to register restricted securities under applicable
securities laws; and
|
|
§
|
The
rights and preferences of the class of securities we own as
compared with other classes of securities the portfolio company has
issued.
|
When the income approach is used to
value warrants, the Company uses the Black-Scholes-Merton
formula.
|
B.
|
LONG-TERM
FIXED-INCOME SECURITIES
|
|
1.
|
Readily
Marketable: Long-term fixed-income securities for which
market quotations are readily available are valued using the most recent
bid quotations when available
|
|
2.
|
Not
Readily Marketable: Long-term fixed-income securities
for which market quotations are not readily available are fair valued
using the market approach. The factors that may be considered when
valuing these types of securities by the market approach
include:
|
|
·
|
Interest
rate analysis;
|
|
·
|
Quotations
from broker-dealers;
|
|
·
|
Prices
from independent pricing services that the Board believes are reasonably
reliable; and
|
|
·
|
Reasonable
price discovery procedures and data from other
sources.
|
|
C.
|
SHORT-TERM
FIXED-INCOME SECURITIES
|
Short-term
fixed-income securities are valued using the market approach in the same manner
as long-term fixed-income securities until the remaining maturity is 60 days or
less, after which time such securities may be valued at amortized cost if there
is no concern over payment at maturity.
D.
INVESTMENTS
IN INTELLECTUAL PROPERTY, PATENTS, RESEARCH AND DEVELOPMENT IN TECHNOLOGY OR
PRODUCT DEVELOPMENT
Such investments are fair valued using
the market approach. The Company may consider factors specific to these types of
investments when using the market approach including:
|
·
|
The
cost of the Company’s investment;
|
|
·
|
Investments
in the same or substantially similar intellectual property or patents or
research and development in technology or product development or offers by
responsible third parties;
|
|
·
|
The
results of research and
development;
|
|
·
|
Product
development and milestone progress;
|
|
·
|
Other
subjective factors.
|
All other securities are reported at
fair value as determined in good faith by the Valuation Committee using the
approaches for determining valuation as described above.
For all other securities, the reported
values shall reflect the Valuation Committee's judgment of fair values as of the
valuation date using the outlined basic approaches of valuation discussed in
Section III. They do not necessarily represent an amount of money that
would be realized if we had to sell such assets in an immediate
liquidation. Thus, valuations as of any particular date are not
necessarily indicative of amounts that we may ultimately realize as a result of
future sales or other dispositions of investments we hold.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
NOTE 1. THE
COMPANY
Harris & Harris Group, Inc. (the
"Company," "us," "our" and "we"), is a venture capital company operating as a
business development company ("BDC") under the Investment Company of 1940 (the
"1940 Act") that specializes in making investments in companies commercializing
and integrating products enabled by nanotechnology and microsystems. We
operate as an internally managed company whereby our officers and employees,
under the general supervision of our Board of Directors, conduct our
operations.
Harris & Harris Enterprises,
Inc.SM, is a
100 percent wholly owned subsidiary of the Company. Harris & Harris
Enterprises, Inc., is a partner in Harris Partners I, L.P. SM, and
is taxed under Subchapter C of the Code (a "C Corporation"). Harris
Partners I, L.P, is a limited partnership and, from time to time, may be used to
hold certain interests in portfolio companies. The partners of Harris
Partners I, L.P., are Harris & Harris Enterprises, Inc., (sole general
partner) and Harris & Harris Group, Inc. (sole limited partner).
Harris & Harris Enterprises, Inc., pays taxes on any non-passive investment
income generated by Harris Partners I, L.P. For the period ended June 30,
2010, there was no non-passive investment income generated by Harris Partners I,
L.P. The Company consolidates the results of its subsidiaries for
financial reporting purposes.
NOTE 2. INTERIM
FINANCIAL STATEMENTS
Our interim financial statements
have been prepared in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X and in conformity with accounting principles generally
accepted in the United States of America ("GAAP") applicable to interim
financial information. Accordingly, they do not include all information
and disclosures necessary for a presentation of our financial position, results
of operations and cash flows in conformity with GAAP. In the opinion of
management, these financial statements reflect all adjustments, consisting of
valuation adjustments and normal recurring accruals, necessary for a fair
presentation of our financial position, results of operations and cash flows for
such periods. The results of operations for any interim period are not
necessarily indicative of the results for the full year. These financial
statements should be read in conjunction with the financial statements and notes
thereto contained in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009.
NOTE 3. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of
significant accounting policies followed in the preparation of the consolidated
financial statements:
Principles of
Consolidation. The consolidated financial statements have been
prepared in accordance with GAAP and include the accounts of the Company and its
wholly owned subsidiary. All significant inter-company accounts and
transactions have been eliminated in consolidation. Certain prior period
amounts have been reclassified to conform to the current period
presentation.
Use of
Estimates. The preparation of the consolidated financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities and the reported amounts of revenues and
expenses. Actual results could differ from these estimates, and the
differences could be material. The most significant estimates relate to
the fair valuations of our investments.
Cash and Cash
Equivalents. Cash and cash equivalents includes demand
deposits. Cash and cash equivalents are carried at cost which approximates
value.
Portfolio Investment
Valuations. Investments are stated at "value" as defined in the
1940 Act and in the applicable regulations of the Securities and Exchange
Commission ("SEC") and in accordance with GAAP. 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 "Valuation Procedures" in the "Footnote to
Consolidated Schedule of Investments.") At June 30, 2010, our
financial statements include privately held venture capital investments valued
at $92,039,997. The fair values of our private venture capital investments were
determined in good faith by, or under the direction, of the Board of
Directors. Upon sale of investments, the values that are ultimately
realized may be different from what is presently estimated. The difference
could be material.
Foreign Currency
Translation. The accounting records of the Company are
maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
For the six months ended June 30, 2010, included in the net decrease in
unrealized depreciation on investments was a $29,246 unrealized loss resulting
from foreign currency translation.
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).
Interest Income
Recognition. Interest income, adjusted for amortization of premium
and accretion of discount, is recorded on an accrual basis. When
securities are determined to be non-income producing, the Company ceases
accruing interest and writes off any previously accrued interest. During
the three months and six months ended June 30, 2010, the Company earned $14,592
and $22,834, respectively, in interest on U.S. government securities and
interest-bearing accounts. During the three months and six months ended
June 30, 2010, the Company recorded $108,616 and $173,447, respectively, of
bridge note interest.
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.
Stock-Based
Compensation. The Company has a stock-based employee
compensation plan. The Company accounts for the Harris & Harris Group,
Inc. 2006 Equity Incentive Plan (the "Stock Plan") by determining the fair value
of all share-based payments to employees, including the fair value of grants of
employee stock options, and records these amounts as an expense in the
Consolidated Statements of Operations over the vesting period with a
corresponding increase to our additional paid-in capital. At June 30,
2010, and December 31, 2009, the increase to our operating expenses was offset
by the increase to our additional paid-in capital, resulting in no net impact to
our NAV. Additionally, the Company does not record the tax benefits
associated with the expensing of stock options, because the Company currently
intends to qualify as a RIC under Subchapter M of the Code. The amount of
non-cash, stock-based compensation expense recognized in the Consolidated
Statements of Operations is based on the fair value of the awards the Company
expects to vest, recognized over the vesting period on a straight-line basis for
each award, and adjusted for actual options vested and pre-vesting
forfeitures. The forfeiture rate is estimated at the time of grant and
revised, if necessary, in subsequent periods if the actual forfeiture rate
differs from the estimated rate and is accounted for in the current period and
prospectively. See "Note 6. Stock-Based Compensation" for further
discussion.
Income
Taxes. As we intend to qualify as a RIC under Subchapter M of
the Internal Revenue Code, the Company does not provide for income taxes.
The Company recognizes interest
and penalties in income tax expense.
We pay federal, state and local income
taxes on behalf of our wholly owned subsidiary, Harris & Harris Enterprises,
Inc., which is a C corporation. See "Note 7. Income
Taxes."
Restricted
Funds. At June 30, 2010, and December 31, 2009, we held $2,000
in restricted funds as a security deposit for a sublessor.
Property and
Equipment. Property and equipment are included in "Other
Assets" and are carried at $384,544 and $69,528 at June 30, 2010, and December
31, 2009, respectively, representing cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the premises and equipment. We estimate the useful lives
to be five to ten years for furniture and fixtures, three years for computer
equipment, and ten years for leasehold improvements.
Rent
expense. Our lease at 1450 Broadway, New York, New York,
commenced on January 21, 2010, with these offices replacing our corporate
headquarters previously located at 111 West 57th Street
in New York City. The lease expires on December 31, 2019. The base
rent is $36 per square foot with a 2.5 percent increase per year over the 10
years of the lease, subject to a full abatement of rent for four months and a
rent credit for six months throughout the lease term. Certain leasehold
improvements were also paid for on our behalf by the landlord, the cost of which
is accounted for as property and equipment and deferred rent in the accompanying
Consolidated Statements of Assets and Liabilities. We apply these rent
abatements, credits and escalations on a straight-line basis in the
determination of rent expense over the lease term.
Lease Termination
Costs. GAAP requires that we maintain a liability for costs
associated with vacating our offices at 111 West 57th Street,
New York, New York, prior to the end of our lease in April 2010. During
the six months ended June 30, 2010, we recognized a loss of $68,038 related to
the termination.
Post Retirement Plan
Liabilities. Unrecognized actuarial gains and losses are
recognized as net periodic benefit cost pursuant to the Company's historical
accounting policy for amortizing such amounts. Actuarial gains and losses
that arise that are not recognized as net periodic benefit cost in the same
periods will be recognized as a component of net assets.
Concentration of Credit
Risk. The Company places its cash and cash equivalents with
financial institutions and, at times, cash held in checking accounts may exceed
the Federal Deposit Insurance Corporation insured limit.
Recent Accounting
Pronouncements. In January 2010, the FASB issued Accounting
Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic
820) - Improving Disclosures about Fair Value Measurements. This
guidance 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. This guidance 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, this guidance
was effective for interim and annual reporting periods beginning after December
15, 2009, with disclosures for previous comparative periods prior to adoption
not required. The adoption of this portion of the guidance on January 1,
2010, did not have a material impact on the Company's disclosures. For the
reconciliation of Level 3 fair value measurements, this guidance is effective
for interim and annual reporting periods beginning after December 15,
2010. The adoption of this portion of the guidance is not expected to have
a material impact on the Company's disclosures.
NOTE 4. BUSINESS
RISKS AND UNCERTAINTIES
We have invested a substantial portion
of our assets in privately held companies, the securities of which are
inherently illiquid. We also seek to invest in small publicly traded
companies that we believe have exceptional growth potential. Although
these companies are publicly traded, their stock may not trade at high volumes
and prices can be volatile, which may restrict our ability to sell our
positions. These privately held and publicly traded businesses tend to
lack management depth, to have limited or no history of operations and to not
have attained profitability. Because of the speculative nature of our
investments and the lack of a public market for privately held investments,
there is greater risk of loss than is the case with traditional investment
securities.
Because there is typically no public or
readily ascertainable market for our interests in the small privately held
companies in which we invest, the valuation of the equity and bridge note
interests in that portion of our portfolio is determined in good faith by our
Valuation Committee, comprised of all of the independent members of our Board of
Directors, in accordance with our Valuation Procedures and is subject to
significant estimates and judgments. The determined value of our portfolio
of equity interests and bridge notes may differ significantly from the values
that would be placed on the portfolio if a ready market for the equity interests
and bridge notes existed. Any changes in valuation are recorded in our
Consolidated Statements of Operations as "Net decrease (increase) in unrealized
depreciation on investments." Changes in valuation of any of our
investments in privately held companies from one period to another may be
volatile.
