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 March 31, 2010
 
o   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
  Incorporation or Organization)
(I.R.S. Employer Identification No.)

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  ¨
Accelerated filer   x
 
Non-accelerated filer  ¨
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 May 10, 2010
Common Stock, $0.01 par value per share
  
30,864,899 shares

 
 
 

Harris & Harris Group, Inc.
Form 10-Q, March 31, 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
33
Financial Highlights
42
Item 2.  Management's Discussion and Analysis of Financial Condition
and Results of Operations
43
Background and Overview
43
Historical Investments
44
Investment Pace
44
Importance of Availability of Liquid Capital
46
Involvement with Portfolio Companies
48
Commercialization of Nanotechnology by Our Portfolio Companies
48
Maturity of Current Venture Capital Portfolio
51
Current Business Environment
53
Valuation of Investments
54
Investment Objective
57
Results of Operations
58
Financial Condition
61
Liquidity
63
Capital Resources
63
Critical Accounting Policies
64
Recent Developments – Portfolio Companies
66
Forward-Looking Statements
67
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
67
Item 4.  Controls and Procedures
69
PART II.  OTHER INFORMATION
  
Item 1A.  Risk Factors
70
Item 5.     Exhibits
71
Signatures
72
Exhibit Index
73


 
 
 

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.

In September 1997, our Board of Directors approved a proposal to seek qualification as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code (the "Code").  At that time, we were taxable under Subchapter C of the Code (a "C Corporation").  We filed for the 1999 tax year to elect treatment as a RIC.  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.  In addition to the requirement that we must annually distribute at least 90 percent of our investment company taxable income, 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 Subchapter M of the Code if we receive a certification from the Securities and Exchange Commission ("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 June 9, 2009, we received SEC certification for 2008, permitting us to qualify for RIC treatment for 2008 (as we had for the years 1999 through 2007) pursuant to Section 851(e) of the Code.  Although the SEC certification for 2008 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.  On April 23, 2010, we applied for SEC certification for 2009.  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.

 
1
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

ASSETS

   
March 31, 2010
    
December 31, 2009
  
   
(Unaudited)
        
Investments, in portfolio securities at value:
            
      Unaffiliated privately held companies
            
      (cost: $31,002,395 and $26,977,200, respectively)
   $ 29,752,075     $ 21,656,436  
      Unaffiliated publicly traded securities
                
      (cost: $547,304 and $298,827, respectively)
     552,454       226,395  
      Non-controlled affiliated privately held companies
                
      (cost: $51,546,166 and $54,864,948, respectively)
     45,559,645       50,297,220  
      Controlled affiliated privately held companies (cost: $11,032,574
                
            and $10,248,932, respectively)
     7,703,226       5,843,430  
Total, investments in privately held and publicly
                
      traded securities at value
                
      (cost: $94,128,439 and $92,389,907, respectively)
   $ 83,567,400     $ 78,023,481  
Investments, in U.S. Treasury obligations at value
                
      (cost: $53,163,696 and $55,960,024, respectively)
     53,160,430       55,947,581  
Cash
     197,294       1,611,465  
Restricted funds
     2,000       2,000  
Receivable from portfolio company
     0       28,247  
Interest receivable
     6       25,832  
Prepaid expenses
     338,542       94,129  
Receivable from unsettled trade
     799,925       0  
Other assets
     691,853       376,366  
Total assets
   $ 138,757,450     $ 136,109,101  


LIABILITIES & NET ASSETS
  
             
Post retirement plan liabilities
   $ 1,402,894     $ 1,369,843  
Accounts payable and accrued liabilities
     672,902       579,162  
Deferred rent
     321,372       1,838  
Total liabilities
     2,397,168       1,950,843  
                 
Net assets
   $ 136,360,282     $ 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
                
      03/31/10 and 12/31/09; 32,690,986 issued at 03/31/10
                
      and 32,688,333 issued at 12/31/09
     326,911       326,884  
Additional paid in capital (Note 8)
     206,491,383       205,977,117  
Accumulated net operating and realized loss
     (56,488,176 )     (54,361,343 )
Accumulated unrealized depreciation of investments
     (10,564,305 )     (14,378,869 )
Treasury stock, at cost (1,828,740 shares at 03/31/10 and 12/31/09)
     (3,405,531 )     (3,405,531 )
                 
Net assets
   $ 136,360,282     $ 134,158,258  
                 
Shares outstanding
     30,862,246       30,859,593  
                 
Net asset value per outstanding share
   $ 4.42     $ 4.35  


The accompanying notes are an integral part of these consolidated financial statements.

