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, 2011

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________
 
Commission file number: 0-11576

HARRIS & HARRIS GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

New York
  
13-3119827
(State or Other Jurisdiction of
  
(I.R.S. Employer Identification No.)
Incorporation or Organization)
    

1450 Broadway, New York, New York
10018
(Address of Principal Executive Offices)
(Zip Code)

(212) 582-0900
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes           x                      No           ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes           x                      No           ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  ¨
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 7, 2011
Common Stock, $0.01 par value per share
  
31,000,601 shares
 
 
 
 
 
Harris & Harris Group, Inc.
Form 10-Q, September 30, 2011

 
Page Number
PART I. FINANCIAL INFORMATION
  
   
Item 1. Consolidated Financial Statements
1
   
Consolidated Statements of Assets and Liabilities
2
   
Consolidated Statements of Operations
3
   
Consolidated Statements of Cash Flows
4
   
Consolidated Statements of Changes in Net Assets
5
   
Consolidated Schedule of Investments
6
   
Notes to Consolidated Financial Statements
33
   
Financial Highlights
46
   
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 47
   
Background
47
   
Overview
47
   
Investment Objective and Strategy
48
   
Involvement with Portfolio Companies
49
   
Historical Investments and Current Investment Pace
50
   
Importance of Availability of Liquid Capital
51
   
Our Sources of Liquid Capital
51
   
Recent and Pending Potential Liquidity Events from our Portfolio as of September 30, 2011
52
   
Maturity of Current Equity-Focused Venture Capital Portfolio
53
   
Current Business Environment
55
   
Valuation of Investments
56
   
Assessment of Venture Capital Investment Portfolio as of September 30, 2011
59
   
Results of Operations
67
   
Financial Condition
75
   
Liquidity
77
   
Borrowings
78
   
Contractual Obligations
79
   
Capital Resources
79
   
Critical Accounting Policies
79
   
Recent Developments – Portfolio Companies
82
   
Forward-Looking Statements
83
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
83
   
Item 4.  Controls and Procedures
85
   
PART II.  OTHER INFORMATION
  
   
Item 1A.  Risk Factors
86
   
Item 6. Exhibits
 87
   
Signatures
88
   
Exhibit Index
89
 
 
 
 
 
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, 2010.
 
 
1
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
 
   
September 30, 2011
    
December 31, 2010
  
   
(Unaudited)
        
             
ASSETS
  
Investments in portfolio securities, at value:
            
Unaffiliated privately held companies
(cost: $23,645,758 and $37,480,266, respectively)
   $ 18,368,097     $ 56,315,330  
Unaffiliated rights to milestone payments
(adjusted cost basis: $3,291,750 and $0, respectively)
     3,344,472       0  
Unaffiliated publicly traded securities
(cost: $12,743,787 and $0, respectively)
     23,908,705       0  
Non-controlled affiliated privately held companies
(cost: $50,209,343 and $51,451,965, respectively)
     45,955,747       42,775,415  
Non-controlled affiliated publicly traded companies
(cost: $2,000,000 and $0, respectively)
     1,946,667       0  
Controlled affiliated privately held companies
(cost: $10,642,727 and $9,715,153, respectively)
     6,609,872       7,059,677  
Total investments in private portfolio companies, rights to
milestone payments and public securities, at value
(cost: $102,533,365 and $98,647,384, respectively)
   $ 100,133,560     $ 106,150,422  
Investments in U.S. Treasury obligations, at value
(cost: $12,599,589 and $38,273,349, respectively)
     12,599,799       38,274,617  
Cash
     24,302,804       3,756,919  
Restricted funds (Note 3)
     1,264,776       2,751  
Funds held in escrow from sales of investments, at value (Note 3)
     939,346       0  
Receivable from portfolio company
     14,500       10,000  
Interest receivable
     5,733       5,924  
Prepaid expenses
     127,312       379,705  
Other assets
     664,879       708,830  
Total assets
   $ 140,052,709     $ 149,289,168  
                 