NOTE
5. INVESTMENTS
At June
30, 2010, our financial assets were categorized as follows in the fair value
hierarchy:
|
|
|
|
|
Fair Value Measurement at Reporting Date Using:
|
|
Description
|
|
June 30, 2010
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities
|
|
$ |
45,930,735 |
|
|
$ |
45,930,735 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately
Held Portfolio Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
$ |
85,717,686 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
85,717,686 |
|
Bridge
Notes
|
|
$ |
4,658,791 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
4,658,791 |
|
Common
Stock
|
|
$ |
1,122,777 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
1,122,777 |
|
Warrants
|
|
$ |
540,743 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
540,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publicly
Traded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
137,970,732 |
|
|
$ |
45,930,735 |
|
|
$ |
0 |
|
|
$ |
92,039,997 |
|
The
following chart shows the components of change in the financial assets
categorized as Level 3 for the three months ended June 30,
2010.
|
|
Beginning
Balance
4/1/2010
|
|
|
Total
Realized
Gains
(Losses)
Included in
Changes in
Net Assets
|
|
|
Total
Unrealized
Gains
(Losses)
Included in
Changes in
Net Assets
|
|
|
Investments
in Private
Placements
and
Interest on
Bridge
Notes
|
|
|
Disposals
|
|
|
Ending
Balance
6/30/2010
|
|
|
Amount of
Total Gains
for the
Period
Included in
Changes in
Net Assets
Attributable
to the
Change in
Unrealized
Gains or
Losses
Relating to
Assets Still
Held at the
Reporting
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
$ |
77,237,407 |
|
|
$ |
0 |
|
|
$ |
4,674,671 |
|
|
$ |
3,805,608 |
|
|
$ |
0 |
|
|
$ |
85,717,686 |
|
|
$ |
4,674,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge
Notes
|
|
|
3,703,674 |
|
|
|
0 |
|
|
|
0 |
|
|
|
955,117 |
|
|
|
0 |
|
|
|
4,658,791 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
1,463,561 |
|
|
|
0 |
|
|
|
(340,784 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
1,122,777 |
|
|
|
(340,784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
610,304 |
|
|
|
(257,007 |
) |
|
|
187,446 |
|
|
|
0 |
|
|
|
0 |
|
|
|
540,743 |
|
|
|
187,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
83,014,946 |
|
|
$ |
(257,007 |
) |
|
$ |
4,521,333 |
|
|
$ |
4,760,725 |
|
|
$ |
0 |
|
|
$ |
92,039,997 |
|
|
$ |
4,521,333 |
|
The
following chart shows the components of change in the financial assets
categorized as Level 3 for the six months ended June 30, 2010.
|
|
Beginning
Balance
1/1/2010
|
|
|
Total
Realized
Gains
(Losses)
Included in
Changes in
Net Assets
|
|
|
Total
Unrealized
Gains
(Losses)
Included in
Changes in
Net Assets
|
|
|
Investments
in Private
Placements
and
Interest on
Bridge
Notes
|
|
|
Disposals
|
|
|
Ending
Balance
6/30/2010
|
|
|
Amount of
Total
Gains for
the Period
Included in
Changes in
Net Assets
Attributable
to the
Change in
Unrealized
Gains or
Losses
Relating to
Assets Still
Held at the
Reporting
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
$ |
73,134,661 |
|
|
$ |
0 |
|
|
$ |
8,317,389 |
|
|
$ |
4,265,636 |
|
|
$ |
0 |
|
|
$ |
85,717,686 |
|
|
$ |
8,317,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge
Notes
|
|
|
2,718,225 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,940,566 |
|
|
|
0 |
|
|
|
4,658,791 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
1,164,599 |
|
|
|
0 |
|
|
|
(50,700 |
) |
|
|
8,878 |
|
|
|
0 |
|
|
|
1,122,777 |
|
|
|
(50,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
779,601 |
|
|
|
(257,007 |
) |
|
|
(17,550 |
) |
|
|
35,699 |
|
|
|
0 |
|
|
|
540,743 |
|
|
|
(17,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
77,797,086 |
|
|
$ |
(257,007 |
) |
|
$ |
8,249,139 |
|
|
$ |
6,250,779 |
|
|
$ |
0 |
|
|
$ |
92,039,997 |
|
|
$ |
8,249,139 |
|
NOTE
6. STOCK-BASED COMPENSATION
On March
18, 2010, and May 12, 2010, the Compensation Committee of the Board of Directors
and the full Board of Directors of the Company approved grants of individual
Non-Qualified Stock Option ("NQSO") awards for certain officers and employees of
the Company. The terms and conditions of the stock options granted were
set forth in award agreements between the Company and each award recipient
entered into on those dates. Options to purchase a total of 150,000 shares
of stock were granted on March 18, 2010, with vesting periods ranging from March
18, 2011, to March 18, 2013, and with an exercise price of $4.75, which was the
closing price of our shares of common stock as quoted on the Nasdaq Global
Market on March 18, 2010. Options to purchase a total of 150,000 shares of
stock were granted on May 12, 2010, with vesting periods ranging from May 12,
2011, to May 12, 2013, and with an exercise price of $4.84, which was the
closing price of our shares of common stock as quoted on the Nasdaq Global
Market on May 12, 2010. The awards may become fully vested and exercisable
prior to the date or dates in the vesting schedule if the Board of Directors
accepts an offer for the sale of all or substantially all of the Company's
assets. Upon exercise, the shares would be issued from our previously
authorized but unissued shares.
The fair
value of the options was determined on the date of grant using the
Black-Scholes-Merton model.
The assumptions used in the calculation
of fair value of the NQSOs granted on March 18, 2010, and May 12, 2010, using
the Black-Scholes-Merton model for the expected term was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Number
|
|
|
Expected
|
|
|
Expected
|
|
|
Expected
|
|
|
Risk-free
|
|
|
Fair
|
|
|
|
|
|
of Options
|
|
|
Term
|
|
|
Volatility
|
|
|
Dividend
|
|
|
Interest
|
|
|
Value
|
|
Type of Award
|
|
Term
|
|
Granted
|
|
|
in Yrs
|
|
|
Factor
|
|
|
Yield
|
|
|
Rates
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
18, 2010 Non-qualified stock options
|
|
5
Years
|
|
|
150,000 |
|
|
|
3.50 |
|
|
|
63.1 |
% |
|
|
0 |
% |
|
|
1.77 |
% |
|
$ |
2.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
12, 2010 Non-qualified stock options
|
|
5
Years
|
|
|
150,000 |
|
|
|
3.50 |
|
|
|
62.3 |
% |
|
|
0 |
% |
|
|
1.64 |
% |
|
$ |
2.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.21 |
|
For the
three months and six months ended June 30, 2010, the Company recognized $661,666
and $1,214,938 of compensation expense in the Consolidated Statements of
Operations. As of June 30, 2010, there was approximately $5,521,421 of
unrecognized compensation cost related to unvested stock option awards.
This cost is expected to be recognized over a weighted average period of
approximately two years.
For the
three months ended June 30, 2010, a total of 2,653 options were exercised for
total proceeds to the Company of $9,949. For the six months ended June 30,
2010, a total of 5,306 options were exercised for total proceeds to the Company
of $19,897.
A summary
of the changes in outstanding stock options for the six months ended June 30,
2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Fair Value
|
|
|
Term (Yrs)
|
|
|
Value
|
|
Options
Outstanding at January 1, 2010
|
|
|
4,184,503 |
|
|
$ |
8.20 |
|
|
$ |
4.79 |
|
|
|
6.24 |
|
|
$ |
216,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
300,000 |
|
|
$ |
4.80 |
|
|
$ |
2.21 |
|
|
|
4.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,306 |
) |
|
$ |
3.75 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or Expired
|
|
|
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding at June 30, 2010
|
|
|
4,479,197 |
|
|
$ |
7.98 |
|
|
$ |
4.62 |
|
|
|
5.69 |
|
|
$ |
72,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable at June 30, 2010
|
|
|
2,695,734 |
|
|
$ |
8.76 |
|
|
$ |
5.06 |
|
|
|
5.13 |
|
|
$ |
72,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable and Expected to be Exercisable at June 30,
2010
|
|
|
4,184,117 |
|
|
$ |
8.04 |
|
|
$ |
4.66 |
|
|
|
5.64 |
|
|
$ |
72,139 |
|
The
aggregate intrinsic value in the table above with respect to options
outstanding, exercisable and expected to be exercisable, is calculated as the
difference between the Company's closing stock price of $4.09 on the last
trading day of the second quarter of 2010 and the exercise price, multiplied by
the number of in-the-money options. This amount represents the total pre-tax
intrinsic value that would have been received by the option holders had all
options been fully vested and all option holders exercised their awards on June
30, 2010. The intrinsic value on the dates of exercise of 5,306 options
exercised during the six months ended June 30, 2010, was $6,081.
On June
2, 2010, the Company announced that its Compensation Committee has cancelled its
previously scheduled meetings for the purpose of awarding stock options pursuant
to the Stock Plan in 2010, and it will not award stock options for at least one
year from the date of the announcement. The Compensation Committee also
decided that any future grants of options, if they occur, will not be awarded at
a price below NAV.
NOTE 7. INCOME
TAXES
We have
elected to be treated as a regulated investment company (“RIC”) under Subchapter
M of the Internal Revenue Code of 1986, as amended (the “Code”) and operate in a
manner so as to qualify for the tax treatment applicable to RICs.
In order
to qualify as a RIC, we must, in general, (1) annually, derive at least 90
percent of our gross income from dividends, interest, gains from the sale of
securities and similar sources; (2) quarterly, meet certain investment
diversification requirements; and (3) annually, distribute at least 90 percent
of our investment company taxable income as a dividend. We may
either distribute or retain our net capital gain from investments, but any net
capital gain not distributed will be subject to corporate income tax and the
excise tax described below. We will be subject to a four percent excise
tax to the extent we fail to distribute at least 98 percent of our annual net
ordinary income and 98 percent of our capital gain net income and would be
subject to income tax to the extent we fail to distribute 100 percent of our
investment company taxable income.
Because
of the specialized nature of our investment portfolio, we generally can satisfy
the diversification requirements under the Code if we receive a certification
from the SEC that we are "principally engaged in the furnishing of capital to
other corporations which are principally engaged in the development or
exploitation of inventions, technological improvements, new processes, or
products not previously generally available."
On
May 28, 2010, we received SEC certification for 2009, permitting us to qualify
for RIC treatment for 2009 (as we had for the years 1999 through 2008) pursuant
to Section 851(e) of the Code. Although the SEC certification for 2009 was
issued, there can be no assurance that we will qualify for or receive such
certification for subsequent years (to the extent we need additional
certification as a result of changes in our portfolio) or that we will actually
qualify for Subchapter M treatment in subsequent years. We qualified for
RIC treatment in 2009 even without certification. In addition, under
certain circumstances, even if we qualified for Subchapter M treatment in a
given year, we might take action in a subsequent year to ensure that we would be
taxed in that subsequent year as a C Corporation, rather than as a RIC.
Because Subchapter M does not permit deduction of operating expenses against net
capital gain, it is not clear that the Company and its shareholders have paid
less in taxes since 1999 than they would have paid had the Company remained a C
Corporation.
For the
six months ended June 30, 2010, we paid $2,632 in federal, state and local
income taxes. During the second quarter of 2010, we paid $0 in federal, state
and local income taxes. At June 30, 2010, we had $0 accrued for federal, state
and local taxes payable by the Company.
We pay
federal, state and local taxes on behalf of our wholly owned subsidiary, Harris
& Harris Enterprises, Inc., which is taxed as a C Corporation. For the three
months ended June 30, 2010, and 2009, our income tax expense for Harris &
Harris Enterprises, Inc., was $0 and $0, respectively. For the six months ended
June 30, 2010, and 2009, our income tax expense for Harris & Harris
Enterprises, Inc., was $2,527 and $0, respectively.
NOTE 8. CAPITAL
TRANSACTIONS
On
October 9, 2009, we closed a public follow-on offering of 4,887,500 shares of
our common stock at a price of $4.75 per share to the public. The net
proceeds of this offering, after deducting underwriting discounts and offering
costs of $2,000,413, were $21,215,212.
NOTE 9. CHANGE IN
NET ASSETS PER SHARE
The following table sets forth the
computation of basic and diluted per share net increases (decreases) in net
assets resulting from operations for the three months and six months ended June
30, 2010, and June 30, 2009.
|
|
For the Three Months Ended
June 30
|
|
|
For the Six Months Ended
June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for increase (decrease) in net assets per share
|
|
$ |
2,150,952 |
|
|
$ |
421,367 |
|
|
$ |
3,838,683 |
|
|
$ |
(530,057 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic weighted average shares
|
|
|
30,864,491 |
|
|
|
25,859,573 |
|
|
|
30,862,202 |
|
|
|
25,859,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net increase (decrease) in net assets per share resulting from
operations
|
|
$ |
0.07 |
|
|
$ |
0.02 |
|
|
$ |
0.12 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted weighted average shares
|
|
|
30,903,625 |
|
|
|
25,859,573 |
|
|
|
30,901,438 |
|
|
|
25,859,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net increase (decrease) in net assets per share resulting from
operations
|
|
$ |
0.07 |
|
|
$ |
0.02 |
|
|
$ |
0.12 |
|
|
$ |
(0.02 |
) |
For the
three months ended June 30, 2010, the calculation of net increase in net assets
resulting from operations per diluted share includes 39,134 stock options from
the March 2009 grant because such options were dilutive. For the six months
ended June 30, 2010, the calculation of net increase in net assets resulting
from operations per diluted share includes 39,236 stock options from the March
2009 grant because such options were dilutive. All other options granted in the
period from June 2006 through May 2010 were anti-dilutive. Stock options may be
dilutive in future periods in which there is a net increase in net assets
resulting from operations, or in the event that there are significant increases
in the average stock price in the stock market or significant decreases in the
amount of unrecognized compensation cost.
