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 September 30, 2013

 

¨ 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         ¨                  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 November 12, 2013
Common Stock, $0.01 par value per share 31,159,256 shares

 

 
 

 

Harris & Harris Group, Inc.

Form 10-Q, September 30, 2013

 

    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 Comprehensive Income (Loss)   4
Consolidated Statements of Cash Flows   5
Consolidated Statements of Changes in Net Assets   6
Consolidated Schedule of Investments   7
Notes to Consolidated Financial Statements   36
Financial Highlights   59
     
Item 2.  Management's Discussion and Analysis of Financial Condition  and Results of Operations   60
     
Background   60
Overview   60
Recent and Potential Liquidity Events From Our Portfolio as of September 30, 2013   62
Strategy for Managing Publicly Traded Positions   63
Maturity of Current Equity-Focused Venture Capital Portfolio   64
Portfolio Company Revenue   65
Growth in Ownership of Portfolio Companies   65
Level of Involvement in Our Portfolio Companies   66
Investment Objective and Strategy   67
Industry Sectors of Investment   70
Our Sources of Liquid Capital   71
Investments and Current Investment Pace   72
Current Business Environment   74
Valuation of Investments   76
Results of Operations   78
Financial Condition   87
Liquidity   88
Borrowings   90
Contractual Obligations   91
Critical Accounting Policies   91
Recent Developments – Portfolio Companies   94
Cautionary Statement Regarding Forward-Looking Statements   95
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk   96
     
Item 4.  Controls and Procedures   97
     
PART II.  OTHER INFORMATION    
     
Item 1A.  Risk Factors   98
     
Item 6.  Exhibits   101
     
Signatures   102
     
Exhibit Index   103

 

 
 

 

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. Accordingly, they do not include all information and disclosures necessary for a fair presentation of our financial position, results of operations and cash flows in conformity with GAAP. The results of operations for any interim period are not necessarily indicative of the results for the full year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

1
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

   September 30, 2013   December 31, 2012 
   (Unaudited)     
ASSETS          
           
Investments, in portfolio securities at value:          
Unaffiliated privately held companies
(cost: $29,399,423 and $29,365,558, respectively)
  $29,923,729   $24,949,756 
Unaffiliated rights to milestone payments
(adjusted cost basis: $3,291,750 and $3,291,750, respectively)
   3,375,388    3,400,734 
Unaffiliated publicly traded securities
(cost: $2,790,739 and $5,070,447, respectively)
   8,504,540    14,422,261 
Non-controlled affiliated privately held companies
(cost: $65,269,025 and $57,789,263, respectively)
   51,573,574    60,792,397 
Non-controlled affiliated publicly traded companies
(cost: $0 and $2,000,000, respectively)
   0    1,348,227 
Controlled affiliated privately held companies
(cost: $8,750,349 and $14,233,804, respectively)
   1,006,305    3,088,816 
Total, investments in private portfolio companies, rights to milestone payments and public
securities at value (cost: $109,501,286 and $111,750,822, respectively)
  $94,383,536   $108,002,191 
Investments, in U.S. Treasury obligations at value
(cost: $0 and $13,996,136, respectively)
   0    13,998,880 
Cash   13,528,468    8,379,111 
Receivable from sales of investments (Note 3)   22,799,975    0 
Restricted funds (Note 3)   10,028    10,015 
Funds held in escrow from sales of investments at value (Note 3)   1,168,671    1,052,345 
Receivable from portfolio company   4,160    23,830 
Interest receivable   15,124    49,068 
Prepaid expenses (Note 5)   827,016    97,410 
Other assets   338,302    377,400 
Total assets  $133,075,280   $131,990,250 
           
LIABILITIES & NET ASSETS          
           
Accounts payable and accrued liabilities  $1,499,238   $1,262,202 
Post retirement plan liabilities (Note 8)   851,877    1,876,447 
Deferred rent   362,656    368,977 
Written call options payable (premiums received:          
$190,564 and $50,000, respectively) (Note 7)   127,500    42,500 
Debt interest and other payable   42    3,350 
Total liabilities   2,841,313    3,553,476 
           
Net assets  $130,233,967   $128,436,774 
           
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 9/30/13 and 12/31/12;
32,987,996 issued at 9/30/13 and 32,945,621 issued at 12/31/12
   329,880    329,456 
Additional paid in capital (Note 9)   214,072,112    213,194,474 
Accumulated net operating and realized loss   (66,678,532)   (77,943,238)
Accumulated unrealized depreciation of investments   (15,054,686)   (3,738,387)
Accumulated other comprehensive income (Note 8)   970,724    0 
Treasury stock, at cost (1,828,740 shares at 9/30/13 and 12/31/12)   (3,405,531)   (3,405,531)
           
Net assets  $130,233,967   $128,436,774 
           
Shares outstanding   31,159,256    31,116,881 
           
Net asset value per outstanding share  $4.18   $4.13 

 

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

 

2
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended Sept. 30,   Nine Months Ended Sept. 30, 
   2013   2012   2013   2012 
                 
Investment income:                    
Interest from:                    
Unaffiliated companies  $58,363   $64,019   $190,209   $185,340 
Non-controlled affiliated companies   9,187    236,695    111,957    86,319 
Controlled affiliated companies   28,441    44,042    72,377    111,043 
Cash and U.S. Treasury obligations and other   3,115    5,213    12,148    17,910 
Miscellaneous income   35,919    46,277    123,387    128,078 
Total investment income   135,025    396,246    510,078    528,690 
                     
Expenses:                    
Salaries, benefits and stock-based compensation (Note 9)   1,305,405    1,200,902    4,065,804    5,148,293 
Administration and operations   221,182    212,917    697,527    795,143 
Professional fees   311,428    222,467    974,296    740,106 
Rent (Note 3)   98,539    105,705    301,240    303,402 
Directors’ fees and expenses   53,687    63,015    184,563    240,747 
Custody fees   13,919    13,653    41,693    35,635 
Depreciation   13,774    15,020    41,670    43,618 
Interest and other debt expense   9,885    12,901    21,590    36,741 
Total expenses   2,027,819    1,846,580    6,328,383    7,343,685 
                     
Net operating loss   (1,892,794)   (1,450,334)   (5,818,305)   (6,814,995)
                     
Net realized gain (loss):                    
Realized gain (loss) from investments:                    
Unaffiliated companies   0    0    105,313    476,887 
Non-Controlled affiliated companies   10,006,915    354    5,770,882    11,775 
Publicly traded companies   2,845,191    2,695,339    11,389,252    3,366,218 
Written call options   42,049    80,573    (84,713)   458,911 
Purchased put options   0    0    (72,209)   0 
U.S. Treasury obligations/other   0    (218)   0    (218)
Realized gain from investments   12,894,155    2,776,048    17,108,525    4,313,573 
                     
Income tax expense (Note 10)   3,343    7,161    25,514    15,236 
Net realized gain from investments   12,890,812    2,768,887    17,083,011    4,298,337 
                     
Net (decrease) increase in unrealized appreciation on investments:                    
Change as a result of investment sales   (11,820,261)   (3,616,482)   (13,703,473)   (4,287,361)
Change on investments held   (1,604,307)   (2,483,303)   2,331,610    6,281,233 
Change on written call options   330,388    1,111,515    55,564    527,333 
Net (decrease) increase in unrealized appreciation on investments   (13,094,180)   (4,988,270)   (11,316,299)   2,521,205 
                     
Net realized and unrealized (loss) gain on investments   (203,368)   (2,219,383)   5,766,712    6,819,542 
                     
Net (decrease) increase in net assets resulting from operations:                    
                     
Total  $(2,096,162)  $(3,669,717)  $(51,593)  $4,547 
                     
Per average basic and diluted outstanding share  $(0.07)  $(0.12)  $(0.00)  $0.00 
                     
Average outstanding shares – basic and diluted   31,159,256    31,000,601    31,131,654    31,000,601 

 

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

 

3
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   Three Months Ended Sept. 30,   Nine Months Ended Sept. 30, 
   2013   2012   2013   2012 
                 
Net (decrease) increase resulting from operations  $(2,096,162)  $(3,669,717)  $(51,593)  $4,547 
                     
Other comprehensive income:                    
                     
Prior service cost  (Note 8)   0    0    1,101,338    0 
Amortization of prior service cost   (43,538)   0    (130,614)   0 
                     
Other comprehensive (loss) income   (43,538)   0    970,724    0 
                     
Comprehensive income (loss)  $(2,139,700)  $(3,669,717)  $919,131   $4,547 

 

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

 

4
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2013   September 30, 2012 
Cash flows used in operating activities:          
Net (decrease) increase in net assets resulting from operations  $(51,593)  $4,547 
Adjustments to reconcile net increase in net assets resulting from operations to net
cash provided by (used in) operating activities:
          
Net realized gain and unrealized depreciation on investments   (5,792,226)   (6,834,778)
Depreciation of fixed assets, amortization of premium or discount on U.S. government
securities, and bridge note interest
   (172,361)   (168,346)
Stock-based compensation expense   939,979    2,457,423 
Purchase of U.S. government securities   (115,598,392)   (9,999,356)
Sale of U.S. government securities   129,599,974    0 
Purchase of affiliated portfolio companies   (10,200,939)   (8,242,326)
Purchase of unaffiliated portfolio companies   (818,880)   (1,575,514)
Principal payments received on debt investments   726,059    331,264 
Proceeds from sale of investments   29,290,630    5,062,210 
Proceeds from call option premiums   1,027,127    2,654,935 
Payments for put and call option purchases   (403,863)   (1,367,364)
           