LIABILITIES & NET ASSETS
  
Post retirement plan liabilities
   $ 1,596,639     $ 1,506,906  
Revolving loan (Note 5)
     1,250,000       0  
Accounts payable and accrued liabilities
     1,077,759       589,592  
Deferred rent
     341,530       338,758  
Debt interest and other payable
     3,035       0  
Total liabilities
     4,268,963       2,435,256  
                 
Net assets
   $ 135,783,746     $ 146,853,912  
                 
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 09/30/11 and 12/31/10;
32,829,341 issued at 09/30/11 and 32,706,904 issued at 12/31/10
     328,294       327,070  
Additional paid in capital
     210,002,890       208,085,735  
Accumulated net operating and realized loss
     (68,742,312 )     (65,657,668 )
Accumulated unrealized (depreciation) appreciation of investments
     (2,399,595 )     7,504,306  
Treasury stock, at cost (1,828,740 shares at 09/30/11 and 12/31/10)
     (3,405,531 )     (3,405,531 )
                 
Net assets
   $ 135,783,746     $ 146,853,912  
Shares outstanding
     31,000,601       30,878,164  
Net asset value per outstanding share
   $ 4.38     $ 4.76  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
2
 

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

    
Three Months Ended Sept. 30,
    
Nine Months Ended Sept. 30,
  
   
2011
    
2010
    
2011
    
2010
  
                         
Investment income:
                        
Interest from:
                        
Fixed-income securities and bridge notes (Note 3)
   $ 161,618     $ 134,097     $ 457,062     $ 330,378  
Miscellaneous income
     40,909       6,348       70,115       18,348  
Total investment income
     202,527       140,445       527,177       348,726  
                                 
Expenses:
                                
Salaries, benefits and stock-based compensation (Note 7)
     1,490,116       1,327,055       4,073,995       4,181,852  
Administration and operations
     207,491       201,222       683,292       711,990  
Professional fees
     413,156       136,643       869,717       556,878  
Rent (Note 3)
     99,323       136,879       278,323       303,239  
Directors’ fees and expenses
     80,387       70,359       264,559       251,280  
Custody fees
     4,380       24,000       52,380       72,000  
Depreciation
     12,729       13,151       37,895       38,940  
Interest and other debt expense
     13,103       0       26,870       0  
Lease termination costs
     0       0       0       68,038  
Total expenses
     2,320,685       1,909,309       6,287,031       6,184,217  
                                 
Net operating loss
     (2,118,158 )     (1,768,864 )     (5,759,854 )     (5,835,491 )
                                 
Net realized (loss) gain:
                                
Realized (loss) gain from investments:
                                
Unaffiliated companies
     (2,017,949 )     0       5,310,794       13,218  
Non-Controlled affiliated companies
     (665,269 )     (3,136,552 )     (2,631,859 )     (3,393,559 )
Publicly traded companies
     0       0       0       (152,980 )
U.S. Treasury obligations/other
     0       (311 )     (82 )     (11,834 )
Realized (loss) gain from investments
     (2,683,218 )     (3,136,863 )     2,678,853       (3,545,155 )
                                 
Income tax expense (Note 8)
     1,250       1,799       3,643       4,431  
Net realized (loss) gain from investments
     (2,684,468 )     (3,138,662 )     2,675,210       (3,549,586 )
                                 
Net (decrease) increase in unrealized appreciation on investments:
                                
Change as a result of investment sales
     2,663,050       3,136,552       (2,015,594 )     3,358,871  
Change on investments held
     (30,945,031 )     1,316,942       (7,888,307 )     9,410,857  
Net (decrease) increase in unrealized appreciation on investments
     (28,281,981 )     4,453,494       (9,903,901 )     12,769,728  
                                 
Net (decrease) increase in net assets resulting from operations
   $ (33,084,607 )   $ (454,032 )   $ (12,988,545 )   $ 3,384,651  
                                 
Per average basic outstanding share
   $ (1.07 )   $ (0.01 )   $ (0.42 )   $ 0.11  
                                 
Average outstanding shares
     31,000,601       30,866,399       30,973,353       30,863,616  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
3
 