NOTE 10. SUBSEQUENT
EVENTS
On July 2, 2010, we made a $580,257 follow-on investment in a privately
held tiny technology portfolio
company.
On July 23, 2010, we made a $400,000 follow-on investment in a privately
held tiny technology portfolio
company.
On July 29, 2010, we made a $40,000 follow-on investment in a privately
held tiny technology portfolio
company.
HARRIS
& HARRIS GROUP, INC.
FINANCIAL
HIGHLIGHTS
(Unaudited)
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, beginning of period
|
|
$ |
4.42 |
|
|
$ |
4.22 |
|
|
$ |
4.35 |
|
|
$ |
4.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating (loss)*
|
|
|
(0.06 |
) |
|
|
(0.07 |
) |
|
|
(0.13 |
) |
|
|
(0.16 |
) |
Net
realized (loss) on investments*
|
|
|
(0.02 |
) |
|
|
(0.06 |
) |
|
|
(0.02 |
) |
|
|
(0.06 |
) |
Net
decrease in unrealized depreciation as a result of sales*
|
|
|
0.01 |
|
|
|
0.06 |
|
|
|
0.01 |
|
|
|
0.06 |
|
Net
decrease in unrealized depreciation on investments
held*(1)
|
|
|
0.14 |
|
|
|
0.09 |
|
|
|
0.26 |
|
|
|
0.14 |
|
Total
from investment operations*
|
|
|
0.07 |
|
|
|
0.02 |
|
|
|
0.12 |
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase as a result of stock- based compensation expense*
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.05 |
|
Net
increase as a result of proceeds from exercise of options
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
Total
increase from capital stock transactions
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, end of period
|
|
$ |
4.51 |
|
|
$ |
4.27 |
|
|
$ |
4.51 |
|
|
$ |
4.27 |
|
Stock
price per share, end of period
|
|
$ |
4.09 |
|
|
$ |
5.83 |
|
|
$ |
4.09 |
|
|
$ |
5.83 |
|
Total
return based on stock price
|
|
|
(11.28 |
)% |
|
|
57.57 |
% |
|
|
(10.50 |
)% |
|
|
47.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets, end of period
|
|
$ |
139,182,848 |
|
|
$ |
110,412,973 |
|
|
$ |
139,182,848 |
|
|
$ |
110,412,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of expenses to average net assets
|
|
|
1.5 |
% |
|
|
1.9 |
% |
|
|
3.1 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net operating (loss) to average net assets
|
|
|
(1.4 |
)% |
|
|
(1.8 |
)% |
|
|
(3.0 |
)% |
|
|
(3.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares outstanding, end of period
|
|
|
30,864,899 |
|
|
|
25,859,573 |
|
|
|
30,864,899 |
|
|
|
25,859,573 |
|
* Based
on Average Shares Outstanding
(1) Net unrealized gains
(losses) includes rounding adjustments to reconcile change in NAV per share. See
Item 2. "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a description of unrealized losses on
investments.
The
accompanying notes are an integral part of this schedule.
Item
2.
|
Management's
Discussion
and Analysis of Financial Condition and
Results of Operations
|
The
information contained in this section should be read in conjunction with the
Company's unaudited June 30, 2010, Consolidated Financial Statements and the
Company's audited 2009 Consolidated Financial Statements and notes
thereto.
Background
and Overview
We incorporated under the laws of the
state of New York in August 1981. In 1983, we completed an initial public
offering ("IPO"). In 1984, we divested all of our assets except Otisville
BioTech, Inc., and became a financial services company with the investment in
Otisville as the initial focus of our business activity.
In 1992, we registered as an investment
company under the 1940 Act, commencing operations as a closed-end,
non-diversified investment company. In 1995, we elected to become a BDC
subject to the provisions of Sections 55 through 65 of the 1940
Act.
We are a
venture capital company that specializes in making investments in companies
commercializing and integrating products enabled by nanotechnology and
microsystems. We define venture capital investments as the money and
resources made available to privately held start-up firms and privately held and
publicly traded small businesses with exceptional growth potential.
Nanotechnology is the study of structures measured in nanometers, which are
units of measurement in billionths of a meter. Microsystems are measured
in micrometers, which are units of measurement in millionths of a meter.
We sometimes use "tiny technology" to describe both of these
disciplines.
We
consider a company to fit our investment thesis if the company employs or
intends to employ technology that we consider to be at the microscale or smaller
and if the employment of that technology is material to its business plan.
By making these investments, we seek to provide our shareholders with a specific
focus on nanotechnology and microsystems through a portfolio of venture capital
investments that address a variety of markets and products.
As of
June 30, 2010, $92,039,997, or 65 percent, of our total assets at fair value
consisted of privately held venture capital investments, net of unrealized
depreciation of $6,044,853. As of December 31, 2009, $77,797,086, or 57
percent, of our total assets at fair value consisted of privately held venture
capital investments, net of unrealized depreciation of $14,293,994.
We
believe that we are the only publicly traded BDC making venture capital
investments exclusively in nanotechnology and microsystems. We believe we
provide four core benefits to our shareholders. First, we are an
established firm with a track record of investing in venture capital-backed
companies. Second, we provide shareholders with access to emerging
companies that commercialize and integrate products enabled by nanotechnology
and microsystems that are privately and publicly owned. Third, we have an
existing portfolio of companies that we believe are comparable in stage to those
found in the latter years of a private venture capital fund. Fourth, we
provide access to venture capital investments in a vehicle that, unlike private
venture capital firms, is both transparent and liquid.
Investment
Strategy
We have
discretion in the investment of our capital. Throughout our corporate
history, we have made primarily early-stage venture capital investments in a
variety of industries. These businesses can range in stage from
pre-revenue to generating positive cash flow. These businesses tend to be
thinly capitalized, unproven, small companies that lack management depth, have
little or no history of operations and are developing unproven
technologies. We historically have invested in equity securities of these
companies that take the form of preferred stock and that are generally illiquid
due to restrictions on resale and to the lack of an established trading
market.
With the lengthening time between
investment and return on investment in privately held venture capital-backed
companies, we seek to generate returns with greater frequency by also investing
in publicly traded companies. As it relates to publicly traded companies,
we believe that our competitive advantage resides with companies with market
capitalizations below $50 million. These companies are commonly referred
to as "nano" capitalization companies. These companies could be listed on
an exchange or be traded on the over-the-counter bulletin board ("OTC
BB"). These companies file their financials with the Securities and
Exchange Commission ("SEC") but are not actively followed by institutional
investors and rarely have the benefit of robust analyst coverage. Many of
these companies have exciting products enabled by nanotechnology and
microsystems. Some of these companies have revenue and some are generating
positive cash flow. Several of these companies are one to two years ahead
of similar venture capital-funded, privately held companies but currently trade
at a deep discount to the value of similar privately held
companies.
We believe our time frame from
investment to monetization of our investment in these publicly traded companies
could be 12-24 months and that our domain expertise, combined with our venture
capital skill-sets and deal structure know-how, provide important competitive
advantages in this space. These companies are in need of capital and
guidance, similar to our privately held portfolio companies. Knowledge of
their technology and their markets is required to identify which companies are
positioned to succeed. As venture capital investors, finding fundamentally
exciting companies in interesting market arenas is our strength. Many of
these companies need access to high quality managements, next generation
technology or complementary business opportunities. These are some of the
services we have provided to our portfolio companies. Lastly, these
companies need help in executing on their business so that they can gain listing
on a national exchange or begin to interest institutional investors, thereby
improving valuation. We have assembled an ecosystem of investors,
analysts, bankers, investor relations experts and consultants that would be
extremely helpful to the companies in which we plan to invest.
Although currently we are focused
primarily on investing in opportunities with market capitalizations below $50
million, we may invest in publicly traded companies with market capitalizations
anywhere below $500 million.
Additionally,
we may provide debt financing to privately held or publicly traded companies
that are generating cash or have near-term visibility to reaching positive cash
flow. Credit remains extremely expensive or unavailable for even the
strongest small privately held and publicly traded companies. We have an
opportunity to secure favorable terms on debt we provide for companies we know
well or work with through our venture investing activities. In addition to
fees and monthly principal and interest payments, we may receive warrants in
these investments. Providing venture debt enables us to generate near-term
cash flow with a defined period for return on our investment.
Historical
Investments
Since our investment in Otisville in
1983 through June 30, 2010, we have made a total of 88 venture capital
investments. We have exited 57 of these 88 investments, realizing total
gross proceeds of $144,325,044 on our cumulative invested capital of
$72,401,420.
In 1994, we invested in our first
nanotechnology company, Nanophase Technologies Corporation. Recognizing
the potential of nanotechnology, we continued to monitor developments in the
field. From August 2001 through June 30, 2010, all 46 of our initial
investments have been in companies commercializing or integrating products
enabled by nanotechnology or microsystems. From August 2001 through June
30, 2010, we have invested a total (before any subsequent write-ups, write-downs
or dispositions) of $123,075,927 in these companies. We currently have 31
companies in our portfolio, including one investment made prior to 2001.
At June 30, 2010, from first dollar in, the average and median holding periods
for these 31 investments were 4.8 years and 4.2 years, respectively.
Historically, as measured from first dollar in to last dollar out, the average
and median holding periods for the 57 investments we have exited were 3.8 years
and 3.3 years, respectively.
Investment
Pace
The following is a summary of our
initial and follow-on investments in nanotechnology from January 1, 2006, to
June 30, 2010. We consider a "round led" to be a round where we were the
new investor or the leader of a set of investors in an investee company.
Typically, but not always, the lead investor negotiates the price and terms of
the deal with the investee company.
|
2006
|
2007
|
2008
|
2009
|
Six
Months Ended
June
30, 2010
|
|
|
|
|
|
|
Total
Incremental Investments
|
$24,408,187
|
$20,595,161
|
$17,779,462
|
$12,334,051
|
$6,327,164
|
|
|
|
|
|
|
Investments
in Privately Held Companies
|
|
|
|
|
|
|
No.
of New Investments
|
6
|
7
|
4
|
1
|
1
|
|
|
|
|
|
|
No.
of Follow-On Investment Rounds
|
14
|
20
|
25
|
27
|
15
|
|
|
|
|
|
|
No.
of Rounds Led
|
7
|
3
|
4
|
5
|
3
|
|
|
|
|
|
|
Average
Dollar Amount – Initial
|
$2,383,424
|
$1,086,441
|
$683,625
|
$250,000
|
$250,000
|
|
|
|
|
|
|
Average
Dollar Amount – Follow-On
|
$721,974
|
$649,504
|
$601,799
|
$436,490
|
$388,579
|
|
Investments
in Publicly Traded Companies
|
|
|
|
|
|
|
No.
of New Investments
|
0
|
0
|
0
|
1
|
1
|
|
|
|
|
|
|
No.
of Follow-On Investment Rounds
|
0
|
0
|
0
|
2
|
3
|
|
|
|
|
|
|
Average
Dollar Amount – Initial
|
$0
|
$0
|
$0
|
$99,624
|
$99,957
|
|
|
|
|
|
|
Average
Dollar Amount – Follow-On
|
$0
|
$0
|
$0
|
$99,602
|
$49,507
|
Importance
of Availability of Liquid Capital
Private venture capital funds are
structured commonly as limited partnerships with a committed level of capital
and finite lifetime. Capital is "called" from limited partners to make
investments and pay for expenses of running the firm at various points within
the lifetime of the fund. For each initial investment, the fund must reserve
additional capital for follow-on investments at later stages of the life of the
portfolio companies. These follow-on investments are required because often
venture-backed portfolio companies in areas in which we invest, whether
privately held or publicly traded, operate with negative cash flow for lengthy
periods of time. In general, the cumulative total of initial invested capital
and reserves cannot exceed the committed level of capital of the
fund.