Changes in assets and liabilities:          
Restricted funds   (13)   (497,979)
Receivable from funds held in escrow from sales of investments   (116,326)   0 
Receivable from portfolio company   19,670    (11,957)
Receivable from unsettled trades   (22,799,975)   (64,185)
Interest receivable   33,944    165 
Income tax receivable   0    7,161 
Prepaid expenses   (729,606)   253,623 
Other assets   1,337    (525)
Post retirement plan liabilities   33,230   157,532 
Accounts payable and accrued liabilities   233,728    66,458 
Deferred rent   (6,321)   (1,980)
           
Net cash provided by (used in) operating activities   5,215,183    (17,768,992)
           
Cash flows from investing activities:          
Purchase of fixed assets   (3,909)   (15,516)
Net cash used in investing activities   (3,909)   (15,516)
           
Cash flows from financing activities:          
Acquisition of vested restricted stock for payment of withholdings   (61,917)   0 
Proceeds from drawdown of credit facility   0    500,000 
           
Net cash (used in) provided by financing activities   (61,917)   500,000 
           
Net increase (decrease) in cash  $5,149,357   $(17,284,508)
           
Cash at beginning of the period   8,379,111    33,841,394 
Cash at end of the period  $13,528,468   $16,556,886 
           
Supplemental disclosures of cash flow information:          
Income taxes paid  $25,514   $8,075 
Interest paid  $0   $21,158 

 

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

 

5
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

 

   Nine Months Ended   Year Ended 
   September 30, 2013   December 31, 2012 
   (Unaudited)     
Changes in net assets from operations:          
           
Net operating loss  $(5,818,305)  $(8,803,343)
Net realized gain on investments   17,083,011    2,406,433 
Net decrease in unrealized appreciation on investments as a result of sales   (13,703,473)   (1,427,730)
Net increase (decrease) in unrealized appreciation on investments held   2,331,610    (12,049,760)
Net increase (decrease) in unrealized appreciation on written call options   55,564    (112,500)
           
Net (decrease) in net assets resulting from operations   (51,593)   (19,986,900)
           
Changes in net assets from capital stock transactions:          
           
Acquisition of vested restricted stock awards to pay required employee withholding   (61,917)   (203,676)
Stock-based compensation expense   939,979    2,928,943 
           
Net increase in net assets resulting from capital stock transactions   878,062    2,725,267 
           
Changes in net assets from accumulated other comprehensive income:          
           
Other comprehensive income   970,724    0 
           
Net increase in net assets resulting from accumulated other comprehensive income   970,724    0 
           
Net increase (decrease) in net assets   1,797,193    (17,261,633)
           
Net Assets:          
           
Beginning of the period   128,436,774    145,698,407 
           
End of the period  $130,233,967   $128,436,774 

 

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

 

6
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Unaffiliated Companies (3) –
32.1% of net assets at value
                     
                      
Private Placement Portfolio (Illiquid) (4) –
23.0% of net assets at value
                     
                      
Bridgelux, Inc. (5)(8)(10)     Energy               
Manufacturing high-power light emitting diodes (LEDs) and arrays                     
Series B Convertible Preferred Stock  (M)     $1,000,000    1,861,504   $1,494,464 
Series C Convertible Preferred Stock  (M)      1,352,196    2,130,699    1,898,508 
Series D Convertible Preferred Stock  (M)      1,371,622    999,999    1,284,225 
Series E Convertible Preferred Stock  (M)      672,599    440,334    654,788 
Series E-1 Convertible Preferred Stock  (M)      386,073    399,579    480,234 
Warrants for Series C Convertible Preferred Stock
expiring 12/31/14
  ( I )      168,270    163,900    74,724 
Warrants for Series D Convertible Preferred Stock
expiring 8/26/14
  ( I )      88,531    124,999    54,831 
Warrants for Series D Convertible Preferred Stock
expiring 3/10/15
  ( I )      40,012    41,666    23,512 
Warrants for Series E Convertible Preferred Stock
expiring 12/31/17
  ( I )      93,969    170,823    193,148 
Warrants for Common Stock expiring 6/1/16  ( I )      72,668    132,100    3,482 
Warrants for Common Stock expiring 8/9/18  ( I )      148,409    171,183    19,552 
Warrants for Common Stock expiring 10/21/18  ( I )      18,816    84,846    6,054 
          5,413,165         6,187,522 
                      
Cambrios Technologies Corporation (5)(8)(9)(10)     Electronics               
Developing nanowire-enabled electronic materials for the
display industry
                     
Series B Convertible Preferred Stock  (M)      1,294,025    1,294,025    1,165,383 
Series C Convertible Preferred Stock  (M)      1,300,000    1,300,000    1,170,764 
Series D Convertible Preferred Stock  (M)      515,756    515,756    773,634 
Series D-2 Convertible Preferred Stock  (M)      92,400    92,400    92,400 
Series D-4 Convertible Preferred Stock  (M)      216,168    216,168    216,168 
          3,418,349         3,418,349 
                      
Cobalt Technologies, Inc. (5)(8)(9)(11)     Energy               
Developing processes for making bio-butanol through
biomass fermentation
                     
Series C-1 Convertible Preferred Stock  (M)      749,998    352,112    939,188 
Series D-1 Convertible Preferred Stock  (M)      122,070    48,828    141,538 
Series E-1 Convertible Preferred Stock  (M)      114,938    46,089    112,843 
Warrants for Series E-1 Pref. Stock expiring on 10/9/22  ( I )      2,781    1,407    3,097 
Warrants for Series E-1 Pref. Stock expiring on 3/11/23  ( I )      5,355    2,707    6,013 
          995,142         1,202,679 

 

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

 

7
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Unaffiliated Companies (3) –
32.1% of net assets at value (Cont.)
                     
                      
Private Placement Portfolio (Illiquid) (4) –
23.0% of net assets at value (Cont.)
                     
                      
Ensemble Therapeutics Corporation (5)(8)(9)(12)     Life Sciences               
Developing DNA-Programmed ChemistryTM for the discovery of new classes of therapeutics                     
Series B Convertible Preferred Stock  (M)     $2,000,000    1,449,275   $96,376 
Secured Convertible Bridge Note, 8%, acquired 9/11/08  (M)      351,522   $250,211    1,610,680 
Secured Convertible Bridge Note, 8%, acquired 12/10/09  (M)      63,782   $48,868    309,706 
Secured Convertible Bridge Note, 8%, acquired 1/25/12  (M)      124,180   $109,400    674,724 
Secured Convertible Bridge Note, 8%, acquired 3/28/13  (M)      76,637   $73,598    447,010 
Secured Convertible Bridge Note, 8%, acquired 6/24/13  (M)      26,326   $25,759    155,957 
Secured Convertible Bridge Note, 8%, acquired 7/8/13  (M)      14,249   $13,983    84,621 
          2,656,696         3,379,074 
                      
GEO Semiconductor Inc. (5)     Electronics               
Developing programmable, high-performance video and geometry processing solutions                     
Participation Agreement with Montage Capital relating to the following assets:                     
Warrants for Series A Pref. Stock expiring on 9/17/17  ( I )      66,684    100,000    79,839 
Warrants for Series A-1 Pref. Stock expiring on 6/30/18  ( I )      23,566    34,500    31,145 
Loan and Security Agreement with GEO Semiconductor relating to the following assets:                     
Warrants for Series A Pref. Stock expiring on 3/1/18  ( I )      7,512    10,000    7,778 
Warrants for Series A-1 Pref. Stock expiring on 6/29/18  ( I )      7,546    10,000    8,249 
          105,308         127,011 
                      
Mersana Therapeutics, Inc. (5)(8)(9)(10)(13)     Life Sciences               
Developing treatments for cancer based on novel drug delivery polymers                     
Series A-1 Convertible Preferred Stock  (M)      443,038    411,630    443,038 
Common Stock  (M)      3,875,395    350,539    108,667 
          4,318,433         551,705 
                      
Molecular Imprints, Inc. (5)(8)(10)(14)     Electronics               
Manufacturing nanoimprint lithography capital equipment                     
Series B Convertible Preferred Stock  (M)      2,000,000    1,333,333    1,185,536 
Series C Convertible Preferred Stock  (M)      2,406,595    1,285,071    1,523,498 
Non-Convertible Bridge Note  ( I )      0   $0    3,790,474 
          4,406,595         6,499,508 

 

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

 

8
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary      Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Unaffiliated Companies (3) –
32.1% of net assets at value (Cont.)
                     
                      
Private Placement Portfolio (Illiquid) (4) –
23.0% of net assets at value (Cont.)
                     