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

   
Nine Months Ended
    
Nine Months Ended
  
   
September 30, 2011
    
September 30, 2010
  
Cash flows used in operating activities:
            
Net (decrease) increase in net assets resulting from operations
   $ (12,988,545 )   $ 3,384,651  
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used in operating activities:
                
Net realized and unrealized loss (gain) on investments
     7,225,048       (9,224,573 )
Depreciation of fixed assets, amortization of premium or discount on
U.S. government securities, and bridge note interest
     (238,886 )     (260,793 )
Stock-based compensation expense
     1,427,321       1,746,734  
                 
Changes in assets and liabilities:
                
Restricted funds
     (1,262,025 )     (1 )
Receivable from portfolio company
     (4,500 )     18,247  
Other receivables
     0       7,187  
Return of security deposits on leased properties
     0       44,376  
Interest receivable
     24,402       11,513  
Income tax receivable
     1,185       0  
Prepaid expenses
     252,393       (3,867 )
Other assets
     8,366       (227,512 )
Post retirement plan liabilities
     89,733       101,316  
Accounts payable and accrued liabilities
     491,235       (46,445 )
Deferred rent
     2,772       343,997  
                 
Net cash used in operating activities
     (4,971,501 )     (4,105,170 )
                 
Cash flows from investing activities:
                
Purchase of U.S. government securities
     (100,032,726 )     (58,644,919 )
Sale of U.S. government securities
     125,682,274       70,746,244  
Investments in affiliated portfolio companies
     (12,465,603 )     (7,489,948 )
Investments in unaffiliated portfolio companies
     (3,732,015 )     (2,177,123 )
Proceeds from conversion of bridge note
     0       1,356  
Principal payments received on debt investments
     1,523,736       0  
Proceeds from sale of investments
     12,804,733       407,543  
Purchase of fixed assets
     (4,071 )     (84,212 )
                 
Net cash provided by investing activities
     23,776,328       2,758,941  
                 
Cash flows from financing activities:
                
Proceeds from stock option exercises
     491,058       39,795  
Payment of offering costs
     0       (48,928 )
Proceeds from drawdown of credit facility
     1,250,000       0  
                 
Net cash provided by (used in) financing activities
     1,741,058       (9,133 )
                 
Net increase (decrease) in cash:
                
Cash at beginning of the period
     3,756,919       1,611,465  
Cash at end of the period.
     24,302,804       256,103  
                 
Net increase (decrease) in cash
   $ 20,545,885     $ (1,355,362 )
                 
Supplemental disclosures of cash flow information:
                
Income taxes paid
   $ 2,458     $ 4,431  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4
 
 
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

   
Nine Months Ended
    
Year Ended
  
   
September 30, 2011
    
December 31, 2010
  
   
(Unaudited)
        
             
Changes in net assets from operations:
            
             
Net operating loss
   $ (5,759,854 )   $ (7,555,807 )
Net realized gain (loss) on investments
     2,675,210       (3,740,518 )
Net (decrease) increase in unrealized appreciation on investments as a result of sales
     (2,015,594 )     3,608,205  
Net (decrease) increase in unrealized appreciation on investments held
     (7,888,307 )     18,274,970  
                 
Net (decrease) increase in net assets resulting from operations
     (12,988,545 )     10,586,850  
                 
Changes in net assets from capital stock transactions:
                
                 
Issuance of common stock upon the exercise of stock options
     1,224       186  
Additional paid-in capital on common stock issued net of offering expenses
     489,834       20,527  
Stock-based compensation expense
     1,427,321       2,088,091  
                 
Net increase in net assets resulting from capital stock transactions
     1,918,379       2,108,804  
                 
Net (decrease) increase in net assets
     (11,070,166 )     12,695,654  
                 
Net assets:
                
                 
Beginning of the period
     146,853,912       134,158,258  
                 
End of the period
   $ 135,783,746     $ 146,853,912  

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

 
5
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)
 
   
Method of
            
Shares/
        
   
Valuation (1)
  
Industry (2)
  