Our strategy for investing capital is
similar to this approach in some respects. We make initial investments in
privately held and publicly traded companies and project the amount of capital
that may be required should the company mature successfully. These projections,
equivalent to the reserves of private venture capital funds, are reviewed weekly
by management, are updated frequently and are a component of the data that guide
our decisions on whether to make new and follow-on investments. As a publicly
traded, internally managed venture capital company, our cash used to make
investments and pay expenses is held by us and not called from external sources
when needed. Accordingly, it is crucial that we operate the company with a
substantial balance of liquid capital for this reason and for four additional
reasons.
|
1)
|
We
manage the company and our investment pace and criteria such that our
projected needs for capital to make new and follow-on investments do not
exceed the total of our liquid investments. Although we use best
efforts to predict when this capital will be required for use in new and
follow-on investments, we cannot predict with certainty the timing for
these investments. We would be unable to make new or follow-on
investments in our portfolio companies without having substantial liquid
resources of capital available to
us.
|
|
2)
|
Venture
capital firms traditionally invest beside other venture capital firms in a
process called syndication. The size of the fund and the amount of
capital reserves available to syndicate partners is often an attribute
that potential co-investors consider when deciding on syndicate
partners. As we do not have committed capital from limited partners,
we believe we must have adequate available liquid capital on our balance
sheet to be able to have access to high-quality deal
flow.
|
|
3)
|
We
rarely commit the total amount of cumulative capital intended for
investment in any portfolio company at one point in time. Instead,
our investments consist of multiple rounds of financing of a given
portfolio company, in which we typically participate if we believe that
the merits of such an investment outweigh the risks. We also
commonly have preemptive rights to invest additional capital in our
privately held portfolio companies. These rights are useful to
protect and potentially increase the value of our positions in our
portfolio companies as they mature. Commonly, the terms of such
financings in privately held companies also include penalties for those
investors that do not invest in these subsequent rounds of
financing. Without available capital at the time of investment, our
ownership in the company would be subject to these penalties that can lead
to a partial or complete loss of the capital invested prior to that round
of financing.
|
|
4)
|
We
may have the opportunity to increase ownership in late rounds of financing
in some of our most mature companies. Many private venture capital funds
that invested in these companies are reaching the end of the term
associated with their limited partnerships. This issue may limit the
available capital to these funds for follow-on investments, and the
ability to take advantage of potentially valuable terms given to those who
have investable capital. Having permanent, liquid capital available for
investment allows us to take advantage of these opportunities as they
arise.
|
Involvement
with Portfolio Companies
The 1940 Act requires that BDCs offer
to "make available significant managerial assistance" to portfolio companies. We
are actively involved with our portfolio companies through membership on boards
of directors, as observers to the boards of directors and/or through frequent
communication with management. As of June 30, 2010, we held at least a board
seat or observer rights on 26 of our 31 portfolio companies (84
percent).
We may hold two or more board seats in
early-stage portfolio companies or those in which we have significant ownership.
As of June 30, 2010, we hold two board seats in Ancora Pharmaceuticals, Enumeral
Technologies, and Laser Light Engines. We may transition off of the board of
directors to an observer role as our portfolio companies raise additional
capital from new investors, as they mature or as they are able to attract
independent members who have relevant industry experience and contacts. We also
typically step off the board of directors upon the completion of an
IPO.
We may be actively involved in the
formation and development of business strategies of our earliest stage portfolio
companies. This involvement may include hiring management, licensing
intellectual property, securing space and raising additional capital. We also
provide managerial assistance to late-stage companies looking for potential exit
opportunities by leveraging our status as a publicly traded company through our
relationships with the banking community and our knowledge and experience
implementing and complying with Section 404 of the Sarbanes-Oxley Act for larger
companies.
Commercialization
of Nanotechnology by Our Portfolio Companies
Our nanotechnology investments have
matured around three main industry clusters: cleantech (46.1 percent of our
venture capital portfolio as of June 30, 2010); electronics, including
semiconductors (25.6 percent of our venture capital portfolio as of June 30,
2010); and healthcare/biotechnology (14.0 percent of our venture capital
portfolio as of June 30, 2010). We call these three areas "Nanotech for
CleantechSM,"
"Nanotech for ElectronicsSM," and
"Nanotech for HealthcareSM,"
respectively. We have and may continue to make investments outside these
industry areas, and we may not maintain these industry clusters or the
weightings within these clusters.
These
three clusters are comprised of multi-billion dollar industries that have grown
historically through innovation of technology. "Cleantech" is a term used
commonly to describe products and processes that solve global problems related
to resource constraints. We classify Nanotech for CleantechSM
companies as those that seek to improve performance, productivity or efficiency,
and to reduce environmental impact, waste, cost, energy consumption or raw
materials using nanotechnology-enabled solutions.
We
classify Nanotech for ElectronicsSM
companies as those that use nanotechnology to address problems in
electronics-related industries, including semiconductors.
We
classify Nanotech for HealthcareSM
companies as those that use nanotechnology to address problems in
healthcare-related industries, including biotechnology, pharmaceuticals and
medical devices.
We
believe the development and commercialization of nanotechnology-enabled
solutions are the result of the convergence of traditionally separate scientific
disciplines such as biology, materials science, chemistry, electronics,
information technology, and physics. We believe such nanotechnology‐enabled advances
in each of these industry clusters, and in general, could not otherwise occur
within one discipline alone.
We define
market domains as groupings of technology that enable new user, business or
economic experiences. There are many billion-dollar market domains within each
of the above listed industry clusters. These market domains hold the potential
for effecting substantial change in everyday life. Our experience is that
technology adoption occurs on two time scales. Existing market
domains can allow for rapid adoption as new technologies are continuously added
to the existing domain. These new technologies refine and improve the
existing experience provided by the market domain. Emerging market
domains often require more time for the adoption of technology than existing
market domains, as the new market domain is itself being absorbed by society and
the economy.
We
classify our portfolio companies into either existing market domains or emerging
market domains. We expect that the time scale at which these companies mature
commercially will be impacted by whether their technology is being adopted into
an existing market domain or an emerging market domain. We continue
to look for investment opportunities in emerging market domains, as we believe
these investments have the potential to create outsized venture capital
returns.
Maturity
of Current Venture Capital Portfolio
Our
venture capital portfolio is composed of companies at varying maturities facing
different types of risks. We have defined these levels of maturity
and sources of risk as: 1) Early Stage / Technology Risk, 2) Mid Stage / Market
Risk and 3) Late Stage / Execution Risk. Early-stage companies have a
high degree of technical, market and execution risk, which is typical of initial
investments by venture capital firms, including us. These companies
often require substantial development of their technologies before they begin
introducing products to market. Mid-stage companies are those that
have overcome most of the technical risk associated with their products and are
now focused on addressing the market acceptance for their
products. For those companies developing therapeutics or medical
devices, the focus is on bringing their products through the first phases of
clinical trials. Late-stage companies are those that have determined
there is a market for their products, and they are now focused on sales
execution and scale. Late-stage healthcare and biotechnology
companies are typically either in Phase III Clinical Trials, which are the
pivotal trials before a possible FDA approval and commercial launch of a
product, or are generating revenue from the commercial sale of one or more
products. The charts below show our assessment of the stage of
maturity of our 31 portfolio companies and the distribution of ownership of our
portfolio companies within each of these stages of maturity,
respectively.
We expect
some of our portfolio companies to transition between stages of maturity
over time. This transition may be forward if the company is maturing and
is successfully executing its business plan or may be backward if the company is
not successfully executing its business plan or decides to change its business
plan substantially from its original plan. Transitions backward are
commonly accompanied by an increase in non-performance risk which reduces
valuation. We discuss non-performance risk and its implications on
value below in the section titled Valuation of Investments.
From
March 31, 2010, to June 30, 2010, we transitioned one company, ABS Materials,
Inc., from being classified as an early-stage company to a mid-stage
company.
We
currently have 22 companies in our venture capital portfolio that generate
revenues ranging from nominal to significant from commercial sales of products
and/or services, from commercial partnerships and/or from government
grants.
On April 15, 2010, NeoPhotonics
Corporation filed a registration statement on Form S-1 to register its shares of
common stock for an IPO. There can be no assurance that this
company will successfully complete an IPO, and a variety of factors, including
stock market and general business conditions, could lead it to terminate such
IPO.
On July 11, 2010, NanoGram was acquired
for an undisclosed amount. Holders of common stock did not receive
any proceeds from this transaction.
As of the beginning of August 2010, two
of our privately held companies retained bankers to explore opportunities to
sell those companies. There can be no assurance that these companies
will successfully identify an acquirer and complete a sale. A variety
of factors, including general business conditions, could lead them to terminate
such efforts.
Current
Business Environment
The
second quarter of 2010 concluded with the public markets declining broadly as
global economic uncertainty and aversion to risk increased. Amidst
this decline in the value of publicly traded equities, there were positive signs
in the exit market for venture-backed companies with fifteen venture-backed
companies managing to complete IPOs, up from three IPOs in the same quarter of
2009. However, most companies that debuted on a public exchange
either priced lower than expected, performed poorly once they debuted, or
both. The number of merger and acquisition transactions of
venture-backed companies was down from the first quarter of 2010; however, the
median amount paid for a venture-backed company in the most recent quarter is
$70 million, almost five times more than the $14.5 million median paid during
the second quarter of 2009. We expect that it may take significantly
more time for the exit market for venture-backed companies to recover from the
current economic turmoil than the public stock markets. Additionally,
any increase in volatility in the financial markets may impact opportunities for
IPOs.
The
venture capital industry’s 10-year performance stands at minus 0.9 percent as of
December 31, 2009, a reversal from positive 35 percent as of December 31, 2008,
as venture capital “bubble” funds roll out of the returns data, according
to Cambridge Associates LLC and the National Venture Capital
Association. Early-stage and multi-stage venture firms both saw
increases in fundraising. Although fundraising increased
year-over-year, the amounts raised by these funds are significantly smaller than
those of past funds. The second quarter of 2010 saw an increase in
the amount of capital invested by venture capital funds in seed and early-stage
companies. The amount of capital invested in expansion and late-stage
companies decreased slightly from the amount invested in the first quarter of
2010. These amounts of investment remain below those prior to
the onset of the financial crisis in the third quarter of 2008. We
believe these data support our conclusion that the availability of capital for
venture capital firms and venture-backed companies continues to be
restricted.
Many of
our portfolio companies have negative cash flow and, therefore, need additional
rounds of financing to continue operations. Historically, this
capital typically comes from the existing venture capital syndicate as well as
new investors. As a result of the economic downturn and the tight
availability of capital for investment by venture capital firms, the existing
investors in a syndicate are increasingly required to provide this capital
without the participation of new investors. This limited market for
capital to invest also affects existing members of syndicates of
investors. Some of these co-investors are unable to invest their full
pro rata amount of a round of financing, if at all, which results in a fractured
syndicate. A fractured syndicate can result in a portfolio company
being unable to raise additional capital to fund operations. The
portfolio company may be forced to sell before reaching its full potential or be
shut down entirely if the remaining investors cannot financially support the
company.
Our
overall goal remains unchanged, which is to maintain our leadership position in
investing in nanotechnology and microsystems and to increase our
NAV. The current environment for venture capital financings favors
those firms that have capital to invest regardless of the stage of the investee
company. We have historically not used leverage or debt financing when making an
investment; thus, we continue to finance our new and follow-on investments from
our cash reserves, currently invested in U.S. treasury
obligations. We believe the turmoil of the venture capital industry
and the current economic climate provide opportunities to invest this capital at
historically low valuations in new and existing privately held and publicly
traded companies of varying maturities.
Valuation
of Investments
We value our privately held venture
capital investments each quarter as determined in good faith by our Valuation
Committee, a committee of all the independent directors, within guidelines
established by our Board of Directors in accordance with the 1940
Act. (See "Footnote to Consolidated Schedule of Investments"
contained in "Consolidated Financial Statements.")
The
values of privately held, venture capital-backed companies are inherently more
difficult than publicly traded companies to assess at any single point in time
because securities of these types of companies are not actively
traded. We believe, perhaps even more than in the past, that
illiquidity, and the perception of illiquidity, can affect value.
Difficult
economic environments can result in weak companies not receiving financing and
being subsequently closed down with a loss to venture investors, and/or strong
companies receiving financing but at significantly lower valuations than the
preceding financing rounds. The current state of the venture capital
market limits the availability of capital for investment by venture capital
firms. Increasingly, existing investors in a syndicate are required
to provide capital without the participation of new investors. Some
of these existing investors are unable to invest their full pro rata amount of a
private round of financing, if at all, which results in a fractured
syndicate. A fractured syndicate can result in a privately held
portfolio company being unable to raise additional capital to fund operations
regardless of the potential of the intellectual property or the business of the
portfolio company. The portfolio company may be forced to sell before
reaching its full potential or be shut down entirely if the remaining investors
cannot financially support the company. These scenarios may adversely
affect value.
Many
venture capital firms, including us, continue to evaluate their investment
portfolios carefully to assess future potential capital needs. In the
current business climate, this evaluation may result in a decrease in the number
of companies we decide to finance going forward or may increase the number of
companies we decide to sell before reaching their full potential. If
we decide to proceed with a follow-on investment, these rounds of financing may
occur at valuations lower than those at which we originally
invested. Our ownership in portfolio companies that we decide to stop
funding may be subject to punitive actions that reduce or eliminate
value. Such actions could result in an unprofitable investment or a
complete loss of invested funds.
In each of the years in the period 2006
through 2009, and for the six months ended June 30, 2010, the Company recorded
the following gross write-ups in privately held securities as a percentage of
net assets at the beginning of the year ("BOY"), gross write-downs in privately
held securities as a percentage of net assets at the beginning of the year, and
change in value of privately held portfolio securities as a percentage of net
assets at the beginning of the year.