 
2
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
    
Three Months Ended
  
   
March 31, 2010
    
March 31, 2009
  
             
Investment income:
            
Interest from:
            
Fixed-income securities and bridge notes (Note 3)
   $ 73,073     $ (35,899 )
Miscellaneous income
     6,000       12,338  
Total investment income (loss)
     79,073       (23,561 )
                 
Expenses:
                
Salaries, benefits and stock-based
                
compensation (Note 6)
     1,389,277       1,387,340  
Administration and operations
     282,522       290,435  
Professional fees
     243,369       215,250  
Rent (Note 3)
     77,215       78,063  
Directors' fees and expenses
     95,361       84,509  
Depreciation
     11,969       12,859  
Custody fees
     24,000       6,862  
Lease termination costs (Note 3)
     68,038       0  
Total expenses
     2,191,751       2,075,318  
                 
Net operating loss
     (2,112,678 )     (2,098,879 )
                 
Net realized loss:
                
Realized loss from investments:
                
Unaffiliated companies
     0       (3,288 )
Non-controlled affiliated companies
     0       0  
Controlled affiliated companies
     0       0  
U.S. Treasury obligations/other
     (11,523 )     (325 )
Realized loss from investments
     (11,523 )     (3,613 )
                 
Income tax expense (Note 7)
     2,632       380  
Net realized loss
     (14,155 )     (3,993 )
                 
Net decrease in unrealized
                
depreciation on investments:
                
Change on investments held
     3,814,564       1,151,448  
Net decrease in unrealized
                
depreciation on investments
     3,814,564       1,151,448  
                 
Net increase (decrease) in net assets resulting from operations:
                
                 
Total
   $ 1,687,731     $ (951,424 )
                 
Per average basic and diluted outstanding share
   $ 0.05     $ (0.04 )
                 
Average outstanding shares
     30,859,888       25,859,573  


The accompanying notes are an integral part of these consolidated financial statements.

 
3
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


   
Three Months Ended
    
Three Months Ended
  
   
March 31, 2010
    
March 31, 2009
  
             
Cash flows (used in) provided by operating activities:
            
Net increase (decrease) in net assets resulting from operations
   $ 1,687,731     $ (951,424 )
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
     (3,803,041 )     (1,147,835 )
      Depreciation of fixed assets, amortization of premium or
                
      discount on U.S. government securities, and bridge note interest
     (41,107 )     86,269  
      Stock-based compensation expense
     553,272       635,638  
                 
Changes in assets and liabilities:
                
      Restricted funds
     0       (618 )
      Receivable from portfolio company
     28,247       0  
      Interest receivable
     12,589       54,660  
      Receivable from investments sold
     (799,925 )     0  
      Prepaid expenses
     (244,413 )     137,680  
      Other assets
     (260,892 )     3,312  
      Post retirement plan liabilities
     33,051       30,981  
      Accounts payable and accrued liabilities
     93,740       (131,084 )
      Deferred rent
     319,534       (1,576 )
                 
      Net cash used in operating activities
     (2,421,214 )     (1,283,997 )
                 
Cash flows from investing activities:
                
      Purchase of U.S. government securities
     (2,399,293 )     (52,334,768 )
      Sale of U.S. government securities
     5,199,533       53,892,347  
      Investment in venture capital investments
     (1,675,058 )     (723,176 )
      Proceeds from conversion of bridge note
     1,356       0  
      Purchase of fixed assets
     (80,516 )     (1,313 )
                 
      Net cash provided by investing activities
     1,046,022       833,090  
                 
Cash flows from financing activities:
                
      Proceeds from stock option exercises
     9,949       0  
      Payment of offering costs
     (48,928 )     0  
      Net cash used in financing activities
     (38,979 )     0  
                 
Net decrease in cash:
                
      Cash at beginning of the period
     1,611,465       692,309  
      Cash at end of the period
     197,294       241,402  
                 
      Net decrease in cash
   $ (1,414,171 )   $ (450,907 )
                 
Supplemental disclosures of cash flow information:
                
      Income taxes paid
   $ 2,632     $ 380  


The accompanying notes are an integral part of these consolidated financial statements.