Cost
    
Principal
    
Value
  
Investments in Unaffiliated Companies (3)(4)(5)(6) –
33.6% of net assets at value
                          
                           
Private Placement Portfolio (Illiquid) –
13.5% of net assets at value
                          
                           
Bridgelux, Inc. (7)(8)
      
Cleantech
                  
Manufacturing high-power light emitting diodes (LEDs) and arrays
                          
Series B Convertible Preferred Stock
  
(M)
       $ 1,000,000       1,861,504     $ 1,039,092  
Series C Convertible Preferred Stock
  
(M)
         1,352,196       2,130,699       1,802,145  
Series D Convertible Preferred Stock
  
(M)
         1,371,622       999,999       1,238,998  
Series E Convertible Preferred Stock
  
(M)
         730,369       440,334       634,874  
Warrants for Series C Convertible Preferred Stock
expiring 12/31/14
  
( I )
         168,270       163,900       68,962  
Warrants for Series D Convertible Preferred Stock
expiring 8/26/14
  
( I )
         128,543       166,665       82,289  
Warrants for Series E Convertible Preferred Stock
expiring 12/31/17
  
( I )
         108,867       170,823       92,312  
              4,859,867               4,958,672  
                                 
Cambrios Technologies Corporation (7)(9)
      
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  
              3,202,181               3,202,181  
                                 
Cobalt Technologies, Inc. (7)(9)(10)
      
Cleantech
                        
Developing processes for making bio-butanol through biomass fermentation
                                
Series C-1 Convertible Preferred Stock
  
(M)
         749,998       352,112       435,580  
Series D-1 Convertible Preferred Stock
  
(M)
         122,070       48,828       65,596  
              872,068               501,176  
                                 
Ensemble Therapeutics Corporation (7)(9)(11)
      
Healthcare
                        
Developing DNA- Programmed ChemistryTM for the discovery of new classes of therapeutics
                                
Series B Convertible Preferred Stock
  
(M)
         2,000,000       1,449,275       125,072  
Secured Convertible Bridge Notes (including interest)
  
(M)
         367,406     $ 299,169       775,997  
              2,367,406               901,069  

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

 
6
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)
 
   
Method of
            
Shares/
        
   
Valuation (1)
  
Industry (2)
  
Cost
    
Principal
    
Value
  
                           
Investments in Unaffiliated Companies (3)(4)(5)(6) –
33.6% of net assets at value (Cont.)
                          
                           
Private Placement Portfolio (Illiquid) –
13.5% of net assets at value (Cont.)
                          
                           
GEO Semiconductor Inc.
      
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 06/30/12
  
( I )
       $ 400,448     $ 500,000     $ 457,950  
Warrants for Series A Pref. Stock expiring on 09/17/17
  
( I )
         66,684       100,000       56,591  
Warrants for Series A-1 Pref. Stock expiring on 06/30/18
  
( I )
         23,566       34,500       19,829  
Loan and Security Agreement with GEO Semiconductor relating to the following assets:
                                
Subordinated secured debt, 15.75%, maturing on 01/01/12
  
( I )
         108,162     $ 125,000       122,830  
Warrants for Series A Pref. Stock expiring on 03/01/18
  
( I )
         7,512       10,000       4,935  
Warrants for Series A-1 Pref. Stock expiring on 06/29/18
  
( I )
         7,546       10,000       4,951  
              613,918               667,086  
                                 
Molecular Imprints, Inc. (7)(12)
      
Electronics
                        
Manufacturing nanoimprint lithography capital equipment
                                
Series B Convertible Preferred Stock
  
(M)
         2,000,000       1,333,333       606,450  
Series C Convertible Preferred Stock
  
(M)
         2,309,098       1,250,000       679,938  
Warrants for Series C Convertible Preferred Stock
expiring 12/31/11
  
( I )
         190,902       125,000       166  
Non-Convertible Bridge Note
  
( I )
         0       0       3,033,338  
              4,500,000               4,319,892  
                                 
Nanosys, Inc. (7)(13)
      
Cleantech
                        
Developing inorganic nanowires and quantum dots for use in batteries and LED-backlit devices
                                