                      
Nanosys, Inc. (5)(8)     Energy               
Developing inorganic nanowires and quantum dots for use in LED-backlit devices                     
Series C Convertible Preferred Stock  (M)     $1,500,000    803,428   $185,868 
Series D Convertible Preferred Stock  (M)      3,000,003    1,016,950    2,818,283 
Series E Convertible Preferred Stock  (M)      496,573    433,688    699,741 
Unsecured Convertible Bridge Note, 4%, acquired 7/16/12  (M)      45,944   $43,821    249,819 
          5,042,520         3,953,711 
                      
Nano Terra, Inc. (5)(9)     Energy               
Developing surface chemistry and nano-manufacturing solutions                     
Senior secured debt, 12.0%, maturing on 12/1/15  ( I )      768,785   $804,188    789,300 
Warrants for Series A-2 Pref. Stock expiring on 2/22/21  ( I )      69,168    446,248    64,874 
Warrants for Series C Pref. Stock expiring on 11/15/22  ( I )      35,403    241,662    34,646 
          873,356         888,820 
                      
Nantero, Inc. (5)(8)(9)(10)     Electronics               
Developing a high-density, nonvolatile, random access memory chip, enabled by carbon nanotubes                     
Series A Convertible Preferred Stock  (M)      489,999    345,070    1,349,224 
Series B Convertible Preferred Stock  (M)      323,000    207,051    809,569 
Series C Convertible Preferred Stock  (M)      571,329    188,315    736,312 
Series D Convertible Preferred Stock  (M)      139,075    35,569    139,075 
          1,523,403         3,034,180 
                      
OHSO Clean, Inc. (5)(15)     Life Sciences               
Developing natural, hypoallergenic household cleaning products enabled by nanotechnology-enabled formulations of thyme oil                     
Participation Agreement with Montage Capital relating to the following assets:                     
Senior secured debt, 13.00%, maturing on 3/31/15  ( I )      554,714   $653,760    611,570 
Warrants for Series C Pref. Stock expiring on 3/30/22  ( I )      91,742    1,109,333    69,600 
          646,456         681,170 
                      
Total Unaffiliated Private Placement Portfolio (cost: $29,399,423)                  $29,923,729 

 

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

 

9
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Rights to Milestone Payments (Illiquid) (6) –
2.6% of net assets at value
                     
                      
Amgen, Inc. (8)(10)     Life Sciences               
Rights to Milestone Payments from Acquisition of BioVex Group, Inc.  ( I )     $3,291,750   $3,291,750   $3,375,388 
                      
Laird Technologies, Inc. (8)(10)     Energy               
Rights to Milestone Payments from Merger & Acquisition of Nextreme Thermal Solutions, Inc.  ( I )      0    0    0 
                      
Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)                  $3,375,388 
                      
Publicly Traded Portfolio (7) – 6.5% of net assets at value                     
                      
Solazyme, Inc. (5)(10)(16)     Energy               
Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology                     
Common Stock  (M)     $590,739    250,000   $2,696,250 
                      
Champions Oncology, Inc. (5)(10)(17)     Life Sciences               
Developing its TumorGraftTM platform for personalized medicine and drug development                     
Common Stock  (M)      2,199,600    3,293,190    5,763,082 
Warrants for Common Stock expiring 1/29/18  ( I )      400    40,000    45,208 
          2,200,000         5,808,290 
                      
Total Unaffiliated Publicly Traded Portfolio (cost: $2,790,739)                  $8,504,540 
                      
Total Investments in Unaffiliated Companies (cost: $35,481,912)                  $41,803,657 

 

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

 

10
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Non-Controlled Affiliated Companies (3) –
39.6% of net assets at value
                     
                      
Private Placement Portfolio (Illiquid) (18) –
39.6% of net assets at value
                     
                      
ABSMaterials, Inc. (5)(8)(9)     Energy               
Developing nano-structured absorbent materials for environmental remediation                     
Series A Convertible Preferred Stock  (M)     $435,000    390,000   $487,500 
Unsecured Convertible Bridge Note, 8%, acquired 10/1/12  (M)      216,000   $200,000    251,294 
          651,000         738,794 
                      
Adesto Technologies Corporation (5)(8)(19)     Electronics               
Developing low-power, high-performance memory devices                     
Series A Convertible Preferred Stock  (M)      2,200,000    6,547,619    1,386,954 
Series B Convertible Preferred Stock  (M)      2,200,000    5,952,381    1,260,868 
Series C Convertible Preferred Stock  (M)      1,485,531    2,122,187    449,534 
Series D Convertible Preferred Stock  (M)      1,393,147    1,466,470    1,042,222 
Series D-1 Convertible Preferred Stock  (M)      703,740    987,706    561,092 
Series E Convertible Preferred Stock  (M)      2,499,999    3,508,771    9,966,238 
          10,482,417         14,666,908 
                      
AgBiome, LLC (formerly AgInnovation, LLC) (5)(8)(9)(10)(20)     Life Sciences               
Providing early stage research and discovery for agriculture and utilizing the crop microbiome to identify products that reduce risk and improve yield                     
Series A-1 Convertible Preferred Stock  (M)      2,000,000    2,000,000    2,476,378 
Series A-2 Convertible Preferred Stock  (M)      260,870    208,696    284,492 
          2,260,870         2,760,870 
                      
Contour Energy Systems, Inc. (5)(8)(9)(10)     Energy               
Developing batteries using nano-structured materials                     
Series A Convertible Preferred Stock  (M)      2,009,995    2,565,798    10,474 
Series B Convertible Preferred Stock  (M)      1,300,000    812,500    4,824 
Series C Convertible Preferred Stock  (M)      1,200,000    1,148,325    304,470 
          4,509,995         319,768 

 

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

 

11
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Non-Controlled Affiliated Companies (3) –
39.6% of net assets at value (Cont.)
                     
                      
Private Placement Portfolio (Illiquid) (18) –
39.6% of net assets at value (Cont.)
                     
                      
D-Wave Systems, Inc. (8)(9)(10)(21)     Electronics               
Developing high-performance quantum computing systems                     
Series 1 Class B Convertible Preferred Stock  (M)     $1,002,074    1,144,869   $1,447,114 
Series 1 Class C Convertible Preferred Stock  (M)      487,804    450,450    569,369 
Series 1 Class D Convertible Preferred Stock  (M)      748,473    855,131    1,080,886 
Series 1 Class E Convertible Preferred Stock  (M)      248,049    269,280    340,370 
Series 1 Class F Convertible Preferred Stock  (M)      238,323    258,721    327,023 
Series 2 Class D Convertible Preferred Stock  (M)      736,019    678,264    857,326 
Series 2 Class E Convertible Preferred Stock  (M)      659,493    513,900    649,570 
Series 2 Class F Convertible Preferred Stock  (M)      633,631    493,747    624,096 
Warrants for Common Stock expiring 6/30/15  ( I )      98,644    153,890    43,044 
          4,852,510         5,938,798 
                      
EchoPixel, Inc. (5)(8)(9)(10)(22)     Life Sciences               
Developing algorithms and software to improve visualization of data for life science and healthcare applications                     
Series Seed Convertible Preferred Stock  (M)      750,000    2,516,778    750,000 
                      
Enumeral Biomedical Corp. (5)(8)(9)(10)     Life Sciences               
Developing therapeutics and diagnostics through functional assaying of single cells                     
Series A Convertible Preferred Stock  (M)      1,026,832    957,038    1,478,450 
Series A-1 Convertible Preferred Stock  (M)      750,000    576,923    836,538 
Series A-2 Convertible Preferred Stock  (M)      1,050,001    724,138    1,050,001 
          2,826,833         3,364,989 
                      
HzO, Inc. (5)(8)(9)     Electronics               
Developing novel industrial coatings that protect electronics against damage from liquids                     
Series A Convertible Preferred Stock  (M)      666,667    4,057,294    1,027,713 
Series B Convertible Preferred Stock  (M)      3,565,338    14,230,331    3,604,543 
          4,232,005         4,632,256 

 

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

 

12
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Non-Controlled Affiliated Companies (3) –
39.6% of net assets at value (Cont.)
                     
                      
Private Placement Portfolio (Illiquid) (18) –
39.6% of net assets at value (Cont.)
                     
                      
Kovio, Inc. (5)(8)(9)     Electronics               
Developing semiconductor products using printed electronics and thin-film technologies                     
Series A' Convertible Preferred Stock  (M)     $5,242,993    2,160,000   $22,459 
Series B' Convertible Preferred Stock  (M)      2,006,540    3,015,493    31,352 
Secured Subordinated Convertible Bridge Note, 7%,
acquired 6/7/13
  (M)      51,112   $50,000    107,898 
          7,300,645         161,709 
                      
Laser Light Engines, Inc. (5)(8)(9)(23)     Energy               
Manufacturing solid-state light sources for digital cinema and large-venue projection displays                     
Series A Convertible Preferred Stock  (M)      2,000,000    7,499,062    0 
Series B Convertible Preferred Stock  (M)      3,095,802    13,571,848    0 
Secured Convertible Bridge Note, 12%, acquired 10/7/11  (M)      227,800   $200,000    27,800 
Secured Convertible Bridge Note, 12%, acquired 11/17/11  (M)      108,948   $95,652    13,296 
Secured Convertible Bridge Note, 12%, acquired 12/21/11  (M)      94,092   $82,609    11,483 
Secured Convertible Bridge Note, 12%, acquired 3/5/12  (M)      495,219   $434,784    60,435 
Secured Convertible Bridge Note, 12%, acquired 7/26/12  (M)      212,942   $186,955    25,987 
Secured Convertible Bridge Note, 20%, acquired 4/29/13  (M)      180,822   $166,667    23,167 
Secured Convertible Bridge Note, 20%, acquired 7/22/13  (M)      173,151   $166,667    23,167 
          6,588,776         185,335 
                      
Metabolon, Inc. (5)(8)(10)     Life Sciences               
Developing service and diagnostic products through the use of a metabolomics, or biochemical, profiling platform                     
Series B Convertible Preferred Stock  (M)      2,500,000    371,739    1,951,723 
Series B-1 Convertible Preferred Stock  (M)      706,214    148,696    780,689 
Series C Convertible Preferred Stock  (M)      1,000,000    1,000,000    1,794,510 
Series D Convertible Preferred Stock  (M)      1,499,999    835,882    1,499,999 
Warrants for Series B-1 Convertible Preferred Stock
expiring 3/25/15
  ( I )      293,786    74,348    149,592 
          5,999,999         6,176,513 
                      
OpGen, Inc. (8)(10)     Life Sciences               
Developing tools for genomic sequence assembly and analysis                     
Series C Convertible Preferred Stock  (M)      3,260,000    23,623,188    13,940 

 

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

 

13
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Non-Controlled Affiliated Companies (3) –
39.6% of net assets at value (Cont.)
                     