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Six Months Ended
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value, BOY
|
|
$ |
117,987,742 |
|
|
$ |
113,930,303 |
|
|
$ |
138,363,344 |
|
|
$ |
109,531,113 |
|
|
$ |
134,158,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Write-Downs During Year
|
|
$ |
(4,211,323 |
) |
|
$ |
(7,810,794 |
) |
|
$ |
(39,671,588 |
) |
|
$ |
(12,845,574 |
) |
|
$ |
(7,588,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Write-Ups During Year
|
|
$ |
279,363 |
|
|
$ |
11,694,618 |
|
|
$ |
820,559 |
|
|
$ |
21,631,864 |
|
|
$ |
15,837,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Write-Downs as a Percentage of
Net
Asset Value, BOY
|
|
|
-3.57 |
% |
|
|
-6.86 |
% |
|
|
-28.67 |
% |
|
|
-11.7 |
% |
|
|
-5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Write-Ups as a Percentage of
Net Asset
Value, BOY
|
|
|
0.24 |
% |
|
|
10.26 |
% |
|
|
0.59 |
% |
|
|
19.7 |
% |
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Change as a Percentage of
Net
Asset Value, BOY
|
|
|
-3.33 |
% |
|
|
3.40 |
% |
|
|
-28.08 |
% |
|
|
8.0 |
% |
|
|
6.1 |
% |
1
From
December 31, 2009, to June 30, 2010, the value of our privately held venture
capital portfolio increased by $14,242,911 from $77,797,086 to
$92,039,997. The table below indicates some of the inputs used to
determine value of our privately held portfolio companies and the portion of the
change in value, on a quarter over quarter basis, relevant to those
inputs. We note that our Valuation Committee takes into account
multiple sources of quantitative and qualitative inputs to ultimately determine
the value of our privately held portfolio companies.
|
|
Q1 2010 to
Q2 2010
|
|
|
Q4 2009 to
Q1 2010
|
|
|
Q3 2009 to
Q4 2009
|
|
|
Q2 2009 to
Q3 2009
|
|
Value
of Privately Held Portfolio as of
Previous
Quarter
|
|
$ |
83,014,946 |
|
|
$ |
77,797,086 |
|
|
$ |
69,876,210 |
|
|
$ |
63,959,811 |
|
Value
of Privately Held Portfolio as of
Current
Quarter
|
|
$ |
92,039,997 |
|
|
$ |
83,014,946 |
|
|
$ |
77,797,086 |
|
|
$ |
69,876,210 |
|
Examples
of Inputs that Contribute to Changes in Value
Total
New and Follow-On Investments
|
|
$ |
4,652,106
|
|
|
$ |
1,426,580 |
|
|
$ |
4,698,782 |
|
|
$ |
3,884,893 |
|
(+)
Due to Terms of New Equity Rounds of Financing
|
|
$ |
11,564,433 |
|
|
$ |
1,436,628 |
|
|
$ |
5,229,990 |
|
|
$ |
4,725,316 |
|
(-)
Due to Terms of New Equity Rounds of Financing
|
|
$ |
(280,649 |
) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
(1,967,156 |
) |
(+)
Due to (+) in Values of Comparables
|
|
$ |
730,026
|
|
|
$ |
2,151,404
|
|
|
$ |
1,938,047 |
|
|
$ |
2,823,833 |
|
(-)
Due to (-) in Values of Comparables
|
|
$ |
(1,618,341 |
) |
|
$ |
0 |
|
|
$ |
(6,313 |
) |
|
$ |
0 |
|
(+)
Due to (-) in Non-Performance Risk
|
|
$ |
1,355,025 |
|
|
$ |
2,511,106 |
|
|
$ |
500,000 |
|
|
$ |
0 |
|
(-)
Due to (+) in Non-Performance Risk
|
|
$ |
(7,172,178 |
) |
|
$ |
(2,307,768 |
) |
|
$ |
(4,795,765 |
) |
|
$ |
(3,794,138 |
) |
Other
Factors1
|
|
$ |
(205,371 |
) |
|
$ |
(90 |
) |
|
$ |
356,135 |
|
|
$ |
243,651 |
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Change in Value of Privately Held Portfolio from Quarter to
Quarter
|
|
$ |
9,025,051 |
|
|
$ |
5,217,860 |
|
|
$ |
7,920,876 |
|
|
$ |
5,916,399 |
|
1 Other
factors include changes in accrued bridge note interest, currency fluctuations
and the value of warrants.
2 Includes
changes in the capital account of Exponential Business Development
Company.
The
values of publicly traded comparables on June 30, 2010, were significant factors
in determining the values of three of our 31 privately held portfolio
companies. Two of these companies decreased in value and the other
one increased in value for the three months ended June 30,
2010. These three companies accounted for approximately $13.2 million
of the total value of our venture capital portfolio as of June 30,
2010. These values could differ materially if calculated on a
different date due to changes in values and/or operating performance of the
publicly traded comparables.
The values set by private equity
financings that occurred during the second quarter of 2010 or that occurred
during the third quarter of 2010, but reflect on value as of June 30, 2010, were
significant inputs in determining the values of five of our 31 privately held
portfolio companies. These five companies accounted for approximately
$33.1 million of the total value of our venture capital portfolio as of June 30,
2010. The financings of three of these five portfolio companies
included third-party independent investors and accounted for $29.3 million of
the $33.1 million. The financings of two of these five portfolio
companies included only current investors and accounted for $3.8 million of the
$33.1 million. These values could differ materially in future
quarters, particularly should these companies not execute on their business
plans and become subject to discounts for non-performance risk or require
additional capital that is available only at lower valuations than those of the
most recent round of financing.
As part of the valuation process, we
consider non-performance risk. Non-performance risk is the risk that
a portfolio company will be: (a) unable to raise capital, will need to be shut
down and will not return our invested capital; or (b) able to raise capital, but
at a valuation significantly lower than the implied post-money
valuation. Our best estimate of the non-performance risk of our
portfolio companies has been quantified and included in the valuation of the
companies as of June 30, 2010. In the future, as these companies
receive terms for additional financings or are unable to receive additional
financing and, therefore, proceed with sales or shutdowns of the business, we
expect the contribution of the discount for non-performance risk to vary in
importance in determining the values of our securities of these
companies. As of June 30, 2010, non-performance risk was a
significant factor in determining the values of 11 of our 31 privately held
portfolio companies. These 11 companies accounted for approximately
$22.9 million of the total value of our privately held venture capital
portfolio. We increased the non-performance risk, thereby decreasing
the value, of five companies. We decreased the non-performance risk,
thereby increasing the value, of two companies, in part due to term sheets for
pending financing events. We maintained the same level of
non-performance risk in four companies.
As of June 30, 2010, our top ten
investments by value accounted for approximately 71 percent of the value of our
venture capital portfolio. As of that date, we believe at least two
of these ten companies will require capital by the end of 2010, and at least two
of the remaining eight companies will require additional capital in the first
half of 2011.
The increase or decrease in the value
of our venture capital investments does not affect the day-to-day operations of
the Company, as we have no debt and fund our venture capital investments and
daily operating expenses from interest earned and proceeds from the sales of our
investments in U.S. government and agency obligations. As of June 30,
2010, we held $45,930,735 in U.S. government obligations, and we had an
additional $2,553,490 in cash.
Investment
Objective
Our principal objective is to
achieve long-term capital appreciation by making venture capital
investments. Therefore, a significant portion of our current venture
capital investment portfolio provides little or no income in the form of
dividends or interest. Current income is a secondary
objective. We are implementing a strategy that we believe will
provide greater regularity and shorter time periods between realizations of
capital gains on investments. As part of this strategy, we may seek
to increase our current income by providing debt financing to privately held and
publicly traded small companies. We seek to reach the point where
future growth is financed through reinvestment of our capital gains from our
venture capital investments and where current income offsets our annual expenses
during periods of time between realizations of capital gains on our
investments.
We currently earn interest income from
fixed-income securities, including U.S. government and agency
securities. The amount of interest income we earn varies with the
average balance of our fixed-income portfolio and the average yield on this
portfolio. In previous years, we have been able to generate
substantial amounts of interest income from our holdings of U.S. treasury
securities. As of June 30, 2010, we held two short-duration U.S.
treasury securities, yielding approximately 0.09 percent. As of June
30, 2010, yields for 3-month, 6-month, and 12-month U.S. treasury securities
were 0.18 percent, 0.22 percent and 0.32 percent, respectively. With
yields at this level, we expect to generate less interest income than in fiscal
quarters and years prior to 2009.
Results
of Operations
We present the financial results of our
operations utilizing GAAP for investment companies. On this basis,
the principal measure of our financial performance during any period is the net
increase (decrease) in our net assets resulting from our operating activities,
which is the sum of the following three elements:
Net
Operating Income (Loss) - the difference
between our income from interest, dividends, and fees and our operating
expenses.
Net
Realized Gain (Loss) on Investments - the difference between
the net proceeds of sales of portfolio securities and their stated cost, plus
income from interests in limited liability companies.
Net
Increase (Decrease) in Unrealized Appreciation or Depreciation on
Investments - the net unrealized change in the value of our investment
portfolio.
Owing to the structure and objectives
of our business, we generally expect to experience net operating losses and seek
to generate increases in our net assets from operations through the long term
appreciation of our venture capital investments. Historically, we
have relied on proceeds from sales of investments, rather than on investment
income, to defray a significant portion of our operating
expenses. Because such sales are unpredictable, we attempt to
maintain adequate working capital to provide for fiscal periods when there are
no such sales.
Three
months ended June 30, 2010, as compared with the three months ended June
30, 2009
In the three months ended June 30,
2010, and June 30, 2009, we had a net increase in net assets resulting from
operations of $2,150,952 and $421,367, respectively.
Investment Income and
Expenses:
We had net operating losses of
$1,953,949 and $1,998,271 for the three months ended June 30, 2010, and June 30,
2009, respectively. The variation in these results is primarily owing
to the changes in investment income and operating expenses, including non-cash
expense of $661,666 in 2010 and $776,279 in 2009 associated with the granting of
stock options. During the three months ended June 30, 2010, and 2009,
total investment income was $129,208 and $83,834,
respectively. During the three months ended June 30, 2010, and 2009,
total operating expenses were $2,083,157 and $2,082,105,
respectively.
During the three months ended June 30,
2010, as compared with the same period in 2009, investment income increased,
reflecting an increase in interest income from bridge notes, as well as an
increase in our average holdings of U.S. government securities, offset by a
substantial decrease in interest rates. During the three months ended
June 30, 2010, our average holdings of such securities were $49,244,819, as
compared with $48,961,646 during the three months ended June 30,
2009. The average yield on our U.S. government securities decreased
from 0.29 percent for the three months ended June 30, 2009, to 0.11 percent for
the three months ended June 30, 2010.
Operating expenses, including non-cash,
stock-based compensation expense, were $2,083,157 and $2,082,105 for the three
months ended June 30, 2010, and June 30, 2009, respectively. The
increase in operating expenses for the three months ended June 30, 2010, as
compared with the three months ended June 30, 2009, was primarily owing to
increases in professional fees, rent expense and custody fees, offset by a
decrease in salaries, benefits and stock-based compensation expense,
administration and operations expense and directors' fees and
expenses. Professional fees increased by $24,575, or 16.1 percent,
for the three months ended June 30, 2010, as compared with the same period in
2009, primarily as a result of an increase in certain legal and consulting
fees. Rent expense increased by $10,147, or 12.8 percent, for the
three months ended June 30, 2010, as compared with the same period in
2009. Our rent expense of $89,145 for the three months ended June 30,
2010, includes $39,188 of rent paid in cash and $49,957 of non-cash rent
expense, credits and abatements that we recognize on a straight-line basis over
the lease term. Custody fees increased by $12,920, or 116.6 percent, for the
three months ended June 30, 2010, as compared with the same period in 2009,
owing to the higher fees charged by our new custodian, the Bank of New York
Mellon, who has more expertise in working with investment
companies. Salaries, benefits and stock-based compensation expense
decreased by $41,077, or 2.7 percent, through June 30, 2010, as compared with
June 30, 2009, primarily as a result of a decrease in non-cash expense of
$114,613 associated with the Harris & Harris Group, Inc. 2006 Equity
Incentive Plan (the "Stock Plan"), offset by an increase in salaries and
benefits owing primarily to an accrual for year-end employee bonuses of $46,000
and to an increase in salary of two of our employees. While the
non-cash, stock-based compensation expense for the Stock Plan increased our
operating expenses by $661,666, this increase was offset by a corresponding
increase to our additional paid-in capital, resulting in no net impact to our
NAV. Administration and operations expense decreased by $2,915, or
1.3 percent, through June 30, 2010, as compared with June 30, 2009, primarily as
a result of a decrease in our directors' and officers' liability insurance
expense and decreases in the expenses related to the annual report and proxy,
offset by increases in managing directors' travel-related expenses and expenses
associated with hosting "Meet the Portfolio" day on May 7,
2010. Directors' fees and expenses decreased by $3,540, or 3.9
percent, through June 30, 2010, as compared with June 30, 2009, primarily as a
result of one less meeting held during the quarter.