Series C Convertible Preferred Stock
  
(M)
         1,500,000       803,428       255,503  
Series D Convertible Preferred Stock
  
(M)
         3,000,003       1,016,950       698,410  
Series E Convertible Preferred Stock
  
(M)
         496,573       433,688       496,573  
              4,996,576               1,450,486  

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

 
7
 
 
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)
 
   
Method of
            
Shares/
        
   
Valuation (1)
  
Industry (2)
  
Cost
    
Principal
    
Value
  
                           
Investments in Unaffiliated Companies (3)(4)(5)(6) –
33.6% of net assets at value (Cont.)
                          
                           
Private Placement Portfolio (Illiquid) –
13.5% of net assets at value (Cont.)
                          
                           
NanoTerra, Inc. (9)(14)
      
Cleantech
                  
Developing surface chemistry and nano-manufacturing solutions
                          
Senior secured debt, 12.0%, maturing on 02/22/14
  
( I )
       $ 368,237     $ 416,271     $ 372,580  
Senior secured debt, 12.0%, maturing on 02/22/13
  
( I )
         162,009     $ 183,142       171,320  
Warrants for Series A-2 Pref. Stock expiring on 02/22/21
  
( I )
         69,168       446,248       68,037  
              599,414               611,937  
                                 
Nantero, Inc. (7)(9)(13)
      
Electronics
                        
Developing a high-density, nonvolatile, random access memory chip, enabled by carbon nanotubes
                                
Series A Convertible Preferred Stock
  
(M)
         489,999       345,070       793,279  
Series B Convertible Preferred Stock
  
(M)
         323,000       207,051       460,485  
Series C Convertible Preferred Stock
  
(M)
         571,329       188,315       501,834  
              1,384,328               1,755,598  
                                 
TetraVitae Bioscience, Inc. (7)(9)(13)(15)
      
Cleantech
                        
Developing methods of producing alternative chemicals and fuels through biomass fermentation
                                
Common Stock
  
(M)
         250,000       118,804       0  
                                 
Total Unaffiliated Private Placement Portfolio (cost: $23,645,758)
                       $ 18,368,097  

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

 
8
 

 
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)

   
Method of
  
 
  
Adjusted
    
Shares/
        
   
Valuation (1)
  
Industry(2)
  
Cost
    
Principal
    
Value
  
                           
Rights to Milestone Payments (Illiquid) –  
2.5% of net assets at value
                          
                           
Amgen, Inc. (7)(13)
      
Healthcare
                  
Rights to Milestone Payments from Acquisition of
BioVex Group, Inc.
  
( I )
       $ 3,291,750     $ 3,291,750     $ 3,344,472  
                                 
Total Unaffiliated Rights to Milestone Payments (cost: $3,291,750)
                       $ 3,344,472  
                                 
Publicly Traded Portfolio  –  17.6% of net assets at value
                                
                                 
NeoPhotonics Corporation (13)
      
Electronics
                        
Developing and manufacturing optical devices and components
                                
Common Stock
  
(M)
       $ 7,299,590       450,907     $ 3,102,240  
                                 
Solazyme, Inc. (7)(13)(16)
      
Cleantech
                        
Developing algal biodiesel, industrial chemicals and specialty ingredients using synthetic biology
                                
Common Stock
  
(M)
         5,444,197       2,304,149       20,806,465  
                                 
Total Unaffiliated Publicly Traded Portfolio (cost: $12,743,787)
                       $ 23,908,705  
                                 
Total Investments in Unaffiliated Companies (cost: $39,681,295)
                       $ 45,621,274  

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

 
9
 

HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)

   
Method of
            
Shares/
        
   
Valuation (1)
  
Industry (2)
  
Cost
    
Principal
    
Value
  
                           
Investments in Non-Controlled  Affiliated Companies (3)(17)(18) –
35.3% of net assets at value
                      
                           
Private Placement Portfolio (Illiquid) –  
33.9% of net assets at value
                          
                           
ABSMaterials, Inc. (7)(9)(13)
      