                      
Private Placement Portfolio (Illiquid) (18) –
39.6% of net assets at value (Cont.)
                     
                      
Produced Water Absorbents, Inc. (5)(8)(9)(10)     Energy               
Developing nano-structured absorbent materials for environmental remediation of contaminated water in the oil and gas industries                     
Series A Convertible Preferred Stock  (M)     $1,000,000    1,000,000   $147,441 
Series B Convertible Preferred Stock  (M)      648,000    2,592,000    750,559 
          1,648,000         898,000 
                      
Senova Systems, Inc. (5)(8)(9)     Life Sciences               
Developing next-generation sensors to measure pH                     
Series B Convertible Preferred Stock  (M)      1,218,462    1,350,000    540,000 
Series B-1 Convertible Preferred Stock  (M)      583,960    1,509,902    603,960 
Warrants for Series B Preferred Stock expiring 10/15/17  ( I )      131,538    164,423    65,753 
Warrants for Series B Preferred Stock expiring 4/24/18  ( I )      20,000    25,000    9,997 
          1,953,960         1,219,710 
                      
SiOnyx, Inc. (5)(8)(9)     Electronics               
Developing silicon-based optoelectronic products enabled by its proprietary Black Silicon                     
Series A Convertible Preferred Stock  (M)      750,000    233,499    175,124 
Series A-1 Convertible Preferred Stock  (M)      890,000    2,966,667    2,225,000 
Series A-2 Convertible Preferred Stock  (M)      2,445,000    4,207,537    3,155,653 
Series B-1 Convertible Preferred Stock  (M)      1,169,561    1,892,836    1,419,627 
Series C Convertible Preferred Stock  (M)      1,171,316    1,674,030    1,255,523 
Secured Conv. Bridge Note, 8%, acquired 7/22/13  (M)      424,662   $418,066    424,662 
Warrants for Series B-1 Convertible Preferred Stock
expiring 2/23/17
  ( I )      130,439    247,350    128,820 
Warrants for Common Stock expiring 3/28/17  ( I )      84,207    418,507    74,745 
          7,065,185         8,859,154 
                      
Ultora, Inc. (5)(8)(9)     Energy               
Developing energy-storage devices enabled by carbon nanotubes                     
Series A Convertible Preferred Stock  (M)      886,830    886,830    886,830 
                      
Total Non-Controlled Private Placement Portfolio (cost: $65,269,025)                  $51,573,574 
                      
Total Investments in Non-Controlled Affiliated Companies (cost: $65,269,025)            $51,573,574 

 

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

 

14
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
Investments in Controlled Affiliated Companies (3) –
0.8% of net assets at value
                     
                      
Private Placement Portfolio (Illiquid) (24) –
0.8% of net assets at value
                     
                      
Ancora Pharmaceuticals Inc. (5)(8)(9)(25)     Life Sciences               
Developing synthetic carbohydrates for pharmaceutical applications                     
Common Stock  ( I )     $2,729,817    57,463   $0 
Series A' Convertible Preferred Stock  ( I )      4,855,627    4,855,627    0 
Senior Secured Debt, 12.00%, maturing on 12/11/13  ( I )      485,195   $500,000    729,330 
Secured Convertible Bridge Note, 8%, acquired 1/23/13  ( I )      369,255   $350,000    149,140 
Secured Convertible Bridge Note, 8%, acquired 4/25/13  ( I )      310,455   $300,000    127,835 
          8,750,349         1,006,305 
                      
Total Controlled Private Placement Portfolio (cost: $8,750,349)                  $1,006,305 
                      
Total Investments in Controlled Affiliated Companies (cost: $8,750,349)                  $1,006,305 
                      
Total Private Placement and Publicly Traded Portfolio (cost: $109,501,286)               $94,383,536 
                      
Total Investments (cost: $109,501,286)                  $94,383,536 

 

   Method of  Number of     
   Valuation (1)  Contracts   Value 
Written Call Options (22) – (0.10)% of net assets at value             
              
Solazyme, Inc. — Strike Price $12.50, December 21, 2013  (M)   500   $27,500 
              
Solazyme, Inc. — Strike Price $15.00, December 21, 2013  (M)   1,000    85,000 
              
Solazyme, Inc. — Strike Price $12.50, March 22, 2014  (M)   1,000    15,000 
              
Total Written Call Options (Premiums Received $190,564)          $(127,500)

 

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

 

15
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

Notes to Consolidated Schedule of Investments

 

(1)See "Footnote to Consolidated Schedule of Investments" on page 32 for a description of the "Valuation Procedures."

 

(2)We classify "Energy" companies as those that seek to improve performance, productivity or efficiency, and to reduce environmental impact, waste, cost, energy consumption or raw materials. We classify "Electronics" companies as those that address problems in electronics-related industries, including semiconductors. We classify "Life Sciences" companies as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials and chemicals, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy.

 

(3)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.

 

(4)The aggregate cost for federal income tax purposes of investments in unaffiliated privately held companies is $29,399,423. The gross unrealized appreciation based on the tax cost for these securities is $5,379,843. The gross unrealized depreciation based on the tax cost for these securities is $4,855,537.

 

(5)All or a portion of the investments or instruments are pledged as collateral under our loan facility.

 

(6)The aggregate cost for federal income tax purposes of investments in unaffiliated rights to milestone payments is $3,291,750. The gross unrealized appreciation based on the tax cost for these securities is $83,638. The gross unrealized depreciation based on the tax cost for these securities is $0.

 

(7)The aggregate cost for federal income tax purposes of investments in unaffiliated publicly traded companies is $2,790,739. The gross unrealized appreciation based on the tax cost for these securities is $5,713,801. The gross unrealized depreciation based on the tax cost for these securities is $0.

 

(8)We are subject to legal restrictions on the sale of our investment(s) in this company.

 

(9)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.

 

(10)Represents a non-income producing security. Investments that have not paid dividends or interest within the last 12 months are considered to be non-income producing.

 

(11)Cobalt Technologies, Inc., also does business as Cobalt Biofuels.

 

(12)With our investments in convertible bridge notes issued by Ensemble Therapeutics Corporation, we received warrants to purchase a number of shares of the class of stock sold in the next financing of Ensemble Therapeutics Corporation equal to $260,989 divided by the price per share of the class of stock sold in the next financing of Ensemble Therapeutics Corporation. The ability to exercise these warrants is, therefore, contingent on Ensemble Therapeutics Corporation completing successfully a subsequent round of financing. These warrants shall expire and no longer be exercisable on dates ranging from September 10, 2015, through July 8, 2020. The cost basis of these warrants is $157.

 

The accompanying unaudited notes are an integral part of this consolidated schedule.

 

16
 

 

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2013

(Unaudited)

 

(13)With our investment in the Mersana Therapeutics, Inc., Series A-1 financing, we received a warrant to purchase 277,760 shares of Series A-2 Convertible Preferred Stock. The ability to exercise the warrant is contingent upon Mersana's achievement of certain milestones. Mersana has not achieved those milestones as of September 30, 2013, and, therefore, this warrant is a contingent asset as of that date. The warrant will expire on July 27, 2022.

 

(14)As part of a loan the Company made to Molecular Imprints in the second quarter of 2011, we received a liquidation preference payable upon a sale of the company equal to three times the principal of the loan, or $4,044,450. This preference is senior to the preferences of the outstanding preferred stock. While the loan has since been repaid, this liquidation preference remains outstanding as of September 30, 2013.

 

(15)OHSO Clean, Inc. also does business as CleanWell Company.

 

(16)A portion of this security is held in connection with written call option contracts: 250,000 shares, having a fair value of $2,696,250, have been pledged to brokers.

 

(17)As of September 30, 2013, we owned a total of 3,293,190 shares of Champions Oncology, Inc. During the third quarter of 2013, the restriction on the sale of these securities expired.

 

(18)The aggregate cost for federal income tax purposes of investments in non-controlled affiliated privately held companies is $65,269,025. The gross unrealized appreciation based on the tax cost for these securities is $8,767,463. The gross unrealized depreciation based on the tax cost for these securities is $22,462,914.

 

(19)Adesto Technologies Corporation's Series E shares have certain rights and preferences in a sale or IPO that are not ascribed to the other classes of stock.

 

(20)On January 29, 2013, AgInnovation, LLC, changed its name to AgBiome, LLC.

 

(21)D-Wave Systems, Inc., is located and is doing business primarily in Canada. We invested in D-Wave Systems, Inc., through Parallel Universes, Inc., 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."

 

(22)Initial investment was made in 2013.

 

(23)We have a 25.01 percent voting interest in Laser Light Engines, Inc. However, we do not control this investment as another investor has a 55 percent voting interest and the majority of the board seats of the company.

 

(24)The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $8,750,349. 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 $7,744,044.

 

(25)On October 31, 2013, Ancora sold a substantial portion of its assets, including the use of its corporate name, to CordenPharma International US, Inc. ("Corden").  The remaining assets formed a new company, SynGlyco, Inc., of which we continue to own shares.  SynGlyco may receive future royalty payments based upon certain sales targets and other terms of the Corden acquisition.

 

The accompanying unaudited notes are an integral part of this consolidated schedule.