 
4
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

   
Three Months Ended
    
Year Ended
  
   
March 31, 2010
    
December 31, 2009
  
   
(Unaudited)
        
Changes in net assets from operations:
            
             
      Net operating loss
   $ (2,112,678 )   $ (8,761,215 )
      Net realized loss on investments
     (14,155 )     (11,105,577 )
      Net decrease in unrealized depreciation
                
            on investments as a result of sales
     0       11,090,579  
      Net decrease in unrealized depreciation
                
            on investments held
     3,814,564       8,627,748  
                 
                 
Net increase (decrease) in net assets resulting
                
      from operations
     1,687,731       (148,465 )
                 
                 
Changes in net assets from capital
                
      stock transactions:
                
                 
      Issuance of common stock upon the
                
            exercise of stock options
     27       1,125  
      Issuance of common stock on offering
     0       48,875  
      Additional paid-in capital on common
                
            stock issued and options exercised
     (39,006 )     21,636,090  
      Stock-based compensation expense
     553,272       3,089,520  
                 
                 
Net increase in net assets resulting from
                
      capital stock transactions
     514,293       24,775,610  
                 
                 
Net increase in net assets
     2,202,024       24,627,145  
                 
                 
Net assets:
                
                 
      Beginning of the period
     134,158,258       109,531,113  
                 
      End of the period
   $ 136,360,282     $ 134,158,258  



The accompanying notes are an integral part of these consolidated financial statements.

 
5
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)


 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Investments in Unaffiliated Companies (2)(3)(4) – 22.2% of
              
net assets at value
              
               
Private Placement Portfolio (Illiquid) – 21.8% 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       18,838  
                1,689,685  
                   
                   
Bridgelux, Inc. (5)(6) -- Manufacturing high-power light
                  
      emitting diodes (LEDs) and arrays
                  
      Series B Convertible Preferred Stock
(M)
     1,861,504       2,345,495  
      Series C Convertible Preferred Stock
(M)
     2,130,699       2,684,681  
      Series D Convertible Preferred Stock
(M)
     999,999       1,259,999  
      Warrants at $0.7136 expiring 12/31/14
( I )
     163,900       135,218  
      Warrants at $1.50 expiring 8/26/14
( I )
     166,665       101,332  
                6,526,725  
                   
                   
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       938,620  
      Series C Convertible Preferred Stock
(M)
     450,450       369,301  
      Series D Convertible Preferred Stock
(M)
     1,533,395       1,257,153  
                2,565,074  
                   
                   
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       155,375  
                5,967,874  

 
The accompanying notes are an integral part of these consolidated financial statements.

 
6
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)


 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Investments in Unaffiliated Companies (2)(3)(4) – 22.2% of
              
net assets at value (Cont.)
              
               
Private Placement Portfolio (Illiquid) – 21.8% of net assets
              
at value (Cont.)
              
               
               
Nanosys, Inc. (5)(6) -- Developing inorganic materials
              
      and devices based on nanowires and quantum dots
              
      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  
                   
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) -- Developing and manufacturing
                  
      optical devices and components
                  
      Common Stock
(M)
     1,130,440       1,030,961  
      Series 1 Convertible Preferred Stock
(M)
     1,831,256       1,670,105  
      Series 2 Convertible Preferred Stock
(M)
     741,898       676,611  
      Series 3 Convertible Preferred Stock
(M)
     2,750,000       2,508,000  
      Series X Convertible Preferred Stock
(M)
     8,923       1,427,680  
                7,313,357  
                   
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       23,467  
      Series B-2 Convertible Preferred Stock
(M)
     676,147       30,427  
                53,894  


 
The accompanying notes are an integral part of these consolidated financial statements.

 
7
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)

 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Investments in Unaffiliated Companies (2)(3)(4) – 22.2% of
              
net assets at value (Cont.)
              
               
Private Placement Portfolio (Illiquid) – 21.8% of net assets
              
at value (Cont.)
              
               
               
Siluria Technologies, Inc. (5)(6)(7) -- Developing nanomaterials
              
      for manufacturing of chemicals
              
      Series S-2 Convertible Preferred Stock
(M)
     612,061     $ 204,000  
                   
                   
TetraVitae Bioscience, Inc. (5)(6)(7)(11) -- 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: $31,002,395)
             $ 29,752,075  






 
The accompanying notes are an integral part of these consolidated financial statements.