Cleantech
                  
Developing nano-structured absorbent materials for environmental remediation
                          
Series A Convertible Preferred Stock
  
(M)
       $ 375,000       375,000     $ 1,500,000  
                                 
Adesto Technologies Corporation (7)(9)
      
Electronics
                        
Developing low-power, high- performance memory devices
                                
Series A Convertible Preferred Stock
  
(M)
         2,200,000       6,547,619       4,583,333  
Series B Convertible Preferred Stock
  
(M)
         2,200,000       5,952,381       4,166,667  
Series C Convertible Preferred Stock
  
(M)
         1,485,531       2,122,187       1,485,531  
              5,885,531               10,235,531  
                                 
Contour Energy Systems, Inc. (7)(9)(13)
      
Cleantech
                        
Developing batteries using nanostructured materials
                                
Series A Convertible Preferred Stock
  
(M)
         2,009,995       2,565,798       2,681,260  
Series B Convertible Preferred Stock
  
(M)
         1,300,000       812,500       1,235,000  
Series C Convertible Preferred Stock
  
(M)
         720,000       688,995       720,000  
              4,029,995               4,636,260  
                                 
Crystal IS, Inc. (7)(13)
      
Cleantech
                        
Developing single-crystal aluminum nitride substrates  for light-emitting diodes
                                
Common Stock
  
(M)
         1,734,199       3,994,468       0  
Warrants for Series A-1 Pref. Stock expiring 05/05/13
  
( I )
         8,746       15,231       0  
Warrants for Series A-1 Pref. Stock expiring 05/12/13
  
( I )
         1,351       2,350       0  
Warrants for Series A-1 Pref. Stock expiring 08/08/13
  
( I )
         2,543       4,396       0  
              1,746,839               0  

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

 
10
 
 
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)
  
   
Method of
            
Shares/
        
   
Valuation (1)
  
Industry (2)
  
Cost
    
Principal
    
Value
  
Investments in Non-Controlled  Affiliated Companies (3)(17)(18) –
35.3% of net assets at value (Cont.)
                      
                           
Private Placement Portfolio (Illiquid) –  
33.9% of net assets at value (Cont.)
                          
                           
D-Wave Systems, Inc. (7)(9)(19)
      
Electronics
                  
Developing high- performance quantum computing systems
                          
Series B Convertible Preferred Stock
  
(M)
       $ 1,002,074       1,144,869     $ 933,412  
Series C Convertible Preferred Stock
  
(M)
         487,804       450,450       376,441  
Series D Convertible Preferred Stock
  
(M)
         1,484,492       1,533,395       1,281,458  
Series E Convertible Preferred Stock
  
(M)
         248,049       269,280       245,072  
Series F Convertible Preferred Stock
  
(M)
         238,323       258,721       235,462  
Warrants for Common Stock expiring 06/30/15
  
( I )
         98,644       153,890       45,051  
              3,559,386               3,116,896  
                                 
Enumeral Biomedical Corp. (7)(9)
      
Healthcare
                        
Developing therapeutics and diagnostics through functional assaying of single cells
                                
Series A Convertible Preferred Stock
  
(M)
         1,026,832       957,038       1,110,164  
                                 
HzO, Inc. (7)(9)(13)(14)
      
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)
         1,000,000       3,947,888       1,000,000  
              1,666,667               2,027,713  
                                 
Kovio, Inc. (7)(9)(13)
      
Electronics
                        
Developing semiconductor products using printed electronics and thin-film technologies
                                
Series A' Convertible Preferred Stock
  
(M)
         5,242,993       2,160,000       1,437,286  
Series B' Convertible Preferred Stock
  
(M)
         1,418,540       2,131,827       1,418,539  
              6,661,533               2,855,825  

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

 
11
 
 
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)

   
Method of
            
Shares/
        
   
Valuation (1)
  
Industry (2)
  
Cost
    
Principal
    
Value
  
Investments in Non-Controlled  Affiliated Companies (3)(17)(18) –
35.3% of net assets at value (Cont.)
                      