 

17
 

 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Unaffiliated Companies (3) –
33.3% of net assets at value
               
                      
Private Placement Portfolio (Illiquid) (4) –  
19.4% of net assets at value
                     
                      
Bridgelux, Inc. (7)(8)     Energy               
Manufacturing high-power light emitting diodes (LEDs) and arrays                     
Series B Convertible Preferred Stock  (M)     $1,000,000    1,861,504   $426,744 
Series C Convertible Preferred Stock  (M)      1,352,196    2,130,699    488,456 
Series D Convertible Preferred Stock  (M)      1,371,622    999,999    356,865 
Series E Convertible Preferred Stock  (M)      672,599    440,334    520,495 
Series E-1 Convertible Preferred Stock  (M)      534,482    399,579    368,251 
Warrants for Series C Convertible Preferred                     
Stock expiring 12/31/14  ( I )      168,270    163,900    11,210 
Warrants for Series D Convertible Preferred                     
Stock expiring 8/26/14  ( I )      88,531    124,999    8,295 
Warrants for Series D Convertible Preferred                     
Stock expiring 3/10/15  ( I )      40,012    41,666    3,976 
Warrants for Series E Convertible Preferred                     
Stock expiring 12/31/17  ( I )      93,969    170,823    144,181 
Warrants for Common Stock expiring 6/1/16  ( I )      72,668    132,100    3,308 
Warrants for Common Stock expiring 10/21/18  ( I )      18,816    84,846    3,800 
          5,413,165         2,335,581 
                      
Cambrios Technologies Corporation (7)(9)(10)     Electronics               
Developing nanowire-enabled electronic materials for the display industry                     
Series B Convertible Preferred Stock  (M)      1,294,025    1,294,025    700,454 
Series C Convertible Preferred Stock  (M)      1,300,000    1,300,000    703,688 
Series D Convertible Preferred Stock  (M)      515,756    515,756    870,338 
Series D-2 Convertible Preferred Stock  (M)      92,400    92,400    86,625 
Series D-4 Convertible Preferred Stock  (M)      216,168    216,168    202,658 
          3,418,349         2,563,763 
                      
Cobalt Technologies, Inc. (7)(9)(11)     Energy               
Developing processes for making bio- butanol through biomass fermentation                     
Series C-1 Convertible Preferred Stock  (M)      749,998    352,112    933,802 
Series D-1 Convertible Preferred Stock  (M)      122,070    48,828    140,664 
Series E-1 Convertible Preferred Stock  (M)      42,328    16,890    41,143 
Secured Convertible Bridge Note, 10%, acquired 5/25/12  (M)      47,828   $45,097    47,828 
Warrants for Series E-1 Pref. Stock expiring on 10/9/22  ( I )      2,781    1,407    3,116 
          965,005         1,166,553 

 

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

 

18
 

  

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Unaffiliated Companies (3) –  
33.3% of net assets at value (Cont.)
                
                      
Private Placement Portfolio (Illiquid) (4) –  
19.4% of net assets at value (Cont.)
                     
                      
Ensemble Therapeutics Corporation (7)(9)(12)     Life Sciences               
Developing DNA-Programmed ChemistryTM for the discovery of new classes of therapeutics                     
Series B Convertible Preferred Stock  (M)     $2,000,000    1,449,275   $0 
Secured Convertible Bridge Note, 8%, acquired 9/11/08  (M)      336,550   $250,211    1,563,344 
Secured Convertible Bridge Note, 8%, acquired 12/10/09  (M)      60,858   $48,868    300,461 
Secured Convertible Bridge Note, 8%, acquired 1/25/12  (M)      117,634   $109,400    654,027 
          2,515,042         2,517,832 
                      
GEO Semiconductor Inc. (13)     Electronics               
Developing programmable, high-performance video and geometry processing solutions                     
Participation Agreement with Montage                     
Capital relating to the following assets:                     
Senior secured debt, 13.75%, maturing on 1/15/13  ( I )      285,125   $375,801    347,830 
Warrants for Series A Pref. Stock expiring on 9/17/17  ( I )      66,684    100,000    79,796 
Warrants for Series A-1 Pref. Stock expiring on 6/30/18  ( I )      23,566    34,500    28,013 
Loan and Security Agreement with GEO Semiconductor relating to the following assets:                     
Subordinated secured debt, 15.75%, maturing on 1/15/13  ( I )      109,574   $125,000    120,410 
Warrants for Series A Pref. Stock expiring on 3/1/18  ( I )      7,512    10,000    7,511 
Warrants for Series A-1 Pref. Stock expiring on 6/29/18  ( I )      7,546    10,000    7,535 
          500,007         591,095 
                      
Mersana Therapeutics, Inc. (7)(9)(14)     Life Sciences               
Developing treatments for cancer based on novel drug delivery polymers                     
Series A-1 Convertible Preferred Stock  (M)      316,453    294,019    316,453 
Common Stock  (M)      3,875,395    350,539    108,667 
          4,191,848         425,120 
                      
Molecular Imprints, Inc. (7)(10)(15)     Electronics               
Manufacturing nanoimprint                     
lithography capital equipment                     
Series B Convertible Preferred Stock  (M)      2,000,000    1,333,333    1,789,108 
Series C Convertible Preferred Stock  (M)      2,406,595    1,285,071    2,138,498 
Non-Convertible Bridge Note  ( I )      0   $0    3,033,338 
          4,406,595         6,960,944 

 

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

 

19
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Unaffiliated Companies (3) –  
33.3% of net assets at value (Cont.)
               
                      
Private Placement Portfolio (Illiquid) (4) –  
19.4% of net assets at value (Cont.)
                     
                      
Nanosys, Inc. (7)     Energy               
Developing inorganic nanowires and quantum dots for use in LED-backlit devices                     
Series C Convertible Preferred Stock  (M)     $1,500,000    803,428   $186,032 
Series D Convertible Preferred Stock  (M)      3,000,003    1,016,950    2,814,423 
Series E Convertible Preferred Stock  (M)      496,573    433,688    698,783 
Unsecured Convertible Bridge Note, 4%, acquired 7/16/12  (M)      44,633   $43,821    249,067 
          5,041,209         3,948,305 
                      
Nano Terra, Inc. (9)     Energy               
Developing surface chemistry and nano- manufacturing solutions                     
Senior secured debt, 12.0%, maturing on 12/1/15  ( I )      614,597   $650,000    622,600 
Warrants for Series A-2 Pref. Stock expiring on 2/22/21  ( I )      69,168    446,248    66,003 
Warrants for Series C Pref. Stock expiring on 11/15/22  ( I )      35,403    241,662    35,271 
          719,168         723,874 
                      
Nantero, Inc. (7)(9)(10)     Electronics               
Developing a high-density, nonvolatile, random access memory chip,                      
enabled by carbon nanotubes                     
Series A Convertible Preferred Stock  (M)      489,999    345,070    1,349,224 
Series B Convertible Preferred Stock  (M)      323,000    207,051    809,569 
Series C Convertible Preferred Stock  (M)      571,329    188,315    736,312 
Series D Convertible Preferred Stock  (M)      139,075    35,569    139,075 
          1,523,403         3,034,180 
                      
OHSO Clean, Inc. (16)(17)     Life Sciences               
Developing natural, hypoallergenic household cleaning products enabled by nanotechnology- enabled formulations of thyme oil                     
Participation Agreement with Montage                     
Capital relating to the following assets:                     
Senior secured debt, 13.00%, maturing on 3/31/15  ( I )      580,025   $683,200    615,750 
Warrants for Series C Pref. Stock expiring on 3/30/22  ( I )      91,742    1,109,333    66,759 
          671,767         682,509 
                      
Total Unaffiliated Private Placement Portfolio (cost: $29,365,558)                  $24,949,756 

 

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

 

20
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Rights to Milestone Payments (Illiquid) (5) –  
2.7% of net assets at value
               
                      
Amgen, Inc. (7)(10)     Life Sciences               
Rights to Milestone Payments from                     
Acquisition of BioVex Group, Inc.  ( I )     $3,291,750   $3,291,750   $3,400,734 
                      
Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)                  $3,400,734 
                      
Publicly Traded Portfolio (6) –  11.2% of net assets at value                     
                      
NeoPhotonics Corporation (10)(18)     Electronics               
Developing and manufacturing optical devices and components                     
Common Stock  (M)     $821,971    50,807   $291,632 
                      
Solazyme, Inc. (10)(19)     Energy               
Developing algal biodiesel, industrial chemicals and specialty ingredients using  synthetic biology                     
Common Stock  (M)      4,248,476    1,797,790    14,130,629 
                      
Total Unaffiliated Publicly Traded Portfolio (cost: $5,070,447)                  $14,422,261 
                      
Total Investments in Unaffiliated Companies (cost: $37,727,755)                  $42,772,751 

 

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

 

21
 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

  

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled Affiliated Companies (3) –                
48.4% of net assets at value                     
                      
Private Placement Portfolio (Illiquid) (20) –  
47.3% of net assets at value
                     
                      
ABSMaterials, Inc. (7)(9)     Energy               
Developing nano-structured absorbent materials for environmental remediation                     
Series A Convertible Preferred Stock  (M)     $435,000    390,000   $97,871 
Secured Convertible Bridge Note, 8%, acquired 10/1/12  (M)      204,033   $200,000    232,080 
          639,033         329,951 
                      
Adesto Technologies Corporation (7)(9)(10)     Electronics               
Developing low-power, high-performance memory devices                     
Series A Convertible Preferred Stock  (M)      2,200,000    6,547,619    4,474,625 
Series B Convertible Preferred Stock  (M)      2,200,000    5,952,381    4,117,841 
Series C Convertible Preferred Stock  (M)      1,485,531    2,122,187    1,643,416 
Series D Convertible Preferred Stock  (M)      1,393,147    1,466,470    1,227,285 
          7,278,678         11,463,167 
                      
AgBiome, LLC (formerly AgInnovation, LLC) (7)(9)(10)(16)(21)     Life Sciences               
Providing early stage research and discovery for  agriculture and utilizing the crop microbiome to identify products that reduce risk and improve yield                     
Series A-1 Convertible Preferred Stock  (M)      2,000,000    2,000,000    2,000,000 
                      
Contour Energy Systems, Inc. (7)(9)(10)     Energy               
Developing batteries using nano-structured materials                     
Series A Convertible Preferred Stock  (M)      2,009,995    2,565,798    1,703,814 
Series B Convertible Preferred Stock  (M)      1,300,000    812,500    1,008,380 
Series C Convertible Preferred Stock  (M)      1,200,000    1,148,325    1,125,002 
          4,509,995         3,837,196 

 

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

 

22
 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

  

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled Affiliated Companies (3) –                
48.4% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (20) –
47.3% of net assets at value (Cont.)
                     