Realized Income and Losses
from Investments:
During the three months ended June 30,
2010, and June 30, 2009, we realized net losses on investments of $396,769 and
$1,511,042, respectively.
During the three months ended June 30,
2010, we realized net losses of $396,769, consisting primarily of realized
losses on a portion of our investment in Kovio, Inc., of $257,007 and in
Orthovita, Inc., of $167,300, offset by realized gains on our investment in
Satcon Technology Corporation of $14,320.
The realized loss on our investment in
Kovio, Inc., was owing to the termination of a warrant. The warrant
was terminated pursuant to the terms of the Series A' financing which closed
during the second quarter of 2010.
During the three months ended June 30,
2010, we received a dividend payment of $13,218 representing our pro rata
portion of the residual net proceeds from the liquidation of Optiva,
Inc. We had invested in Optiva during 2002, and in 2005, it began
liquidation under an assignment for the benefit of creditors. This
amount represents the final payment from the liquidation.
During the three months ended June 30,
2009, we realized net losses of $1,511,042, consisting of a realized loss of
$11,042 on our investment in Exponential Business Development Company and a
realized loss of $1,500,000 on our investment in Kereos, Inc. Since
the date of our investment of $25,000 in Exponential Business Development
Company in 1995, we periodically received cash distributions totaling $31,208
through the date of the sale.
Net Unrealized Appreciation
and Depreciation of Portfolio Securities:
During the three months ended June 30,
2010, net unrealized depreciation on total investments decreased by $4,501,670,
or 42.6 percent, from net unrealized depreciation of $10,564,305 at March 31,
2010, to net unrealized depreciation of $6,062,635 at June 30,
2010. During the three months ended June 30, 2009, net unrealized
depreciation on total investments decreased by $3,932,409, or 11.9 percent, from
net unrealized depreciation of $32,945,748 at March 31, 2009, to net unrealized
depreciation of $29,013,339 at June 30, 2009.
During
the three months ended June 30, 2010, net unrealized depreciation on our venture
capital investments decreased by $4,516,186, from net unrealized depreciation of
$10,561,039 at March 31, 2010, to net unrealized depreciation of $6,044,853 at
June 30, 2010, owing primarily to increases in the valuations of the following
investments held:
Investment
|
|
Amount of Write-Up
|
|
|
|
|
|
BioVex
Group, Inc.
|
|
$ |
423,421 |
|
D-Wave
Systems, Inc.
|
|
|
855,025 |
|
Laser
Light Engines, Inc.
|
|
|
500,000 |
|
SiOnyx,
Inc.
|
|
|
2,002,611 |
|
Solazyme,
Inc.
|
|
|
8,149,698 |
|
Xradia,
Inc.
|
|
|
730,022 |
|
The
write-ups for the three months ended June 30, 2010, were partially offset by
decreases in the valuations of the following investments held:
Investment
|
|
Amount of Write-Down
|
|
|
|
|
|
Bridgelux,
Inc.
|
|
$ |
1,663,728 |
|
Kovio,
Inc.
|
|
|
335,675 |
|
Mersana
Therapeutics, Inc.
|
|
|
14,109 |
|
Metabolon,
Inc.
|
|
|
6,527 |
|
Molecular
Imprints, Inc.
|
|
|
2,014,874 |
|
Nanosys,
Inc.
|
|
|
280,649 |
|
NeoPhotonics
Corporation
|
|
|
1,548,863 |
|
Nextreme
Thermal Solutions, Inc.
|
|
|
2,202,629 |
|
PolyRemedy,
Inc.
|
|
|
53,893 |
|
Questech
Corporation
|
|
|
69,479 |
|
TetraVitae
Bioscience, Inc.
|
|
|
62,500 |
|
We had an
increase in unrealized depreciation for Satcon Technology Corporation of $5,797
owing to the sale of its securities.
We had a decrease in unrealized
depreciation for Kovio, Inc., of $227,469 owing to the termination of a
warrant. The warrant was terminated pursuant to the terms of the
Series A' financing which closed during the second quarter of 2010.
We had a
decrease in unrealized depreciation for Orthovita, Inc., of $648 owing to the
sale of its securities.
We had an
increase in unrealized depreciation owing to foreign currency translation of
$113,985 on our investment in D-Wave Systems, Inc.
Unrealized
depreciation on our U.S. government securities portfolio increased from $3,266
at March 31, 2010, to $17,782 at June 30, 2010.
During
the three months ended June 30, 2009, net unrealized depreciation on our venture
capital investments decreased by $3,913,035, from net unrealized depreciation of
$32,942,791 at March 31, 2009, to net unrealized depreciation of $29,029,756 at
June 30, 2009, owing primarily to increases in the valuations of the following
investments held:
Investment
|
|
Amount of Write-Up
|
|
|
|
|
|
Metabolon,
Inc.
|
|
$ |
568,029 |
|
Molecular
Imprints, Inc.
|
|
|
1,073,605 |
|
NeoPhotonics
Corporation
|
|
|
630,977 |
|
Nextreme
Thermal Solutions, Inc.
|
|
|
2,202,628 |
|
Questech
Corporation
|
|
|
51,879 |
|
Siluria
Technologies, Inc.
|
|
|
160,723 |
|
The
write-ups for the three months ended June 30, 2009, were partially offset by
decreases in the valuations of the following investments held:
Investment
|
|
Amount of Write-Down
|
|
|
|
|
|
Ancora
Pharmaceuticals Inc.
|
|
$ |
359,091 |
|
BioVex
Group, Inc.
|
|
|
25,462 |
|
Bridgelux,
Inc.
|
|
|
984 |
|
Kovio,
Inc.
|
|
|
6,762 |
|
Mersana
Therapeutics, Inc.
|
|
|
4,123 |
|
NanoGram
Corporation
|
|
|
735,903 |
|
Nanomix,
Inc.
|
|
|
30,050 |
|
Nanosys,
Inc.
|
|
|
1,342,529 |
|
PolyRemedy,
Inc.
|
|
|
28,384 |
|
We also
had decreases in the unrealized depreciation of Exponential Business Development
Company and Kereos, Inc., of $12,439 and $1,500,000,
respectively. These decreases were owing to unrealized appreciation
as a result of our disposal of these assets. We had an increase owing
to foreign currency translation of $246,043 on our investment in D-Wave Systems,
Inc. Unrealized depreciation on our U.S. government securities
portfolio decreased from $2,957 at March 31, 2009, to an unrealized appreciation
of $16,417 at June 30, 2009.
Six
months ended June 30, 2010, as compared with the six months ended June 30,
2009
In the six months ended June 30, 2010,
we had a net increase in net assets resulting from operations of $3,838,683. In the six months
ended June 30, 2009, we had a net decrease in net assets resulting from
operations of $530,057.
Investment Income and
Expenses:
We had net operating losses of
$4,066,627 and $4,097,150 for the six months ended June 30, 2010, and June 30,
2009, respectively. The variation in these results is primarily owing
to the changes in investment income and operating expenses, including non-cash
expense of $1,214,938 in 2010 and $1,411,917 in 2009 associated with the
granting of stock options. During the six months ended June 30,
2010, and 2009, total investment income was $208,281 and $60,273,
respectively. During the six months ended June 30, 2010, and 2009,
total operating expenses were $4,274,908 and $4,157,423,
respectively.
During the six months ended June 30,
2010, as compared with the same period in 2009, investment income increased,
reflecting an increase in interest income from bridge notes, as well as an
increase in our average holdings of U.S. government securities, offset by a
substantial decrease in interest rates. The average yield on our U.S.
government securities decreased from 0.30 percent for the six months ended June
30, 2009, to 0.09 percent for the six months ended June 30,
2010. During the six months ended June 30, 2010, our average holdings
of such securities were $51,492,274, as compared with $50,358,585 at June 30,
2009.
Operating expenses, including non-cash,
stock-based compensation expense, were $4,274,908 and $4,157,423 for the six
months ended June 30, 2010, and June 30, 2009, respectively. The
increase in operating expenses for the six months ended June 30, 2010, as
compared with the six months ended June 30, 2009, was primarily owing to
increases in professional fees, rent expense, directors' fees and expenses and
custody fees, offset by a decrease in salaries, benefits and stock-based
compensation expense and administration and operations
expense. Professional fees increased by $52,694, or 14.3 percent, for
the six months ended June 30, 2010, as compared with the same period in 2009,
primarily as a result of an increase in certain legal and consulting fees,
offset by a reduction in certain accounting fees. Rent expense
increased $9,299, or 5.9 percent, for the six months ended June 30, 2010, as
compared with the same period in 2009. Our rent expense of $166,360
for the six months ended June 30, 2010, includes $71,030 of rent paid in cash
and $95,330 of non-cash rent expense, credits and abatements that we recognize
on a straight-line basis over the lease term. For the six months
ended June 30, 2010, we had a loss of $68,038 as a result of abandoning our
lease at our former office prior to the end of the lease term, which expired in
April 2010. Directors' fees and expenses increased by $7,312, or 4.2
percent, through June 30, 2010, as compared with June 30, 2009, primarily as a
result of one additional meeting held during the first quarter of
2010. Custody fees increased by $30,058, or 167.5 percent for the six
months ended June 30, 2010, as compared with the same period in 2009, owing to
the higher fees charged by our new custodian, the Bank of New York Mellon, who
has more expertise in working with investment companies. Salaries,
benefits and stock-based compensation expense decreased by $39,140, or 1.4
percent, through June 30, 2010, as compared with June 30, 2009, primarily as a
result of a decrease in non-cash expense of $196,979 associated with the Stock
Plan, offset by an increase in salaries and benefits owing primarily to an
accrual for year-end employee bonuses of $119,500 and to an increase in salary
of two of our employees. While the non-cash, stock-based compensation
expense for the Stock Plan increased our operating expenses by $1,214,938, this
increase was offset by a corresponding increase to our additional paid-in
capital, resulting in no net impact to our NAV. Administration and
operations expense decreased by $10,828, or 2.1 percent, through June 30, 2010,
as compared with June 30, 2009, primarily as a result of a decrease in our
directors' and officers' liability insurance expense and decreases in the
expenses related to the annual report and proxy, offset by increases in the cost
of non-employee-related insurance, expenses associated with the relocation of
our corporate headquarters in New York City and expenses associated with hosting
"Meet the Portfolio" day on May 7, 2010.
Realized Income and Losses
from Investments:
During the six months ended June 30,
2010, we realized net losses on investments of $408,292, as compared with
realized net losses on investments of $1,514,655 during the six months ended
June 30, 2009.
During the six months ended June 30,
2010, we realized net losses of $408,292, consisting primarily of realized
losses on a portion of our investment in Kovio, Inc., of $257,007, in Orthovita,
Inc., of $167,300, and realized losses on the disposal of fixed assets, offset
by realized gains on our investment in Satcon Technology Corporation of $14,320
and realized gains on the sale of U.S. government securities.
The realized loss on our investment in
Kovio, Inc., was owing to the termination of a warrant. The warrant
was terminated pursuant to the terms of the Series A' financing which closed
during the second quarter of 2010.
During the six months ended June 30,
2010, we received a dividend payment of $13,218 representing our pro rata
portion of the residual net proceeds from the liquidation of Optiva,
Inc. We had invested in Optiva during 2002, and in 2005, it began
liquidation under an assignment for the benefit of creditors. This
sum represents the final payment from the liquidation.
During the six months ended June 30,
2009, we realized net losses of $1,514,655, consisting primarily of a realized
loss of $14,330 on our investment in Exponential Business Development Company
and a realized loss of $1,500,000 on our investment in Kereos,
Inc. Since the date of our investment of $25,000 in Exponential
Business Development Company in 1995, we periodically received cash
distributions totaling $31,208 through the date of the sale.
Net Unrealized Appreciation
and Depreciation of Portfolio Securities:
During the six months ended June 30,
2010, net
unrealized depreciation on total investments decreased by $8,316,234, or 57.8
percent, from net unrealized depreciation of $14,378,869 at December 31, 2009,
to net unrealized depreciation of $6,062,635 at June 30, 2010. During
the six months ended June 30, 2009, net
unrealized depreciation on total investments decreased by $5,083,857, or 14.9
percent, from net unrealized depreciation of $34,097,196 at December 31, 2008,
to net unrealized depreciation of $29,013,339 at June 30, 2009.