                           
Private Placement Portfolio (Illiquid) –  
33.9% of net assets at value (Cont.)
                          
                           
Mersana Therapeutics, Inc. (7)(9)
      
Healthcare
                  
Developing treatments for cancer based on novel drug delivery polymers
                          
Series A Convertible Preferred Stock
  
(M)
       $ 700,000       68,451     $ 0  
Series B Convertible Preferred Stock
  
(M)
         1,542,098       866,500       0  
Unsecured Convertible Bridge Notes (including interest)
  
(M)
         1,338,393     $ 1,120,875       1,338,393  
              3,580,491               1,338,393  
                                 
Metabolon, Inc. (7)(13)
      
Healthcare
                        
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       177,005  
              5,999,999               6,203,926  
                                 
Nextreme Thermal Solutions, Inc. (7)(9)(13)
      
Cleantech
                        
Developing thin-film thermoelectric devices for cooling and energy conversion
                                
Series A Convertible Preferred Stock
  
(M)
         1,750,000       17,500       0  
Series B Convertible Preferred Stock
  
(M)
         2,634,762       4,870,244       0  
              4,384,762               0  
                                 
Produced Water Absorbents, Inc. (7)(9)(13)(14)
      
Cleantech
                        
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       1,000,000  

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

 
12
 

 
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)

   
Method of
            
Shares/
        
   
Valuation (1)
  
Industry (2)
  
Cost
    
Principal
    
Value
  
                           
Investments in Non-Controlled  Affiliated Companies (3)(17)(18) –
35.3% of net assets at value (Cont.)
                      
                           
Private Placement Portfolio (Illiquid) –  
33.9% of net assets at value (Cont.)
                          
                           
Senova Systems, Inc. (7)(9)(13)(14)
      
Healthcare
                  
Developing next-generation sensors to measure pH
                          
Series B Convertible Preferred Stock
  
(M)
         692,308       692,308     $ 692,308  
                                 
SiOnyx, Inc. (7)(9)(13)
      
Electronics
                        
Developing silicon-based optoelectronic products enabled by its proprietary Black Silicon
                                
Series A Convertible Preferred Stock
  
(M)
       $ 750,000       233,499       129,133  
Series A-1 Convertible Preferred Stock
  
(M)
         890,000       2,966,667       1,368,598  
Series A-2 Convertible Preferred Stock
  
(M)
         2,445,000       4,207,537       2,236,727  
Series B-1 Convertible Preferred Stock
  
(M)
         1,169,561       1,892,836       1,056,250  
Warrants for Series B-1 Convertible Preferred Stock
expiring 2/23/17
  
( I )
         130,439       247,350       106,306  
              5,385,000               4,897,014  
                                 
Ultora, Inc. (7)(9)(13)
      
Cleantech
                        
Developing energy-storage devices enabled by carbon nanotubes
                                
Series A Convertible Preferred Stock
  
(M)
         215,000       215,000       215,000  
                                 
Xradia, Inc. (7)(13)
      
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       6,126,717  
                                 
Total Non-Controlled Private Placement Portfolio (cost: $50,209,343)
                       $ 45,955,747  

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

 
13
 
 
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF SEPTEMBER 30, 2011
(Unaudited)

   
Method of
  
 
        
Shares/
        
   
Valuation (1)
  
Industry (2)
  
Cost
    
Principal
    
Value
  
                           
Publicly Traded Portfolio (Illiquid) –  
1.4% of net assets at value
                          
                           
Champions Oncology, Inc. (7)(13)(14)(20)
      
Healthcare
                  
Developing its TumorGraftTM platform for personalized medicine and drug development
                          
Common Stock
  
(M)
       $ 2,000,000       2,666,667     $ 1,946,667  
                                 
Total Non-Controlled Affiliated Publicly Traded Portfolio (cost: $2,000,000)
                       $ 1,946,667  
                                 
Total Investments in Non-Controlled Affiliated Companies (cost: $52,209,343)
                       $ 47,902,414  
                                 
Investments in Controlled Affiliated Companies (3)(21) –
4.8% of net assets at value