                      
D-Wave Systems, Inc. (7)(9)(22)     Electronics               
Developing high-performance quantum computing systems                     
Series 1 Class B Convertible Preferred Stock  (M)     $1,002,074    1,144,869   $1,493,024 
Series 1 Class C Convertible Preferred Stock  (M)      487,804    450,450    587,432 
Series 1 Class D Convertible Preferred Stock  (M)      748,473    855,131    1,115,176 
Series 1 Class E Convertible Preferred Stock  (M)      248,049    269,280    351,168 
Series 1 Class F Convertible Preferred Stock  (M)      238,323    258,721    337,398 
Series 2 Class D Convertible Preferred Stock  (M)      736,019    678,264    884,524 
Series 2 Class E Convertible Preferred Stock  (M)      409,032    317,746    414,372 
Series 2 Class F Convertible Preferred Stock  (M)      392,993    305,286    398,124 
Warrants for Common Stock expiring 6/30/15  ( I )      98,644    153,890    40,103 
          4,361,411         5,621,321 
                      
Enumeral Biomedical Corp. (7)(9)(10)     Life Sciences               
Developing therapeutics and diagnostics through functional assaying of single cells                     
Series A Convertible Preferred Stock  (M)      1,026,832    957,038    1,325,507 
Series A-1 Convertible Preferred Stock  (M)      750,000    576,923    750,000 
          1,776,832         2,075,507 
                      
HzO, Inc. (7)(9)(10)     Electronics               
Developing novel industrial coatings that  protect electronics against damage from liquids                     
Series A Convertible Preferred Stock  (M)      666,667    4,057,294    760,227 
Series B Convertible Preferred Stock  (M)      2,000,000    7,895,776    1,737,366 
          2,666,667         2,497,593 
                      
Kovio, Inc. (7)(9)(10)     Electronics               
Developing semiconductor products using printed electronics and thin-film technologies                     
Series A' Convertible Preferred Stock  (M)      5,242,993    2,160,000    359,321 
Series B' Convertible Preferred Stock  (M)      2,006,540    3,015,493    1,362,591 
          7,249,533         1,721,912 

 

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

 

23
 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled Affiliated Companies (3) –              
48.4% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (20) –  
47.3% of net assets at value (Cont.)
                     
                      
Metabolon, Inc. (7)(10)     Life Sciences               
Developing service and diagnostic products through the use of a metabolomics, or  biochemical, profiling platform                     
Series B Convertible Preferred Stock  (M)     $2,500,000    371,739   $1,951,723 
Series B-1 Convertible Preferred Stock  (M)      706,214    148,696    780,689 
Series C Convertible Preferred Stock  (M)      1,000,000    1,000,000    1,794,510 
Series D Convertible Preferred Stock  (M)      1,499,999    835,882    1,499,999 
Warrants for Series B-1 Convertible Preferred Stock expiring 3/25/15  ( I )      293,786    74,348    71,164 
          5,999,999         6,098,085 
                      
Nextreme Thermal Solutions, Inc. (7)(9)(10)(23)     Energy               
Developed thin-film thermoelectric devices for cooling and energy conversion                     
Common Stock  (M)      4,384,762    8,080,153    0 
                      
OpGen, Inc. (7)(10)(16)     Life Sciences               
Developing tools for genomic sequence assembly and analysis                     
Series C Convertible Preferred Stock  (M)      3,260,000    23,623,188    3,260,000 
                      
Produced Water Absorbents, Inc. (7)(9)(10)     Energy               
Developing nano-structured absorbent materials for environmental remediation of contaminated water in the oil and gas industries                     
Series A Convertible Preferred Stock  (M)      1,000,000    1,000,000    278,170 
                      
Senova Systems, Inc. (7)(9)(10)     Life Sciences               
Developing next-generation sensors to measure pH                     
Series B Convertible Preferred Stock  (M)      1,218,462    1,350,000    810,000 
Warrants for Series B Preferred Stock expiring 10/15/17  ( I )      131,538    164,423    98,637 
          1,350,000         908,637 

 

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

 

24
 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

  

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled Affiliated Companies (3) –                 
48.4% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) (20) –  
47.3% of net assets at value (Cont.)
                     
                      
SiOnyx, Inc. (7)(9)(10)     Electronics               
Developing silicon-based optoelectronic products enabled by its proprietary Black Silicon                     
Series A Convertible Preferred Stock  (M)     $750,000    233,499   $160,367 
Series A-1 Convertible Preferred Stock  (M)      890,000    2,966,667    2,037,507 
Series A-2 Convertible Preferred Stock  (M)      2,445,000    4,207,537    2,889,736 
Series B-1 Convertible Preferred Stock  (M)      1,169,561    1,892,836    1,300,000 
Series C Convertible Preferred Stock  (M)      1,171,316    1,674,030    1,255,523 
Warrants for Series B-1 Convertible Preferred Stock expiring 2/23/17  ( I )      130,439    247,350    50,113 
Warrants for Common Stock expiring 3/28/17  ( I )      84,207    418,507    32,098 
          6,640,523         7,725,344 
                      
Ultora, Inc. (7)(9)     Energy               
Developing energy-storage devices enabled by carbon nanotubes                     
Series A Convertible Preferred Stock  (M)      671,830    671,830    671,830 
                      
Xradia, Inc. (7)(10)     Electronics               
Designing, manufacturing and selling ultra- high resolution 3D x-ray microscopes and  fluorescence imaging systems                     
Series D Convertible Preferred Stock     (M)   4,000,000    3,121,099    12,303,684 
                      
Total Non-Controlled Private Placement Portfolio (cost: $57,789,263)                  $60,792,397 

 

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

 

25
 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

  

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Non-Controlled Affiliated Companies (3) –               
48.4% of net assets at value (Cont.)                     
                      
Publicly Traded Portfolio (Illiquid) (24) –  1.1% of net assets at value                     
                      
Champions Oncology, Inc. (10)     Life Sciences               
Developing its TumorGraftTM platform for personalized medicine and drug development                     
Common Stock  (M)     $2,000,000    2,666,667   $1,348,227 
                      
Total Non-Controlled Affiliated Publicly Traded Portfolio (cost: $2,000,000)                  $1,348,227 
                      
Total Investments in Non-Controlled Affiliated Companies (cost: $59,789,263)                  $62,140,624 
                      
Investments in Controlled Affiliated Companies (3)(25) –                     
2.4% of net assets at value                     
                      
Private Placement Portfolio (Illiquid) – 2.4% of net assets at value                     
                      
Ancora Pharmaceuticals Inc. (7)(9)     Life Sciences               
Developing synthetic carbohydrates for pharmaceutical applications                     
Common Stock  ( I )     $2,729,817    57,463   $0 
Series A' Convertible Preferred Stock  ( I )      4,855,627    4,855,627    521,494 
Senior Secured Debt, 12.00%, maturing on 12/11/13  ( I )      446,731   $500,000    453,270 
          8,032,175         974,764 

 

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

 

26
 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

  

   Method of  Primary     Shares/     
   Valuation (1)  Industry (2)  Cost   Principal   Value 
                   
Investments in Controlled Affiliated Companies (3)(25) –                
2.4% of net assets at value (Cont.)                     
                      
Private Placement Portfolio (Illiquid) –
2.4% of net assets at value (Cont.)
                     