During
the six months ended June 30, 2010, net unrealized depreciation on our venture
capital investments decreased by $8,321,573, from net unrealized depreciation of
$14,366,426 at December 31, 2009, to net unrealized depreciation of $6,044,853
at June 30, 2010, owing primarily to increases
in the valuations of the following investments held:
Investment
|
|
Amount of Write-Up
|
|
|
|
|
|
BioVex
Group, Inc.
|
|
$ |
421,422 |
|
D-Wave
Systems, Inc.
|
|
|
855,025 |
|
Ensemble Therapeutics
Corporation
|
|
|
500,000 |
|
Laser
Light Engines, Inc.
|
|
|
500,000 |
|
Mersana
Therapeutics, Inc.
|
|
|
961,704 |
|
Metabolon,
Inc.
|
|
|
69,635 |
|
Solazyme,
Inc.
|
|
|
8,149,698 |
|
SiOnyx,
Inc.
|
|
|
3,078,765 |
|
Xradia,
Inc.
|
|
|
1,330,469 |
|
The
write-ups for the six months ended June 30, 2010, were partially offset by
decreases in the valuations of the following investments held:
Investment
|
|
Amount of Write-Down
|
|
|
|
|
|
Bridgelux,
Inc.
|
|
$ |
220,253 |
|
Kovio,
Inc.
|
|
|
1,750,165 |
|
Molecular
Imprints, Inc.
|
|
|
2,023,124 |
|
Nanosys,
Inc.
|
|
|
280,649 |
|
NeoPhotonics
Corporation
|
|
|
5,111 |
|
Nextreme
Thermal Solutions, Inc.
|
|
|
3,303,943 |
|
PolyRemedy,
Inc.
|
|
|
107,786 |
|
TetraVitae
Bioscience, Inc.
|
|
|
62,500 |
|
Questech
Corporation
|
|
|
62,269 |
|
We had a decrease in unrealized
depreciation for Kovio, Inc., of $227,469 owing to the termination of a
warrant. The warrant was terminated pursuant to the terms of the
Series A' financing which closed during the second quarter of 2010.
We had a
decrease in unrealized depreciation for Orthovita, Inc., of $72,432 owing to the
sale of its securities.
We had an
increase in unrealized depreciation owing to foreign currency translation of
$29,246 on our investment in D-Wave Systems, Inc.
Unrealized
depreciation on our U.S. government securities portfolio decreased from $12,443
at December 31, 2009, to $17,782 at June 30, 2010.
During
the six months ended June 30, 2009, net unrealized depreciation on our venture
capital investments decreased by $5,095,092, from net unrealized depreciation of
$34,124,848 at December 31, 2008, to net unrealized depreciation of $29,029,756
at June 30, 2009, owing primarily to increases
in the valuations of the following investments held:
Investment
|
|
Amount of Write-Up
|
|
|
|
|
|
Metabolon,
Inc.
|
|
$ |
205,198 |
|
Molecular
Imprints, Inc.
|
|
|
1,069,605 |
|
NeoPhotonics
Corporation
|
|
|
572,326 |
|
Nextreme
Thermal Solutions, Inc.
|
|
|
2,202,628 |
|
Questech
Corporation
|
|
|
22,690 |
|
Siluria
Technologies, Inc.
|
|
|
160,723 |
|
Solazyme,
Inc.
|
|
|
5,376,988 |
|
These
write-ups for the six months ended June 30, 2009, were partially offset by the
following write-downs:
Investment
|
|
Amount of Write-Down
|
|
|
|
|
|
Ancora
Pharmaceuticals Inc.
|
|
$ |
759,091 |
|
BioVex
Group, Inc.
|
|
|
19,621 |
|
Bridgelux,
Inc.
|
|
|
1,967 |
|
Crystal
IS, Inc.
|
|
|
332,238 |
|
CSwitch,
Inc.
|
|
|
20,286 |
|
Kovio,
Inc.
|
|
|
12,491 |
|
Laser
Light Engines, Inc.
|
|
|
500,000 |
|
Mersana
Therapeutics, Inc.
|
|
|
7,880 |
|
NanoGram
Corporation
|
|
|
735,903 |
|
Nanomix,
Inc.
|
|
|
30,050 |
|
Nanosys,
Inc.
|
|
|
2,685,059 |
|
PolyRemedy,
Inc.
|
|
|
28,384 |
|
SiOnyx,
Inc.
|
|
|
1,076,155 |
|
We also
had decreases to unrealized depreciation for Exponential Business Development
Company and Kereos, Inc., of $15,361 and $1,500,000, respectively, owing to the
disposal of their securities and changes in the capital account balance of
Exponential Business Development Company prior to its sale.
We had an
increase owing to foreign currency translation of $178,698 on our investment in
D-Wave Systems, Inc. Unrealized appreciation on our U.S. government
securities portfolio decreased from $27,652 at December 31, 2008, to $16,417 at
June 30, 2009.
Financial
Condition
At June 30, 2010, our total assets and
net assets were $141,459,436 and $139,182,848, respectively. At
December 31, 2009, they were $136,109,101 and $134,158,258,
respectively.
At June 30, 2010, NAV per share was
$4.51, as compared with $4.35 at December 31, 2009. At June 30, 2010,
our shares outstanding increased to 30,864,899 from 30,859,593 at December 31,
2009.
Significant developments in the six
months ended June 30, 2010, included an increase in
the holdings of our venture capital investments of $14,016,516 and a decrease in
our holdings of U.S. government obligations and cash of
$9,074,821. The increase in the value of our venture capital
investments from $78,023,481 at December 31, 2009, to $92,039,997 at June 30,
2010, resulted primarily from an increase in the net value of our venture
capital investments of $7,911,585 and by two new and 18 follow-on investments of
$6,327,164. The decrease in the value of our U.S. government
obligations and cash from $57,559,046 at December 31, 2009, to $48,484,225 at
June 30, 2010, is primarily owing to the payment of cash basis operating
expenses of $2,844,062 and to new and follow-on venture capital investments
totaling $6,327,164.
The following table is a summary of
additions to our portfolio of venture capital investments made during the six
months ended June 30, 2010:
New Investments
|
|
Amount of Investment
|
|
|
|
|
|
ABS
Materials, Inc.
|
|
$ |
250,000 |
|
Satcon
Technology Corporation
|
|
|
99,957 |
|
Follow-On Investments
|
|
Amount of Investment
|
|
|
|
|
|
ABS
Materials, Inc.
|
|
$ |
125,000 |
|
Ancora
Pharmaceuticals Inc.
|
|
|
500,000 |
|
Ancora
Pharmaceuticals Inc.
|
|
|
600,000 |
|
BioVex
Group, Inc.
|
|
|
354,390 |
|
Bridgelux,
Inc.
|
|
|
250,041 |
|
Kovio,
Inc.
|
|
|
526,225 |
|
Laser
Light Engines, Inc.
|
|
|
250,000 |
|
Laser
Light Engines, Inc.
|
|
|
250,000 |
|
Mersana
Therapeutics, Inc.
|
|
|
87,500 |
|
Mersana
Therapeutics, Inc.
|
|
|
84,475 |
|
NeoPhotonics
Corporation
|
|
|
2,455 |
|
NeoPhotonics
Corporation
|
|
|
2,109 |
|
Orthovita,
Inc.
|
|
|
98,427 |
|
Satcon
Technology Corporation
|
|
|
22,134 |
|
Satcon
Technology Corporation
|
|
|
27,960 |
|
SiOnyx,
Inc.
|
|
|
339,760 |
|
SiOnyx,
Inc.
|
|
|
956,740 |
|
Solazyme,
Inc.
|
|
|
1,499,991 |
|
|
|
|
|
|
Total
|
|
$ |
6,327,164 |
|
The following tables summarize
the values of our portfolios of venture capital investments and U.S. government
obligations, as compared with their cost, at June 30, 2010, and December 31,
2009:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
Venture
capital investments, at cost
|
|
$ |
98,084,850 |
|
|
$ |
92,389,907 |
|
Net
unrealized depreciation(1)
|
|
|
6,044,853 |
|
|
|
14,366,426 |
|
Venture
capital investments, at value
|
|
$ |
92,039,997 |
|
|
$ |
78,023,481 |
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
U.S.
government obligations, at cost
|
|
$ |
45,948,517 |
|
|
$ |
55,960,024 |
|
Net
unrealized depreciation(1)
|
|
|
17,782 |
|
|
|
12,443 |
|
U.S.
government obligations, at value
|
|
$ |
45,930,735 |
|
|
$ |
55,947,581 |
|
(1)At June
30, 2010, and December 31, 2009, the net accumulated unrealized depreciation on
investments was $6,062,635 and $14,378,869, respectively.
Liquidity
Our liquidity and capital
resources are generated and generally available through our cash holdings,
interest earned on our investments on U.S. government securities, cash flows
from the sales of U.S. government securities, proceeds from periodic follow-on
equity offerings and realized capital gains retained for
reinvestment.
We fund
our day-to-day operations using interest earned and proceeds from the sales of
our investments in U.S. government securities. The increase or
decrease in the valuations of our portfolio companies does not impact our daily
liquidity. At June 30, 2010, and December 31, 2009, we had no
investments in money market mutual funds. We have no debt
outstanding, and, therefore, are not subject to credit agency
downgrades.
As a
venture capital company, it is critical that we have capital available to
support our best companies until we have an opportunity for liquidity in our
investments. As such, we will continue to maintain a substantial
amount of liquid capital on our balance sheet and will not put the company in a
position where we must raise capital through additional equity financings to
continue operations. However, to complement our private portfolio
investing, we seek to invest some of this capital in publicly traded companies
and debt where we will have greater liquidity and more defined investment return
timelines, respectively, than we currently have in our existing
portfolio.
At June
30, 2010, and December 31, 2009, our total net primary liquidity was $48,506,150
and $57,642,233, respectively. Our primary liquidity is comprised of
our cash, U.S. government securities, receivables from unsettled trades,
receivables from portfolio companies and interest receivables. The
decrease in our primary liquidity from December 31, 2009, to June 30, 2010, is
primarily owing to the use of funds for investments and payment of net operating
expenses.
At June 30, 2010, and December 31,
2009, our secondary liquidity was $0 and $226,395, respectively. Our
secondary liquidity consists of our publicly traded
securities. Although these companies are publicly traded, their stock
may not trade at high volumes and prices can be volatile, which may restrict our
ability to sell our positions at any given time.
Although
we cannot predict future market conditions, we continue to believe that our
current cash and U.S. government security holdings, our strategy to invest in
more publicly traded companies and debt and our ability to adjust our investment
pace will provide us with adequate liquidity to execute our current business
strategy.
Except
for a rights offering, we are also generally not able to issue and sell our
common stock at a price below our NAV per share, exclusive of any distributing
commission or discount, without shareholder approval. As of June 30,
2010, our NAV was $4.51 per share and our closing market price was $4.09 per
share. We do not currently have shareholder approval to issue or sell
shares below our NAV per share.
Capital
Resources
On
October 9, 2009, we completed the sale of 4,887,500 shares of our common stock
at a price of $4.75 per share to the public for total gross proceeds of
$23,215,625; net proceeds of this offering, after deducting underwriting
discounts and offering costs of $2,000,413, were $21,215,212. We
intend to use, and have been using, the net proceeds of this offering to make
new investments in nanotechnology, as well as for follow-on investments in our
existing venture capital investments and for working capital. Through
June 30, 2010, we have used $14,990,227 of the net proceeds from this offering
for these purposes.
Critical
Accounting Policies
The Company's significant accounting
policies are described in Note 3 to the Consolidated Financial Statements and in
the Footnote to the Consolidated Schedule of Investments. Critical
accounting policies are those that are both important to the presentation of our
financial condition and results of operations and those that require
management’s most difficult, complex or subjective judgments. The
Company considers the following accounting policies and related estimates to be
critical:
Valuation of Portfolio
Investments
The most
significant estimate inherent in the preparation of our consolidated financial
statements is the valuation of investments and the related amounts of unrealized
appreciation and depreciation of investments recorded. As a BDC, we
invest in primarily illiquid securities that generally have no established
trading market.
Investments
are stated at "value" as defined in the 1940 Act and in the applicable
regulations of the SEC and GAAP. 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 "Valuation Procedures" in the "Footnote to Consolidated
Schedule of Investments.") As of June 30, 2010, our financial
statements include privately held venture capital investments valued at
$92,039,997, the fair values of which were determined in good faith by, or under
the direction of, the Board of Directors. As of June 30, 2010,
approximately 66.1 percent of our net assets represent investments in portfolio
companies valued at fair value by the Board of Directors.
Determining fair value requires that
judgment be applied to the specific facts and circumstances of each portfolio
investment, although our valuation policy is intended to provide a consistent
basis for determining fair value of the portfolio
investments. Factors that may be considered include, but are not
limited to, readily available public market quotations; the cost of the
Company’s investment; transactions in the portfolio company’s
securities or unconditional firm offers by responsible parties; the financial
condition and operating results of the company; the long-term potential of the
business and technology of the company; the values of similar securities issued
by companies in similar businesses; multiples to revenues, net income or EBITDA
that similar securities issued by companies in similar businesses receive; the
proportion of the company’s securities we own and the nature of any rights to
require the company to register restricted securities under the applicable
securities laws; the achievement of milestones; and the rights and preferences
of the class of securities we own as compared with other classes of securities
the portfolio has issued.