 
8
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)

 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Publicly Traded Portfolio – 0.4% of net assets
              
at value
              
               
               
Orthovita, Inc. (6) -- Developing materials and devices
              
      for orthopedic medical implant applications
              
      Common Stock
(M)
     93,100     $ 396,606  
                   
                   
                   
Satcon Technology Corporation (6)(12) – Developing power
                  
      conversion solutions and providing system design services
                  
      for utility-scale renewable energy plants
                  
      Common Stock
(M)
     64,400       155,848  
                   
                   
                   
                   
Total Unaffiliated Publicly Traded Portfolio (cost: $547,304)
             $ 552,454  
                   
Total Investments in Unaffiliated Companies (cost: $31,549,699)
             $ 30,304,529  








 
The accompanying notes are an integral part of these consolidated financial statements.

 
9
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)

 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Investments in Non-Controlled Affiliated Companies (2)(13) –
              
33.4% of net assets at value
              
               
Private Placement Portfolio (Illiquid) – 33.4% of net assets
              
at value
              
               
               
ABS Materials, Inc. (5)(6)(7)(12) -- Developing nano-structured
              
      materials for environmental remediation and the petroleum industry
              
      Series A Convertible Preferred Stock
(M)
     250,000     $ 250,000  
                   
                   
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  
                   
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  
                   
Contour Energy Systems, Inc. (5)(6)(7)(14) -- 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)
     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.
10

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)

 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Investments in Non-Controlled Affiliated Companies (2)(13) –
              
33.4% of net assets at value (Cont.)
              
               
Private Placement Portfolio (Illiquid) – 33.4% of net assets
              
at value (Cont.)
              
               
               
Ensemble Discovery Corporation (5)(6)(15) -- 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       331,472  
                2,331,472  
                   
Enumeral Technologies, Inc. (5)(6)(7) -- Developing therapeutics
                  
      and diagnostics through functional assaying of single cells
                  
      Unsecured Convertible Bridge Note (including interest)
(M)
   $ 250,000       255,425  
                   
                   
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       640,313  
      Series D Convertible Preferred Stock
(M)
     800,000       204,900  
      Series E Convertible Preferred Stock
(M)
     1,200,000       307,350  
      Warrants at $1.25 expiring 12/31/12
( I )
     355,880       29,538  
                1,182,101  
                   
Mersana Therapeutics, Inc. (5)(6)(7) -- 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       899,020  
      Warrants at $2.00 expiring 10/21/10
( I )
     91,625       57,082  
      
                  
                2,826,004  

The accompanying notes are an integral part of these consolidated financial statements.

 
11
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)

 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Investments in Non-Controlled Affiliated Companies (2)(13) –
              
33.4% of net assets at value (Cont.)
              
               
Private Placement Portfolio (Illiquid) – 33.4% 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     $ 1,087,870  
      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       112,921  
                2,635,940  
                   
NanoGram Corporation (5)(6) -- Developing solar power products
                  
      enabled by silicon-based nanomaterials
                  
      Common Stock
(M)
     2,988,437       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       1,312,500  
      Series B Convertible Preferred Stock
(M)
     4,870,244       1,991,443  
                3,303,943  
                   
Questech Corporation (5)(6) -- Manufacturing and marketing
                  
      proprietary metal and stone decorative tiles
                  
      Common Stock
(M)
     655,454       432,600  
                   
                   
Solazyme, Inc. (5)(6)(7) -- Developing algal biodiesel, industrial
                  
      chemicals and specialty 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.

 
12
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)

 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Investments in Non-Controlled Affiliated Companies (2)(13) –
              
33.4% of net assets at value (Cont.)
              
               
Private Placement Portfolio (Illiquid) – 33.4% 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     $ 6,323,658  
                   
                   
                   
                   
                   
                   
                   
Total Non-Controlled Private Placement Portfolio (cost: $51,546,166)
             $ 45,559,645  
                   
                   
Total Investments in Non-Controlled Affiliated Companies (cost: $51,546,166)
             $ 45,559,645  




 
The accompanying notes are an integral part of these consolidated financial statements.

 
13
 


HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2010
(Unaudited)

 
Method of
  
Shares/
        
 
Valuation (1)
  
Principal
    
Value
  
               
Investments in Controlled Affiliated Companies (2)(16) –
              
5.6% of net assets at value
              
               
Private Placement Portfolio (Illiquid) – 5.6% 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     $ 17,375  
      Series C Convertible Preferred Stock
(M)
     2,066,051       1,239,631  
      Secured Convertible Bridge Note (including interest)
(M)
   $ 500,000       505,479  
                1,762,485