                      
Laser Light Engines, Inc. (7)(9)    Energy               
Manufacturing solid-state light sources for digital cinema and large-venue projection displays                     
Series A Convertible Preferred Stock  (M)     $2,000,000    7,499,062   $0 
Series B Convertible Preferred Stock  (M)      3,095,802    13,571,848    1,008,225 
Secured Convertible Bridge Note, 12%, acquired 10/7/11  (M)      229,721   $200,000    229,721 
Secured Convertible Bridge Note, 12%, acquired 11/17/11  (M)      108,577   $95,652    108,577 
Secured Convertible Bridge Note, 12%, acquired 12/21/11  (M)      92,848   $82,609    92,848 
Secured Convertible Bridge Note, 12%, acquired 3/5/12  (M)      477,953   $434,784    477,953 
Secured Convertible Bridge Note, 12%, acquired 7/26/12  (M)      196,728   $186,955    196,728 
          6,201,629         2,114,052 
                      
Total Controlled Private Placement Portfolio (cost: $14,233,804)                  $3,088,816 
                      
Total Investments in Controlled Affiliated Companies (cost: $14,233,804)                  $3,088,816 
                      
Total Private Placement and Publicly Traded Portfolio (cost: $111,750,822)                  $108,002,191 

 

   Method of     Shares/     
   Valuation (1)  Cost   Principal   Value 
                
U.S. Government Securities (26) –  10.9% of net assets at value              
                   
U.S. Treasury Bill — due date 03/28/13  (M)  $13,996,136   $14,000,000   $13,998,880 
                   
Total Investments in U.S. Government Securities (cost: $13,996,136)               $13,998,880 
                   
Total Investments (cost: $125,746,958)             $122,001,071 

 

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

 

27
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

   Method of  Number of     
   Valuation (1)  Contracts   Value 
            
Written Call Options (16) –  (0.03)% of net assets at value          
              
Solazyme, Inc. — Strike Price $10.00, March 16, 2013  (M)   1,500   $(37,500)
              
NeoPhotonics Corporation — Strike Price $7.50, February 16, 2013  (M)   500    (5,000)
              
Total Written Call Options (Premiums Received $50,000)          $(42,500)

 

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

 

28
 

 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

Notes to Consolidated Schedule of Investments

 

(1)See "Footnote to Consolidated Schedule of Investments" on page 32 for a description of the "Valuation Procedures."

 

(2)We classify "Energy" 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 "Electronics" companies as those that use nanotechnology to address problems in electronics-related industries, including semiconductors. In the fourth quarter of 2012, we renamed the industry classification "Healthcare" to "Life Sciences." We classify "Life Sciences" companies as those that address problems in life sciences-related industries, including biotechnology, agriculture, advanced materials and chemicals, healthcare, bioprocessing, water, industrial biotechnology, food, nutrition and energy.

 

(3)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.

 

(4)The aggregate cost for federal income tax purposes of investments in unaffiliated privately held companies is $29,365,558. The gross unrealized appreciation based on the tax cost for these securities is $4,376,000. The gross unrealized depreciation based on the tax cost for these securities is $8,791,802.

 

(5)The aggregate cost for federal income tax purposes of investments in unaffiliated rights to milestone payments is $3,291,750. The gross unrealized appreciation based on the tax cost for these securities is $108,984. The gross unrealized depreciation based on the tax cost for these securities is $0.

 

(6)The aggregate cost for federal income tax purposes of investments in unaffiliated publicly traded companies is $5,070,447. The gross unrealized appreciation based on the tax cost for these securities is $9,882,153. The gross unrealized depreciation based on the tax cost for these securities is $530,339.

 

(7)We are subject to legal restrictions on the sale of our investment(s) in this company.

 

(8)With the conversion of our bridge note into shares of Series E-1 Preferred Stock, we received a warrant to purchase shares of common stock at $0.25 per share. The number of shares is determined by certain financial targets for 2012 set upon receipt of the audited financial statements for 2012. These financial statements have not yet been issued, and, therefore, the warrant remains contingent as of December 31, 2012.

 

(9)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.

 

The accompanying notes are an integral part of this consolidated schedule.

 

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HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

(10)Represents a non-income producing security. Investments that have not paid dividends or interest within the last 12 months are considered to be non-income producing.

 

(11)Cobalt Technologies, Inc., also does business as Cobalt Biofuels.

 

(12)With our investment in a convertible bridge note issued by Ensemble Therapeutics Corporation, we received a warrant to purchase a number of shares of the class of stock sold in the next financing of Ensemble Therapeutics Corporation equal to $149,540 divided by the price per share of the class of stock sold in the next financing of Ensemble Therapeutics Corporation. The ability to exercise this warrant is, therefore, contingent on Ensemble Therapeutics Corporation 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.

 

(13)The outstanding loans with maturity dates of 1/15/13 were not repaid as of that date. The maturity dates of these loans are expected to be extended to at least 6/30/13. GEO Semiconductor continues to pay principal and interest, as applicable, on each loan based on the terms negotiated as of December 31, 2012.

 

(14)With our investment in the Mersana Therapeutics, Inc., Series A-1 financing, we received a warrant to purchase 277,760 shares of Series A-2 Convertible Preferred Stock. The ability to exercise the warrant is contingent upon Mersana's achievement of certain milestones. Mersana has not achieved those milestones as of December 31, 2012, and, therefore, this warrant is a contingent asset as of that date. The warrant will expire on July 27, 2022.

 

(15)As part of a loan the Company made to Molecular Imprints in the second quarter of 2011, we received a liquidation preference payable upon a sale of the company equal to three times the principal of the loan, or $4,044,450. This preference is senior to the preferences of the outstanding preferred stock. While the loan has since been repaid, this liquidation preference remains outstanding as of December 31, 2012.

 

(16)Initial investment was made during 2012.

 

(17)OHSO Clean, Inc. also does business as CleanWell Company.

 

(18)A portion of this security is held in connection with written call option contracts: 50,000 shares, having a fair value of $287,000, have been pledged to brokers.

 

(19)A portion of this security is held in connection with written call option contracts: 150,000 shares, having a fair value of $1,175,000, have been pledged to brokers.

 

(20)The aggregate cost for federal income tax purposes of investments in non-controlled affiliated companies is $57,789,263. The gross unrealized appreciation based on the tax cost for these securities is $15,229,665. The gross unrealized depreciation based on the tax cost for these securities is $12,226,531.

 

(21)On January 29, 2013, AgInnovation, LLC, changed its name to AgBiome, LLC.

 

The accompanying notes are an integral part of this consolidated schedule.

 

30
 

  

HARRIS & HARRIS GROUP, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2012

 

(22)D-Wave Systems, Inc., is located and is doing business primarily in Canada. We invested in D-Wave Systems, Inc., through Parallel Universes, Inc., a Delaware company. Our investment is denominated in Canadian dollars and is subject to foreign currency translation. See "Note 2. Summary of Significant Accounting Policies."

 

(23)On February 13, 2013, Nextreme Thermal Solutions, Inc., was acquired by Laird Technologies, Inc., for $1 and the potential for future milestone payments.

 

(24)The aggregate cost for federal income tax purposes of investments in non-controlled affiliated publicly traded companies is $2,000,000. 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 $651,773.

 

(25)The aggregate cost for federal income tax purposes of investments in controlled affiliated companies is $14,233,804. 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 $11,144,988.

 

(26)The aggregate cost for federal income tax purposes of our U.S. government securities is $13,996,136. The gross unrealized appreciation on the tax cost for these securities is $2,744. The gross unrealized depreciation on the tax cost of these securities is $0.

 

The accompanying notes are an integral part of this consolidated schedule.

 

31
 

 

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. 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. An independent valuation firm also reviews select portfolio company valuations. The independent valuation firm does not provide proposed valuations.

 

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

 

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In 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 (M): The market approach may use quantitative inputs such as prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities and the values of market multiples derived from a set of comparable companies. The market approach may also use qualitative inputs such as progress toward milestones, the long-term potential of the business, current and future financing requirements and the rights and preferences of certain securities versus those of other securities. The selection of the relevant inputs used to derive value under the market approach requires judgment considering factors specific to the significance and relevance of each input to deriving value.

 

32
 

 

·Income Approach (I): 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, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs are in those markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers; and

 

·Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are those inputs that reflect our own assumptions that market participants would use to price the asset or liability based upon the best available information.

 

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

 

·All other securities.

 

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:

 

33
 

 

A.EQUITY-RELATED SECURITIES

 

Equity-related securities, including options or 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 income approach. The factors that may be considered when valuing these types of securities by the income approach include:

 

·Credit quality;
·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.

 

34
 

 

C.SHORT-TERM FIXED-INCOME SECURITIES

 

Short-term fixed-income securities are valued 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, 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;
·Commercial prospects;
·Term of patent;
·Projected markets; and
·Other subjective factors.

 

E.ALL OTHER SECURITIES

 

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.

 

35
 

  

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 Act of 1940 (the "1940 Act") that specializes in making investments in transformative companies enabled by disruptive science. We operate as an internally managed investment company whereby our officers and employees, under the general supervision of our Board of Directors, conduct our operations.

 

H&H Ventures Management, Inc.SM ("Ventures"), formerly Harris & Harris Enterprises, Inc.SM, is a 100 percent wholly owned subsidiary of the Company. Ventures is taxed under Subchapter C (a "C Corporation") of the Internal Revenue Code of 1986 (the "Code"). 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 Ventures (sole general partner) and the Company (sole limited partner). Ventures pays taxes on income generated by its operations as well as on any non-passive investment income generated by Harris Partners I, L.P. For the period ended September 30, 2013, there was no non-passive investment income generated by Harris Partners I, L.P. Ventures, as the sole general partner, consolidates Harris Partners I, L.P. The Company consolidates its wholly owned subsidiary, Ventures, 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 fair statement 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 statement 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, 2012.

 

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:

 

36
 

 

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. In accordance with GAAP and Regulation S-X, the Company may only consolidate its interests in investment company subsidiaries and controlled operating companies whose business consists of providing services to the Company. Our wholly owned subsidiary, Ventures, is a controlled operating company that provides services to us and is, therefore, consolidated. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

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.

 

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.") As of September 30, 2013, our financial statements include privately held investments fair valued at $85,924,204. The fair values of our privately held investments and warrants of Champions Oncology, Inc., a publicly traded company, 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.

 

Cash. Cash includes demand deposits. Cash is carried at cost, which approximates fair value.

 

Restricted Funds. At September 30, 2013, and December 31, 2012, we held $10,028 and $10,015, respectively, in "Restricted funds," related to security deposits for sublessors.