The
difficult economic environment continues to make it extremely difficult for many
companies to raise capital. Moreover, the cost of capital has
increased substantially. Historically, difficult economic
environments have resulted in weak companies not receiving financing and being
subsequently closed down with a loss of investment to venture investors, and/or
strong companies receiving financing but at significantly lower valuations than
the preceding rounds, leading to very deep dilution for those who do not
participate in the new rounds of investment. Our best estimate of
this non-performance risk has been quantified and included in the valuation of
our portfolio companies as of June 30, 2010.
All investments recorded at fair value
are categorized based upon the level of judgment associated with the inputs used
to measure their fair value. Hierarchical levels related to the
amount of subjectivity associated with the inputs to fair valuation of these
assets, are as follows:
|
·
|
Level
1: Unadjusted quoted prices in active markets for
identical assets or liabilities.
|
|
·
|
Level
2: Quoted prices in active markets for similar assets or
liabilities, or quoted prices for identical or similar assets or
liabilities in markets that are not active, or inputs other than quoted
prices that are observable for the asset or
liability.
|
|
·
|
Level
3: Unobservable inputs for the asset or
liability.
|
As of
June 30, 2010, all of our privately held portfolio investments were classified
as Level 3 in the hierarchy, indicating a high level of judgment required in
their valuation.
The
values assigned to our assets are based on available information and do not
necessarily represent amounts that might ultimately be realized, as these
amounts depend on future circumstances and cannot be reasonably determined until
the individual investments are actually liquidated or become readily
marketable. Upon sale of investments, the values that are ultimately
realized may be different from what is presently estimated. This
difference could be material.
Stock-Based
Compensation
Determining the appropriate fair-value
model and calculating the fair value of share-based awards on the date of grant
requires judgment. Historically, we have used the
Black-Scholes-Merton option pricing model to estimate the fair value of employee
stock options. During the quarter ended June 30, 2010, we used the
Black-Scholes-Merton option pricing model to estimate the fair value of the
five-year NQSOs granted on May 12, 2010.
Management
uses the Black-Scholes-Merton option pricing model in instances where we lack
historical data necessary for more complex models and when the share award terms
can be valued within the model. Other models may yield fair values
that are significantly different from those calculated by the
Black-Scholes-Merton option pricing model.
Management
uses a binomial lattice option pricing model in instances where it is necessary
to include a broader array of assumptions. We used the binomial
lattice model for the 10-year NQSOs granted on March 18, 2009. These
awards included accelerated vesting provisions that were based on market
conditions. At the date of the grant, management’s analysis concluded
that triggering of the market condition acceleration clause was
probable.
Option
pricing models require the use of subjective input assumptions, including
expected volatility, expected life, expected dividend rate, and expected
risk-free rate of return. Variations in the expected volatility or
expected term assumptions have a significant impact on fair value. As
the volatility or expected term assumptions increase, the fair value of the
stock option increases. The expected dividend rate and expected
risk-free rate of return are not as significant to the calculation of fair
value. A higher assumed dividend rate yields a lower fair value,
whereas higher assumed interest rates yield higher fair values for stock
options.
In the
Black-Scholes-Merton model, we use the simplified calculation of expected term
as described in the SEC’s Staff Accounting Bulletin 107 because of the lack of
historical information about option exercise patterns. In the
binomial lattice model, we use an expected term that assumes the options will be
exercised at two-times the strike price because of the lack of option exercise
patterns. Future exercise behavior could be materially different than
that which is assumed by the model.
Expected volatility is based on the
historical fluctuations in the Company's stock. The Company's stock
has historically been volatile, which increases the fair value of the underlying
share-based awards.
GAAP requires us to develop an estimate
of the number of share-based awards that will be forfeited owing to employee
turnover. Quarterly changes in the estimated forfeiture rate can have
a significant effect on reported share-based compensation, as the effect of
adjusting the rate for all expense amortization after the grant date is
recognized in the period the forfeiture estimate is changed. If
the actual forfeiture rate proves to be higher than the estimated forfeiture
rate, then an adjustment will be made to increase the estimated forfeiture rate,
which would result in a decrease to the expense recognized in the financial
statements. If the actual forfeiture rate proves to be lower than the
estimated forfeiture rate, then an adjustment will be made to decrease the
estimated forfeiture rate, which would result in an increase to the expense
recognized in the financial statements. Such adjustments would affect
our operating expenses and additional paid-in capital, but would have no effect
on our NAV.
Pension and Post-Retirement
Benefit Plan Assumptions
The
Company provides a Retiree Medical Benefit Plan for employees who meet certain
eligibility requirements. Several statistical and other factors that
attempt to anticipate future events are used in calculating the expense and
liability values related to our post-retirement benefit plans. These
factors include assumptions we make about the discount rate, the rate of
increase in healthcare costs, and mortality, among others.
The
discount rate reflects the current rate at which the post-retirement benefit
liabilities could be effectively settled considering the timing of expected
payments for plan participants. In estimating this rate, we consider
the Citigroup Pension Liability Index in the determination of the appropriate
discount rate assumptions. The weighted average rate we utilized to
measure our post retirement medical benefit obligation as of December 31,
2009, and to calculate our 2010 expense was 5.72 percent. A rate of
6.55 percent was used in determining the 2008 expense and a rate of 5.71 percent
was used in calculating the 2008 benefit obligation. We used a
discount rate of 5.75 percent to calculate our pension obligation.
Recent
Developments - Portfolio Companies
On July 2, 2010, we made a $580,257
follow-on investment in a privately held tiny technology portfolio
company.
On July 23, 2010, we made a $400,000
follow-on investment in a privately held tiny technology portfolio
company.
On July 29, 2010, we made a $40,000
follow-on investment in a privately held tiny technology portfolio
company.
Recent
Developments - Other
On July 20, 2010, one of our Managing
Directors informed the Company of his intention to resign effective December 31,
2010. At that date, we will have nine employees, down from 11 at the
beginning of 2010.
Forward-Looking
Statements
The information contained herein may
contain "forward-looking statements" based on our current expectations,
assumptions and estimates about us and our industry. These
forward-looking statements involve risks and uncertainties. Words
such as "believe," "anticipate," "estimate," "expect," "intend," "plan," "will,"
"may," "might," "could," "continue" and other similar expressions identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. Our actual results
could differ materially from those anticipated in the forward-looking statements
as a result of several factors more fully described in "Risk Factors" and
elsewhere in this Form 10-Q, and in our Form 10-K for the year ended December
31, 2009. The forward-looking statements made in this Form 10-Q
relate only to events as of the date on which the statements are
made. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Our business activities contain
elements of risk. We consider the principal types of market risk to
be valuation risk, interest rate risk and foreign currency
risk. Although we are risk-seeking rather than risk-averse in our
investments, we consider the management of risk to be essential to our
business.
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 the "Valuation Procedures" in the "Footnote to
Consolidated Schedule of Investments" contained in "Item 1. Consolidated
Financial Statements.")
Because there is typically no public
market for our interests in the small privately held companies in which we
invest, the valuation of the equity interests in that portion of our portfolio
is determined in good faith by our Valuation Committee, comprised of the
independent members of our Board of Directors, in accordance with our Valuation
Procedures. In the absence of a readily ascertainable market value,
the determined value of our portfolio of equity interests may differ
significantly from the values that would be placed on the portfolio if a ready
market for the equity interests existed. Any changes in valuation are
recorded in our Consolidated Statements of Operations as "Net decrease in
unrealized depreciation on investments." Changes in valuation of any
of our investments in privately held companies from one period to another may be
volatile.
Investments in privately held, immature
companies are inherently more volatile than investments in more mature
businesses. Such immature businesses are inherently fragile and easily
affected by both internal and external forces. Our investee companies can
lose much or all of their value suddenly in response to an internal or external
adverse event. Conversely, these immature businesses can gain suddenly in
value in response to an internal or external positive development.
Interest
Rate Risk
We generally also invest in both short
and long-term U.S. government and agency securities. To the extent
that we invest in short and long-term U.S. government and agency securities,
changes in interest rates result in changes in the value of these obligations
that result in an increase or decrease of our NAV. The level of
interest rate risk exposure at any given point in time depends on the market
environment, the expectations of future price and market
movements, and the quantity and duration of long-term U.S.
government and agency securities held by the Company, and it will vary from
period to period. If the average interest rate on U.S. government
securities at June 30, 2010, were to increase by 25, 75 and 150 basis points,
the average value of these securities held by us at June 30, 2010, would
decrease by approximately $114,827, $344,481 and $688,961, respectively, and our
NAV would decrease correspondingly.
In
addition, in the future, we may from time to time opt to borrow money to make
investments. Our net investment income will be dependent upon the
difference between the rate at which we borrow funds and the rate at which we
invest such funds. As a result, there can be no assurance that a
significant change in market interest rates and the current credit crisis will
not have a material adverse effect on our net investment income in the event we
choose to borrow funds for investing purposes.
Foreign
Currency Risk
Most of our investments are denominated
in U.S. dollars. We currently have one investment denominated in
Canadian dollars. We are exposed to foreign currency risk related to
potential changes in foreign currency exchange rates. The potential
loss in fair value on this investment resulting from a 10 percent adverse change
in quoted foreign currency exchange rates is $309,668 at June 30,
2010.
Item
4. Controls and Procedures
(a) Disclosure Controls and
Procedures. As of the end of the period covered by this
report, the Company’s management, under the supervision and with the
participation of our chief executive officer and chief financial officer,
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as required by Rules 13a-15 of the 1934
Act). Disclosure controls and procedures means controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports that it files or submits under the
1934 Act is recorded, processed, summarized and reported, within time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the issuer's management, as appropriate, to allow timely
decisions regarding required disclosures. As of June 30, 2010, based
upon this evaluation of our disclosure controls and procedures, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures were effective.
(b) Changes in Internal Control Over
Financial Reporting. There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the second quarter
of 2010 to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II. OTHER INFORMATION
Item
1A. Risk Factors
Investing
in our common stock involves significant risks relating to our business and
investment objective. You should carefully consider the risks and
uncertainties described in our Annual Report on Form 10-K for the year ended
December 31, 2009, before you purchase any of our common stock.
The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Unknown additional risks and uncertainties, or ones that we currently
consider immaterial, may also impair our business. If any of these
risks or uncertainties materialize, our business, financial condition or results
of operations could be materially adversely affected. In this event,
the trading price of our common stock could decline, and you could lose all or
part of your investment. In addition to the risks described in our
Annual Report on Form 10-K, you should also consider the following
risks:
The
market price of our shares of common stock may be adversely affected by the sale
of shares by our management or founding stockholder.
Sales of
our shares of common stock by our officers through 10b5-1 plans or by our
founding stockholder could adversely and unpredictably affect the price of those
securities. Additionally, the price of our shares of common stock
could be affected even by the potential for sales by these
persons. We cannot predict the effect that any future sales of our
common stock, or the potential for those sales, will have on our share
price. Furthermore, due to relatively low trading volume of our
stock, should one or more large stockholders seek to sell a significant portion
of its stock in a short period of time, the price of our stock may
decline.
Our
portfolio companies face risks associated with international sales.
We
anticipate that certain of our portfolio companies could generate revenue from
international sales. Risks associated with these potential future
sales include:
|
·
|
Political
and economic instability;
|
|
·
|
Export
controls and other trade
restrictions;
|
|
·
|
Changes
in legal and regulatory
requirements;
|
|
·
|
U.S.
and foreign government policy changes affecting the markets for the
technologies;
|
|
·
|
Changes
in tax laws and tariffs;
|
|
·
|
Convertibility
and transferability of international currencies;
and
|
|
·
|
International
currency exchange rate
fluctuations.
|
Any of
these factors could have a material adverse effect on the business, results of
operations and financial condition of our portfolio companies. Currency exchange
rate fluctuations may negatively affect the cost of portfolio company products
to international customers and, therefore, reduce their competitive
position.
|
31.01*
|
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.02*
|
Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32*
|
Certification
of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
*filed
herewith
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Harris
& Harris Group, Inc.
|
|
/s/
|
Daniel B. Wolfe
|
By:
|
Daniel
B. Wolfe
|
|
Chief
Financial Officer
|
|
|
/s/
|
Patricia N. Egan
|
By:
|
Patricia
N. Egan
|
|
Chief
Accounting Officer
|
|
and
Vice President
|
Date:
August 6, 2010
EXHIBIT
INDEX
Exhibit No.
|
|
Description
|
|
|
|
31.01
|
|
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.02
|
|
Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32
|
|
Certification
of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|