 

Unaffiliated Rights to Milestone Payments. At September 30, 2013, and December 31, 2012, the outstanding milestone payments from Amgen, Inc.’s acquisition of Biovex Group, Inc., were valued at $3,375,388 and $3,400,734, respectively. The milestone payments are derivatives and valued using the probability-adjusted, present value of proceeds from future payments that would be due upon successful completion of certain regulatory and sales milestones. If all remaining milestones are met, we would receive $9,526,393. There can be no assurance as to how much of this amount we will ultimately realize or when it will be realized, if at all. At September 30, 2013, the outstanding milestone payments from Laird Technologies, Inc.’s acquisition of Nextreme Thermal Solutions, Inc., were valued at $0.

 

Receivable from Sales of Investments. At September 30, 2013, we had a receivable totaling $22,799,975 relating to an unsettled trade from the sale of a U.S. Treasury security. This transaction settled on October 1, 2013, at which time we received the cash for this sale. We liquidated our U.S. Treasury position owing to the risk of default associated with those securities in October.

 

37
 

 

Funds Held in Escrow from Sale of Investment. At September 30, 2013, there were funds held in escrow fair valued at $1,168,671 relating to the sale of Xradia, Inc., to Carl Zeiss AG. Funds held in escrow are valued using certain discounts applied to the amounts withheld. Funds held in escrow from the Xradia transaction will be released in January and July of 2014 net of any settlement of any indemnity claims and expenses related to the transaction. If the funds held in escrow for this transaction are released in full, we would receive $2,374,827.

 

Prepaid Expenses. We include prepaid insurance premiums and deferred financing charges in "Prepaid expenses." Prepaid insurance premiums are recognized over the term of the insurance contract. Deferred financing charges consist of fees and expenses paid in connection with the closing of loan facilities and are capitalized at the time of payment. Deferred financing charges are amortized over the term of the loan facility discussed in "Note 5. Debt." Amortization of the financing charges is included in "Interest and other debt expense" in the Consolidated Statements of Operations.

 

Property and Equipment. Property and equipment are included in "Other assets" and are carried at $250,361 and $288,122 at September 30, 2013, and December 31, 2012, 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 the lesser of ten years or the remaining life of the lease for leasehold improvements.

 

Post Retirement Plan Liabilities. The Company provides a Retiree Medical Benefit Plan for employees who meet certain eligibility requirements. Until it was terminated on May 5, 2011, the Company also provided an Executive Mandatory Retirement Benefit Plan for certain individuals employed by us in a bona fide executive or high policy-making position. The net periodic postretirement benefit cost for the year is determined as the sum of service cost for the year and interest on the accumulated postretirement benefit obligation. Unrecognized actuarial gains and losses are recognized as net periodic benefit cost pursuant to the Company's historical accounting policy. The impact of plan amendments are amortized over the service period as a component of "Accumulated other comprehensive income."

 

Interest Income Recognition. Interest income, including amortization of premium and accretion of discount, is recorded on an accrual basis. When accrued interest is determined to not be recoverable, the Company ceases accruing interest and writes off any previously accrued interest. Securities are deemed to be non-income producing if, on their last interest or dividend date, no cash was paid or no cash or in-kind dividends were declared. These write-offs are reversed through interest income. During the three months and nine months ended September 30, 2013, the Company earned $81,787 and $257,604, respectively, in interest on U.S. government securities, senior secured debt, participation agreements, subordinated secured debt, non-convertible promissory notes and interest-bearing accounts. During the three months and nine months ended September 30, 2013, the Company recorded $33,238 and $172,474, respectively, of bridge note interest. During the three months and nine months ended September 30, 2012, the Company earned $74,821 and $210,146, respectively, in interest on U.S. government securities, senior secured debt, participation agreements, subordinated secured debt and interest-bearing accounts. During the three months and nine months ended September 30, 2012, the Company recorded, on a net basis, $275,148 and $190,466, respectively, of bridge note interest.

 

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Loan Fees. Loan fees received in connection with our venture debt investments are deferred. The unearned fee income is accreted into income based on the effective interest method over the life of the investment.

 

Call Options. The Company writes covered call options on publicly traded securities with the intention of earning option premiums. Option premiums may increase the Company’s realized gains and, therefore, may help increase distributable income, but may limit the realized gains on the security. When a Company writes (sells) an option, an amount equal to the premium received by the Company is recorded in the Consolidated Statements of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. When an option expires, the Company realizes a gain on the option to the extent of the premiums received. Premiums received from writing options that are exercised or closed are added to the proceeds or offset against the amount paid on the transaction to determine the realized gain or loss. At September 30, 2013, and December 31, 2012, the Company had 250,000 shares and 150,000 shares, respectively, of Solazyme, Inc., covered by call option contracts. In the event these contracts are exercised, the Company would be required to deliver those shares to the counterparty.

 

Put Options. The Company purchases put options on publicly traded securities with the intention of limiting its downside risk. When the Company purchases a put option, an amount equal to the premium paid is recorded in the Consolidated Statements of Assets and Liabilities as an investment. The amount of this asset is subsequently marked-to-market to reflect the current value of the put option. In the event that the put option is exercised, the Company would be required to deliver those shares to the counterparty. When the put option expires unexercised, the Company realizes a loss on the premium paid. The Company did not have any put options outstanding at September 30, 2013, or December 31, 2012.

 

Stock-Based Compensation. The Company has a stock-based employee compensation plan. The Company accounts for the Amended and Restated Harris & Harris Group, Inc. 2012 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 restricted stock awards, 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 September 30, 2013, and December 31, 2012, the increase to our operating expenses was offset by the increase to our additional paid-in capital, resulting in no net impact to our net asset value. Additionally, the Company does not record the potential tax benefits associated with the expensing of stock options or restricted stock because the Company currently intends to qualify as a regulated investment company ("RIC") under Subchapter M of the Code, and the deduction attributable to such expensing, therefore, is unlikely to provide any additional tax savings. 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 awards 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 9. Stock-Based Compensation" for further discussion.

 

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Rent expense. Our lease at 1450 Broadway, New York, New York, commenced on January 21, 2010. 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. These leasehold improvements are depreciated over the lease term. We also lease office space in California and North Carolina. We apply these rent abatements, credits, escalations and landlord payments on a straight-line basis in the determination of rent expense over the lease term.

 

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.

 

Income Taxes. As we intend to qualify as a RIC under Subchapter M of the Code, the Company does not accrue for income taxes. The Company has capital loss carryforwards that can be used to offset net realized capital gains. 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, Ventures, which is a C corporation. See "Note 10. Income Taxes."

 

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 three months ended September 30, 2013, included in the net increase in unrealized depreciation on investments was an unrealized gain of $132,582 resulting from foreign currency translation. For the nine months ended September 30, 2013, included in the net increase in unrealized depreciation on investments was an unrealized loss of $177,465 resulting from foreign currency translation. For the three months and nine months ended September 30, 2012, included in the net increase in unrealized appreciation on investments was unrealized appreciation of $216,249 and $199,932, respectively, 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).

 

Concentration of Credit Risk. The Company places its cash and cash equivalents with financial institutions and, at times, cash held in depository accounts may exceed the Federal Deposit Insurance Corporation insured limit.

 

NOTE 4. BUSINESS RISKS AND UNCERTAINTIES

 

We invest primarily in privately held companies, the securities of which are inherently illiquid. We also have investments in small publicly traded companies. 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 not have attained profitability, and many of these businesses also lack management depth and have limited or no history of operations. Because of the speculative nature of our investments and the lack of a liquid market for and restrictions on transfers of privately held investments, there is greater risk of loss relative to traditional marketable investment securities.

 

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We do not choose investments based on a strategy of diversification. We also do not rebalance the portfolio should one of our portfolio companies increase in value substantially relative to the rest of the portfolio.  Therefore, the value of our portfolio may be more vulnerable to microeconomic events affecting a single sector, industry or portfolio company and to general macroeconomic events that may be unrelated to our portfolio companies. These factors may subject the value of our portfolio to greater volatility than a company that follows a diversification strategy. As of September 30, 2013, and December 31, 2012, our largest 10 investments by value accounted for approximately 74 percent and 73 percent, respectively, of the value of our equity-focused venture capital portfolio. Our largest three investments, by value, Adesto Technologies Corporation, SiOnyx, Inc., and Molecular Imprints, Inc., accounted for approximately 16 percent, 10 percent and 7 percent, respectively, of our equity-focused venture capital portfolio at September 30, 2013. Adesto Technologies, SiOnyx and Molecular Imprints are privately held portfolio companies. As of December 31, 2012, our largest two investments, by value, Solazyme, Inc., a publicly traded company, and Xradia, Inc., a privately held company, accounted for approximately 14 percent and 12 percent, respectively, of our equity-focused venture capital portfolio.

 

Approximately 91 percent of the portion of our equity-focused venture capital portfolio that was fair valued was comprised of securities of 25 privately held companies and warrants of one publicly traded company. 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 securities in that portion of our portfolio is determined in good faith by our Valuation Committee, which is comprised of all of the independent members of our Board of Directors. The values are determined in accordance with our Valuation Procedures and are subject to significant estimates and judgments. The fair value of the securities in our portfolio may differ significantly from the values that would be placed on these securities if a ready market for the securities existed. Any changes in valuation are recorded in our Consolidated Statements of Operations as "Net (decrease) increase in unrealized appreciation on investments." Changes in valuation of any of our investments in privately held companies from one period to another may be significant.

 

NOTE 5. DEBT

 

On September 30, 2013, the Company terminated the Revolving Loan Agreement by and between the Company and TD Bank, N.A., dated February 24, 2011, as amen